Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of August ~~13, 2018, 6,414,235~~14, 2019, 9,194,332 shares of our common stock, $0.0001 par value, were outstanding.

For the ~~three~~Three and ~~six months ended~~Six Months Ended June 30, ~~2018~~2019 and ~~2017~~2018

~~Eastside Distilling, Inc. (referred to herein as “Eastside,” “EAST,” “the Company,” “us,” or “we”) is~~We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin and rum. ~~Unlike other distillers, we operate several retail tasting rooms~~We currently sell our products in Oregon to market our brands directly to consumers. Our strategy for growth is to build on our local base in the Pacific Northwest and expand selectively to other markets, using major spirits distributors. In December 2016, we retained Sandstrom Partners, an internationally-known spirit branding firm that branded St-Germain and Bulleit Bourbon, to guide our marketing strategy and branding. Sandstrom Partners subsequently became an investor in our company. During 2017, with the assistance of Sandstrom Partners and using our in-house spirits expertise, we created Redneck Riviera Whiskey (“RRW”) in collaboration with country music superstar John Rich, of the duo “Big & Rich.” Supported by John Rich’s marketing efforts, we launched RRW in the Southeastern and Gulf States primarily through Republic National Distributing Company (“RNDC”). We believe that RRW will achieve commercial success on a broad scale, and we have therefore focused our sales efforts on RRW outside Oregon. We believe RRW will be a key growth engine in 2018 and will also provide a “coattail” effect for our other brands, helping them to achieve improved national recognition and success.

Operating as a small business in a large, international spirits marketplace occupied by massive conglomerates, we seek to turn our small size from a disadvantage into an advantage. As the success of our RRW launch and Sandstrom Partners collaboration demonstrate, our team can leverage its smaller size to launch new brands more quickly than larger conglomerates because we are able to dedicate more of our attention and resources to developing innovative products. We believe that the dominance of Canadian whiskeys in the light-whiskey segment is vulnerable to a light whiskey that is 100% American, and we are exploiting that vulnerability with RRW, a product that went from idea, to celebrity collaboration, to design and formulation, to market roll-out in less than nine months. We are innovative in targeting emerging trends with our products; for example, we developed our Hue-Hue Coffee Rum with cold brew coffee and low sugar,46 states as well as ~~our gluten-free potato vodka. We seek~~Ontario, Canada. The Company also generates revenue from tastings, tasting room tours, private parties, and merchandise sales from its facilities in Oregon. In addition, we bottle, can and package alcoholic beverages for others. The Company is subject to ~~be both a leader in creating spirits that offer better value than comparable spirits (for example, our value-priced Portland Potato Vodka),~~the Oregon Liquor Control Commission (“OLCC”) and ~~an innovator in creating imaginative spirits that offer a unique taste experience, like our Hue-Hue Coffee Rum, Oregon oak-aged whiskeys~~the Alcohol and ~~Marionberry Whiskey.~~Tobacco Tax and Trade Bureau (“TTB”).

~~As a Nasdaq-traded company, we have access to public capital markets to support our growth initiatives, including strategic acquisitions.~~ In May 2017, we used our shares to acquire 90% of Big Bottom Distillery, LLC (“BBD”), known for its award-winning, super-premium gins and whiskeys, including The Ninety One Gin, Navy Strength Gin, Oregon Gin, Delta Rye and American Single Malt Whiskey. ~~BBD’s super-premium spirits give us a presence at~~In December 2018, we acquired the ~~“high end”~~remaining 10% of ~~the market.~~BBD. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary acquired in March 2017, and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC prior to the acquisition) (“Craft Canning”) acquired on January 11, 2019, we also provide contract bottling, canning, and packaging services for existing and emerging beer, wine, spirits producers, some of whom contract with us to blend or distill spirits. During 2018, we have begun to use our “slim line” canning equipment, newly installed at MotherLode, to profit from an emerging consumer interest in canned wine. We believe our location close to vineyards in Oregon and ~~Washington is a competitive advantage.~~

We currently sell our products in 37 states (Oregon, Washington, California, Alabama, Alaska, Colorado, Connecticut, Florida, Georgia, Idaho, Indiana, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, West Virginia, Wisconsin and Wyoming) as well as the District of Columbia and Ontario, Canada. The Company also generates revenue from tastings, tasting room tours, private parties, and merchandise sales from its retail tasting rooms in Oregon. The Company is subject to the Oregon Liquor Control Commission (OLCC) and the Alcohol and Tobacco Tax and Trade Bureau (TTB).

Historically, the Company has funded its cash and liquidity needs through the issuance of ~~notes,~~ convertible notes, extended credit terms and the sale of equity. The Company has incurred a net loss of ~~$3,225,046~~$5.9 million and has an accumulated deficit of ~~$21,316,007 for the six months ended~~$33.2 million as of June 30, ~~2018.~~2019. The Company has been dependent on raising capital from debt and equity financings to fund its operating activities. For the six months ended June 30, ~~2018,~~2019, the Company ~~raised $7,274,894 in proceeds~~did not raise any additional capital from financing activities.

At June 30, ~~2018,~~2019, the Company had ~~$2,352,658~~$0.8 million of cash on hand with a positive working capital of ~~$9,968,317.~~$12.2 million. The Company’s ability to meet its ongoing operating cash needs over the next twelve months is dependent on raising additional debt or equity capital, generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. Management ~~has taken~~intends to implement additional actions to improve profitability, by managing expenses while ~~increasing~~continuing to increase sales. ~~In addition, through August 13, 2018,~~Additionally, management intends to utilize the ~~Company raised an additional $5,761,090 in cash through a debt offering~~large inventory and the exercise of previously issued warrants (see Note 15, Subsequent Events). Management believes that cash on hand and proceeds generated from the most recent financings, along with revenue that the Company expectsaccounts receivable balances to ~~generate from operations, will be sufficient to meet the Company’s cash~~help satisfy its working capital needs over the next twelve months.

The accompanying unaudited condensed consolidated financial statements for Eastside Distilling, Inc. and ~~Subsidiaries~~subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America ~~(GAAP)~~(“GAAP”) for interim financial information and in accordance with ~~instructions for Form 10-Q~~the rules and ~~therefore, do not include all~~regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures ~~necessary for a complete presentation of~~normally included in financial ~~condition, results of operations,~~statements in accordance with GAAP have been condensed or eliminated as permitted under the SEC’s rules and ~~cash flows in conformity with GAAP.~~regulations. In our opinion, the unaudited condensed consolidated financial statements include all material adjustments, all of which are of a normal and recurring nature, necessary to present fairly our financial position as of June 30, ~~2018,~~2019, our operating results for the three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018 and our cash flows for the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Interim results are not necessarily indicative of the results that may be expected for ~~the~~an entire fiscal ~~year ending December 31, 2018.~~ year.

The condensed consolidated financial statements include the accounts of Eastside Distilling, Inc.’s wholly-owned ~~subsidiary,~~subsidiaries, including, MotherLode, BBD, and Craft Canning (beginning as of ~~March 8, 2017), and majority-owned subsidiary, BBD (beginning as of May 1, 2017)~~January 11, 2019). All intercompany balances and transactions have been eliminated in consolidation.

The Company determined its operating segment on the same basis that it uses to evaluate its performance internally. The Company has one business activity, packaging, producing, marketing and distributing ~~hand-crafted spirits,~~alcoholic beverages and operates as one segment. The Company’s chief operating decision ~~makers,~~maker, its interim 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.

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.

Net revenue includes product sales, less excise taxes and customer programs and incentives. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 –Revenue from Contracts with Customers: ~~(i)~~(1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. .

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

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

Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the ~~alcohol~~alcoholic beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising, promotional and selling expenses ~~ASCbased~~in accordance with ASC 606 -Revenue from Contracts with Customers, based on the nature of the expenditure. Amounts paid to customers totaled ~~$105,591~~$226,903 and ~~$79,837~~$105,591 for the six months ended June 30, 2019 and 2018, ~~and 2017,~~ respectively.

The following expenses are included in advertising, ~~promotions~~promotional and selling expenses in the accompanying consolidated statements of operations: media advertising costs, special event costs, tasting room costs, sales and marketing expenses, salary and benefit expenses, travel and entertainment expenses for the sales, brand and sales support workforce and promotional activity expenses. Advertising, promotional and selling costs are expensed as incurred. Advertising, promotional and selling ~~expense was~~expenses totaled $2,569,418 and $1,709,824 ~~and $935,997~~ for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs.

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

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 June 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade receivables. At June 30, ~~2018, four~~2019, no customers represented ~~70%~~greater than 10% of trade receivables, and at December 31, ~~2017,~~2018, two customers represented ~~79%~~34% of trade receivables. Sales to one customer accounted for approximately 18% of consolidated net sales for the six months ended June 30, 2019. Sales to two customers accounted for approximately 46% of net sales for the six months ended June 30, ~~2018 and 2017.~~2018.

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 June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 June 30, ~~2018~~2019 and December 31, ~~2017.~~2018. However, GAAP requires the disclosure of fair value information about financial instruments that are not measured at fair value. Financial instruments consist principally of trade receivables, accounts payable, accrued liabilities, notes payable, and convertible notes 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 June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s notes payable ~~convertible notes payable and secured credit facility balances outstanding~~ are at fixed rates and their carrying value approximates fair value.

Certain assets and liabilities acquired in a business acquisition are valued at fair value at the date of acquisition.

Inventories primarily consist of bulk and bottled liquor and merchandise and are stated at the lower of cost or market. Cost is determined using an average costing methodology, which approximates cost under the first-in, first-out (FIFO) method. A portion of inventory is held by certain independent distributors on consignment until it is sold to a third party. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost basis of accounting for the related inventory. The Company has recorded no write-downs of inventory for the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

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

The Company accounts for long-lived assets, including property and equipment and intangible assets, at amortized cost. Management reviews long-lived assets for probable impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If there is an indication of impairment, management would prepare an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these estimated cash flows were less than the carrying amount, ~~of the asset,~~ an impairment loss would be recognized to write down the asset to its estimated fair value. ~~At December 31, 2017, an impairment loss~~The Company performed a qualitative assessment of ~~$218,374 was recognized related to its acquisition of Big Bottom Distillery, LLC. At~~goodwill at June 30, ~~2018, no additional impairment loss~~2019 and determined that goodwill was ~~recognized.~~not impaired.

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.

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 June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company established valuation allowances against its net deferred tax assets.

Income tax positions that meet the “more-likely-than-not” recognition threshold are measured at the largest amount of income tax benefit that is more than 50 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 condensed consolidated statements of operations. There were no unrecognized income tax benefits, nor any interest and penalties associated with unrecognized income tax benefits, accrued or expensed at and for the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

The Company files federal income tax returns in the U.S. and various state income tax returns. The Company is no longer subject to examinations by the related tax authorities for the Company’s U.S. federal and state income tax returns for years prior to ~~2012.~~2011.

The Company does not have any reconciling other comprehensive income items for the six months ended June 30, ~~2018~~2019 and ~~2017.~~2018.

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~~alcoholic beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled ~~$237,638~~$319,735 and ~~$415,843~~$237,638 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

The Company recognizes as compensation expense all stock-based awards issued to employees. The compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards, which is generally the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility, expected terms of the awards, risk-free interest rate, and dividend rates, if applicable. Stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest. Stock-based compensation was ~~$847,358~~$395,561 and ~~$619,042~~$847,358 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

~~During~~On June 28, 2019, the ~~three months ended June 30, 2017, we terminated our previous~~Company entered into an accounts receivable factoring program. Under the ~~prior~~ program, ~~we had~~the Company has the option to sell certain customer account receivables in advance of payment for 75% of the amount due. When the customer ~~remitted~~remits payment, ~~we would receive~~the Company receives the remaining 25%. ~~We were~~Interest is charged ~~interest~~ on the advanced 75% payment at a rate of ~~1.5% per month.~~2.4% for the first 30 days plus 1.44% for each additional ten-day period. Under the terms of the agreement ~~with~~ the factoring provider ~~any factored invoices had~~has recourse against the Company should the customer fail to pay the invoice. Thus, ~~we recorded~~ factored amounts are recorded as a liability until the customer ~~remitted~~remits payment and ~~we received~~ the remaining 25% of the non-factored ~~amount. We did not factor any~~amount is received. The Company factored $155,536 of invoices and ~~did not incur any~~incurred $0 in fees associated with the factoring program during the six months ended June 30, ~~2018.~~2019. At June 30, ~~2018 and 2017, we~~2019, the Company had no$155,536 factored invoices outstanding. ~~We incurred fees associated with the factoring program of $63,238 during the six months ended June 30, 2017.~~

In ~~February~~August 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments(“ASU ~~No. 2016-02,~~2016-15”) and in November 2016 issued~~Leases~~ASU 2016-18, Statement of Cash Flows (Topic ~~842)~~230): Restricted Cash (“ASU ~~2016-02”~~2016-18”)~~. 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 ASU No. 2014-09,~~Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”)~~. 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 2016-02standards are effective for fiscal years beginning after December 15, ~~2018, including~~2017, and interim periods within those fiscal years, ~~(i.e.,~~and amend the existing accounting standards for the statement of cash flows. The amendments provide guidance on the following nine cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; separately identifiable cash flows and application of the predominance principle; and restricted cash. The adoption on January 1, ~~2019, for~~2018 of ASU 2016-15 and ASU 2016-18 did not have a calendar year entity). Early application is permitted for all public business entities upon issuance. 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. We are currently evaluating the impact ASU 2016-02 will havematerial effect on the ~~Company’s condensed~~ consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, which ~~will supersede~~superseded virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company ~~will elect~~elected to apply ~~the impact (if any) of applying~~ ASU 2014-09 ~~to the most current reporting period presented in the financial statements~~ with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date(“ASU 2015-14”). ASU 2015-14 deferred the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. WeThe Company adopted ASU 2014-09 as of January 1, 2018. The Company does not believe the adoption of ASU 2014-09 had any material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842) (“ASU 2016-02”). 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 will be largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and ASU No. 2014-09, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (i.e., January 1, 2019, for a calendar year entity). Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842).This guidance provides an additional (and optional) transition method whereby the new lease standard is applied at the adoption date and recognized as an adjustment to retained earnings. In addition, this ASU provides a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease and instead account for the lease as a single component if both the timing and pattern of transfer of the nonlease component(s) are the same, and if the lease would be classified as an operating lease. These amendments have the same effective date as ASU 2016-02. On January 1, 2019, the Company adopted the new accounting standard using the modified retrospective approach and elected to not adjust comparative periods. Upon adoption, the Company recognized right-of-use assets of $920,805 and lease liabilities of $1,110,445, and a net adjustment to retained earnings of $187,353. The Company considers the impact of the adoption to be immaterial to its consolidated financial statements on an ongoing basis.

