SEC Form 424B3 filed by Heritage Distilling Holding Company Inc.
$CASK
Beverages (Production/Distribution)
Consumer Staples
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-284509
PROSPECTUS SUPPLEMENT NO. 1
(to prospectus dated May 12, 2025)
Up to a Maximum of 5,000,000 Shares of Common Stock
Heritage Distilling Holding Company, Inc.
This prospectus supplement is being filed to update and supplement the information contained in the prospectus dated May 12, 2025 (as supplemented or amended from time to time, the “Prospectus”), with the information contained in our Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) May 20, 2025 (the “Quarterly Report”). Accordingly, we have attached the Quarterly Report to this prospectus supplement.
The Prospectus relates to the resale from time to time by C/M Capital Master Fund, LP, a Delaware limited partnership (the “Investor”), of up to 5,000,000 shares of our common stock, par value $0.0001 per share, of the up to $15,000,000 aggregate gross purchase price of shares of common stock (the “ELOC Shares”), which would represent approximately 13,636,364 shares based on the closing price of our shares on The Nasdaq Capital Markets (“Nasdaq”) on January 22, 2025 of $1.10 per share (the “Market Price” based on the closing price on that date), that have been or may be issued by us to the Investor pursuant to the Securities Purchase Agreement, dated as of January 23, 2025, between our company and the Investor (the “ELOC Purchase Agreement”), establishing a committed equity facility (the “Facility” or “Equity Line of Credit”). Of the 5,000,000 shares of our common stock originally registered under the registration statement of which the Prospectus forms a part, 1,187,453 shares have been sold as of the date of this prospectus supplement.
This prospectus supplement updates and supplements the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with, the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you should rely on the information in this prospectus supplement.
Our common stock is listed on Nasdaq under the symbol “CASK.” Pursuant to the ELOC Purchase Agreement, for purposes of establishing the Market Price, the last reported sale price of our common stock on Nasdaq on January 22, 2025 was $1.10 per share. On May 20, 2025, the closing sale price of our common stock was $0.52. We recommend that you obtain current market quotations for our common stock prior to making an investment decision.
Investing in our shares is highly speculative and involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our shares in “Risk Factors” beginning on page 12 of the Prospectus and the risk factors in any accompanying prospectus supplement.
Neither the SEC nor any state securities commission has approved or disapproved of the securities to be issued under the Prospectus or determined if the Prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus supplement is May 21, 2025.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________
FORM
10-Q
_________________________
|
x |
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For
the quarterly period ended March
31, 2025
OR
|
o |
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For
the transition period from __________ to __________
Commission
file number 001-42411
_________________________
HERITAGE
DISTILLING HOLDING COMPANY, INC
(Exact
name of registrant as specified in its charter)
_________________________
|
Delaware |
83-4558219 | |||||||
|
(State
or other jurisdiction of
incorporation
or organization) |
(I.R.S.
Employer Identification No.) | |||||||
|
9668
Bujacich Road, Gig Harbor,
Washington |
98332 | |||||||
|
(Address
of Principal Executive Offices) |
(Zip
Code) | |||||||
(253)
509-0008
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class |
Trading
Symbol(s) |
Name
of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.0001 per share | CASK | The Nasdaq Stock Market LLC | ||||||||||||
Indicate
by check mark whether the registrant (1) has 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 o
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated
filer |
o |
Accelerated
filer |
o | |||||||||||
|
Non-accelerated
filer |
x |
Smaller reporting
company |
x | |||||||||||
|
Emerging growth
company |
x | |||||||||||||
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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o
No x
The
number of shares of the Registrant’s common stock, par value $0.0001 per share, outstanding as of May 19, 2025, was 8,151,324.
Table
of Contents
| Page | |||||
2
Part
I - Financial Information
Item
1. Financial Statements
HERITAGE
DISTILLING HOLDING COMPANY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Index
to Consolidated Financial Statements
| Page | ||||||||
|
Unaudited
Interim Condensed Consolidated Financial Statements for the Three Month Periods ended March 31, 2025 and 2024 |
||||||||
3
Heritage
Distilling Holding Company, Inc.
Condensed
Consolidated Balance Sheets
(unaudited)
(unaudited)
| March 31, 2025 | December 31, 2024 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash | $ | 99,542 | $ | 453,162 | |||||||
| Accounts Receivable | 199,279 | 638,890 | |||||||||
| Inventory | 2,505,488 | 2,471,567 | |||||||||
| Other Current Assets | 445,458 | 355,928 | |||||||||
| Total Current Assets | 3,249,767 | 3,919,547 | |||||||||
| Long Term Assets | |||||||||||
| Property and Equipment, net of Accumulated Depreciation | 5,106,872 | 5,449,412 | |||||||||
| Operating Lease Right-of-Use Assets, net | 3,389,361 | 3,303,158 | |||||||||
| Investment in Flavored Bourbon LLC | 14,285,222 | 14,285,222 | |||||||||
| Intangible Assets (Note 8) | 403,865 | 421,151 | |||||||||
| Goodwill (Note 8) | 589,870 | 589,870 | |||||||||
| Other Long Term Assets | 38,566 | 31,666 | |||||||||
| Total Long Term Assets | 23,813,756 | 24,080,479 | |||||||||
| Total Assets | $ | 27,063,523 | $ | 28,000,026 | |||||||
| LIABILITIES & STOCKHOLDERS’ EQUITY / (DEFICIT) | |||||||||||
| Current Liabilities | |||||||||||
| Accounts Payable | $ | 5,519,332 | $ | 4,979,353 | |||||||
| Accrued Payroll | 921,454 | 950,974 | |||||||||
| Accrued Tax Liability | 1,478,668 | 1,535,628 | |||||||||
| Other Current Liabilities | 1,152,267 | 1,253,052 | |||||||||
| Operating Lease Liabilities, Current | 1,214,478 | 1,131,545 | |||||||||
| Notes Payable, Current | 3,474,242 | 3,758,595 | |||||||||
| Accrued Interest | 174,791 | 202,367 | |||||||||
| Total Current Liabilities | 13,935,232 | 13,811,514 | |||||||||
| Long Term Liabilities | |||||||||||
| Operating Lease Liabilities, net of Current Portion | 2,809,007 | 2,810,015 | |||||||||
| Notes Payable, net of Current Portion | 9,485,939 | 9,482,339 | |||||||||
| Accrued Interest, net of Current Portion | 1,035,245 | 977,316 | |||||||||
| Other Long Term Liabilities | 127,076 | 127,075 | |||||||||
| Total Long-Term Liabilities | 13,457,267 | 13,396,745 | |||||||||
| Total Liabilities | 27,392,499 | 27,208,259 | |||||||||
| Commitments and Contingencies (Note 10) | |||||||||||
| Stockholders’ Equity / (Deficit) | |||||||||||
|
Preferred
Stock - par value $0.0001
per share, 5,000,000
shares authorized: |
|||||||||||
|
Series
A Convertible, 500,000
shares designated; 494,840
shares issued and outstanding as of March 31, 2025 and December 31, 2024 |
49 | 49 | |||||||||
|
Series
B Convertible, 750,000
and 0
shares designated; 167,981
and 0
shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively |
17 | — | |||||||||
|
Common
Stock, par value $0.0001
per share; 70,000,000
shares authorized; 6,921,564
and 5,273,611
shares issued and outstanding as of March 31, 2025 and December 31, 2024, respectively |
721 | 556 | |||||||||
| Additional Paid-In-Capital | 76,837,302 | 74,925,180 | |||||||||
| Accumulated Deficit | (77,167,065) | (74,134,018) | |||||||||
| Total Stockholders’ Equity / (Deficit) | (328,976) | 791,767 | |||||||||
| Total Liabilities & Stockholders’ Equity / (Deficit) | $ | 27,063,523 | $ | 28,000,026 | |||||||
The
accompanying notes are an integral part of these condensed consolidated financial statements.
4
Heritage
Distilling Holding Company, Inc.
Condensed
Consolidated Statement of Operations
(unaudited)
(unaudited)
| For
the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| NET SALES | |||||||||||
| Products | $ | 838,055 | $ | 1,231,823 | |||||||
| Services | 253,928 | 474,336 | |||||||||
| Total Net Sales | 1,091,983 | 1,706,159 | |||||||||
| COST OF SALES | |||||||||||
| Products | 814,209 | 1,213,565 | |||||||||
| Services | 5,889 | 84,057 | |||||||||
| Total Cost of Sales | 820,098 | 1,297,622 | |||||||||
| Gross Profit | 271,885 | 408,537 | |||||||||
| OPERATING EXPENSES | |||||||||||
| Sales and Marketing | 1,315,386 | 1,189,854 | |||||||||
| General and Administrative | 1,407,676 | 1,445,553 | |||||||||
| Total Operating Expenses | 2,723,062 | 2,635,407 | |||||||||
| Operating Loss | (2,451,177) | (2,226,870) | |||||||||
| OTHER INCOME / (EXPENSE) | |||||||||||
| Interest Expense | (523,214) | (601,006) | |||||||||
| Gain on Investment | — | 3,421,222 | |||||||||
| Change in Fair Value of Convertible Notes | — | (571,089) | |||||||||
| Change in Fair Value of Warrant Liabilities | — | 430,208 | |||||||||
| Other Income / (Expense) | (58,656) | 374 | |||||||||
| Total Other Income / (Expense) | (581,870) | 2,679,709 | |||||||||
| Income / (Loss) Before Income Taxes | (3,033,047) | 452,839 | |||||||||
| Income Taxes | |||||||||||
| Net Income / (Loss) | $ | (3,033,047) | $ | 452,839 | |||||||
| Net Income / (Loss) Per Share, Basic | $ | (0.34) | $ | 1.12 | |||||||
| Weighted Average Common Shares Outstanding, Basic | 9,662,201 | 403,329 | |||||||||
| Net Income / (Loss) Per Share, Diluted (See Note 13) | $ | (0.34) | $ | 0.13 | |||||||
| Weighted Average Common Shares Outstanding, Diluted | 9,662,201 | 3,473,832 | |||||||||
The
accompanying notes are an integral part of these condensed consolidated financial statements.
5
Heritage
Distilling Holding Company, Inc.
Condensed
Consolidated Statements of Stockholders’ Equity / (Deficit)
(unaudited)
(unaudited)
| Common Stock | Preferred Stock - Series A | Preferred Stock - Series B | Accumulated Equity / (Deficit) |
Total Stock-holders’ Equity / (Deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Number
of Shares |
Par Value | Number
of Shares |
Par Value | Number
of Shares |
Par Value | Additional Paid-in Capital | |||||||||||||||||||||||||||||||||||||||||||||||
| Beginning Balance December 31, 2024 | 5,273,611 | $ | 556 | 494,840 | $ | 49 | — | $ | — | $ | 74,925,180 | $ | (74,134,018) | $ | 791,767 | ||||||||||||||||||||||||||||||||||||||
| Private Placement of Series B Preferred Stock (and warrants) (See Note 7) | — | — | — | — | 167,981 | 17 | 1,679,793 | — | 1,679,810 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of ELOC Commitment Warrant | 67,162 | 7 | — | — | — | — | 60 | — | 67 | ||||||||||||||||||||||||||||||||||||||||||||
| ELOC Agreement Sales of Common Stock | 330,014 | 33 | — | — | — | — | 232,394 | — | 232,427 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of Prepaid Warrants to Purchase Common Stock | 1,250,777 | 125 | — | — | — | — | (125) | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Shares Repurchased | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Net Income / (Loss) | — | — | — | — | — | — | — | (3,033,047) | (3,033,047) | ||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance March 31, 2025 | 6,921,564 | $ | 721 | 494,840 | $ | 49 | 167,981 | $ | 17 | $ | 76,837,302 | $ | (77,167,065) | $ | (328,976) | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital |
Accumulated Equity / (Deficit) | Total Stockholders’ Equity / (Deficit) | ||||||||||||||||||||||||||
| Number
of Shares |
Par Value | ||||||||||||||||||||||||||||
| Beginning Balance December 31, 2023 | 381,484 | $ | 67 | $ | 31,421,953 | $ | (74,844,476) | $ | (43,422,456) | ||||||||||||||||||||
| Acquisition of Thinking Tree Spirits | 50,958 | 5 | (5) | — | — | ||||||||||||||||||||||||
| Net Income / (Loss) | — | — | — | 452,839 | 452,839 | ||||||||||||||||||||||||
| Ending Balance March 31, 2024 | 432,442 | $ | 72 | $ | 31,421,948 | $ | (74,391,637) | $ | (42,969,617) | ||||||||||||||||||||
The
accompanying notes are an integral part of these condensed consolidated financial statements.
6
Heritage
Distilling Holding Company, Inc.
Condensed
Consolidated Statements of Cash Flows
(unaudited)
(unaudited)
| For
the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Net Income / (Loss) | $ | (3,033,047) | $ | 452,839 | |||||||
| Adjustments to Reconcile Net Income / (Loss) to Net Cash Used in Operating Activities: | |||||||||||
| Depreciation Expense | 296,528 | 320,465 | |||||||||
| Amortization of operating lease right-of-use assets | 95,657 | 144,384 | |||||||||
| Loss on disposal of property and equipment | 5,702 | 17,994 | |||||||||
| Gain on Investment | — | (3,421,222) | |||||||||
| Change in Fair Value of Convertible Notes | — | 571,089 | |||||||||
| Change in Fair Value of Warrant Liabilities | — | (430,208) | |||||||||
| Non-cash Interest Expense | 49,600 | 84,447 | |||||||||
| Changes in Operating Assets and Liabilities: | |||||||||||
| Accounts Receivable | 439,611 | 296,870 | |||||||||
| Inventory | (33,921) | 198,547 | |||||||||
| Other Current Assets | (89,530) | (260,047) | |||||||||
| Other Long Term Assets | (6,900) | — | |||||||||
| Accounts Payable | 532,236 | 252,981 | |||||||||
| Other Current Liabilities | (187,265) | (710,980) | |||||||||
| Operating Lease Liabilities | (99,935) | (177,242) | |||||||||
| Net Cash Used in Operating Activities | (2,031,264) | (2,660,083) | |||||||||
| Cash Flow from Investing Activities | |||||||||||
| Acquisition, net of cash acquired | — | 5,090 | |||||||||
| Purchase of Property and Equipment | (17,325) | — | |||||||||
| Proceeds from Sale of Asset | 82,665 | — | |||||||||
| Net Cash Provided by Investing Activities | 65,340 | 5,090 | |||||||||
| Cash Flow from Financing Activities | |||||||||||
| Proceeds from Notes Payable | — | 39,247 | |||||||||
|
Proceeds
from Whiskey Notes (including proceeds from related party Whiskey Notes of $0
and $1,100,000
for the three months ended March 31, 2025 and 2024, respectively) |
— | 3,115,870 | |||||||||
| Repayment of Notes Payable | (300,000) | (41,454) | |||||||||
| Proceeds from Private Placement of Series B Preferred Stock (and warrants) (Note 7) | 1,679,810 | — | |||||||||
|
Proceeds
from ELOC Sales of Common Stock |
232,427 | — | |||||||||
| Proceeds from Warrants Exercised | 67 | — | |||||||||
|
Deferred
Transaction Costs associated with S-1 Filing |
— | (81,996) | |||||||||
| Net Cash Provided by Financing Activities | 1,612,304 | 3,031,667 | |||||||||
| Net Increase (Decrease) in Cash | (353,620) | 376,674 | |||||||||
| Cash – Beginning of Period | 453,162 | 76,878 | |||||||||
| Cash – End of Period | $ | 99,542 | $ | 453,552 | |||||||
| Supplemental Cash Flow Information related to Interest Paid & Income Taxes Paid: | |||||||||||
| Cash Paid during the Period for: | |||||||||||
| Interest Expense | $ | 473,613 | $ | 516,559 | |||||||
| Supplemental Schedule of Non-cash Investing and Financing Activities: | |||||||||||
| Right-of-use Assets Obtained in Exchange for New Operating Lease Liabilities | $ | 181,861 | $ | — | |||||||
| Transaction Costs Associated with S-1 Filing in Accounts Payable and Other Current Liabilities | $ | — | $ | 76,608 | |||||||
| Unpaid Property and Equipment Additions | $ | 7,743 | $ | — | |||||||
The
accompanying notes are an integral part of these condensed consolidated financial statements.
7
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
1 — DESCRIPTION
OF OPERATIONS AND BASIS OF PRESENTATION
Description
of operations
— Heritage Distilling Holding Company, Inc. (“HDHC” or the “Company”) is a Delaware corporation, for the
purpose of investing in, managing, and/or operating businesses that are engaged in the production, sale, or distribution of alcoholic
beverages. The Company is headquartered in Gig Harbor, Washington and has one
wholly owned subsidiary, Heritage Distilling Company, Inc. (“HDC”), that is included in the condensed consolidated financial
statements.
HDC
has operated since 2011 as a craft distillery making a variety of whiskeys, vodkas, gins and rums as well as Ready-to-Drink (“RTD”)
beverages and operates distillery tasting rooms in Washington and Oregon.
Initial
Public Offering — On
November 25, 2024, the Company closed an initial public offering (“IPO”) of 1,687,500
shares of common stock at $4.00
per share. Concurrently, the Company also closed a private offering of 382,205
common warrants to purchase shares of common stock with an exercise price of $0.01
per share at $3.99
per warrant. (See Note 7.)
Registration
of Common Stock
— On January 24, 2025, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933 to register up to a
maximum of 5,000,000
shares of common stock and 67,162
shares of common stock issuable upon the exercise of the Commitment Warrants of the up to $15,000,000
aggregate gross purchase price of shares of common stock (the “ELOC Shares”) that have been or may be issued by us to the
ELOC Investor (the “Investor”) pursuant to the Securities Purchase Agreement, dated as of January 23, 2025, between the Company
and the Investor (the “ELOC Purchase Agreement”), establishing a committed equity facility (the “Facility” or
“Equity Line of Credit”). The 67,162
shares of common stock issuable to the Investor upon the exercise of a stock purchase warrant with an exercise price of $0.001
per share (the “Commitment Warrants”) were issued pursuant to the ELOC Purchase Agreement that the Company and the Investor
entered into in a letter agreement dated January 23, 2025 under which the Investor shall not be allowed to exercise the Commitment Warrants
for a number of shares of common stock that would give it and its affiliates beneficial ownership of an amount of common stock greater
than 1% of the total outstanding common stock after giving effect to such conversion. In February 2025, the Investor exercised the Commitment
Warrants for $67.
Business
Combination Agreement
— On December 9, 2022, the Company entered into a business combination agreement (as amended, the “Business Combination Agreement”)
with a publicly-traded special purpose acquisition company (“SPAC”). On May 18, 2023, the Business Combination Agreement was
terminated and deferred expenses related to the transaction were expensed. Subsequent to the termination of the Business Combination,
the Company successfully consummated an initial public offering (“IPO”) on November 25, 2024.
Basis
of Presentation
— The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) and include the Company’s wholly-owned subsidiary. All intercompany
transactions and balances have been eliminated in the consolidation process. Certain accounts relating to the prior year have been reclassified
to conform to the current period’s presentation. These reclassifications had no effect on the net income / (loss) or net assets
as previously reported.
Stock
Split —
On May 11, 2024, the Board and Stockholders of the Company approved, and on May 14, 2024 the Company effected, a .57-for-1
reverse stock split. All share and per share numbers included in these financial statements as of and for all periods presented reflect
the effect of that stock split unless otherwise noted.