In June 2018, the FASB issued ASU No. 2018-07,Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under ASU 2018-07, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard became effective on January 1, 2019 and should be applied to all new awards granted after the date of adoption. The Company adopted ASU 2018-07 as of January 1, 2019. The Company does not believe the adoption of ASU 2018-07 had any material impact on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04,Intangibles-Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by performing procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. ASU 2017-04 will require companies to perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and will be applied prospectively. Early adoption of this standard is permitted. The Company is currently in the process of evaluating the impact of ASU 2017-04 on its consolidated financial statements.

During the fiscal year ~~2017,~~2019, the Company completed the following ~~acquisitions:~~acquisition:

On ~~March 8, 2017,~~January 11, 2019, the Company completed the acquisition of ~~MotherLode~~ Craft ~~Distillery,~~Canning + Bottling, LLC (“~~MotherLode”~~Craft Canning”), a ~~small~~ Portland, Oregon-based provider of bottling ~~services~~ and ~~production support to craft distilleries.~~canning services. The Company’s condensed consolidated financial statements for the ~~three and~~ six months ended June 30, ~~2018~~2019 include ~~MotherLode’s~~Craft Canning’s results of operations. For the ~~three and~~ six months ended June 30, ~~2017, MotherLode’s~~2019, Craft Canning’s results of operations are included from the acquisition date of ~~March 8, 2017~~January 11, 2019 through June 30, ~~2017.~~2019. The Company’s condensed consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. ~~MotherLode had approximately $375,000 in revenues (unaudited) in 2016.~~

Intangible assets are recorded at estimated fair value, as determined by management based on available information. The fair value assigned to the customer list intangible asset was determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earning methods. The major assumptions used in arriving at the estimated identifiable intangible asset value included management’s estimates of future cash flows, discounted at an appropriate rate of return which is based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the tangible assets that are expected to contribute directly or indirectly to future cash flows. The customer relationships estimated useful life is seven years. ~~The fair values assigned to the license intangible asset were determined through the use of the cost approach. The license has an indefinite life and will not be amortized.~~

~~On May 1, 2017,~~The Company incurred acquisitions costs of $81,811 during the Company acquired 90% of the ownership of Big Bottom Distillery, LLC (“BBD”), a Hillsboro, Oregon-based distiller of super premium spirits. The Company’s condensed consolidated financial statements for the three and six months ended June 30, ~~2018 include BBD’s results~~2019 that have been recorded in general and administrative expenses on the consolidated statement of operations. The ~~Company’s condensed~~results of the Craft Canning acquisition are included in our consolidated financial statements ~~reflect~~from the ~~final purchase accounting adjustments~~date of acquisition through June 30, 2019. The sales and net income (including transaction costs) of Craft Canning operations included in ~~accordance with ASC 805 “Business Combinations”, whereby~~our consolidated statements of operations were $3,766,714 and $526,282, for the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. BBD had approximately $201,000 in revenues (unaudited) in 2016.period from January 11, 2019 through June 30, 2019.

The following ~~allocation~~unaudited pro forma consolidated results of operations for the six months ended June 30, 2019 and 2018 assume the acquisition was completed on January 1, 2018:

Pro forma data does not purport to be indicative of the ~~purchase price is as follows:~~

~~Intangible assets are recorded~~results that would have been obtained had these events actually occurred at ~~estimated fair value, as determined by management based on available information. The fair value assigned to~~ the ~~license intangible asset was determined through the use~~beginning of the ~~cost approach.~~periods presented and is not intended to be a projection of future results. The ~~license has an indefinite life~~share and ~~will not be amortized. For the year ended December 31, 2017, the Company recognized an impairment of $218,374~~per share data have been retroactively reflected for the ~~intangible asset – license and the goodwill originally recorded as part of the purchase price allocation for BBD.~~acquisition.

Purchases of property and equipment totaled ~~$697,056~~$2,158,970 and ~~$152,532~~$697,056 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Depreciation ~~and amortization~~ expense totaled ~~$113,519~~$409,568 and ~~$14,563~~$113,519 for the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Intangible assets and goodwill at June 30, ~~2018~~2019 and December 31, ~~2017 consists~~2018 consisted of the following:

Amortization expense totaled ~~$14,890~~$231,911 and ~~$15,481~~$14,890 for the six months ended June 30, 2019 and 2018, respectively.

Other assets ~~consist~~at June 30, 2019 and December 31, 2018 consisted of the following:

As of June 30, ~~2018,~~2019, the Company had ~~$285,000~~$585,000 of capitalized costs related to services provided for the rebranding of its ~~Burnside~~existing product ~~line.~~line and branding of new product lines. This amount is being amortized over a seven-year life. ~~Additionally, there was $130,000~~In December 2018 and January 2019, the Company invested in ~~deposits for the branding services related~~an online (direct-to-consumer) business and intends to ~~the future release of other product lines.~~begin selling select products through this platform. The remaining deposits of ~~$23,072~~$56,542 represent office and retail space lease deposits.

The Company has various lease agreements in place for facilities and equipment. Terms of these leases include, in some instances, scheduled rent increases, renewals, purchase options and maintenance costs, and vary by lease. These lease obligations expire at various dates through 2023. As the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate based on information available at commencement to determine the present value of the lease payments. Based on the present value of the lease payments for the remaining lease term of the Company’s existing leases, the Company recognized right-of-use assets of $920,805, lease liabilities of $1,110,445, and a net adjustment to retained earnings of $187,353 upon adoption on January 1, 2019. Right-of-use assets and lease liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of June 30, 2019, the right-of-use assets and lease liabilities were $1,041,328 and $1,214,370, respectively. Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet and are recognized on a straight-line basis over the lease term. Aggregate lease expense for the six months ended June 30, 2019 was $371,004, consisting of $305,549 in lease expense for lease liabilities recorded on the Company’s balance sheet and $65,455 in short-term lease expense.

We paid $84,360 and $74,426 in interest on notes for the six months ended June 30, 2019 and 2018, respectively.

On May 10, 2018, ~~Eastside Distilling, Inc. (the “Company”)~~the Company entered into a credit and security agreement (the “Credit and Security Agreement”), by and between the Company and The KFK Children’s Trust, Jeffrey Anderson – Trustee (the “Lender”). Pursuant to the Credit and Security Agreement, the Lender will make loans to the Company in an aggregate principal amount not to exceed $3,000,000 (the “Loans”). The Loans are secured by all of the Company’s bulk whiskey, bourbon and rye inventory held in third-party storage facilities (“Specified Inventory”). The Company may borrow 80% of the value of the Specified Inventory it is able to purchase under the Credit and Security Agreement.

The proceeds of the Loans are to be used by the Company to purchase ~~bulk whiskey, bourbon and rye inventory~~the Specified Inventory for use in distilling and producing its spirits products, and for no other purpose.

The Loans have an annual interest rate of 7.00%. The Company will pay accrued and unpaid interest on the Loans, for the period commencing on the date each such Loan is made and continuing until each such Loan is paid in full. During the six months ended June 30, 2019, the Company paid $105,583 in interest on the Loans. The Company ~~will~~must pay the outstanding principal amount of the ~~Loans: (i)~~Loans in a one-time payment on the termination date of the Credit and Security Agreement ~~which shall take place 37 months from the effective date thereof,~~(June 10, 2021), or earlier pursuant to other provisions ~~thereof; and (ii) the~~thereof. The Company may prepay the Loans or any portion thereof at any time, and from time to time, without premium or penalty. As of June 30, 2019, the Company had borrowed the full $3 million available under the Credit and Security Agreement.

The current market value of the Company’s bulk whiskey, bourbon and rye inventories must be at least 120% of the outstanding Loan balance. In addition, the Credit and Security Agreement contains other customary covenants including, among other things, certain restrictions on incurring indebtedness.

The Company leases its corporate office, warehouse, kiosks, and tasting room space under operating lease agreements which expire at various dates through March 2021. Monthly lease payments range from $1,857 to $6,400 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.

~~At June 30, 2018, future minimum lease payments required under the operating leases are approximately as follows:~~

~~Total rent expense was $183,278 and $145,844 for the six months ended June 30, 2018 and 2017, respectively.~~

We are not currently subject to any material legal proceedings, however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our ~~business.~~business, or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation can, among other things, be time consuming and expensive to resolve, and divert management resources.

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 effect is anti-dilutive. There were no dilutive common shares at June 30, ~~2018~~2019 and ~~2017.~~2018. The numerators and denominators used in computing basic and diluted net loss per common share in ~~2018~~2019 and ~~2017~~2018 are as follows:

All shares related and per share information in these financial statements has been adjusted to give effect to the 20-for-1 reverse stock split of the Company’s common stock, effected on October 18, 2016, and the 3-for-1 reverse stock split of the Company’s common stock, effected on June 15, 2017.

~~During the six months ended June 30, 2018,~~On January 11, 2019, the Company issued ~~280,028~~338,212 shares of common stock ~~at $5.40 per share~~ in connection with the ~~exercise~~acquisition of ~~warrants~~Craft Canning for ~~cash proceeds~~a total consideration of $1,512,151, and 5,000 shares of common stock at $6.00 per share in connection with the exercise of warrants for proceeds of $30,000. In addition, the Company received cash proceeds of $298,522 during the six months ended June 30, 2018 in connection with the exercise of warrants for shares of common stock that were issued in July 2018.$2,080,004.

During the ~~six months ended June 30, 2018,~~first half of 2019, the Company issued ~~31,629~~63,978 shares of common stock to directors, employees and ~~employees~~consultants for stock-based compensation of ~~$236,443.~~$376,982. The shares were valued using the closing share price of our common stock on the date of grant, ~~with~~within the range of ~~$3.99~~$4.47 - ~~$8.50~~$6.13 per share.

~~During the six months ended June 30, 2018,~~In April 2019, the Company issued ~~1,848~~1,077 shares of common stock in connection with existing option exercises at an ~~average~~ exercise price of ~~$5.24.~~

During the six months ended June 30, 2018, the Company issued 17,525 shares of common stock to consultants in exchange for services. The shares were valued using the closing share price of our common stock on the date of grant, with a range of $3.99 - $7.40 per share, for a total value of $87,118.

In December 2017, the Company issued 18,371 shares of common stock to directors and employees for stock-based compensation of $79,351. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.78 - $4.33 per share.

In December 2017, the Company issued 32,000 shares of common stock to a consultant in exchange for services, which were subject to a claw-back provision tied to specific performance. The shares were valued using the closing share price of our common stock on the date of grant, $4.54 per share.

In December 2017, the Company issued 14,384 shares of its common stock upon conversion of 8% convertible promissory notes with an aggregate principal amount converted of $52,500. No gain or loss recorded on the transactions.

In September 2017, the Company issued 14,760 shares of common stock to directors and employees for stock-based compensation of $56,221. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.78 - $4.38 per share.

In August 2017, the Company issued 83,334 shares of its common stock upon conversion of a 6% convertible promissory note with an aggregate principal amount converted of $500,000. No gain or loss recorded on the transactions.

In August 2017, the Company issued 5,209 shares of common stock to a third-party consultant in exchange for services rendered. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.40 - $3.50 per share.

In August 2017, the Company completed an underwritten public offering of 1,200,000 units consisting of 1,200,000 shares of its common stock and warrants to purchase up to an aggregate of 1,200,000 shares of its common stock (each, a “Unit”) at a public offering price of $4.50 per Unit. The warrants have a per share exercise price of $5.40, are exercisable immediately, and will expire five years from the date of issuance. The gross proceeds to the Company from this offering were $5.4 million, before deducting underwriting discounts and commissions and other estimated offering expenses. On August 24, 2017, the underwriters exercised their option to purchase an additional 180,000 Units to cover over-allotments, that resulted in additional gross proceeds to the Company of $810,000, before deducting offering expenses.

In June 2017, the Company issued 2,716 shares of common stock to employees for stock-based compensation of $15,943, all of which were fully vested upon issuance. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $4.38 - $6.00 per share.

In May 2017, the Company completed the acquisition of a majority stake in BBD. We issued 28,096 shares of common stock to the owners of BBD as consideration for 90% of the BBD LLC units. Based on the closing share price of our common stock of $4.80 on May 1, 2017, the value of the transaction was $134,858. Issuance costs incurred were $14,400.

~~In April 2017, the independent directors, Messrs. Trent Davis and Michael Fleming, respectively, each exercised 4,630 stock options to purchase common stock at $5.40 per share.~~

In April 2017, the Company issued 50,335 shares of common stock to three third-party consultants in exchange for services rendered. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $4.35 - $4.50 per share.

In April 2017, the Company approved a restricted stock unit grant of 33,334 shares of common stock to the Company’s Chief Executive Officer, Grover Wickersham. The grant vested on April 5, 2017, of which 10,218 shares were withheld in order to satisfy Mr. Wickersham’s personal tax withholding responsibility. The shares were valued using the $4.80 closing share price of our common stock on the date of grant.

~~In April 2017, the Company issued 16,667 shares of its common stock upon conversion of 50 shares of preferred stock.~~

~~In March 2017, the Company issued 83,334 shares of its common stock upon conversion of 250 shares of preferred stock.~~

In March 2017, the Company issued 22,436 shares of its common stock upon conversion of 8% convertible promissory notes with an aggregate principal amount converted of $87,500. No gain or loss recorded on the transactions.

On March 8, 2017, the Company completed the acquisition of MotherLode. We issued 86,667 shares of common stock to the owners of MotherLode as consideration for the acquisition. Based on the closing share price of our common stock of $4.35 on March 8, 2017, the value of the transaction was $377,000. Issuance costs incurred were $5,580.

In March 2017, the Company issued 575 shares of common stock to employees for stock-based compensation of $2,517. The shares were valued using the $4.38 closing share price of our common stock on the date of grant.

In March 2017, the Company issued 19,796 shares of common stock to four third-party consultants in exchange for services rendered. The shares were valued using the closing share price of our common stock on the date of grant, with the range of $3.90 - $4.35 per share.

~~From March 31, 2017 to June 2, 2017, the Company issued 400,019 shares of its common stock for aggregate cash proceeds of $1,560,000, including 400,019 warrants for common stock.~~

~~From January 15, 2017 through February 16, 2017, the Company received warrant exercises and common stock subscriptions for 40,834 shares for aggregate cash proceeds of $159,250.~~

~~From January 4, 2017 to January 22, 2017, the Company sold 15,001 shares of common stock to accredited investors at a price of $3.90 per share for aggregate cash proceeds of $58,500.~~

Each share of Series A Preferred has a stated value of $1,000, which is convertible into shares of the Company’s common stock at a fixed conversion price equal to $4.50 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 therefore. 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~~shareholder divided by (ii) 90% of the average of the per share market values during the twenty (20) trading days immediately preceding athe 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 is 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 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,~~shareholders, the holders of the Series A Preferred as a class 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 vote separately a class to change any of the rights, preferences and privileges of the Series A Preferred.