Unaudited
Interim Financial Information
— The accompanying condensed consolidated balance sheet as of March 31, 2025, the condensed consolidated statement of operations
and the condensed consolidated statements of stockholders’ deficit, for the three months ended March 31, 2025 and 2024, and
the condensed consolidated statement of cash flows for the three months ended March 31, 2025 and 2024 are unaudited. The unaudited
interim condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for the fair
statement of the Company’s financial position as of March 31, 2025 and the results of its operations and cash flows for the
three months ended March 31, 2025 and 2024. The financial data and other information disclosed in these notes related to the three
months ended March 31, 2025 and 2024 are also unaudited. The results for the three-month
8
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
periods
ended March 31, 2025 are not necessarily indicative of results to be expected for the year ending December 31, 2025, any other
interim periods, or any future year or period.
The
accompanying consolidated balance sheet as of December 31, 2024 has been derived from the Company’s audited consolidated financial
statements for the year ended December 31, 2024. These unaudited interim condensed consolidated financial statements should be read
in conjunction with the audited annual consolidated financial statements for the year ended December 31, 2024 included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on April 28, 2025..
Liquidity
and Going Concern
— The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate
continuation of the Company as a going concern. The Company’s recurring net losses, negative working capital, increased accumulated
deficit and stockholders’ deficit, raise substantial doubt about its ability to continue as a going concern. During the three months
ended March 31, 2025, the Company recorded net income / (loss) of approximately $(3,033,047)
and reported net cash used in operations of approximately $2.0
million. On March 31, 2025, the accumulated deficit was approximately $77.2
million and the stockholders’ deficit was approximately $0.3
million. In connection with these condensed consolidated financial statements, management evaluated whether there were conditions and
events, considered in the aggregate, that raise substantial doubt about the Company’s ability to meet its obligations as they become
due within one year
from the date of issuance of these condensed consolidated financial statements. Management assessed that there were such conditions and
events, including a history of recurring operating losses, and negative cash flows from operating activities, and significant current
debt obligations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
As
of March 31, 2025, the Company believes its current cash balances coupled with anticipated cash flow from operating activities may
not be sufficient to meet its working capital requirements for at least one year from the date of the issuance of the accompanying condensed
consolidated financial statements. The Company has the ability to raise additional funds by issuing equity or equity-linked securities,
including through the equity line of credit (ELOC) finalized in February 2025 or the sale of additional shares of Series B Preferred Stock,
or other securities or instruments (See Notes 7 and 14). In addition, management is in discussion with additional third parties about
different financing options unrelated to the ELOC or Series B Preferred Stock that would make the use of those securities instruments
no longer necessary. The Company is evaluating different term sheets to evaluate the best path forward.
The
accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern,
which contemplates the realization of assets and settlement of liabilities in the normal course of business and do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result from uncertainty related to its ability to continue as a going concern.
Risks
and Uncertainties
Global
Conflict, International Relations and Market Reactions
Management
continues to monitor the changing landscape of global conflicts,international relations and related market responses, and their potential
impacts on its business. The most recent of these concerns are the announcements of tariffs by the United States on imports from several
countries around the world, and the corresponding countervailing tariffs announced by those impacted countries as a result. The scale
and reach of the trade war initially impacted the public markets negatively and escalated the war of words and saber rattling between
the United States and its primary economic adversaries, further elevating tensions. A direct result of the tariffs at this moment is the
reported lack of cargo ships on the water between Asia and ports of call in the United States, indicating a possible supply shortage in
the coming months for many items.
In
addition, escalating tensions and violence in the middle east, led by strikes from, and retaliatory strikes upon, Yemen create further
uncertainty. The very recent escalation of armed conflict between India and Pakistan is adding to this
9
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
uncertainty,
and is particularly concerning given that India stands to become a significant trade partner as the United States attempts to force domestic
companies to invest more inside the United States and diversify the countries from which they seek imports. The ongoing conflict in Ukraine,
which caused initial disruptions in the grain, natural gas and fertilizer markets, continues to create uncertainty Because the Company
relies on grains for part of its raw inputs, these disruptions could increase the supply costs. However, since the Company sources all
its grain from local or known domestic suppliers, management considers that the impact of the Ukraine war is not significant based on
the Company’s history and relationship with the existing farmers and growers. The other potential conflict the Company monitors
is the threatening military activity between China and Taiwan. The Company used to primarily source its glass bottles from vendors who
used suppliers in China. Given the risks associated with tariffs increases, the Company asked its suppliers to begin looking for glass
suppliers in other countries, and that effort remains ongoing. Finally, the ongoing standoff and strikes between Israel and Hamas is keeping
tensions in the region high, further feeding uncertainty in the markets, impacting prices for fuel, transportation, freight and other
related items.
Inflation
While
reports of the core inflation rate subsiding are positive, unknown unreported inflation from the recently announced tariffs and resulting
tariff war could increase overall costs across the country as the markets attempt to react to supply disruptions and additional costs.
This could put cost pressure on the Company faster than it can raise prices on its products. In such cases the Company could lose money
on products, or its margins or profits could decline. In other cases, consumers may choose to forgo making purchases that they do not
deem to be essential, thereby impacting the Company’s growth plans. Likewise, labor pressures could continue to increase as employees
become increasingly focused on their own standard of living, putting upward labor costs on the Company before the Company has achieved
some or all of its growth plans. Management continues to focus on cost containment and is monitoring the risks associated with inflation
and will continue to do so for the foreseeable future.
U.S.
Government and State Legislative Items
Congress
is currently debating a large multi-year tax package. It is unclear at this time what the scale of those tax changes will be and how they
would impact the Company. Further, state legislatures have completed much of their legislative agenda items for 2025, including significant
tax increases in Washington state. As many of the bills related to those changed are on the Governor’s desk waiting action, the
Company will be monitoring the situation to determine if, or how, such changes might impact the Company.
Tariffs
In
the first quarter of 2025, the Trump administration announced the imposition of 25% tariff on aluminum, which could increase prices for
aluminum cans, impacting the input costs for the Company’s RTDs. In late March and early April the Trump administration instituted
blanket tariffs of varying amounts on virtually all countries, resulting in market and consumer apprehension and retaliatory tariffs from
many nations on American made goods. The Company remains firm that the Company’s exposure to the cost of tariffs on direct inputs
remains low, and retaliatory tariffs on American products has no impact on the Company’s current customer base or revenue as the
Company does not export. It is too soon to tell what the trickle down or secondary cost impacts will be on the Company’s business
operations from the tariffs on imported goods.
The
Company’s suppliers source some of the Company’s glass bottles from markets in Asia subject to recent tariff increases announced
by the Trump administration in the first quarter of 2025 and April 2025 . The Company does not believe these tariffs will materially impact
gross margin as these glass bottles are used to make the Company’s most premium and highest priced products. The Company is also
working with its glass bottle suppliers to ensure source diversification away from zones subject to the highest levels of tariffs.
The
Company sources some labels and printed collateral from suppliers in Canada, and recent tariffs announced by the Trump administration
on Canadian imports in the first quarter of 2025 could impact those items. However, these labels and print collateral items typically
have a cost ranging from $0.10
to $1.00
each, and because these labels and print items
10
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.)
are
used for the Company’s most expensive and premium products, the Company does not believe the imposition of tariffs on those items
will have a material effect on gross margin for those products. (See Global
Conflict, International Relations and Market Reactions
discussion above for further context).
NOTE
2 — SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use
of estimates
— The presentation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions
reflected in these condensed consolidated financial statements include the valuation of common stock, common stock warrants, convertible
notes, warrant liabilities, and stock options. Results could differ from those estimates. Estimates are periodically reviewed due to changes
in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known.
Fair
value measurements
— Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. There is a hierarchy based upon the transparency of inputs used in the valuation of an asset
or liability. The valuation hierarchy contains three levels:
| Level 1 — | Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets. | ||||
| Level 2 — | Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the assets or liabilities being measured. | ||||
| Level 3 — | Valuation inputs are unobservable and significant to the fair value measurement. | ||||
The
asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that
is significant to the fair value measurement. Valuation techniques used need to maximize observable inputs and minimize unobservable inputs.
In
determining the appropriate levels, the Company analyzes the assets and liabilities measured and reported on a fair value basis. At each
reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified
as Level 3.
The
Company’s financial instruments consist primarily of cash, accounts receivable, inventory and accounts payable. The carrying amount
of such instruments approximates fair value due to their short-term nature. The carrying value of long-term debt approximates fair value
because of the market interest rate of the debt. The convertible notes and warrant liabilities associated with the Company’s convertible
promissory notes are carried at fair value, determined according to Level 3 inputs in the fair value hierarchy described above.
During
the three months ended March 31, 2025 and 2024, there were no transfers between Level 1, Level 2, and Level 3.
Concentrations
of credit risk
— Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of accounts receivable,
accounts payable and bank demand deposits that may, from time to time, exceed Federal Depository Insurance Corporation (“FDIC”)
insurance limits. To mitigate the risks associated with FDIC insured limits the Company recently opened an Insured Cash Swap (“ICS”)
service account at its primary bank. Under terms of the ICS, when the bank places funds for the Company using ICS, the deposit is sent
from the Company’s transaction account into deposit accounts at other ICS Network banks in amounts below the standard FDIC insured
maximum of $250,000
for overnight settling. If the Company’s account exceeds the FDIC limit of $250,000
at the end of the business day, funds are automatically swept out by the Company’s bank and spread among partner banks in accounts,
each totaling less than $250,000.
This makes the Company’s funds eligible for FDIC insurance protection each day. The funds are then swept back into the Company’s
account at the beginning of the next business day. The aggregate limit that can be protected for the Company under this program is approximately
$150
million.
11
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
The
Company considers the concentration of credit risk associated with its accounts receivable to be commercially reasonable and believes
that such concentration does not result in the significant risk of near-term severe adverse impacts. As of March 31, 2025 and December 31,
2024, the Company had customers that individually represented 10% or more of the Company’s accounts receivable. There were five
and two individual customers that together represented 84%
and 77%
of total accounts receivable, as of March 31, 2025 and December 31, 2024, respectively.
| Concentration of Revenues |
Three
Months Ended March 31, | |||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
| Customer A | 16 | % | 27 | % | ||||||||||||||||
| Customer B | 25 | % | 11 | % | ||||||||||||||||
|
Customer C |
15 | % | 13 | % | ||||||||||||||||
|
Customer D |
31 | % | — | % | ||||||||||||||||
|
Customer E |
— | % | 18 | % | ||||||||||||||||
|
Customer F |
— | % | 12 | % | ||||||||||||||||
| 87 | % | 81 | % | |||||||||||||||||
Accounts
receivable
— Accounts receivable are reported at net realizable value. Receivables consist of amounts due from distributors. In evaluating
the collectability of individual receivable balances, the Company considers several factors, including the age of the balance, the customers’
historical payment history, its credit worthiness and economic trends. There was no
allowance for credit losses as of March 31, 2025 and December 31, 2024.
Inventories
— Inventories are stated at the lower of cost or net realizable value, with cost being determined under the weighted average method,
and consist of raw materials, work-in-process, and finished goods. Costs associated with spirit production and other costs related to
manufacturing of products for sale, are recorded as inventory. Work-in-process inventory is comprised of all accumulated costs of raw
materials, direct labor, and manufacturing overhead to the respective stage of production. Finished goods and raw materials inventory
includes the supplier cost, shipping charges, import fees, and federal excise taxes. Management routinely monitors inventory and periodically
writes off damaged and unsellable inventory. There was no
valuation allowance as of March 31, 2025 and December 31, 2024.
The
Company holds volumes of barreled whiskey, which will not be sold within one year due to the duration of the aging process. Consistent
with industry practices, all barreled whiskey is classified as work-in-process inventory and is included in current assets.
Goodwill — Goodwill
represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not
subject to amortization, and instead, assessed for impairment annually at the end of each fiscal year, or more frequently when events
or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying
amount in accordance with ASC 350 — Intangibles — Goodwill and Other.
The
Company has the option to first assess qualitative factors to determine whether events or circumstances indicate it is more likely than
not that the fair value of a reporting unit is greater than its carrying amount, in which case a quantitative impairment test is not required.
As
provided for by ASU 2017-04, Simplifying the Test for Goodwill Impairment, the quantitative goodwill impairment test is performed
by comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill is not impaired. An impairment loss is recognized for any excess of the carrying amount of the reporting
unit over its fair value up to the amount of goodwill allocated to the reporting unit. Income tax effects from any tax-deductible goodwill
on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable.
12
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Finite-Lived
Intangible Assets — Intangible
assets are recorded at cost less any accumulated amortization and any accumulated impairment losses. Intangible assets acquired through
business combinations are measured at fair value at the acquisition date, and are amortized over estimated useful lives of 6
to 10
years.
Intangible
assets with finite lives are comprised of customer relationships and intellectual property and are amortized over their estimated useful
lives on an accelerated basis over the projected pattern of economic benefits. Finite-lived intangible assets are reviewed for impairment
annually, or more frequently when events or changes in circumstances indicate that it is more likely than not that the fair value has
been reduced to less than its carrying amount.
Property
and equipment, net of accumulated depreciation
— Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the
assets — generally three to twenty
years. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset’s estimated useful
life or the term of the lease. Construction in progress is related to the construction or development of property and equipment that have
not yet been placed in service for their intended use. When the asset is available for use, it is transferred from construction in progress
to the appropriate category of property and equipment and depreciation on the item commences.
Upon
retirement or sale, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included
in the consolidated statement of operations. Costs of maintenance and repairs are charged to expense as incurred; significant renewals
and betterments are capitalized.
Leases
— The Company has operating leases for corporate offices, warehouses, distilleries and tasting rooms that are accounted for under
ASC 842. The Company determines if an arrangement is a lease at inception. Operating lease ROU assets represent the Company’s right
to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments
arising from a lease. Operating lease ROU assets and lease liabilities are recognized at the commencement date based on the present value
of the future minimum lease payments over the lease term. The Company recognizes lease expense for lease payments on a straight-line basis
over the term of the lease. Operating lease ROU assets also include the impact of any lease incentives. An amendment to a lease is assessed
to determine if it represents a lease modification or a separate contract. Lease modifications are reassessed as of the effective date
of the modification. For modified leases, the Company also reassess the lease classification as of the modification’s effective
date.
The
interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate, because
the interest rate implicit in the Company’s operating leases is not readily determinable. The incremental borrowing rate is estimated
to approximate the interest rate on a collateralized basis with similar terms and payments, and in the economic environments where the
leased asset is located. The incremental borrowing rate is calculated by modeling the Company’s credit rating based on its historic
arm’s-length secured borrowing facility and estimating an appropriate credit rating for similar secured debt instruments. The Company’s
calculated credit rating on secured debt instruments determines the yield curve used. In addition, an incremental credit spread is estimated
and applied to reflect the Company’s ability to continue as a going concern. Using the spread adjusted yield curve with a maturity
equal to the remaining lease term, the Company determines the borrowing rates for all operating leases.
The
Company’s operating lease terms include periods under options to extend or terminate the operating lease when it is reasonably certain
that the Company will exercise that option in the measurement of its operating lease ROU assets and liabilities. The Company considers
contractual-based factors such as the nature and terms of the renewal or termination, asset-based factors such as the physical location
of the asset and entity-based factors such as the importance of the leased asset to the Company’s operations to determine the operating
lease term. The Company generally uses the base, non- cancelable lease term when determining the operating lease ROU assets and lease
liabilities. The ROU asset is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be fully recoverable in accordance with Accounting Standards Codification Topic 360, Property,
Plant, and Equipment.
Operating
lease transactions are included in operating lease ROU assets, current operating lease liabilities and operating lease liabilities, net
of current portion on the consolidated balance sheets.
Impairment
of long-lived assets
— All of the Company’s long-lived assets held and used are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amounts may not be recoverable.
13
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Factors
that the Company considers in deciding when to perform an impairment review include: significant underperformance of the business in relation
to expectations; significant negative industry or economic trends; and significant changes or planned changes in the use of the assets.
When such an event occurs, future cash flows expected to result from the use of the asset and its eventual disposition is estimated. If
the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized for the difference
between the asset’s fair value and its carrying value. The Company did not
record any impairment losses on long-lived assets for the three months ended March 31, 2025 and 2024.
Investments/Investment
in Flavored Bourbon LLC
— Non-marketable equity investments of privately held companies are accounted for as equity securities without readily determinable
fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment
of the same issue pursuant to Accounting Standards Codification (“ASC”) Topic 321 Investments — Equity Securities (“ASC
321”) as the Company does not exert any significant influence over the operations of the investee company.
The
Company performs a qualitative assessment at each reporting period considering impairment indicators to evaluate whether the investment
is impaired. Impairment indicators that the Company considers include but are not limited to: i) a significant deterioration in the earnings
performance, credit rating, asset quality, or business prospects of the investee, ii) a significant adverse change in the regulatory,
economic, or technological environment of the investee, iii) a significant adverse change in the general market condition of either the
geographical area or the industry in which the investee operates, iv) a bona fide offer to purchase, an offer by the investee to sell,
or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment; and
v) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows
from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants. If the qualitative
assessment indicates that the investment is impaired, a loss is recorded equal to the difference between the fair value and carrying value
of the investment.
As
of March 31, 2025 and December 31, 2024, the Company had a 12.2%
and 12.2%
ownership interest in Flavored Bourbon, LLC., respectively, and did not record any impairment charges related to its investment in Flavored
Bourbon, LLC for the year ended December 31, 2023. See also Note 10 - Payment Upon Sale of Flavored Bourbon, LLC. Treasury
stock —
Treasury stock is shares of the Company’s own stock that have been issued and subsequently repurchased by the Company. Converting
outstanding shares to treasury shares does not reduce the number of shares issued but does reduce the number of shares outstanding. These
shares are not eligible to receive dividends.
The
Company accounts for treasury stock under the cost method. Upon the retirement of treasury shares, the Company deducts the par value of
the retired treasury shares from common stock and allocates the excess of cost over par value as a deduction to additional paid-in capital
based on the pro-rata portion of additional paid-in-capital, and the remaining excess as an increase to accumulated deficit. Retired treasury
shares revert to the status of authorized but unissued shares. All shares repurchased to date have been retired. For the three months
ended March 31, 2025 and 2024, the Company did not
repurchase any shares of common stock.
Revenue
recognition
— The Company’s revenue consists primarily of the sale of spirits domestically in the United States. Customers consist primarily
of direct consumers. The Company’s revenue generating activities have a single performance obligation and are recognized at the
point in time when control transfers and the obligation has been fulfilled, which is when the related goods are shipped or delivered to
the customer, depending upon the method of distribution and shipping terms. Revenue is measured as the amount of consideration the Company
expects to receive in exchange for the sale of a product. Revenue is recognized net of any taxes collected from customers, which are subsequently
remitted to governmental authorities. Sales terms do not allow for a right of return unless the product is damaged. Historically, returns
have not been material to the Company. Amounts billed to customers for shipping and handling are included in sales. The results of operations
are affected by economic conditions, which can vary significantly by time of year and can be impacted by the consumer disposable income
levels and spending habits.
Direct
to Consumer
— The Company sells its spirits and other merchandise directly to consumers through spirits club memberships, at the Heritage Distilling
tasting rooms and through the internet (e-commerce).
14
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Spirits
club membership sales are made under contracts with customers, which specify the quantity and timing of future shipments. Customer credit
cards are charged in advance of quarterly shipments in accordance with each contract. The Company transfers control and recognizes revenue
for these contracts upon shipment of the spirits to the customer.
Tasting
room and internet spirit sales are paid for at the time of sale. The Company transfers control and recognizes revenue for the spirits
and merchandise when the product is either received by the customer (on-site tasting room sales) or upon shipment to the customer (internet
sales).
The
Company periodically offers discounts on spirits and other merchandise sold directly to consumers through spirits club memberships, at
the Heritage Distilling tasting rooms and through the internet. All discounts are recorded as a reduction of retail product revenue.