As of June 30, ~~2018,~~2019, the Company has zero shares of preferred stock outstanding.

On September 8, 2016, the Company adopted the 2016 Equity Incentive Plan (the “2016 Plan”). ~~The total number~~Pursuant to the terms of ~~shares available for~~ the ~~grant of either stock options or compensation stock under the 2016 Plan is 166,667 shares, subject to adjustment. On~~plan, on January 1, ~~2017,~~2019, the number of shares available for grant under the 2016 Plan reset to 307,139 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year. On October 18, 2017, the Board of Directors (the “Board”) approved amendments to the 2016 Plan to (i) increase the number of shares of the common stock that may be issued under the 2016 Plan (the “Aggregate Limit”) by an additional 192,861 shares of common stock, for a total of 500,000 shares of common stock, (ii) increase the number of shares of common stock that may be granted to any participant pursuant to options to purchase common stock and stock appreciation rights under the 2016 Plan in any one-year period (the “Individual Option Limit”) from 8,333 shares to 200,000 shares, (iii) increase the number of shares of common stock that may be granted to any participant pursuant to other awards (the “Individual Award Limit”) under the 2016 Plan in any one-year period from 8,333 shares to 200,000 shares and (iv) increase the number of shares of common stock that may be paid to any one participant under the 2016 Plan for a performance period pursuant to performance compensation awards under the 2016 Plan (the “Individual Performance Award Limit”) from 8,333 shares to 200,000 shares, which amendments were adopted and approved at the December 2017 meeting of stockholders. The exercise price per share of each stock option will not be less than 100 percent of the fair market value of the Company’s common stock on the date of grant. On January 1, 2018, the number of shares available for grant under the 2016 Plan reset to 1,131,8802,030,775 shares, equal to 8% of the number of outstanding shares of the Company’s capital stock, calculated on an as-converted basis, on December 31 of the preceding calendar year, and then added to the prior year plan amount. AtAs of June 30, ~~2018,~~2019, there ~~were 839,422~~have been 983,249 options and ~~164,693~~289,758 restricted stock units (“RSUs”) issued under the 2016 Plan, with vesting schedules varying between immediate and five (5) years from the grant date.

On January 29, 2015, the Company adopted the 2015 Stock Incentive Plan (the ~~2015 Plan)~~“2015 Plan” and, together with the 2016 Plan, the “Plans”). The total number of shares available for the grant of either stock options or compensation stock under the 2015 Plan is 50,000 shares, subject to adjustment. The exercise price per share of each stock option will not be less than 20 percent of the fair market value of the Company’s common stock on the date of grant. At June 30, ~~2018,~~2019, there were ~~14,584~~49,584 options issued under the Plan outstanding, which options vest at the rate of at least 25 percent in the first year, starting ~~6-months~~six months after the grant date, and 75% in year two.

The Company also issues, from time to time, options ~~which~~that are not registered under a formal option plan. At June 30, ~~2018,~~2019, there were no options outstanding that were not issued under the Plans.

A summary of all stock option activity at and for the six months ended June 30, ~~2018~~2019 is presented below:

The aggregate intrinsic value of options outstanding at June 30, ~~2018~~2019 was ~~$2,962,012.~~$232,310.

At June 30, ~~2018,~~2019, there were ~~579,042~~415,085 unvested options with an aggregate grant date fair value of ~~$1,566,646.~~$1,054,563. The unvested options will vest in accordance with the vesting schedule in each respective option agreement, which varies between immediate and five (5) years from the grant date. The aggregate intrinsic value of unvested options at June 30, ~~2018~~2019 was ~~$2,265,104.~~$86,599. During the six months ended June 30, ~~2018, 76,500~~2019, 117,808 options vested and became ~~vested.~~exercisable.

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 six months ended June 30, ~~2018:~~2019:

The weighted-average grant-date fair value per share of stock options granted during the six months ended June 30, ~~2018~~2019 was ~~$2.57.~~$1.80. The aggregate grant date fair value of the ~~480,000~~79,000 options granted during the six months ended June 30, ~~2018~~2019 was ~~$1,233,600.~~$142,189.

For the six months ended June 30, ~~2018~~2019 and ~~2017,~~2018, total stock ~~option~~compensation expense related to stock options was ~~$398,615~~$395,561 and ~~$279,322,~~$398,615 respectively. At June 30, ~~2018,~~2019, the total compensation cost related to stock options not yet recognized is approximately ~~$1,572,611,~~$935,755, which is expected to be recognized over a weighted-average period of approximately ~~2.67~~2.01 years.

During the six months ended June 30, ~~2018,~~2019, the Company issued an aggregate of ~~455,298~~146,262 common stock warrants in connection with the acquisition of Craft Canning on January 11, 2019. These warrants are subject to the continuation of a consulting agreement and are not part of the purchase price of ~~$4.55 million in promissory notes. $3.63 million was purchased with new cash proceeds and $922,980 was purchased from~~ the ~~conversion of prior existing notes.~~acquisition. The Company has determined the warrants should be classified as equity on the condensed consolidated balance sheet as of June 30, ~~2018.~~2019. The estimated fair value of the warrants at issuance was ~~$1,776,646,~~$133,537, based on a combination of closing market trading price on the date of issuance for the public offering warrants, and the Black-Scholes option-pricing model using the weighted-average assumptions below:

~~A total of 285,028~~No warrants were exercised during the six months ended June 30, ~~2018 for cash proceeds of $1,542,211.~~

The following is a description of transactions since January 1, ~~2016~~2018 as to which the amount involved exceeds the lesser of $120,000 or one percent (1%) of the average of our total assets at year-end for the last two completed fiscal years which was $176,934 and in which any related person has or will have a direct or indirect material interest, other than equity, compensation, termination and other arrangements.

On August 9, 2018, Grover Wickersham, the Executive Chairperson of our Board as of June 2, 2017, Mr. Wickersham purchased 15,189 units at $3.90 per unit, with each unit consisting of one share of common stock and one three-year common stock purchase warrant exercisable at $7.50 per share (subject to adjustment), for total proceeds of $59,237 in cash.

~~On August 10, 2017, Mr. Wickersham~~30, 2019 and his affiliates ~~purchased~~exercised 55,555 ~~units~~warrants acquired in connection with the Company’s 2017 unit offering at ~~$4.50~~an exercise price of $5.40 per ~~unit, with each unit consisting of one~~ share, ~~of common stock and one Public Warrant,~~ for total proceeds of approximately ~~$250,000 in cash.~~$300,000.

On August 23, 2017, our Board of Directors (the “Board”) appointed Jack Peterson to the Board to fill an existing vacancy on the Board effective immediately. Mr. Peterson is also the President of Sandstrom Partners. In late 2016, with the goal of increasing its brand value and accelerating sales, the Company retained Sandstrom Partners and tasked them with reviewing the Company’s current product portfolio, as well as its new ideas, and advising it with respect to marketing, creation of brand awareness and product positioning, locally and nationally. The Company is using ~~Sandstrom’s~~Sandstrom Partner’s full range of brand development services, including research, strategy, brand identity, package design, environments, advertising as well as digital design and development. The Company paid $140,000 in cash, issued 33,334 shares of stock valued at $145,000 (at the time of issuance), and issued 42,000 warrants with an exercise price of $3.50 valued at $43,596 (using a Black-Scholes value at the time of issuance) to Sandstrom Partners in 2017 for services rendered by Sandstrom under its agreement with the Company. We have also issued an additional 10,025 shares valued at $40,000 (at the time of issuance) to Sandstrom in 2018. On August 11, 2018, we issued 42,000 shares of common stock to Sandstrom in connection with the exercise of their 42,000 warrants in exchange for services rendered. During the first half of 2019, we paid $140,000 in cash to Sandstrom for work performed.

On December 29, 2017, the Grover T. Wickersham Employees’ Profit Sharing Plan (“PSP”) purchased from us a promissory note bearing interest at the rate of 8% per annum (a “Promissory Note”) for aggregate consideration of $464,750. Interest is paid monthly. The ~~note~~Promissory Note is due on June 30, 2019 or in the event the Company completes a private or public offering of its equity or debt securities in which the gross amount raised in such financing is at least $2.0 million (a “Future Financing”), all ~~amount~~amounts due under ~~this~~the Promissory Note ~~shall~~will become due and payable within five (5) business days of the final closing of such Future Financing. In lieu of receiving the cash repayment of amounts due under this Note in connection with a Future Financing, at the option of ~~Payee,~~PSP, the principal amount due and payable may be used to purchase the securities offered in the Future Financing. ~~The payee~~PSP used a balance of $379,750 to purchase the Company’s new private offering of notes with warrants. The remaining principal balance of $85,000 was paid in April 2018. The new promissory notes bear interest at 8% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. In conjunction with this new offering, ~~the Payee~~PSP was issued 37,975 warrants, exercisable at $5.40 per share. On August 9, 2018, PSP exercised the 37,975 warrants at $5.40 per share in exchange for a reduction in outstanding note principal due. $174,685 remained outstanding on the note.

On December 29, 2017, the Grover T. and Jill Z. Wickersham 2000 Charitable Remainder Trust (the “Wickersham Trust”) purchased from us a promissory note bearing interest at the rate of 8% per annum (a “Promissory Note”) for aggregate consideration of $179,300. Interest is paid monthly. The ~~note~~Promissory Note is due on June 30, 2019 or in the event the Company completes a private or public offering of its equity or debt securities in which the gross amount raised in such financing is at least $2.0 million (a “Future Financing”), all ~~amount~~amounts due under ~~this~~the Promissory Note ~~shall~~will become due and payable within five (5) business days of the final closing of such Future Financing. In lieu of receiving the cash repayment of amounts due under ~~this~~the Promissory Note in connection with a Future Financing, at the option of ~~Payee,~~Wickersham Trust, the principal amount due and payable may be used to purchase the securities offered in the Future Financing. During the first quarter of 2018, ~~the payee~~Wickersham Trust used the balance to purchase the Company’s new private offering of notes with warrants. The new promissory notes bear interest at 8% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. In conjunction with this new offering, the ~~Payee~~Wickersham Trust was issued ~~37,975~~17,930 warrants, exercisable at $5.40 per share. On August 9, 2018, the Wickersham Trust exercised the 17,930 warrants at $5.40 per share in exchange for a reduction in outstanding note principal due. $82,478 remained outstanding on the note.

On June 11, 2019, our Board appointed Owen Lingley to the Board to fill an existing vacancy on the Board effective immediately. Owen Lingley is the founder of Craft Canning, LLC, which was acquired by the Company on January 11, 2019 and subsequently changed its name to Craft Canning + Bottling LLC. In connection with the acquisition of Craft Canning, Mr. Lingley received $1,843,200 in cash, 338,212 shares of common stock of the Company and a promissory note in the aggregate principal amount of $731,211, which bears interest at a rate of 5% per annum and matures on January 11, 2022. The shares acquired by Mr. Lingley in connection with the acquisition of Craft are subject to a one-year lock-up restriction and have “piggyback” registration rights effective after the one-year lock-up.

In addition, the Company also issued to Mr. Lingley a warrant to purchase 146,262 shares of common stock of the Company at $7.80 per share and an exercise period of three years. The shares of common stock issuable upon exercise of the warrant will be subject to the same “piggyback” registration rights as the shares received in connection with the acquisition of Craft, described above.

Following the acquisition of Craft, Mr. Lingley became non-executive Chairman of Craft and is party to a consulting agreement with the Company. Under his consulting agreement with the Company, Mr. Lingley receives annual cash compensation of $75,000 per year.

On March 29, 2018, June 22, 2018 and July 10, 2018, Paul F. Shoen, who was elected to our Board in August 2019, purchased from us promissory notes having an aggregate principal amount of $363,930, $500,000 and $197,020, respectively. The promissory notes bear interest at a rate of 5% per annum, payable monthly on the last day of the month. In August 2018, we repaid a total of $572,912 of the principal balance outstanding under the notes. In September 2018, Mr. Shoen sold an additional $300,000 of the outstanding principal amount. The entire amount of the remaining principal and any accrued and unpaid interest is due and payable on May 1, 2021. $188,037 currently remains outstanding on the notes.

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.~~Board. We will continue to conduct an appropriate review of all related party transactions and potential conflicts of interest on an ongoing basis. Our audit committee has the authority and responsibility to review, approve and oversee any transaction between the Company and any related person and any other potential conflict of interest situation on an ongoing basis, in accordance with Company policies and procedures in effect from time to time.

On July ~~10, 2018,~~3, 2019, the Company entered into a new capital equipment line of credit with a borrowing limit of $300,000, pursuant to which the Company is permitted to borrow 100% of the cost of new equipment purchases, and 90% of the cost of used equipment purchases. On August 8, 2019, The Company borrowed the full $300,000 on the line of credit. The line of credit carries and interest rate of 3.91%. Principal and accrued interest are to be paid monthly starting in September 2019 until maturity in August 2024.

Between July 1, 2019 and July 21, 2019, the Company issued ~~4,792~~26,980 shares of common stock ~~in connection with employee option exercises.~~

~~Between July 2, 2018~~under the 2016 Plan to directors and ~~July 20, 2018,~~consultants for stock-based compensation of $118,409. The shares were valued using the Company raised an additional $447,020 under its private offering of promissory notes and accompanying warrants. The promissory notes bear interest at 5% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. For every $100,000 in principal, the Company issued to the investor 10,000 common stock purchase warrants, for a total of 88,000 warrants. The warrants, which are identical to the warrants that were issued in the Company’s public offering that was consummated in August 2017, are exercisable through August 10, 2022, unless earlier redeemed, at an exercise price of $5.40, subject to adjustment for stock splits, reverse splits and other similar recapitalization events. The Company has the option to redeem all or a part of the outstanding warrants at any time after the closing share price of the Company’s common stock ~~exceeds $7.65 for five consecutive trading days. In electing to redeem~~on the ~~warrants, the Company will provide 30 days’ notice~~date of the ~~redemption date, during which time~~grant, with the ~~holders~~range of ~~outstanding warrants will have the opportunity~~$3.68 to ~~exercise their warrants at the exercise price then in effect. Any warrants remaining outstanding at the close of business on the 30th day of the notice period will be redeemed at a price of $0.15~~$4.55 per ~~warrant, after which, the warrants will be cancelled.~~share.

Between July 2, 2018 and August 13, 2018, the Company received an aggregate of $5,314,070 upon exercise of a total of 984,087 common stock purchase warrants that were sold in the Company’s August 2017 public offering as well as the identical warrants that were sold in the private offering of promissory notes during 2018. As of August 13, 2018, there remains outstanding 535,885 warrants sold in the public offering, in addition to a remaining total of 80,000 identical warrants sold in the private placement noted above. We also issued 32,308 common shares associated with the exercise of common stock purchase warrants that were sold in a prior private offering.