Wholesale
— The
Company sells its spirits to wholesale distributors under purchase orders. The Company transfers control and recognizes revenue for these
orders upon shipment of the spirits from the Company’s warehouse facilities. Payment terms to wholesale distributors typically range
from 30 to 45 days. The Company pays depletion allowances to its wholesale distributors based on their sales to their customers which
are recorded as a reduction of wholesale product revenue. The Company also pays certain incentives to distributors which are reflected
net within revenues as variable consideration. The total amount of depletion allowances and sales incentives for three months ended March 31,
2025 and 2024 were $4,049
and $18,106,
respectively.
Third
Party —
The Company produced and sold barreled spirits to Third Party customers who either hold them for investment or who have a plan to use
the product in the future once the spirits are finished aging. Third Party Barreled Spirits were paid with a deposit up front, with the
remainder billed at the time of completion when the finished spirits were produced and supplied to the customer. In most cases, the barrels
are stored during aging for the customer at a fee. As of March 31, 2025 and December 31, 2024, the Company had deferred revenues
of $95,610
and $100,099,
respectively, included in other current liabilities within the consolidated balance sheets. These performance obligations are expected
to be satisfied within one year.
Service
revenue —
Represents fees for distinct value-added services that the Company provides to third parties, which may include production, bottling,
marketing consulting and other services aimed at growing and improving brands and sales. Revenue is billed monthly and earned and recognized
over-time as the agreed upon services are completed. The Company recorded $253,928
and $474,336
in service revenue in the condensed consolidated statements of operations for the three months ended March 31, 2025 and 2024, respectively.
There is no contractually committed service revenue that would give rise to an unsatisfied performance obligation at the end of each reporting
period.
The
following table presents revenue disaggregated by sales channel:
| For
the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Direct to Consumer | $ | 568,714 | $ | 742,443 | |||||||
| Wholesale | 269,341 | 318,157 | |||||||||
| Third Party | — | 171,223 | |||||||||
| Total Products Net Sales | 838,055 | 1,231,823 | |||||||||
| Services | 253,928 | 474,336 | |||||||||
| Total Net Sales | $ | 1,091,983 | $ | 1,706,159 | |||||||
Substantially
all revenue is recognized from sales of goods or services transferred when contract performance obligations are met. As such, the accompanying
condensed consolidated financial statements present financial information in a format which does not further disaggregate revenue, as
there are no significant variations in economic factors affecting the nature, amount, timing, and uncertainty of cash flows.
15
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Excise
taxes —
Excise taxes are levied on alcoholic beverages by governmental agencies. For imported alcoholic beverages, excise taxes are levied at
the time of removal from the port of entry and are payable to the U.S. Customs and Boarder Protection (the “CBP”). For domestically
produced alcoholic beverages, excise taxes are levied at the time of removal from a bonded production site and are payable to the Alcohol
and Tobacco Tax and Trade Bureau (the “TTB”). These taxes are not collected from customers but are instead the responsibilities
of the Company. The Company’s accounting policy is to include excise taxes in “Cost of Sales” within the consolidated
statements of operations, which totaled $30,576
and $45,842
for the three months ended March 31, 2025 and 2024, respectively.
Shipping
and handling costs
— Shipping and handling costs of $53,770
and $89,926
were included in “Cost of Sales” within the condensed consolidated statements of operations for the three months ended March 31,
2025 and 2024, respectively.
Stock-based
compensation
— The Company measures compensation for all stock-based awards at fair value on the grant date and recognizes compensation expense
over the service period on a straight-line basis for awards expected to vest.
The
fair value of stock options granted is estimated on the grant date using the Black-Scholes option pricing model. The Company uses a third-party
valuation firm to assist in calculating the fair value of the Company’s stock options. This valuation model requires the Company
to make assumptions and judgment about the variables used in the calculation, including the volatility of the Company’s common stock
and assumed risk-free interest rate, expected years until liquidity, and discount for lack of marketability. Forfeitures are accounted
for and are recognized in calculating net expense in the period in which they occur. Stock-based compensation from vested stock options,
whether forfeited or not, is not reversed.
In
the past the Company granted stock options to purchase common stock with exercise prices equal to the value of the underlying stock, as
determined by the Company’s Board of Directors on the date the equity award was granted.
The
Board of Directors determines the value of the underlying stock by considering several factors, including historical and projected financial
results, the risks the Company faced at the time, the preferences of the Company’s stockholders, and the lack of liquidity of the
Company’s common stock.
During
the three months ended March 31, 2025 and 2024, the Company did not
grant any stock option awards. The Company has not granted any stock options since 2019, when the Company’s 2018 Plan was terminated
in favor of the 2019 Plan, under which, the Company has granted RSUs. See Note 7. Upon the closing of the Company’s initial public
offering (which occurred on November 25, 2024), the 2024 Equity Incentive Plan (the “2024 Plan”) became effective, authorizing
the issuance of up to 2,500,000
shares of common stock.
Stock
option awards generally vest on time-based vesting schedules. Stock-based compensation expense is recognized based on the value of the
portion of stock-based payment awards that is ultimately expected to vest and become exercisable during the period. The Company recognizes
compensation expense for all stock-based payment awards made to employees, directors, and non-employees using a straight-line method,
generally over a service period of four
years.
Advertising
—
The Company expenses costs relating to advertising either as costs are incurred or the first time the advertising takes place. Advertising
expenses totaled $189,295
and $85,278
for the three months ended March 31, 2025 and 2024, respectively and were included in “Sales and marketing” in the condensed
consolidated statements of operations.
Income
taxes —
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 740, “Income
Taxes”
for establishing and classifying any tax provisions for uncertain tax positions. The Company’s policy is to recognize and include
accrued interest and penalties related to unrecognized tax benefits as a component of income tax expenses. The Company is not aware of
any entity level uncertain tax positions.
Income
taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the condensed consolidated financial statements. Under this
method, deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis
of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enacted date.
16
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Net
income / (loss) per share attributable to common stockholders
— The Company computed basic net income / (loss) per share attributable to common stockholders by dividing net income / (loss) attributable
to common stockholders by the weighted-average number of common stock outstanding for the period, without consideration for potentially
dilutive securities. The Company computes diluted net income / (loss) per common share after giving consideration to all potentially dilutive
common stock, including stock options, RSU awards, and warrants to purchase common stock outstanding during the period determined using
the treasury-stock method as well as the convertible notes outstanding during the period determined using the if-converted method, except
where the effect of including such securities would be antidilutive.
Segment
Information —
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker (“CODM”), or decision–making group, in deciding how to allocate resources
and assess performance. The Company’s CODM is the Chief Executive Officer. The Company operates as one
operating segment and uses net income / (loss) as measures of profit or loss on a consolidated basis in making decisions regarding resource
allocation and performance assessment. Additionally, the Company’s CODM regularly reviews the Company’s expenses on a consolidated
basis. The financial metrics used by the CODM help make key operating decisions, such as allocation of budgets between the following significant
segment expenses: cost of revenues; general and administrative; and research and development expenses.
Recent
accounting pronouncements —
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires entities to disclose specific rate
reconciliations, amount of income taxes separated by federal and individual jurisdiction, and the amount of income/(loss) from continuing
operations before income tax expense (benefit) disaggregated between federal, state, and foreign. The new standard is effective for the
Company for its annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact
of adopting the standard.
In
November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic
220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”), and in January 2025, the FASB issued ASU 2025-01, Income
Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date (“ASU
2025-01”). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures
about specific types of expenses included in the expense captions presented in the statement of operations. ASU 2024-03, as clarified
by ASU 2025-01, is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after
December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact these standards will have on its financial
statements.
NOTE
3 — INVENTORIES
Inventories
consisted of the following:
| March
31, 2025 |
December
31, 2024 | ||||||||||
| Finished Goods | $ | 605,190 | $ | 461,254 | |||||||
| Work-in-Process | 871,752 | 936,181 | |||||||||
| Raw Materials | 1,028,546 | 1,074,132 | |||||||||
| Total Inventory | $ | 2,505,488 | $ | 2,471,567 | |||||||
17
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
4 — PROPERTY
AND EQUIPMENT, NET
Property
and equipment, net consisted of the following:
| Estimated
Useful Lives (in years) |
March
31, 2025 |
December
31, 2024 | |||||||||||||||
| Machinery and Equipment |
5
to 20 |
$ | 3,406,433 | $ | 3,478,062 | ||||||||||||
| Leasehold Improvements | Lease term | 6,930,585 | 6,930,585 | ||||||||||||||
| Computer and Office Equipment |
3
to 10 |
2,458,194 | 2,460,632 | ||||||||||||||
| Vehicles | 5 | 274,559 | 274,559 | ||||||||||||||
| Construction in Progress | N/A | 84,957 | 84,957 | ||||||||||||||
| Total Property and Equipment | 13,154,728 | 13,228,795 | |||||||||||||||
| Less: Accumulated Depreciation | (8,047,856) | (7,779,383) | |||||||||||||||
| Property and Equipment, net of Accumulated Depreciation | $ | 5,106,872 | $ | 5,449,412 | |||||||||||||
Depreciation
expense related to property and equipment for the three months ended March 31, 2025 and 2024 was $296,528
and $320,465
respectively.
NOTE
5 — BORROWINGS
Borrowings
of the Company consisted of the following:
| March
31, 2025 |
December
31, 2024 | ||||||||||
| Silverview Loan | $ | 10,382,438 | $ | 10,682,438 | |||||||
| PPP Loan | 2,269,456 | 2,269,456 | |||||||||
| COVID19 TTS Loan | 39,247 | 39,247 | |||||||||
| City of Eugene | 389,875 | 389,875 | |||||||||
| Total Notes Payable | 13,081,016 | 13,381,016 | |||||||||
| Less: Debt Issuance Costs | (120,835) | (140,082) | |||||||||
| $ | 12,960,181 | $ | 13,240,934 | ||||||||
In
March and September 2021, the Company executed a secured term loan agreement and an amendment with Silverview Credit Partners, L.P. (the
“Silverview Loan”) for an aggregate borrowing capacity of $15,000,000.
The Silverview Loan originally matured on April 15, 2025, which was extended to October 25, 2026 as part of the Silverview Loan modification
executed on October 1, 2024. The Silverview Loan accrued interest through the 18-month anniversary of the closing date at (i) a fixed
rate of 10.0%,
which portion was payable in cash, and (ii) at a fixed rate of 6.5%,
which portion was payable in kind and added to the outstanding obligations as principal. Effective on the 19th
month anniversary of the closing date, the Silverview Loan accrues interest at a fixed rate of 15.0%
through maturity. Interest payable in cash is required to be repaid on the fifteenth day of each calendar month. The Company had an option
to prepay the Silverview Loan with a prepayment premium up to 30.0%
of the obligations during the first twenty-four months of the loan, after which time the Company can prepay the loan with no premium due.
The
Company is now past that initial twenty-four-month window and can prepay all or some of the outstanding balance without penalty. The Silverview
Loan also contained certain financial and other debt covenants that, among other things, imposed certain restrictions on indebtedness,
liens, investments and capital expenditures. The financial covenants required that, at the end of each applicable fiscal period as defined
pursuant to the Silverview Loan agreement, the Company has either (i) an EBITDA interest coverage ratio up to 2.00
to 1.00, or (ii) a cash interest coverage ratio of not less than 1.25
to 1.00. Commencing with the fiscal quarter ending June 30, 2021, the Company shall maintain liquidity of
18
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
5 — BORROWINGS (cont.)
not
less than $500,000.
The Silverview Loan may be used for general corporate purposes, including working capital needs and capital expenditures.
As
of March 31, 2025 and December 31, 2024, the outstanding balance of the Silverview Loan was $10,382,438
and $10,682,438,
respectively.
In
2024, the Company violated various financial and other debt covenants regarding its failure to comply with the financial covenants and
to timely furnish its financial statements for the period through June 2024,when the Company reached an agreement in principal (which
was finalized and agreed to in October 2024) with Silverview to complete a loan modification of the Silverview Loan in the following ways,
which became effective upon the close of the Company’s initial public offering (which occurred on November 25, 2024): 1) extend
the maturity date by 18
months to October 25, 2026; 2) recast the amortization schedule to reduce the amount paid each quarter to allow the Company to preserve
cash, as follows: $2,050,000
(including December 2024 interest of $182,438)
due by December 31, 2024 (which was paid $300,000
in January 2025 and $1,750,000
in December 2024), $700,000
due June 30, 2025 and then $500,000
due every six months thereafter; 3) increase in the coupon rate from 15%
to 16.5%
in the month starting after the close of the Company’s initial public offering (which occurred on November 25, 2024), with
monthly interest payments remaining in effect; 4) waiver of any past missed amortization payments; 5) waiver of any past missed covenant
faults; 6) 1%
additional exit fee due at loan payoff; 7) an additional 1%
exit fee due at payoff if the Company does not refinance or repay the entire debt by July 30, 2025; 8) the elimination of EBITDA coverage
and interest coverage ratio tests; and 9) simplified reporting requirements to match the reporting the Company must make as a public company.
The lender had previously agreed to waive any existing covenant compliance matters as of December 31, 2023 and to forbear exercising its
rights and remedies under the loan agreement through the date of IPO. The amount due under the Silverview Loan within one year of March 31,
2025 is classified as a current liability, and the amount due subsequent to one year from March 31, 2025 is classified as a non-current
liability as of March 31, 2025 as the Maturity Date is October 25, 2026.
In
April 2020, the Company was granted a loan under the Paycheck Protection Program (“PPP”) offered by the Small Business Administration
(the “SBA”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), section 7(a)(36) of
the Small Business Act for $3,776,100.
The proceeds from the PPP loan may only be used to retain workers and maintain payroll or make mortgage interest, lease and utility payments
and all or a portion of the loan may be forgiven if the proceeds are used in accordance with the terms of the program within the 8
or 24-week
measurement period. The loan terms require the principal balance and 1%
interest to be paid back within two
years of the date of the note. In June 2021, the Company’s bank approved forgiveness of the loan of $3,776,100.
During the year ended December 31, 2022, the forgiveness was partially rescinded by the SBA and the Company recognized $1,506,644
as other income in the consolidated statements of operations, resulting in $2,269,456
in debt. Under the terms of the PPP loan, the Company has also recorded interest expense on the PPP loan at the rate of 1%,
for a total of $5,596
and $5,596
for the three months ended March 31, 2025 and 2024, respectively. Accrued interest payable on the PPP loan was $112,851
and $107,255
as of March 31, 2025 and December 31, 2024, respectively. The Company is currently in the process of disputing a portion if
not all of the difference. The terms of the agreement state that the Company has 18-24
months to repay the PPP loan.
In
2023, the Company entered into a secured business loan and security agreement with Channel Partners Capital, LLC (“Channel Partners”)
(the “2023 Channel Partners Loan”) for an aggregate borrowing capacity of $250,000,
of which. $47,104
of proceeds was used to pay off the remaining balance of a previous Channel Partners loan. The 2023 Channel Partners Loan matured and
was paid off in full on October 5, 2024. During its term the 2023 Channel Partners Loan accrued interest at a fixed rate of 13.34%,
and had payments of $16,944,
principal plus interest was payable monthly. The Company had an option to prepay the 2023 Channel Partners Loan with a prepayment discount
of 5.0%.
As of both March 31, 2025 and December 31, 2024, the outstanding balance of the 2023 Channel Partners Loan was $0.
In
February 2024, the Company acquired the debt of Thinking Tree Spirits with City of Eugene in the amount of $389,875.
(See Note 8.) The City of Eugene loan will mature on May 1. 2028 with an interest rate of 0%
through July 31, 2025
and an interest
rate of 5%
per annum beginning on August 1, 2025. Monthly payments are scheduled to begin on September 1, 2025 in the amount of $6,714,
including accrued interest.In May 2024, the Company raised $100,000
under the terms of an accounts receivable factoring arrangement with a related party. (See Note 12.)
19
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
5 — BORROWINGS (cont.)
As
of July 1, 2024, the Company raised an additional aggregate of $299,667
between two separate investors under the terms of a July 1, 2024 accounts receivable factoring arrangement, including $166,667
from the related party. The Company issued an aggregate of 66,549
five year
warrants to purchase common stock at $6.00
per share in conjunction with the July 1, 2024 accounts receivable factoring agreements. (See Note 12.)
In
August 2024, the aggregate of $399,667
received from the two separate investors under the terms of the May 2024 and July 2024 factoring agreements, including accrued fees and
66,549
related warrants was exchanged for an aggregate of 44,291
shares of Series A Preferred Stock and 19,983
warrants to purchase shares of common stock at the lesser of $5.00
per share or the price per share at which the common stock is sold in the Company’s initial public offering. (Including $266,667
received from a related party, which was exchanged for 29,661
shares of Series A Preferred Stock, and 13,333
warrants at $5.00
per share.) Upon the November 25, 2024 initial public offering at $4.00
per share, the 19,983
warrants at $5.00
per share were recalculated and reissued as 24,978
warrants at $4.00
per share (and the 13,333
related party warrants at $5.00
per share were recalculated and reissued as 16,666
warrants at $4.00
per share). (See Note 12.)
In
July 2024, the Company raised an additional $250,000
from an investor under the terms of a July 2024 accounts receivable factoring arrangement. The Company issued 83,333
five year
warrants to purchase common stock at $6.00
per share in conjunction with the July 2024 accounts receivable factoring arrangement (which remain outstanding). As of September 2024,
the Company recorded a total liability of $277,000
(including $27,000
of fees) related to this July 2024 factoring agreement, which was exchanged for 27,700
shares of Series A Preferred Stock, including 12,500
warrants to purchase shares of common stock at the lesser of $5.00
per share or the price per share at which the common stock is sold in the Company’s initial public offering. Upon the November 25,
2024 initial public offering at $4.00
per share, the 12,500
warrants at $5.00
per share were recalculated and reissued as 15,625
warrants at $4.00
per share.
As
of March 31, 2025, the principal repayments of the Company’s debt measured on an amortized basis of $13,081,016
will be due within five years from the issuance of these condensed consolidated financial statements. The outstanding principal repayments
due within the next 12 months of $3,474,242,
net of debt issuance costs of $70,574,
was classified as a current liability on the Company’s consolidated balance sheet as of March 31, 2025. The outstanding principal
repayments due after the next 12 months of $9,485,939,
net of debt issuance cost of $50,261,
was classified as a long-term liability on the Company’s consolidated balance sheet as of March 31, 2025.
The
following table represents principal repayments from 2025 and the years through 2029 and thereafter:
| Years Ending | Amount | ||||
| 2025 | 3,529,169 | ||||
| 2026 | 9,245,977 | ||||
| 2027 | 66,789 | ||||
| 2028 | 239,081 | ||||
| 2029 | — | ||||
|
thereafter |
— | ||||
| $ | 13,081,016 | ||||
Liabilities
for Deferred Revenue — During
2023, the Company entered into a distilled spirits barreling production agreement with a related party for production of 1,200
barrels of distilled spirits over time. There was a prepayment of $1,000,000
made to the Company in January 2023. In March 2024, the agreement was amended to 600
barrels for $500,000,
with the then $500,000
excess prepayment used to purchase a Whiskey Note in the principal amount of $672,500,
which was subsequently exchanged (upon the consummation of the Company’s initial public offering on November 25, 2024) under
the terms of a Subscription Exchange Agreement for common stock in conjunction with the February 29, 2024 exchange of Whiskey Notes
for common stock.