~~Between July 2, 2018 and July 10, 2018, the Company issued 167,273 shares of common stock in connection with the conversion of $1,003,638 in convertible note principal and accrued interest.~~

On August 3, 2018 the Company announced that it is exercising its option to call for redemption of the common stock purchase warrants sold in the Company’s public unit offering in August 2017 and the warrants sold in the note offering between March and June 2018 (collectively, the “Common Stock Purchase Warrants”). Registered holders of the Common Stock Purchase Warrants will have until September 10, 2018 (the “Redemption Date”) to exercise each Common Stock Purchase Warrant for one share of the Company’s common stock, $0.0001 par value (the “Common Stock”), at $5.40 per share. The Company has also arranged a call of the warrants issued between July 2, 2018 and July 20, 2018 in connection with its private offering of promissory notes totaling $447,020, on the same terms and conditions.

ITEM 2.2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes. This section of the Quarterly Report includes a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended 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,~~like “believe”, “expect”, “estimate”, “anticipate”, “intend”, “project”, “plan” and similar expressions, or words which, by their nature, refer to future events. Forward-looking statements may include, among other things, statements about:

You should not place undue certainty on these forward-looking statements which speak only as of the date made, and except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that could cause differences include, but are not limited ~~to:~~to, customer acceptance risks for current and new ~~brands;~~brands, reliance on external sources on ~~financing;~~financing, development risks for new products and ~~brands;~~brands, dependence on wholesale ~~distributors;~~distributors, inventory carrying ~~issue;,~~issues, fluctuations in market demand and customer ~~preferences;~~preferences, as well as general conditions of the alcohol and beverage ~~industry;~~industry, and other factors discussed in Item 1A of Part I of our annual report on Form 10-K for the year ended December 31, ~~2017~~2018 entitled “Risk Factors,” similar discussions in subsequently filed Quarterly Reports on Form 10-Q, including this Form 10-Q, as applicable, and those contained from time to time in our other filings with the Securities and Exchange Commission.

We are an Oregon-based producer and marketer of craft spirits, founded in 2008. Our products span several alcoholic beverage categories, including bourbon, American whiskey, vodka, gin and ~~rum. Unlike other distillers,~~rum, as well as non-alcoholic CBD-based beverages. We sell our products on a wholesale basis to distributors, and we operate several retail tasting rooms in Oregon to market our brands directly to consumers. Our strategy for growth is to build on our local base in the Pacific Northwest and expand selectively to other markets, using major spirits distributors. In December 2016, we retained Sandstrom Partners, an internationally-known spirit branding firm that branded St-Germain and Bulleit Bourbon, to guide our marketing strategy and branding. Sandstrom Partners subsequently became an investor in our company. ~~During 2017, with~~With the assistance of Sandstrom Partners and using our in-house spirits expertise, during 2017, we created Redneck Riviera Whiskey (“RRW”), in collaboration with ~~country music~~Country Music superstar John Rich, of the duo “Big & Rich.” Supported by John Rich’s marketing efforts, we launched RRW in the Southeastern and Gulf States primarily through Republic National Distributing Company (“RNDC”). We believe that RRW will achieve commercial success on a broad scale, and we have therefore focused our sales efforts on RRW outside Oregon. We believe RRW will be a key growth engine in 2018 and will also provide a “coattail” effect for our other brands, helping them to achieve improved national recognition and success.early 2018.

Operating as a small business in a large, international spirits marketplace occupied by massive conglomerates, we seek to ~~turn~~utilize our small size ~~from a disadvantage into an~~to our advantage. As the success of our RRW launch and Sandstrom Partners collaboration demonstrate, our team can leverage its smaller size to launch new brands more quickly than larger conglomerates because we are able to dedicate more of our attention and resources to developing innovative products. We believe that the dominance of Canadian whiskeys in the light-whiskey segment is vulnerable to a light whiskey that is 100% American, and we are exploiting that vulnerability with RRW, a product that went from idea, to celebrity collaboration, to design and formulation, to market roll-out in less than nine months. We are innovative in targeting emerging trends with our ~~products;~~other products as well; for example, we developed our ~~Hue-Hue~~ Coffee Rum with cold brew coffee and low sugar, as well as our gluten-free potato vodka. We seek to be both a leader in creating spirits that offer better value than comparable spirits (for example, our value-priced Portland Potato Vodka), and an innovator in creating imaginative spirits that offer a unique taste experience, like our ~~Hue-Hue~~ Coffee Rum, Oregon oak-aged whiskeys, our Portland Mule drink (a ready-to-drink (“RTD”) cocktail in a single serving can), and ~~Marionberry Whiskey.~~most recently Outlandish (a non-alcoholic beverage line that contains CBD).

As a Nasdaq-traded company, we have access to public capital markets to support our growth initiatives, including strategic acquisitions. In May 2017, we used our shares to acquire 90% of Big Bottom Distillery, LLC (“BBD”), known for its award-winning, super-premium gins and whiskeys, including The Ninety One Gin, Navy Strength Gin, Oregon Gin, Delta Rye and American Single Malt Whiskey. BBD’s super-premium spirits give us a presence at the “high end” of the market. In December of 2018, we acquired the remaining 10% of BBD. In addition, through MotherLode Craft Distillery (“MotherLode”), our wholly-owned subsidiary acquired in March 2017, and Craft Canning + Bottling, LLC (formerly known as Craft Canning, LLC) (“Craft Canning”) acquired on January 11, 2019, we also provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits ~~producers, some of whom contract with us to blend or distill spirits. During 2018, we have begun~~producers. We intend to use our ~~“slim line”~~ canning equipment, ~~newly installed~~ at MotherLode and Craft Canning, to profit from ~~an emerging consumer interest~~the rapid growth in canned ~~wine.~~beverages (Beer, Wine, Spirit-based RTD’s and CBD). We believe our ~~location close~~significant capacity expansion (and regional reputation) due to ~~vineyards in Oregon and Washington~~the more recent acquisition of Craft Canning, is a competitive advantage.

~~First~~Our first half ~~2018~~2019 results benefitted from continued growth in key parts of the ~~impact~~business as well as from the newly acquired Craft Canning in January of ~~several key initiatives the Company started in 2017. Second quarter gross~~this year. Gross sales increased ~~90%~~157% over the ~~prior year, and gross sales for the six months ended June 30, 2018 increased 80% over~~comparable period of the prior year, primarily due ~~to five key factors:~~to: 1) the ~~newly launched~~continued sales momentum of RRW, ~~product, which experienced very strong sales with its initial market launch,~~ 2) the addition of Craft Canning; and 3) increased wholesale sales traction within the Pacific Northwest, especially with our various vodka products and our Burnside product as we strategically invested in programs to promote the vodka product, 3) the re-launch of our new Burnside Bourbon packaging, which began in late 2017, and its corresponding growth, 4) the acquisitions of MotherLode and BBD, and the expansion of our private label business with our new canning abilities; and 5) the addition of retail locations within Oregon.line.

In order to support our ~~planned growth,~~key initiatives, we ~~invested~~have continued to invest heavily in our infrastructure (facilities, people, and marketing programs) ~~during 2017.~~. We believe we are ~~now~~ well positioned from a capacity and infrastructure standpoint to leverage ~~those~~these investments ~~made~~ and ~~thus~~ experience improved performance throughout ~~2018.~~the balance of 2019.

Three Months Ended June 30, ~~2018~~2019 Compared to the Three Months Ended June 30, ~~2017~~2018

Our sales for the three months ended June 30, ~~2018~~2019 increased to ~~$1,675,067,~~$4,252,415, or approximately ~~90%~~154%, from ~~$883,522~~$1,675,067 for the three months ended June 30, ~~2017.~~2018. The following table compares our sales in the three months ended June 30, ~~2018~~2019 and ~~2017:~~2018:

The increase in sales in the three months ended June 30, ~~2018~~2019 is primarily attributable to: the ~~newly launched~~ RRW product, increased wholesale sales traction within the Pacific Northwest and our ~~acquisitions~~acquisition of ~~MotherLode~~Craft Canning and ~~BBD and~~the related expansion of our private ~~label~~label/co-packing business and canning ~~abilities, offset by a reduction in retail due to store relocations.~~abilities.

Excise taxes, customer programs and incentives for the three months ended June 30, ~~2018 decreased~~2019 increased to ~~$150,380,~~$357,237, or approximately ~~46%~~137.6%, from ~~$278,492~~$150,380 for the comparable ~~2017~~2018 period. The ~~decrease is primarily~~increase was attributable to ~~the lower federal excise tax rates that went into effect this year, in addition to decreased Oregon~~higher excise taxes ~~(from our retail operations), partially offset by higher customer programs during~~as a result of the ~~period.~~

~~During the three months ended June 30, 2018, cost of~~increase in spirit sales, ~~increased to $763,768, or approximately 94%, from $394,625 for the three months ended June 30, 2017. The increase is attributable to the costs associated with our increased liquor sales in the period~~ as well as ~~higher facilities costs.~~an increase in customer programs and incentives due to increased distribution.

~~Gross profit is calculated by subtracting the cost of products sold from net sales.~~ Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs. During the three months ended June 30, 2019, cost of sales increased to $2,413,240, or approximately 216%, from $763,768 for the three months ended June 30, 2018. The increase is attributable to the costs associated with our increased sales in the period, as well as higher facilities costs.

Gross profit is calculated by subtracting the cost of sales from net sales. Gross margin is gross profits stated as a percentage of net sales.

The following table compares our gross profit and gross margin in the three months ended June 30, ~~2018~~2019 and ~~2017:~~three months ended June 30, 2018:

Our gross margin of ~~50%~~38% of net sales in the three months ended June 30, ~~2018 increased~~2019 decreased from our gross margin of ~~35%~~50% for the three months ended June 30, ~~2017~~2018 primarily due to ~~the combination of our new products which have higher margins than prior legacy products~~a change in product and business mix as well as ~~the new, lower federal excise tax.~~higher raw material costs and higher facilities costs. While our goal is to ultimately improve our overall gross margin itand improve the efficiencies of our now larger production facility as we generate increased volumes, our margins may continue to fluctuate ~~around the current level due to the impact~~as a result of ~~two~~other key factors: raw material costs which tend to fluctuate, product sales mix and the related customer programs and incentives, ~~both of~~ which are subject to seasonal fluctuations and the competitive environment.

Advertising, promotional and selling expenses for the three months ended June 30, ~~2018~~2019 increased to ~~$1,066,847,~~$1,236,143, or approximately ~~94%~~15.9%, from ~~$549,865~~$1,066,847 for the three months ended June 30, ~~2017.~~2018. This increase is primarily due to our efforts to expand our product sales both regionally in the Pacific Northwest as well as target national markets, particularly with the ~~new~~newer RRW ~~product launch.~~product.

General and administrative expenses for the three months ended June 30, ~~2018~~2019 increased to ~~$1,495,486,~~$3,077,174, or approximately ~~76%~~106%, from ~~$848,472~~$1,495,486 for the three months ended June 30, ~~2017.~~2018. This increase is primarily due to increased headcount and the associated compensation and benefits, ~~in addition~~higher depreciation and amortizations costs, and certain one-time costs related to ~~$254,548 higher stock-based compensation expense in 2018.~~bonuses paid and acquisition-related expenses.

Total other expense, net was $117,108 for the three months ended June 30, 2019, compared to $104,515 for the three months ended June 30, 2018, ~~compared to $95,753 for the three months ended June 30, 2017,~~ an increase of 9%12%. This increase was primarily due to higher interest expense on an increased notes payable balance in ~~2018.~~2019.

Net loss attributable to common shareholders during the three months ended June 30, ~~2018~~2019 was ~~$1,906,625~~$2,948,487 as compared to a loss of ~~$1,287,651~~$1,906,625 for the three months ended June 30, ~~2017.~~2018. The increase in our net loss was primarily attributable to our higher general and administrative expenses and advertising, promotional and selling expenses during ~~2018,~~2019, partially offset by an increase in gross profit.

Six Months Ended June 30, ~~2018~~2019 Compared to the Six Months Ended June 30, ~~2017~~2018

Our sales for the six months ended June 30, ~~2018~~2019 increased to ~~$3,088,249,~~$7,938,115, or approximately ~~80%~~157%, from ~~$1,713,191~~$3,088,249 for the six months ended June 30, ~~2017.~~2018. The following table compares our sales in the six months ended June 30, ~~2018~~2019 and ~~2017:~~2018:

The increase in sales ~~for~~in the six months ended June 30, ~~2018~~2019 is primarily attributable to: the ~~newly launched~~ RRW product, increased wholesale sales traction within the Pacific Northwest and our ~~acquisitions~~acquisition of ~~MotherLode~~Craft Canning and ~~BBD and~~the related expansion of our private ~~label~~label/co-packing business and canning ~~abilities, and the addition of new and relocation of existing retail locations.~~abilities.

Excise taxes, customer programs and incentives for the six months ended June 30, ~~2018 decreased~~2019 increased to ~~$343,229,~~$546,638, or approximately ~~31%~~59.3%, from ~~$495,680~~$343,229 for the comparable ~~2017~~2018 period. The ~~decrease is primarily~~increase was attributable to ~~the lower federal excise tax rates that went into effect this year, in addition to decreased Oregon~~higher excise taxes ~~(from our retail operations), partially offset by higher customer programs during~~as a result of the ~~period.~~

~~During the six months ended June 30, 2018, cost of~~increase in spirit sales, ~~increased to $1,391,291, or approximately 94%, from $717,538 for the six months ended June 30, 2017. The increase is attributable to the costs associated with our increased liquor sales in the period~~ as well as ~~higher facilities costs.~~an increase in customer programs and incentives due to increased distribution.

~~Gross profit is calculated by subtracting the cost of products sold from net sales.~~ Cost of sales consists of the costs of ingredients utilized in the production of spirits, manufacturing labor and overhead, warehousing rent, packaging, and in-bound freight charges. Ingredients account for the largest portion of the cost of sales, followed by packaging and production costs. ~~Gross margin~~During the six months ended June 30, 2019, cost of sales increased to $4,734,538, or approximately 240%, from $1,391,291 for the six months ended June 30, 2018. The increase is ~~gross profits stated~~attributable to the costs associated with our increased sales in the period, as ~~a percentage of net sales.~~well as higher facilities costs.

The following table compares our gross profit and gross margin in the six months ended June 30, ~~2018~~2019 and ~~2017:~~six months ended June 30, 2018:

Our gross margin of ~~49%~~36% of net sales in the six months ended June 30, ~~2018 increased~~2019 decreased from our gross margin of ~~41%~~49% for the six months ended June 30, ~~2017,~~2018 primarily due to ~~the combination of our new products which have higher margins than prior legacy products~~a change in product and business mix as well as ~~the new, lower federal excise tax.~~higher raw material costs and higher facilities costs. While our goal is to ultimately to improve our overall gross margin itand improve the efficiencies of our now larger production facility as we generate increased volumes, our margins may continue to fluctuate ~~around the current level due to the impact~~as a result of ~~two~~other key factors: raw material costs which tend to fluctuate, product sales mix and the related customer programs and incentives, ~~both of~~ which are subject to seasonal fluctuations and the competitive environment.