20
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
6 — FAIR
VALUE MEASUREMENT
Upon
the consummation of the Company’s initial public offering on November 25, 2024, the 2022 and 2023 Convertible Notes; Warrant
Liabilities - 2022 and 2023 Convertible Notes; Whiskey Special Ops 2023 Notes; and Warrant Liabilities - Whiskey Special Ops 2023 Notes
were all exchanged and reclassified from liabilities to equity. Accordingly, the respective fair values of those liabilities as of March 31,
2025 and December 31, 2024 was $0,
The
following table provides a roll forward of the aggregate fair values of the Company’s financial instruments described above, for
which fair value is determined using Level 3 inputs:
| 2022
and 2023 Convertible Notes |
Whiskey
Special Ops Notes |
2022 Notes Warrant Liabilities |
Whiskey
Special Ops Notes Warrant Liabilities | ||||||||||||||||||||
|
Balance as of
January 1, 2024 |
$ | 36,283,890 | $ | 1,452,562 | $ | 794,868 | $ | 1,512,692 | |||||||||||||||
| Issuances | — | 2,813,850 | — | 302,020 | |||||||||||||||||||
| Change in Fair Value | (16,275,433) | 16,846,522 | 817,454 | (1,247,662) | |||||||||||||||||||
| Balance as of March 31, 2024 | $ | 20,008,457 | $ | 21,112,934 | $ | 1,612,322 | $ | 567,050 | |||||||||||||||
There
were no financial instruments for which fair value is determined using Level 3 inputs for the three months ended March 31, 2025.
NOTE
7 — STOCKHOLDERS’
EQUITY / (DEFICIT)
On
May 11, 2024, the Board and Stockholders of the Company approved, and on May 14, 2024 the Company effected, a .57-for-1
reverse stock split. All share and per share numbers included in these condensed consolidated financial statements as of and for all periods
presented reflect the effect of that stock split unless otherwise noted.
On
November 25, 2024, the Company consummated its initial public offering ("IPO") whereby it sold a total of 1,687,500
shares of common stock, at an offer price of $4.00
per share. The Company received net proceeds from the IPO of $5,960,000
after deducting underwriting expenses and commission of $790,000.
Concurrent
with the closing of the IPO on November 25, 2024, the Company consummated a private offering, to certain of its existing security
holders, of common stock warrants to purchase an aggregate of up to 382,205
shares of common stock (the “Common Warrants”) at an exercise price of $0.01
per share. The Common Warrants were sold in such private placement for a purchase price of $3.99
per Common Warrant, which was equal to the $4.00
price per share at which the common stock was sold in the IPO offering less the $0.01
exercise price. The Company received net proceeds from the private offering of Common Warrants of $1,397,998
after deducting underwriting discounts and commission of $127,000.
The Common Warrants are immediately exercisable and will expire five
years from the date of issuance. Subject to limited exceptions, a holder of Common Warrants will not have the right to
exercise any portion of its Common Warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99%
(or, at the election of the holder, 9.99%)
of the number of shares of common stock outstanding immediately after giving effect to such exercise. The Company offered the Common Warrants
to enable certain existing security holders of the Company that were expected to participate in the offering to maintain their percentage
ownership interest in the Company without violating the purchaser concentration rules of Nasdaq applicable to initial public offerings
of common stock. The Common Warrants and the shares of common stock issuable upon exercise of such warrants were not registered under
the Securities Act of 1933, as amended (the “Securities Act”), and were offered pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended provided in Section 4(a)(2) of the Securities Act and Rule 506(b) promulgated thereunder.
Concurrent
with the closing of the IPO on November 25, 2024, any contingencies disclosed above related to the accounting treatment recognizing
the conversion of debt to equity for the following private transactions were lifted as a result of the IPO (see Notes 5 and 6):
21
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
•The
2022 and 2023 Convertible Promissory Notes which were previously exchanged for 3,312,148
shares of common stock and 507,394
prepaid warrants to purchase common stock (See Note 12);
•The
2023 Series — Convertible Whiskey Special Ops 2023 Notes and related warrants which were previously exchanged for 2,399,090
shares of common stock and 546,927
prepaid warrants to purchase common stock (See Note 12);
•The
$399,667
received from the two separate investors under the terms of the May 2024 and July 2024 factoring agreements, including accrued fees and
66,549
related warrants, which was exchanged for an aggregate of 44,291
shares of Series A Preferred Stock and 24,978
warrants to purchase shares of common stock at $4.00
per share (including $266,667
received from a related party, which was exchanged for 29,661
shares of Series A Preferred Stock, and 16,667
warrants). (See Notes 5 and 12.)
•The
$250,000
received from an investor under the terms of a July 2024 accounts receivable factoring agreement, including accrued fees, which was exchanged
for 27,700
shares of Series A Preferred Stock, including 15,625
warrants to purchase shares of common stock at $4.00
per share. (See Notes 5 and 12.)
In
addition to the Common Warrants discussed above, pursuant to the Underwriting Agreement dated November 21, 2024, by and between the Company
and the underwriters named therein (the “Representative”), the Company issued 84,377
of Representative’s Warrants to the Representative with an initial exercise date on or after May 24, 2025, an exercise price of
$4.00
per share, and an expiration date of November 21, 2029.
Common
stock —
On October 31, 2023, the Company’s Board of Directors and shareholders increased the number of shares the Company is authorized
to issue from 3,000,000
shares to 10,000,000
shares, including 9,500,000
shares of common stock and 500,000
shares of Founders Common Stock, par value of $0.0001
per share (which Founders Common Stock had four
votes per share). The key terms of the common stocks are summarized below:
Dividends
— The holders of common stock and Founders Common Stock are entitled to receive dividends if declared by the Board of Directors.
No
dividends have been declared since the inception of the Company.
Voting
rights —
The holders of Founders Common Stock were entitled to four
votes for each share of Founders Common Stock and general common stockholders were entitled to one
vote for each share of general common stock. The designation of Founders Common Stock was terminated upon the completion of the IPO and
now all common stock is treated as general common stock, with each share having one vote.
Upon
approval of the April 2024 increase in authorized shares, the 2022 and 2023 Convertible Notes were exchanged (contingent upon the consummation
of the Company's initial public offering) for 3,312,148
additional shares of common stock and 507,394
prepaid warrants; The actual unconditional exchange of the 2022 and 2023 Convertible Notes and reclassification of the aggregate fair
value of exchanged notes (of $15,278,168
as of November 25, 2024, (the date of the Company's initial public offering) was reclassified from Convertible Notes to equity (of
Common Stock Par Value of $382
and Paid-in-capital of $15,277,786)
under the terms of the Subscription Exchange Agreement upon the closing of the Company’s initial public offering — which occurred
on November 25, 2024 and was the remaining prerequisite for the unconditional exchange of the 2022 and 2023 Convertible Notes for
equity.
Upon
approval of the April 2024 increase in authorized shares, the Whiskey Special Operation Convertible Notes were exchanged (contingent upon
the consummation of the Company’s initial public offering, which occurred on November 25, 2024) for 2,399,090
additional shares of common stock and 546,927
prepaid warrants; The actual unconditional exchange of the Convertible Notes and reclassification of the aggregate fair value of exchanged
notes (of $11,784,068
as of November 25, 2024, (the date of the Company's initial public offering) was reclassified from Convertible Notes to equity (of
Common Stock Par Value of $295
and Paid-in-capital of $11,783,773)
under the terms of the Subscription Exchange Agreement upon the closing of the Company’s initial public offering — which occurred
on November 25, 2024) and was the remaining prerequisite for the unconditional exchange of the Whiskey Special Operation Convertible
Notes for equity.
22
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
As
of March 31, 2025, the Company had 6,921,564
shares of common stock issued and outstanding, including the 3,312,148
shares of common stock related to the conversion of the 2022 and 2023 Convertible Notes (comprised of 3,819,542
shares of common stock, net of: 507,394;
and subsequently, 1,420,406
additional shares of common stock exchanged for prepaid warrants); and the 2,399,090
shares of common stock related to the conversion of the Whiskey Special Operation Convertible Notes (comprised of 2,946,015
shares of common stock, net of: 546,927;
and subsequently, 1,422,265
additional shares of common stock exchanged for prepaid warrants). During the three months ended March 31, 2025 and 2024, respectively,
the Company repurchased 0 and 0
shares of common stock and and 0
and 0
warrants to purchase common stock were exercised.
In
the second quarter of 2024, the Company’s Board of Directors and shareholders took certain actions and approved amendments to the
Company’s amended and restated certificate of incorporation in preparation for the Company’s initial public offering (which
occurred on November 25, 2024) (the “Actions and Amendments”). These Actions and Amendments, included, among other things:
•filing
a second amendment to the Company’s amended and restated certificate of incorporation on April 1, 2024, to increase the Company’s
authorized capital stock from 10,000,000
shares to 70,000,000
shares, including 69,500,000
shares of common stock and 500,000
shares of Founders Common Stock. The increase in authorized shares included provision for the additional shares to be issued with the
Company’s anticipated IPO, including those discussed in the following paragraphs, and other future equity activities not yet known.
•filing
a third amendment to the Company’s amended and restated certificate of incorporation on May 14, 2024, to further increase the
Company’s authorized capital stock to 75,000,000
shares, including 5,000,000
shares of preferred stock.
ELOC
Agreement
— On January 23, 2025, the Company entered into an agreement for an equity line of credit purchase agreement (the “ELOC Purchase
Agreement”) with an investor (the “ELOC Investor”). Pursuant to the ELOC Purchase Agreement, upon the effectiveness
of a related Registration Statement (the
“ELOC Registration Statement”) (which was subsequently filed on January 24, 2025) the
Company and the investor entered into an equity line of credit purchase agreement whereby the Company will have the right from time to
time (at the Company’s option) to direct the Investor to purchase up to $15,000,000
of the Company’s common stock (subject to certain limitations and conditions. (the “ELOC Purchase Agreement”, or the
“Facility”). The amount of sales of common stock to the investor under the ELOC Purchase Agreement (the “ELOC Shares”),
and the timing of any sales, will be determined by the Company from time to time in its sole discretion and will depend on a variety of
factors, including, among others, market conditions, the trading price of
the Company’s shares and
determinations by the Company regarding the use of proceeds from any sale of such ELOC Shares. The net proceeds from any sales under the
Facility will depend on the frequency with, and prices at, which the ELOC Shares are sold to the Investor.