Advertising, promotional and selling expenses for the six months ended June 30, ~~2018~~2019 increased to ~~$1,709,824,~~$2,569,418, or approximately ~~83%~~50.3%, from ~~$935,997~~$ 1,709,824 for the six months ended June 30, ~~2017.~~2018. This increase is primarily due to our efforts to expand our product sales both regionally in the Pacific Northwest as well as target national markets, particularly with the ~~new~~newer RRW ~~product launch.~~product.

General and administrative expenses for the six months ended June 30, ~~2018~~2019 increased to ~~$2,707,998,~~$5,754,929, or approximately ~~72%~~112.5%, from ~~$1,574,868~~$2,707,998 for the six months ended June 30, ~~2017.~~2018. This increase is primarily due to increased headcount and the associated compensation and ~~benefits in addition to $228,316 higher stock-based compensation expense in 2018.~~benefits.

Total other expense, net was $224,518 for the six months ended June 30, 2019, compared to $160,953 for the six months ended June 30, 2018, ~~compared to $139,077 for the six months ended June 30, 2017,~~ an increase of ~~16%~~39.5%. This increase was primarily due to higher interest expense on an increased notes payable balance in ~~2018.~~2019.

Net loss attributable to common shareholders during the six months ended June 30, ~~2018~~2019 was ~~$3,225,149~~$5,891,926 as compared to a loss of ~~$2,194,506~~$3,225,149 for the six months ended June 30, ~~2017.~~2018. The increase in our net loss was primarily attributable to our higher general and administrative expenses and advertising, promotional and selling expenses during ~~2018,~~2019, partially offset by an increase in gross profit.

~~The Company’s~~Our primary capital requirements are for the financing of inventories, ~~and~~ cash used in operating ~~activities.~~activities and financing acquisitions. Funds for ~~the Company’s~~our cash and liquidity needs have historically not been generated from operations but rather from short-term credit in the form of extended payment terms from suppliers as well as from convertible debt and equity ~~financings rather than from operations.~~financings.

For the six months ended June 30, 2019 and 2018, ~~and 2017, the Company~~we incurred a net loss of approximately ~~$3.2~~$5.9 million and ~~$2.2~~$3.2 million, respectively, and ~~has~~had an accumulated deficit of approximately ~~$21.3~~$33.2 million as of June 30, ~~2018. The Company has~~2019. We have been dependent on raising capital from debt and equity financings to meet ~~its~~our needs for cash flow used in operating activities. For the six months ended June 30, ~~2018, the Company raised approximately $7.3 million from financing activities to meet cash flows used in operating activities.~~2019, we did not raise additional capital.

At June 30, ~~2018,~~2019, the Company had ~~approximately $2.4~~$0.8 million of cash on hand with a positive working capital of ~~$10.0~~$12.2 million. The Company’s ability to meet its ongoing operating cash needs over the next 12 months is dependent on raising additional debt or equity capital, generating positive operating cash flow, primarily through increased sales, improved profit growth and controlling expenses. Management ~~has taken~~intends to implement additional actions to improve profitability, ~~and~~by managing expenses while continuing to increase sales. ~~Management believes that cash on hand~~Additionally, management intends to utilize the large inventory and ~~proceeds generated from the most recent financings, along with revenue that the Company expects~~accounts receivable balances to ~~generate from operations, will be sufficient to meet the Company’s cash~~help satisfy its working capital needs over the next twelve months.

The Company’s cash flows for the six months ended June 30, ~~2018~~2019 and ~~2017~~six months ended June 30, 2018 are as follows:

During the six months ended June 30, ~~2018,~~2019, our net loss plus non-cash adjustments and changes in operating assets and liabilities used was approximately ~~$2.2~~$6.2 million compared to using ~~$1.5~~$6.8 million cash in operating activities in 2018. There was an increase of $0.7 million in ~~2017. The~~inventory, a $0.5 million increase in ~~cash usage can be primarily attributed to the larger net loss incurred~~trade receivables and a $0.3 million reduction in ~~2018 as compared to 2017.~~accounts payable and accrued liabilities in 2019. In ~~addition,~~2018, there was an increase of $3.8 million in inventory, a $0.3 million increase in trade receivables and a ~~$0.5~~$0.3 million net reduction in ~~accounts payable and accrued liabilities in 2018. In 2017, there was a $0.1 million increase in inventory and $0.3 million net reduction~~ accounts payable and accrued liabilities.

Cash used in investing activities consists primarily of acquisitions and purchases of property and equipment. ~~Capital~~We incurred capital expenditures of ~~$697,056~~$3,608,887 and ~~$152,532 were incurred~~$697,056 in the six months ended June 30, 2019 and 2018, ~~and 2017,~~ respectively. The increase in cash used in investing activities in the six months ended June 30, 2019 was also largely due to the $1,449,917 Craft Canning acquisition, net of cash acquired, in January 2019.

During the six months ended June 30, ~~2018, the Company’s~~2019, our operating losses and working capital needs were primarily funded by existing cash on hand. Net cash flows provided by financing activities during the six months ended June 30, 2018 primarily consisted of $1.8 million in proceeds from warrant exercises, $3.6 million in proceeds from the issuance of promissory notes and $2.0 million in proceeds from a secured credit facility. Net cash flows provided by financing activities during the six months ended June 30, 2017 primarily consisted of $1.6 million in proceeds from the sale of common stock and $1.4 million in proceeds from the issuance of promissory notes.

The discussion and analysis of our financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These items are monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Our critical accounting policies ~~summarized below,~~ are highly dependent upon subjective or complex judgements, assumptions and estimates. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from the Company’s estimates if past experience or other assumptions do not turn out to be substantially accurate.

~~Net sales includes product sales, less excise taxes, customer programs~~Other than our adoption and ~~incentives. we recognize revenue by applying the following steps~~beginning to apply Topic 842 (Leases) and Topic 718 (Improvements to Nonemployee Share-Based Payment Accounting) as discussed in ~~accordance with ASC 606 –~~~~Revenue from Contracts with Customers~~: (i) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not“Note 3 - Summary of Significant Accounting Policies” under Part 1, Item 1 of this Report), management believes that there have been ~~adjusted and continues to be reported under ASC 605 –~~~~Revenue Recognition~~, record 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.

~~We recognize 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~~no significant changes to the ~~OLCC,~~items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for 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. We exclude 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.

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

Customer programs and incentives, which include customer promotional discount programs, customer incentives and other payments, are a common practice in the alcohol beverage industry. The Company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing. Amounts paid in connection with customer programs and incentives are recorded as reductions to net revenue or as advertising, promotional and selling expenses based on the nature of the expenditure. Amounts paid to customers totaled $105,591 and $79,837 for the six months ended June 30, 2018 and 2017, respectively.

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. We have recorded no write-downs of inventory for the six months ended June 30, 2018 and 2017.

The Company is responsible for compliance with Alcohol and Tobacco Tax and Trade Bureau (TTB) regulations, which includes making timely and accurate excise tax payments. The Company is subject to periodic compliance audits by the TTB. Individual states also impose excise taxes on alcohol beverages in varying amounts. The Company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws. Excise taxes totaled $237,638 and $415,843 for the six months ended June 30, 2018 and 2017, respectively.

~~The Company recognizes as compensation expense all stock-based awards issued to employees in accordance with the fair value recognition provisions of Accounting Standards Codification Topic 718,~~~~Compensation - Stock Compensation~~. 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. Stock-based compensation was $847,358 and $619,042 for the six months ended June 30, 2018 and 2017, respectively.

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

~~In February 2016, the FASB issued ASU No. 2016-02,~~~~Leases (Topic 842) (“~~~~ASU 2016-02”)~~. ~~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). Early application is permitted for all public business entities upon issuance. 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. We are currently evaluating the impact ASU 2016-02 will have on the Company’s condensed consolidated financial statements.

~~In May 2014, the FASB issued ASU No. 2014-09,~~~~Revenue from Contracts with Customers (Topic 606) (“~~~~ASU 2014-09”)~~.ASU 2014-09 will supersede virtually all existing revenue guidance. Under this update, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. ASU 2014-09 is to be applied retrospectively either to each prior reporting period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. The Company will elect to apply the impact (if any) of applying ASU 2014-09 to the most current reporting period presented in the financial statements with a cumulative effect adjustment to retained earnings. In August 2015, the FASB issued ASU No. 2015-14,~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~. ASU 2015-14 deferred the effective date of ASU 2014-09 for one year, making it effective for the year beginning December 31, 2017, with early adoption permitted as of January 1, 2017. We adopted ASU 2014-09 as of January 1, 2018. The Company does not believe the adoption of ASU 2014-09 had any material impact on its condensed consolidated financial statements.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) that are designed to provide reasonable assurances that the 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 Interim Chief Executive Officer and ~~the~~ Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

~~In connection with the preparation of this quarterly report on Form 10-Q,~~We conducted an evaluation ~~was carried out by our management,~~(pursuant to Rule 13a-15(b) of the Exchange Act)), under the supervision and with the participation of management, including the Interim Chief Executive Officer and ~~the~~ Chief Financial Officer, of the effectiveness of the ~~design and operation of our~~Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this report. Based ~~upon this~~on the evaluation, ~~our~~the Interim Chief Executive Officer and Chief Financial Officer has concluded that ~~our~~these disclosure controls and procedures were effective as of ~~the end of the period covered by this report.~~June 30, 2019.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

As of the end of the period covered by this report, there have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended June 30, ~~2018,~~2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are not currently subject to any material legal proceedings; however, we could be subject to legal proceedings and claims from time to time in the ordinary course of our ~~business.~~business or legal proceedings we considered immaterial may in the future become material. Regardless of the outcome, litigation is time consuming and expensive to resolve, and it diverts management resources.

~~There have been no material changes~~In addition to the other information contained in ~~our~~this Quarterly Report on Form 10-Q, the following risk factors ~~from those~~should be considered carefully in evaluating our business. Our business, financial condition, results of operations or cash flows may be materially adversely affected by these and other risks. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations. The following risk factors include changes to and supersede the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017, and incorporated therein by reference.~~2018.

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

Although certain of our brands continue to achieve acceptance in the Pacific Northwest, most of our brands are relatively new and have not achieved national brand recognition. Also, brands we may develop and/or acquire in the future may not establish widespread brand recognition. Accordingly, if consumers do not accept our brands at scale, our sales will be limited, and we will not be able to penetrate our markets.

In addition, our profitability depends in part on achieving scale. We will need to achieve wider market acceptance of our brands and materially increase sales and gain profitability.

We have incurred significant operating losses every quarter since our inception and anticipate that we will continue to incur significant operating losses in the future.

We believe that we will continue to incur net losses for the foreseeable future as we expect to make continued significant investment in product development and sales and marketing and to incur significant administrative expenses as we seek to grow our brands. We also anticipate that our cash needs will exceed our income from sales for the foreseeable future. Some of our products may never achieve widespread market acceptance and may not generate sales and profits to justify our investment in them. Also, we may find that our expansion plans are more costly than we anticipate and that they do not ultimately result in commensurate increases in our sales, which would further increase our losses. We expect we will continue to experience losses and negative cash flow, some of which could be significant. Results of operations will depend upon numerous factors, some of which are beyond our control, including market acceptance of our products, new product introductions and competition. We also incur substantial operating expenses at the corporate level, including costs directly related to being a reporting company with the U.S. Securities and Exchange Commission (the “SEC”). For the quarter ended June 30, 2019, we reported a net loss of $2.9 million. As of June 30, 2019, we had an accumulated deficit since inception of $33.2 million.

We may require additional capital, which we may not be able to obtain on acceptable terms, or at all. 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 may require additional capital in order to continue our operations, and failure to obtain such additional capital could 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, if and when needed, additional financing will be available to us on acceptable terms or at all. If additional capital is needed and either unavailable or cost prohibitive, 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.

The success of our Redneck Riviera brand is dependent on our relationship with and on the reputation and popularity of John Rich. Any adverse reactions to publicity relating to Mr. Rich, or the loss of his services and relationship, could adversely affect our revenues and results of operations as well as our ability to maintain our consumer base and brand reputation.

In October 2017, we were granted an exclusive license for the use of the Redneck Riviera brand for spirits-based products. The Redneck Riviera trademark is owned by Rich Marks, which is controlled by John Rich, a “multiple platinum” country music singer and songwriter who performs with the “Big & Rich” band. Beginning in 2020, we will be required to meet certain levels of case sales, and if such sale levels are not met, Rich Marks will have the right to terminate the license.

In addition, the success of our Redneck Riviera Whiskey may be negatively impacted by a number of factors, including the reputation and popularity of Mr. Rich. Mr. Rich’s reputation may be harmed due to factors outside our control, which could negatively impact our brand image and have a material adverse effect on our business. If we fail to maintain and enhance the Redneck Riviera brand, or if excessive expenses are incurred in an effort to do so, our business, financial condition and results of operations could be materially and adversely affected.

In addition, if our relationship with Mr. Rich deteriorates, our reputation and operating results may be adversely affected. The license agreement related to the Redneck Riviera trademark generally provides, among other things, that we may not take any action which is harmful or potentially harmful to Mr. Rich’s or the brand’s reputation. If we are unable to maintain our current associations with Mr. Rich at a reasonable cost, or we experience an unplanned interruption or termination of our collaboration, we could lose the benefits of this relationship and return on our substantial investment in the brand.

We must attract new Board members to provide valuable contributions to us and ensure we meet Nasdaq independence requirements. In addition, new directors will not be voted on by shareholders.

At our Annual Meeting held on August 8, 2019, four members of our Board who were nominees resigned and/or did not get re-elected. Those directors comprised all but one of our nominated independent directors and comprised all of the members of our independent Board committees. As a result, and as of that date, we did not comply with the independence requirements of Nasdaq, the exchange on which we list our common stock. Our failure to timely add new independent directors to our Board could result in our delisting. In addition, our corporate governance and risk and strategic oversight will suffer until we add a sufficient number of talented independent directors to our Board. In addition, because we need to add these directors shortly after our Annual Meeting, our shareholders will not vote on these directors. Instead and although we plan to consider directors proffered by shareholders, the new directors will be appointed by the current Board and will serve without shareholder approval until our Annual Meeting in 2020.

Our failure to attract or retain key executive or employee talent, or changes in our 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. If we or one of our executive officers or significant employees terminates her or his employment, we may not be able to replace their expertise, fully integrate new personnel or replicate the prior working relationships, and the loss of their services might significantly delay or prevent the achievement of our business objectives. Qualified individuals with the breadth of skills and experience in our industry that we require are in high demand, and we may incur significant costs to attract 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.

We have recently experienced significant changes to our executive leadership team. In May 2019, our Chief Executive Officer announced his transition to Executive Chairperson, stepping down from his dual role as Chairman and Chief Executive Officer, and has since that time left our Board. Our Chief Financial Officer, Steven Shum, has been appointed as Interim Chief Executive Officer, while the Company conducts a search for a permanent Chief Executive Officer. This executive leadership transition has the potential to disrupt our operations and relationships with employees, customers and suppliers. Our future operating results depend substantially upon the continued service of our key personnel and in significant part upon our ability to attract and retain qualified management personnel. If we are unable to mitigate these or other similar risks, our business activity could be disrupted, and our financial condition and results of operations could be materially adversely affected

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 the raw materials for all of our products, including our distillate products and other ingredients. These suppliers consist of third-party producers in the United States. We do not have long-term, written agreements with any of our suppliers. The termination of our relationships or an adverse change in the terms of these arrangements could have a negative impact on our business. If our suppliers increase their prices, we may not be able to secure alternative suppliers, 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, financial condition or results of operations 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 distribute our products adequately within their territories could harm our sales and result in a decline in our results of operations to distribute our products.

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 United States. 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 distribute our products in 46 states.

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. 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. 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.

We rely on a few key distributors, and the loss of any one key distributor would substantially reduce our revenues.

We currently derive a significant amount of our revenues from a few major distributors. A significant decrease in business from or loss of any of our major distributors could harm our financial condition by causing a significant decline in revenues attributable to such distributors. Sales to one distributor, the Oregon Liquor Control Commission, accounted for approximately 17.6% and 34% of our consolidated sales for 2019 and 2018, respectively. While we believe our relationships with our major distributors are good, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis. If we experience a significant decrease in sales to any of our major distributors and are unable to replace such sales volume with orders from other customers, our sales may decrease which would have a material adverse financial effect on our results of operations and financial condition.

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. Products selected for listing in control states must generally reach certain volumes and/or profit levels to maintain their listings. Products in control states 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 develop or acquire, sales of our products could decrease significantly which would have a material adverse financial effect on our results of operations and financial condition.

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

We must maintain relatively large inventories of our products to meet customer delivery requirements. We have used our inventory as collateral in our financing. If we do not timely make payments on the financing, or we breach our covenants in any financing document, including maintaining loan-to-value ratios, the lenders may foreclose and take possession of our inventory. In addition, 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.

The federal and state regulatory landscape regarding products containing CBD is uncertain and evolving, and new or changing laws or regulations relating to hemp and hemp-derived products could have a material adverse effect on our business, financial condition and results of operations.

On December 20, 2018, the Agricultural Improvement Act of 2018, which is also known as the “2018 Farm Bill,” was enacted and legalized hemp and hemp products under U.S. federal law. However, we must still comply with all applicable state hemp laws. In addition, the Food and Drug Administration (the “FDA”) has publicly stated that certain products derived from hemp, including CBD, which is a cannabinoid that can be extracted from hemp, will be regulated by the FDA. Thus, participants in the hemp industry will need to comply with all applicable federal and state laws, rules and regulations in the cultivation, transportation, and sale of hemp and hemp derived products.

We commenced distribution of Outlandish, a non-alcoholic beverage that contains hemp-derived CBD. While we believe our current operations and the sale of Outlandish in Oregon, a state that has legalized CBD for personal consumption, comply with existing federal and state laws relating to hemp and hemp-derived products, we will have to quickly adapt our sales and operations to comply with forthcoming and rapidly-shifting federal and state regulations. Local, state, federal, and international laws and regulations pertaining to CBD are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance requirements. In addition, violations or allegations of such violations of these laws, including an assertion by the FDA that it has jurisdiction over our intrastate CBD sales, could disrupt our business, result in fines or discontinuance of our CBD products and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our CBD business. It is also possible that the federal government will change existing laws, which may limit the legal uses of the hemp plant and its derivatives and extracts, such as cannabinoids. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our activities in the legal hemp industry.

We could face a variety of risks of as a result of our expansion into the production and distribution of non-alcoholic CBD beverages, which is a new product line.

We may face additional risks in connection with our expansion into the production and distribution of non-alcoholic CBD beverages. Risks of our entry into the new business line, include, without limitation: (i) potential diversion of management’s attention and other resources, including available cash, from our existing businesses; (ii) unanticipated liabilities or contingencies; and (iii) the need for additional capital and other resources to expand into this new line of business. Further, our business model and strategy are still evolving and are continually being reviewed and revised, and we may not be able to successfully implement our business model and strategy with respect to our production and distribution of CBD products. We may not be able to anticipate consumer tastes or preferences, and we may not be able to attract or retain a sufficiently large number of customers for Outlandish or recover costs incurred for developing and marketing our CBD products. We will additionally face costs of complying with local, state, federal and international laws related to CBD, including in the course of development and production of Outlandish. If we are unable to successfully implement our growth strategies, our revenue and profitability may not grow as we expect, our competitiveness may be materially and adversely affected, and our reputation and business may be harmed. In developing and marketing our CBD products, we may invest significant time and resources. Initial timetables for the introduction and development of our CBD product may not be achieved and price and profitability targets may not prove feasible. Failure to successfully manage these risks in the development and implementation of our new CBD product could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to identify and successfully acquire additional brands that are complementary to our existing portfolio, our growth will be limited, and, even if additional brands are acquired, we may not realize anticipated benefits, due to integration difficulties or other operating issues.

A component of our growth strategy may be the acquisition of additional brands that are complementary to our existing portfolio through acquisitions of such brands or their corporate owners, directly or through mergers, joint ventures, long-term exclusive distribution arrangements and/or other strategic relationships. For example, in May 2017, we acquired 90% (and the remaining 10% in December 2018) of the ownership of BBD for its award-winning range of super-premium gins and whiskeys, and we acquired MotherLode in March 2017, which provides contract canning, bottling and packaging services for existing and emerging spirits producers, some of whom contract with us to blend or distill spirits. In early 2019, we completed the acquisition of Craft Canning, which significantly adds to our contract canning, bottling and packaging services. If we are unable to identify suitable brand candidates and successfully execute our acquisition strategy, our growth will be limited. In addition, our entry into and expansion of our contract bottling, canning, and packaging services as a result of our acquisitions of MotherLode and Craft Canning may not be successful, and we may not realize the benefits of these co-packing operations and may face certain risks, including safety concerns, product contamination, and equipment malfunctions or breakdowns, among other things associated with our manufacturing operations. In addition, if our bottling, canning, or packaging services fail to meet our customers’ expectations, or there is an overall decline in demand for bottling, canning, or packaging services, our reputation, business, results of operations and financial condition could be adversely affected.

Also, even if we are successful in acquiring additional brands or related service businesses, we may not be able to achieve or maintain profitability levels that justify our investment in or realize operating and economic efficiencies or other planned benefits with respect to those additional brands or services. The addition of new products or businesses entails numerous risks with respect to integration and other operating issues, any of which could have a detrimental effect on our results of operations and/or the value of our equity. These risks include, but are not limited to:

Our ability to grow through the acquisition of additional brands will also be dependent upon identifying acceptable acquisition targets and opportunities, our ability to consummate prospective transactions on favorable terms, or at all, and the availability of capital to complete the necessary acquisition arrangements. We intend to finance our brand acquisitions through a combination of our available cash resources, third-party financing and, in appropriate circumstances, the further issuance of equity and/or debt securities. Acquiring additional brands could have a significant effect on our financial position and could cause substantial fluctuations in our quarterly and yearly operating results. Also, acquisitions could result in the recording of significant goodwill and intangible assets on our financial statements, the amortization or impairment of which would reduce reported earnings in subsequent years.

Our failure to protect our 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 or service product information technology systems or: cyber-security breach or cyber-related fraud 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.

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.

If we fail to manage growth effectively or prepare for product scalability, it could have an adverse effect on our employee efficiency, product quality, working capital levels and results of operations.

Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes. During any period of growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities. We would also need to continue to expand, train and manage our employee base. Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees. Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the marketing of the products we sell, and the hiring of additional employees. For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls. Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability. We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.

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, dining and beverage consumption patterns and a downturn in economic conditions, any or all of which may reduce consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences toward beer, wine or non-alcoholic beverages or other products. 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.

A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:

In addition, our continued success depends, in part, on our ability to develop new products to meet consumer needs and anticipate changes in consumer preferences. The launch and ongoing success of new products are inherently uncertain, especially with regard to their appeal to consumers. The launch of a new product can give rise to a variety of costs, and an unsuccessful launch, among other things, can affect consumer perception of existing brands and our reputation. Unsuccessful implementation or short-lived popularity of our product innovations may result in inventory write-offs and other costs.

In addition, the legalization of marijuana in any of the jurisdictions in which we sell our products may result in a reduction in sales. Studies have shown that sales of alcohol may decrease in jurisdictions where marijuana has been legalized (e.g. California, Colorado, Washington and Oregon). As a result, marijuana sales may adversely affect our sales and profitability.

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. Many of our current and potential competitors have longer operating histories and have substantially greater financial, sales, marketing and other resources than we do, as well as larger installed customer bases, greater name recognition and broader product offerings. Some of these competitors can devote greater resources to the development, promotion, sale and support of their products. As a result, 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.

Class actions 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 or related to the labelling of our products. 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. Although we expect a significantly positive impact on our operating results from the enactment of the Craft Modernization and Tax Reform Act of 2017, which was part of the 2017 federal tax legislation that went into effect on January 1, 2018, resulting from the lowering of the federal excise tax on spirits for the first 100,000 proof gallons per year from $13.50 to $2.70 per gallon, there can be no assurance this revised tax rate will remain in effect after the initial two-year period.

We could face product liability or other related liabilities that increase our costs of operations and harm our reputation. In addition, our insurance coverage might not be adequate.

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 product liability or other related liabilities. Our product liability insurance coverage is limited to $2 million per occurrence and $5 million in the aggregate and our general liability umbrella policy is capped at $2 million, which may be insufficient. 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 or business.

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 and potentially serious damage to our reputation for product quality, as well as product liability claims. 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.

In addition, we also provide contract bottling, canning, and packaging services for existing and emerging beer, wine and spirits producers through our subsidiaries MotherLode and Craft Canning. Beer and wine products produced by third parties may be more susceptible to contamination than the distilled products that we produce, due to the lower alcohol content.

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. In addition, recent developments in the industry may compel us to identify the source and location of our distillate products and notify the consumer of whether the product was distilled by us. 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.

Our common stock is thinly traded, and investors may be unable to sell some or all of their shares at the price they would like, or at all, and sales of large blocks of shares may depress the price of our common stock.

Our common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or non-existent. As a consequence, there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. This could lead to wide fluctuations in our share price. Investors may be unable to sell their common stock at or above their purchase price, which may result in substantial losses. Also, as a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously in the event a large number of shares of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer that could better absorb such sales without adverse impact on its share price.

Our failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock.

In August 2017, our shares of common stock began trading on the Nasdaq Capital Market. If we fail to satisfy the continued listing requirements of the Nasdaq Capital Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would expect to take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements. As of August 8, 2019, we failed to comply with Nasdaq’s requirement to have a majority independent Board and independent audit and compensation committees. We must regain compliance in a timely manner or risk delisting.

While our warrants are outstanding, it may be more difficult to raise additional equity capital.

We currently have non-trading, privately-issued common stock warrants to purchase 1,229,697 shares of common stock. During the term that our Private Warrants are outstanding, the holders of such warrants will be given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while the Public Warrants and/or Private Warrants are outstanding. As of June 30, 2019, there are no remaining publicly-traded warrants outstanding.

A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.

A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plans and operations, including our ability to develop new services and continue our current operations. If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.

For the foreseeable future, it is anticipated that earnings, if any, that may be generated from our operations will be used to finance our operations and that cash dividends will not be paid to holders of common stock.

Our former Executive Chairperson owns a significant number of shares of our outstanding common stock, and as long as he does, he may be able to control the outcome of stockholder voting.

Grover T. Wickersham, our former executive chairperson, who continues to serve in a consulting role, is the beneficial owner of approximately 5.04% of the outstanding shares of our common stock as of June 27, 2019, including shares he owns as the indirect beneficial owner (but for which he disclaims beneficial ownership), and including shares he (or the entities for which he is deemed to be the beneficial owner) has the right to acquire upon exercise of warrants and options that may be exercised in the future. Accordingly, as a result of his direct and indirect beneficial ownership, he may be able to exercise substantial control and directly influence 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. Were all of the options and warrants exercised for which Mr. Wickersham is deemed to own, whether directly and indirectly, his influence over matters that are subject to a stockholder vote would further increase.

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. However, if we fail to obtain shareholder approval for additional authorized common stock, our financing alternatives will be limited.

Our Articles of Incorporation authorizes the Board to issue up to 15,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. The power of the Board 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 issuances of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment, and the new securities may have rights, preferences and privileges senior to those of our common stock.

We have over 11,000,000 shares of common stock outstanding or subject to warrants or other convertible securities. We are limited to issuing up to 15,000,0000 shares of common stock. The limited number of available shares of common stock constrains our ability to conduct equity offerings or engage in financing transactions that may have an equity component. In addition, this limitation will constrain our ability to grant equity incentives, which could result in a failure to align management to shareholder objectives or to be able to retain and motive key personnel.

By issuing preferred stock, we may be able to delay, defer, or prevent a change of control.

Our Articles of Incorporation permits us to issue, without approval from our stockholders, a total of 100,000,000 shares of preferred stock. Our Board may 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, 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.

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

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), as well as related rules and regulations implemented by the SEC and the Public Company Accounting Oversight Board, require compliance with certain corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“SOX 404”), has materially increased our legal and financial compliance costs and made some activities more time-consuming, burdensome and expensive. Although we currently believe our internal control over financial reporting is effective, the effectiveness of our internal controls in future periods is subject to the risk that our controls may become inadequate or may not operate effectively. Any failure to comply with the requirements of SOX 404, 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 SOX 404. 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 and we could be subject to regulatory sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

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.

The following list sets forth information regarding all securities sold or granted by us during the period covered by this report that were not registered under the Securities Act, and the consideration, if any, received by us for such securities, which proceeds has been or will be used by us for general working capital purposes. The securities were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) or Rule 506(b) of Regulation D promulgated under the Securities Act, which exempt transactions by an issuer not involving any public offering. The purchasers were “accredited investors,” as such term is defined in Regulation D. The securities are non-transferable in the absence of an effective registration statement under the Act or an available exemption therefrom, and all certificates are imprinted with a restrictive legend to that effect.None.

During the first six months of 2018, the Company completed a private offering of promissory notes and accompanying warrants in which it raised $4,552,980 in gross proceeds. The promissory notes bear interest at 8% per annum, payable monthly on the last day of the month. The entire amount of principal and any accrued and unpaid interest is due and payable on May 1, 2021. For every $100,000 in principal, the Company issued to the investor 10,000 common stock purchase warrants, for a total of 125,000 warrants. The warrants, which are identical to the warrants that were issued in the Company’s public offering that was consummated in August 2017, are exercisable through August 10, 2022, unless earlier redeemed, at an exercise price of $5.40, subject to adjustment for stock splits, reverse splits and other similar recapitalization events. The Company has the option to redeem all or a part of the outstanding warrants at any time after the closing price of the Company’s common stock exceeds $7.65 for five consecutive trading days. In electing to redeem the warrants, the Company will provide 30 days’ notice of the redemption date, during which time the holders of outstanding warrants will have the opportunity to exercise their warrants at the exercise price then in effect. Any warrants remaining outstanding at the close of business on the 30th day of the notice period will be redeemed at a price of $0.15 per warrant, after which, the warrants will be cancelled.

During the first six months of 2018, we issued 10,025 shares to our partner, Sandstrom Partners, as part of their branding work on our products, and 7,500 shares to two different service providers for services rendered.

~~Not applicable.~~Effective August 8, 2019, Directors Trent Davis, Michael Fleming, David Holmes and Matt Szot resigned from our Board of Directors. At the time of their resignations, Eastside’s Audit Committee was comprised of Messrs. Szot (Chair), Davis and Fleming, Eastside’s Compensation Committee was comprised of Messrs. Davis (Chair), Fleming and Szot, and Eastside’s Nominating and Corporate Governance Committee was comprised of Messrs. Fleming (Chair) and Davis.

As a result, on August 8, 2019, Eastside notified The Nasdaq Stock Market that, as a result of the resignations of Messrs. Davis, Fleming, Holmes, and Szot, it was not in compliance with Nasdaq Listing Rule 5605(b)(1), which requires Eastside’s Board to consist of a majority of independent directors, Nasdaq Listing Rule 5605(c)(2)(A), which requires Eastside’s Audit Committee to be comprised of at least three independent directors, and Nasdaq Listing Rule 5605(d)(2)(A), which requires Eastside’s Compensation Committee to be comprised of at least two independent directors.

Paul Shoen was elected to the Board of Directors on August 8, 2019. Eastside intends to fill the remaining vacancies on the Board as promptly as possible in order to regain compliance on a timely basis in accordance with Nasdaq Listing Rules.

Also during the quarter, Steven Shum was named Interim Chief Executive Officer until a full-time Chief Executive Officer is appointed. Mr. Shum will also maintain his current role as Chief Financial Officer.

**Filed ~~herewith; confidential status has been requested for certain portions of this exhibit pursuant to~~herewith.

+ Indicates a ~~Confidential Treatment Request filed August 13, 2018. Such provisions have been separately filed with the Commission.~~management contract or compensatory plan.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period endedJune 30, ~~2018~~2019

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

Nevada		20-3937596
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Common Stock, $0.0001 par value	EAST	The Nasdaq Stock Market LLC
(Title of Each Class)	(Trading Symbol)	(Name of Each Exchange on Which Registered)

Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [ ] ~~(Do not check if a smaller reporting company)~~		Smaller reporting company [X]
Emerging growth company [ ]

		Page
PART I— FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2019 and December 31, ~~2017~~2018	3
	Condensed Consolidated Statements of Operations for ~~the~~ three and six months ended June 30, ~~2018~~2019 and ~~2017~~2018	4
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, ~~2018~~2019 and ~~2017~~2018	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2724
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3429
Item 44.	~~Controls~~Control and Procedures	3429

PART II— OTHER INFORMATION

Item 11.	Legal Proceedings	3430
Item 1A1A.	Risk Factors	3430
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3440
Item 3.	Defaults Upon Senior Securities	3541
Item 4.	Mine Safety Disclosures	3541
Item 5.	Other Information	3541
Item 6.	Exhibits	3541

SIGNATURES		3642

	June 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
Assets
Current assets:
Cash	$	2,352,658		$	2,586,315		$	768,711		$	10,642,877
Trade receivables		580,978			315,321			2,214,539			1,064,078
Inventories		7,891,154			4,051,282			11,907,810			11,017,459
Prepaid expenses and current assets		637,298			649,749			685,696			765,146
Total current assets		11,462,088			7,602,667			15,576,756			23,489,560
Property and equipment, net		1,312,043			728,506			5,647,018			1,758,130
Right-of-use assets								1,041,328			-
Intangible assets, net		310,778			325,668			2,949,083			285,676
Goodwill		28,182			28,182			28,182			28,182
Other assets, net		407,571			343,942			1,003,506			796,260
Total Assets	$	13,520,662		$	9,028,965		$	26,245,873		$	26,357,808

Liabilities and Stockholders’ (Deficit) Equity
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	720,583		$	1,267,189		$	1,840,258		$	1,984,690
Accrued liabilities		334,663			156,163			545,950			386,166
Deferred revenue		986			1,579			17,915			1,728
Current portion of lease liabilities								624,564			-
Current portion of notes payable		437,539			293,726			308,139			-
Total current liabilities		1,493,771			1,718,657			3,336,826			2,372,584
Secured credit facility, net of debt issuance costs		1,957,432			-
Lease liability – less current portion								589,806			-
Secured trade credit facility, net of debt issuance costs								2,947,836			2,934,106
Notes payable - less current portion and debt discount		5,205,693			2,161,760			3,838,447			2,300,000
Total liabilities		8,656,896			3,880,417			10,712,915			7,606,690

Commitments and contingencies (Note 11)
Commitments and contingencies (Note 12)

Stockholders’ (deficit) equity:
Series A convertible preferred stock, $0.0001 par value; 3,000 shares authorized; 0 shares issued and outstanding at June 30, 2018 and December 31, 2017		-			-
Common stock, $0.0001 par value; 15,000,000 shares authorized; 5,225,775 and 4,889,745 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		522			489
Stockholders’ equity:
Common stock, $0.0001 par value; 15,000,000 shares authorized; 9,167,352 and 8,764,085 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively								917			876
Additional paid-in capital		25,865,248			23,223,435			48,749,950			45,888,872
Common stock payable		298,522			-
Accumulated deficit		(21,316,007	)		(18,090,961	)		(33,217,909	)		(27,138,630	)
Total Eastside Distilling, Inc. Stockholders’ (Deficit) Equity		4,848,285			5,132,963
Noncontrolling interests		15,481			15,585
Total Stockholders’ Equity		4,863,766			5,148,548
Total Liabilities and Stockholders’ (Deficit) Equity	$	13,520,662		$	9,028,965
Total Eastside Distilling, Inc. Stockholders’ Equity								15,532,958			18,751,118
Total Liabilities and Stockholders’ Equity							$	26,245,873		$	26,357,808

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017			June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Sales	$	1,675,067		$	883,522		$	3,088,249		$	1,713,191		$	4,252,415		$	1,675,067		$	7,938,115		$	3,088,249
Less excise taxes, customer programs and incentives		150,380			278,492			343,229			495,680			357,237			150,380			546,638			343,229
Net sales		1,524,687			605,030			2,745,020			1,217,511			3,895,178			1,524,687			7,391,477			2,745,020
Cost of sales		763,768			394,625			1,391,291			717,538			2,413,240			763,768			4,734,538			1,391,291
Gross profit		760,919			210,405			1,353,729			499,973			1,481,938			760,919			2,656,939			1,353,729
Operating expenses:
Advertising, promotional and selling expenses		1,066,847			549,865			1,709,824			935,997			1,236,143			1,066,847			2,569,418			1,709,824
General and administrative expenses		1,495,486			848,472			2,707,998			1,574,868			3,077,174			1,495,486			5,754,929			2,707,998
Loss on disposal of property and equipment		-			5,441			-			40,975
Total operating expenses		2,562,333			1,403,778			4,417,822			2,551,840			4,313,317			2,562,333			8,324,347			4,417,822
Loss from operations		(1,801,414	)		(1,193,373	)		(3,064,093	)		(2,051,867	)		(2,831,379	)		(1,801,414	)		(5,667,408	)		(3,064,093	)
Other income (expense), net
Interest expense		(107,015	)		(95,753	)		(163,653	)		(143,562	)		(117,902	)		(107,015	)		(225,312	)		(163,653	)
Other income (expense)		2,500			-			2,700			4,485			794			2,500			794			2,700
Total other expense, net		(104,515	)		(95,753	)		(160,953	)		(139,077	)		(117,108	)		(104,515	)		(224,518	)		(160,953	)
Loss before income taxes		(1,905,929	)		(1,289,126	)		(3,225,046	)		(2,190,944	)		(2,948,487	)		(1,905,929	)		(5,891,926	)		(3,225,046	)
Provision for income taxes		-			-			-			-			-			-			-			-
Net loss	$	(1,905,929	)	$	(1,289,126	)	$	(3,225,046	)	$	(2,190,944	)	$	(2,948,487	)	$	(1,905,929	)	$	(5,891,926	)	$	(3,225,046	)

Dividends on convertible preferred stock		-			-			-			5,037
Loss attributable to noncontrolling interests		(696	)		(1,475	)		(103	)		(1,475	)		-			(696	)		-			(103	)

Net loss attributable to Eastside Distilling, Inc. common shareholders	$	(1,906,625	)	$	(1,287,651	)	$	(3,225,149	)	$	(2,194,506	)	$	(2,948,487	)	$	(1,906,625	)	$	(5,891,926	)	$	(3,225,149	)

Basic and diluted net loss per common share	$	(0.37	)	$	(0.40	)	$	(0.64	)	$	(0.75	)	$	(0.32	)	$	(0.37)		$	(0.65	)	$	(0.64	)

Basic and diluted weighted average common shares outstanding		5,194,538			3,253,246			5,058,293			2,935,551			9,143,755			5,194,538			9,104,593			5,058,293

	2018			2017
Cash Flows From Operating Activities:
Net loss	$	(3,225,046	)	$	(2,190,944	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		158,945			30,044
Loss on disposal of property and equipment		-			40,975
Amortization of debt issuance costs and debt discount		50,305			52,657
Issuance of common stock in exchange for services		196,078			339,720
Stock-based compensation		651,280			279,322

Changes in operating assets and liabilities:
Trade receivables		(265,657	)		104,417
Inventories		(3,839,872	)		(512,579	)
Prepaid expenses and other assets		(190,674	)		(201,008	)
Accounts payable		(546,616	)		(74,236	)
Accrued liabilities		200,355			(619,329	)
Deferred revenue		(593	)		(994	)
Net cash used in operating activities		(6,811,495	)		(2,751,955	)
Cash Flows From Investing Activities:
Cash acquired in acquisition		-			4,541
Purchases of property and equipment		(697,056	)		(152,532	)
Net cash used in investing activities		(697,056	)		(147,991	)
Cash Flows From Financing Activities:
Stock issuance cost related to acquisitions		-			(19,980	)
Stock issuance costs related to common shares issued for preferred conversion		-			(15,000	)
Proceeds from common stock, net of issuance costs of $6,033, with detachable warrants		-			1,612,467
Proceeds from option exercise		9,689			-
Proceeds from warrant exercise		1,542,211			159,250
Proceeds from warrant exercise, shares not yet issued		298,522			-

Payments of principal on notes payable		(160,528	)		(27,612	)
Proceeds from convertible notes payable, net of issuance costs		3,630,000			1,400,000
Proceeds from secured credit facility, net of issuance costs		1,955,000			-
Net cash provided by financing activities		7,274,894			3,109,125
Net (decrease) increase in cash		(233,657	)		209,179
Cash - beginning of period		2,586,315			1,088,066
Cash - end of period	$	2,352,658		$	1,297,245

Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest	$	74,426		$	81,529

Supplemental Disclosure of Non-Cash Financing Activity
Issuance of debt discount	$	351,348		$	-
Issuance of common stock for the acquisition of MotherLode Craft Distillery, LLC	$	-		$	377,000
Issuance of common stock for the acquisition of Big Bottom Distilling, LLC	$	-		$	134,858
Issuance of common stock in exchange for services recorded as other assets	$	-		$	145,000
Common stock issued in exchange of notes payable	$	-		$	87,500
Note payable issued in exchange of accounts payable	$	-		$	60,000

	2019			2018
Cash Flows From Operating Activities:
Net loss	$	(5,891,926	)	$	(3,225,046	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		671,479			158,945
Lease expense		263,574			-
Amortization of debt issuance costs		13,730			50,305
Issuance of common stock in exchange for services for related parties		376,982			-
Issuance of common stock in exchange for services by third parties		26,862			196,078
Stock-based compensation		363,271			651,280

Changes in operating assets and liabilities:
Trade receivables		(524,744	)		(265,657	)
Inventories		(735,527	)		(3,839,872	)
Prepaid expenses and other assets		(130,947	)		(190,674	)
Accounts payable		(376,044	)		(546,616	)
Accrued liabilities		103,132			200,355
Deferred revenue		(35,813	)		(593	)
Net lease liabilities		(301,376	)		-
Net cash used in operating activities		(6,177,347	)		(6,811,495	)
Cash Flows From Investing Activities:
Acquisition of business, net of cash acquired		(1,449,917	)		-
Purchases of property and equipment		(2,158,970	)		(697,056	)
Net cash used in investing activities		(3,608,887	)		(697,056	)
Cash Flows From Financing Activities:
Contributed capital		14,000			-
Proceeds from option exercise		-			9,689
Proceeds from warrant exercise		-			1,542,211
Proceeds from warrant exercise, shares not yet issued		-			298,522
Payments of principal on notes payable		(101,932	)		(160,528	)
Proceeds from convertible notes payable, net of issuance costs		-			3,630,000
Proceeds from secured credit facility, net of issuance costs		-			1,955,000
Net cash (used in) provided by financing activities		(87,932	)		7,274,894
Net decrease in cash		(9,874,166	)		(233,657	)
Cash - beginning of period		10,642,877			2,586,315
Cash - end of period	$	768,711		$	2,352,658

Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest	$	189,943		$	74,426
Cash paid for amounts included in measurement of lease liabilities	$	311,065		$	-

Supplemental Disclosure of Non-Cash Financing Activity
Issuance of debt discount	$	-		$	351,348
Fixed assets acquired through financing	$	300,000		$	-
Right-of-use assets obtained in exchange for lease obligations	$	1,072,018		$	-

	Level 1:	Fair value of the asset or liability is determined using cash or unadjusted quoted prices in active markets for identical assets or liabilities.

	Level 2:	Fair value of the asset or liability is determined using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

	Level 3:	Fair value of the asset or liability is determined using unobservable inputs that are significant to the fair value measurement and reflect management’s own assumptions regarding the applicable asset or liability.

	-	~~A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and~~

	-	~~A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.~~

	-	A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

	-	A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Consideration given:
338,212 shares of common stock valued at $6.10 per share	$	2,080,004
Cash		2,003,200
Notes payable		761,678
Total value of acquisition	$	4,844,882

Assets and liabilities acquired:
Cash	$	553,283
Trade receivables, net		625,717
Inventories, net		154,824
Prepaid expenses and current assets		250
Property and equipment, net		1,839,486
Right-of-use assets		232,884
Intangible assets - customer list		2,895,318
Other assets		26,600
Accounts payable		(231,613	)
Accrued liabilities		(74,389	)
Deferred revenue		(52,000	)
Lease liabilities		(256,375	)
Notes payable		(869,103	)
Total	$	4,844,882

Consideration given:
86,667 shares of common stock valued at $4.35 per share	$	377,000
Assets and liabilities acquired:
Cash		7,062
Inventory		103,488
Property and equipment		46,250
Intangible assets - customer list and license		376,431
Goodwill		28,182
Accounts payable		(5,180	)
Customer deposits		(179,233	)
	$	377,000

Consideration given:
28,096 shares of common stock valued at $4.80 per share for 90%	$	134,858
Noncontrolling interests		14,984
Total value of acquisition	$	149,842

Assets and liabilities acquired:
Cash (overdraft)	$	(2,521	)
Accounts receivable		6,224
Inventory		129,922
Property and equipment		22,717
Intangible assets - license		25,000
Goodwill		193,374
Accrued liabilities		(52,841	)
Notes payable		(172,033	)
Total	$	149,842

	June 30, 2018			December 31, 2017
Furniture and fixtures	$	934,866		$	326,088
Leasehold improvements		466,040			56,410
Vehicles		49,483			49,483
Construction in progress		51,315			372,667
Total cost		1,501,704			804,648
Less accumulated depreciation		(189,661	)		(76,142	)
Property and equipment - net	$	1,312,043		$	728,506

	Operating Leases			Weighted-Average Remaining Term in Years
2019	$	364,642
2020		553,832
2021		304,068
2022		41,407
Thereafter		38,564
Total lease payments		1,302,513
Less imputed interest (based on 6.3% weighted- average discount rate		(88,143	)
Present value of lease liability	$	1,214,370			2.2

	June 30, 2018			December 31, 2017
Notes payable bearing interest at 8%. The notes have a 2-year maturity, are due on September 19, 2018 or June 30, 2019 and pay interest-only on a monthly basis.	$	407,500		$	407,500
Note payable bearing interest at 2.74%. The note is payable in monthly principal plus interest payments of $100 through December 2019		1,705			2,306
Note payable bearing interest at 4.00%. The note is payable in quarterly principal plus interest payments of $9,614 through March 2019.		28,344			56,341
Convertible notes payable bearing interest at 4.00%. The notes principal plus accrued interest is due in full at various dates between April 3, 2020 – September 30, 2020. The notes have an automatic conversion feature upon the closing (or first in a series of closings) of the next equity financing in which the Company sells shares of its equity securities for an aggregate consideration of at least $4,000,000 at a purchase price of at least $7.50. The outstanding principal and unpaid accrued interest on the notes will be automatically converted into equity securities at a price equal to 80% of the price paid per share by the investors in the next equity financing or $6.00, whichever is lower, provided, however, that in no event will the conversion price be less than $6.00. The note has a voluntary conversion feature where the investor may convert, in whole or in part, at any time at the conversion price of $6.00.		949,507			927,192
Promissory notes payable bearing interest at 8.00%. The notes’ principal is due on June 30, 2019. Interest is paid monthly.		489,996			1,101,840
Notes payable bearing interest at 5.00%. The notes’ principal, plus any accrued and unpaid interest is due May 1, 2021. Interest is paid monthly.		4,552,980			-
Total notes payable		5,989,032			2,495,179
Less current portion		(437,539	)		(293,726	)
Less debt discount for detachable warrant		(345,800	)		(39,693	)
Long-term portion of notes payable	$	5,205,693		$	2,161,760

2018	$	257,500
2019		229,055
2020		949,507
2021		4,552,970
Thereafter		-
	$	5,989,032

2019	$	337,088
2020		505,720
2021		2,808,305
Thereafter		495,473
	$	4,146,586

2018	$	140,261
2019		253,202
2020		167,303
2021		19,200
2022		-
Thereafter		-
Total	$	579,966

	Three months ended June 30,						Three months ended June 30,
	2018			2017			2019			2018
Net loss attributable to Eastside Distilling, Inc. common shareholders (numerator)	$	(1,906,625	)	$	(1,287,651	)	$	(2,948,487	)	$	(1,906,625	)
Weighted average shares (denominator)		5,194,538			3,253,246			9,143,755			5,194,538
Basic and diluted net loss per common share	$	(0.37	)	$	(0.40	)	$	(0.32	)	$	(0.37	)

	Six months ended June 30,						Six months ended June 30,
	2018			2017			2019			2018
Net loss attributable to Eastside Distilling, Inc. common shareholders (numerator)	$	(3,225,149	)	$	(2,194,506	)	$	(5,891,926	)	$	(3,225,149	)
Weighted average shares (denominator)		5,058,293			2,935,551			9,104,593			5,058,293
Basic and diluted net loss per common share	$	(0.64	)	$	(0.75	)	$	(0.65	)	$	(0.64	)

	Common Stock				Paid-in			Accumulated			Total Stockholders’
	Shares		Amount		Capital			Deficit			Equity
Balance, December 31, 2018		8,764,085	$	876	$	45,888,872		$	(27,138,630	)	$	18,751,118
Issuance of common stock in exchange for services by third parties		-		-		26,862			-			26,862
Issuance of common stock for services by employees		63,978		7		376,975			-			376,985
Issuance of common stock for purchase Craft Canning + Bottling, LLC		338,212		34		2,079,970			-			2,080,004
Stock option exercises		1,077		-		-			-			-
Stock-based compensation		-		-		395,561			-			395,561
Net issuance to settle RSUs		-		-		(32,290	)		-			(32,290	)
Adjustment to accumulated deficit for adoption of ASC 842		-		-		-			(187,353	)		(187,353	)
Contributed capital		-		-		14,000			-			14,000
Net loss attributable to common shareholders		-		-		-			(5,891,926	)		(5,891,926	)
Balance, June 30, 2019		9,167,352		917		48,794,950		$	(33,217,909	)	$	15,532,958

	Common Stock				Paid-in		Stock		Accumulated			Total Stockholders’			Non-controlling interest in consolidated			Total
	Shares		Amount		Capital		Payable		Deficit			Equity			Entities			Equity
Balance, December 31, 2017		4,889,745	$	489	$	23,223,435	$	-	$	(18,090,961	)	$	5,132,963		$	15,585		$	5,148,548

Issuance of common stock from warrant exercise for cash		285,028		29		1,542,182		-		-			1,542,211			-			1,542,211
Issuance of common stock for services by third parties		17,525		1		103,339		-		-			103,340			-			103,340
Issuance of common stock for services by employees		31,629		3		236,440		-		-			236,443			-			236,443
Issuance of detachable warrants on notes payable		-		-		351,548		-		-			351,548			-			351,548
Stock option exercises		1,848		-		9,689		-		-			9,689			-			9,689
Cash received for warrant exercises, not yet issued		-		-				298,522		-			-						298,522
Stock-based compensation		-		-		398,615		-		-			398,615			-			398,615
Net loss attributable to noncontrolling interests		-		-		-		-		-			-			(103	)		(103	)
Net loss attributable to common shareholders		-		-		-		-		(3,225,046	)		(3,225,046	)		-			(3,225,046	)
Balance, June 30, 2018		5,225,775	$	522	$	25,865,248	$	298,522	$	(21,316,007	)	$	4,848,285		$	15,481		$	4,863,766

	# of Options			Weighted- Average Exercise Price		# of Options			Weighted- Average Exercise Price
Outstanding at December 31, 2017		369,006		$	6.47
Outstanding at December 31, 2018							895,858		$	5.62
Options granted		485,000		$	4.60		79,000		$	5.03
Options exercised		(1,848	)		5.24		(3,167	)	$	4.04
Options canceled		-					(32,334	)	$	4.73
Outstanding at June 30, 2018		852,158		$	4.62
Outstanding at June 30, 2019							939,357		$	5.61

Exercisable at June 30, 2018		274,948		$	6.07
Exercisable at June 30, 2019							545,521		$	5.69

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

Risk-free interest rate	~~2.44~~2.22	%
Expected term (in years)	~~6.21~~6.5
Dividend yield	-
Expected volatility	6331	%

Volatility		31	%		31	%
Risk-free interest rate		2.587	%		2.51	%
Expected term (in years)		4.2			3.0
Expected dividend yield		-			-
Fair value of common stock	$	7.89		$	6.10

	Warrants			Weighted Average Remaining Life		Weighted Average Exercise Price		Aggregate Intrinsic Value		Warrants		Weighted Average Remaining Life		Weighted Average Exercise Price		Aggregate Intrinsic Value

Outstanding at December 31, 2017		2,623,077			3.62 years	$	5.96	$	54,880
Outstanding at December 31, 2018											1,083,435		1.04 years	$	6.83	$	-

Six months ended June 30, 2018:
Six months ended June 30, 2019:
Granted		455,298			4.5 years	$	5.40	$	1,411,424		146,262		2.50years	$	7.80	$	-
Exercised		(285,028	)		4.5 years	$	5.41		-		-		-	$	-	$	-
Forfeited and cancelled		-			-	$	-		-		-		-	$	-	$	-

Outstanding at June 30, 2018		2,793,347			3.50 years	$	5.92	$	7,196,481
Outstanding at June 30, 2019											1,229,697		1.02years	$	6.95	$	-

	●	General industry, market and economic conditions (including consumer spending patterns and preferences) and our expectations regarding growth in the markets in which we operate;
	●	Our ability to introduce competitive new products on a timely basis and continue to make investments in product development and our expectations regarding the effect of new products on our operating results;
	●	Our realizing the results of our competitive strengths;
	●	Our continuing to focus on and ability to realize our strategic objectives;
	●	Our intention to implement actions to improve profitability, manage expenses, increase sales and utilize inventory and accounts receivable balances to help satisfy our working capital needs;
	●	Our continuing to follow our product approach;
	●	Our ability to retain, market and grow our existing brands, including Redneck Riviera Whiskey and the effect that may have on other brands;
	●	Our ability to protect our intellectual property, including trademarks related to our brands;
	●	The effects of competition and consolidation in the markets in which we operate;
	●	The ability of our production capabilities to support our business and operations and our ability to continue to expand our production capabilities to meet demand;
	●	Our ability to cultivate our distribution network and maintain relationships with our major distributors;
	●	Application of and changes in applicable laws, regulations and taxes in jurisdictions in which we operate and the impact of newly enacted laws;
	●	Our tax position, including any change to federal excise taxes;
	●	The availability of financing;
	●	Our expectations regarding our direct-to-consumer sales and retail stores;
	●	Our ability to expand our operations by acquisitions, including our ability to identify, complete, an and finance acquisitions, and our ability to integrate and realize the benefits of our acquisitions;
	●	Our ability to realize the anticipated benefits of our canned beverage and bottling operations;
	●	Our plan and ability to exploit cannabidiol (“CBD”) products;
	●	Our liquidity and capital needs and ability to meet our liquidity needs; and
	●	Our operations, financial performance and results of operations.

	●	difficulties in assimilating acquired operations or products, including failure to anticipate synergies;

	●	failure to realize or anticipate benefits or execute on our planned strategy for the acquired brand or business;

	●	unanticipated costs that could materially adversely affect our results of operations;

	●	negative effects on reported results of operations from acquisition-related charges and amortization of acquired intangibles;

	●	diversion of management’s attention from other business concerns;

	●	adverse effects on existing business relationships with suppliers, distributors and retail customers;

	●	risks of entering new markets or markets in which we have limited prior experience; and

	●	the potential inability to retain and motivate key employees of acquired businesses.

	●	a general decline in economic or geopolitical conditions;

	●	changing consumer preferences, including to other beverage products or alternatives to alcoholic beverages;

	●	concern about the health consequences of consuming beverage alcohol products and about drinking and driving;

	●	a general decline in the consumption of beverage alcohol products in on-premises establishments, such as may result from smoking bans and stricter laws relating to driving while under the influence of alcohol;

	●	consumer dietary preferences favoring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products;

	●	increased federal, state, provincial and foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing;

	●	increased regulation placing restrictions on the purchase or consumption of beverage alcohol products or increasing prices due to the imposition of duties or excise taxes;

	●	inflation; and

	●	wars, pandemics, weather and natural or man-made disasters.

Exhibit No.		Description

3.1		Amended and Restated Articles of Incorporation of the Company, as presently in effect, filed as Exhibit 3.1 to the Registration Statement on Form S-1 filed on November 14, 2011 (File No. 333-177918) and incorporated by reference herein.
3.2		Articles of Merger, filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated November 19, 2014 and filed on November 25, 2014 and incorporated by reference herein.
3.3		Certificate of Designation – Series A Preferred Stock, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 9, 2016 and filed on March 11, 2016 and incorporated by reference herein.
~~3.3~~3.4		Amendment to Certificate of Designation After Issuance of Class or Series, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 1, 2016 and filed on June 9, 2016 and incorporated by reference herein.
~~3.4~~3.5		Certificate of Change, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 6, 2016 and filed on October 11, 2016 and incorporated by reference herein.
~~3.5~~3.6		Certificate of Change, filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated June 14, 2017 and filed on June 15, 2017 and incorporated by reference herein.
~~3.6~~3.7		Amended and Restated Bylaws of the Company, as presently in effect, filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated ~~October 13, 2016~~August 8, 2019 and filed on ~~October 19, 2016~~August 9, 2019 and incorporated by reference herein.
10.1		~~Credit and Security~~Executive Chairperson Agreement, dated May 10, ~~2018,~~2019, between the Company and ~~The KFK Children’s Trust, Jeffrey Anderson – Trustee,~~Grover Wickersham, filed as Exhibit ~~10.1~~10.2 to the ~~Registrant’s Current~~Company’s Quarterly Report on Form 10-Q, filed on May ~~14, 2018~~13,2019 and incorporated by reference ~~herein.~~herin.
~~10.2~~		Amended and Restated Redneck Riviera License Agreement dated May 31, 2018**
~~31.1~~31.1*		Certification of ~~Grover Wickersham~~Interim Chief Executive Officer pursuant to Rule 13a-14(a).
31.2*		Certification of ~~Steven Shum~~Chief Financial Officer pursuant to Rule 13a-14(a).
32.1*		Certification of Interim Chief Executive Officer pursuant to 18 ~~U.S.C~~U.S.C. Section 1350.
32.2*		Certification of Chief Financial Officer pursuant to 18 ~~U.S.C~~U.S.C. Section 1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema Linkbase Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Definition Linkbase Document
101.LAB		XBRL Taxonomy Labels Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document