Under
the terms of the ELOC Purchase Agreement, within five (5) business days of the close of execution of the documents for this offering
the Company will issue
prepaid warrants exercisable into $75,000
worth of common stock priced at the VWAP per share for the trading day preceding the date such documents are executed (the “Commitment
Warrants”). The Commitment Warrants shall have an exercise price of $0.001
per share and shall not be exercisable if such exercise into common stock, when combined with other common stock owned by Investor, would
cause its ownership to exceed 4.99%
of the Company’s overall outstanding common stock. Upon exercise of the Commitment Warrants the resulting shares shall be called
“Commitment Shares”. The Investor agreed not to sell more of such Commitment Shares in any one trading day than is equal to
seven percent (7%)
of the total trading volume on the day such Commitment
Shares are sold. Such warrants were issued to the Investor as consideration for its entry into the ELOC Purchase Agreement (the “Commitment
Warrants”). In February 2025, the Company issued 67,162
Commitment Warrants to the ELOC Investor. In
February 2025, the Investor exercised the Commitment Warrants for $67.
Pursuant
to the ELOC Purchase Agreement, the Investor also agreed to purchase $1,000,000
of
the Company’s Series B Preferred Stock, of which $500,000
will be purchased, and the Company will deliver such Series B Preferred Shares, within twenty four (24)
hours after the ELOC Registration Statement is filed with the SEC. The second tranche of $500,000
will be purchased, and the Company will deliver such Series B Preferred shares, within three
trading days following the date the ELOC Registration Statement is declared effective by the SEC. Each share of Series B Preferred
23
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
Stock
will have a purchase price of $10.00
per share and a stated value of $12.00
per share, will pay dividends at the rate of 15%
per annum of the stated value (or $1.80
per share), and will be convertible by the holder at any time following the 90th
day following the date of effectiveness of the ELOC Registration Statement. The conversion of Series B Preferred Stock into common stock
shall be determined by dividing (a) an amount equal to 110%
of the sum of (i) the stated value plus (ii) the amount of all accrued and unpaid dividends, by (b) the Conversion Price. The Conversion
Price shall be the fixed price equaling the Volume Weighted Average Price on the trading day preceding the date the documents required
for the offering are executed. The Series B Preferred Stock will be subject to redemption by the Company at the Company’s option
at any time following the ninety (90) day anniversary such Series B Preferred Stock is acquired, but subject to any restrictions on such
redemption in the Company’s credit facilities, at a redemption price equal to the stated value of the Series B Preferred Stock to
be redeemed plus any accrued but unpaid dividends thereon. The shares of common stock that could result from any conversion of Series
B Preferred Stock are not being registered in the ELOC Registration Statement. Additional shares of the Company’s Series B Preferred
Stock may be sold after the date the ELOC Registration Statement becomes effective. As of January 24, 2025, the Conversion Price was fixed
at $1.10
per share.
In
accordance with the Company’s obligations under the ELOC Purchase Agreement and the Registration Rights Agreement, dated as of January
23, 2025, between the Company and the Investor (the “ELOC Registration Rights Agreement”), the Company is filing the ELOC
Registration Statement to register the resale by the Investor of (i) up to $15,000,000
of ELOC Shares (up to 5,000,000
shares of common stock) that the Company may elect, in the Company’s sole discretion, to issue and
sell to the Investor, from time to time from and after the Commencement Date under the ELOC Purchase Agreement, and (ii) 67,162
Commitment
Shares that would result from the exercise of the Commitment Warrants. Unless earlier terminated, the ELOC Purchase Agreement will remain
in effect until the earlier of: (i) January 23, 2028, i.e., the expiry of the 36-month
period commencing on the date of the ELOC Purchase Agreement, (ii) the date on which the Investor has purchased the Maximum Commitment
Amount (the “Commitment Period”), or (iii) an earlier date mutually agreed upon by both the Company and the Investor in the
future.
Under
the terms of the ELOC Purchase Agreement, the Investor may not purchase any ELOC Shares under the ELOC Purchase Agreement if such shares,
when aggregated with all other shares then beneficially owned by the Investor and its affiliates would result in the Investor beneficially
owning shares in excess of 4.99%
of the number of
the Company’s shares outstanding.
In
conjunction with the ELOC Purchase Agreement, on January 23, 2025, the Company’s Board of Directors approved the terms of the ELOC
Purchase Agreement and Registration Rights Agreement, the offering of up to 100,000
shares of Series B Preferred Stock, and the filing of the related ELOC Registration
Statement for up to 5,000,000
shares of common stock and 67,162
shares of common stock issuable upon the exercise of the related Commitment Warrants. In February 2025, the Investor exercised the Commitment
Warrants for $67.
In
the three months ended March 31, 2025, an aggregate of 330,014
shares of common stock had been sold to the investor under the ELOC Purchase Agreement for aggregate gross proceeds to the Company of
$232,427.
Subsequent to March 31, 2025, through May 19, 2025, an additional 857,439
shares of common stock had been sold to the investor under the ELOC Purchase Agreement for aggregate gross proceeds of $412,647.
Prepaid
Warrants to Purchase Common Stock
— In August 2024, certain holders of shares of common stock agreed to exchange an aggregate of 2,816,291
shares of their common stock into a like number of pre-paid warrants. Such pre-paid warrants will be eligible for exercise without the
payment of additional consideration at any time that the respective holder beneficially owns a number of shares of common stock that is
less than 9.99%
of the Company’s outstanding shares of common stock for a number of shares that would cause the holder to beneficially own 9.99%
of the Company’s outstanding shares of common, and having no expiration date. As of March 31, 2025, 2,619,433
of the pre-paid warrants remained outstanding.
24
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
The
following sets forth the outstanding prepaid warrants and common warrants as of March 31, 2025:
| Prepaid Warrants | Common Warrants | ||||||||||
| Balance December 31, 2024 | 3,871,992 | 382,205 | |||||||||
| Exercise of Prepaid Warrants in Exchange for Common Stock | (1,252,559) | — | |||||||||
| Balance March 31, 2025 | 2,619,433 | 382,205 | |||||||||
Upon
the closing of the Company's initial public offering on November 25, 2024, the conditional issuances of prepaid warrants and common
stock noted in the table above became effective.
In
addition to the prepaid warrants and common warrants in the table above: 119,207
warrants to purchase common stock at $0.01
per share were issued in connection with the initial aggregate $250,000
of non-ELOC Investor Series B Preferred Stock subscriptions (see Preferred Stock - Series B below); and, subsequent to March 31, 2025,
327,868
prepaid warrants were issued in connection with the issuance of Series B Preferred Stock (see Note 14).
In
the three months ended March 31, 2025, 1,252,559
prepaid warrants (with an exercise price of $0.001
each) were exercised cashlessly for 1,250,777
shares of common stock (including related party cashlessly exercised 1,117,559
prepaid warrants with an exercise price of $0.001
each for 1,115,909
shares of common stock) leaving 2,619,433
prepaid warrants remaining outstanding.
Subsequent
to March 31, 2025, through May 19, 2025, 700,000
prepaid warrants were exchanged for 39,200
shares of Series B Preferred Stock; 327,868
prepaid warrants were issued in connection with the issuance of Series B Preferred Stock, and, 1,072,960
prepaid warrants were exercised for common stock (including 341,658
from a related party), leaving 1,874,341
prepaid warrants outstanding (including 862,125
prepaid warrants outstanding of the related party).
Preferred
stock — Series A
— In May 2024 through September 2024, the Company sold $4,948,478
of Series A Convertible Preferred Stock The shares of Series A Convertible Preferred Stock, par value $0.0001
per share (the “Series A Preferred Stock”) had a subscription price of $10
per share and a stated value of $12
per share (the “Stated Value”), and included stock purchase warrants to purchase shares of common stock calculated at 25%
of the subscription price then divided by $5.00,
with an exercise price equal to the lesser of $5.00
per share or the price per share at which the common stock is sold in the Company’s initial public offering. (Upon the closing of
the Company's initial public offering on November 25, 2024, the exercise price was set at the initial public offering price of $4.00
per share.) The warrants expire June 15, 2029. At any time after June 15, 2027, the Warrants shall be automatically exercised
on a cashless basis if the common stock has traded for 5
consecutive trading days at or above 125%
of the Exercise Price (or $5.00
per share). The Series A Preferred Stock is entitled to receive, out of funds legally available therefor, cumulative dividends at
the rate of 15%
per annum of the Stated Value (or $1.80
per share) payable if and when declared by the Board of Directors of the Company or upon conversion or redemption of the Series A
Preferred Stock.
Dividends
on the Series A Preferred Stock may be paid by the Company in cash, by delivery of shares of common stock or through a combination
of cash and shares of common stock. If paid in common stock, the holder shall receive a number of shares of common stock equal to the
quotient of 110%
of the accrued dividends to be paid in common stock divided by the Conversion Price (as defined below). The Company may make payments
of dividends in common stock only if the average closing price of the common stock over the five trading days preceding the dividend
payment date is at or above the Conversion Price. Holders of the Series A Preferred Stock have no voting rights except as required
by law.
Each
share of Series A Preferred Stock may be converted at any time at the election of the holder into a number of shares of common stock
determined by dividing (a) an amount equal to 110%
of the sum of (i) the Stated Value plus (ii) the amount of all accrued dividends, by (b) the then applicable Conversion
Price. The “Conversion Price” was initially equal to $5.00
per share, subject to adjustment to the price per share at which the common stock is sold at the Company’s Initial Public Offering
if lower than the initial Conversion Price (and was fixed at $4.00
per share upon the November 25,
25
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
2024
initial public offering at $4.00
per share). Each share of Series A Preferred Stock will automatically be converted on June 15, 2027 into a number of shares
of common stock determined by dividing (a) an amount equal to 110%
of the sum of (i) the Stated Value plus (ii) the amount of all accrued dividends, by (b) the then-applicable Conversion
Price.
Any
time on or after June 15, 2025, the Company shall have the right to redeem some or all of the outstanding shares of Series A
Preferred Stock from funds legally available therefor, upon at least 30
days prior written notice to the holders of the Series A Preferred Stock, at a redemption price per share equal to 110%
of the sum of the Stated Amount, plus all accrued and unpaid dividends on such 494,840
shares of Series A Preferred Stock (or $7,318,436,
including accrued dividends of $715,044
as of March 31, 2025) (or $3,116,148
on 210,700
shares of Series A Preferred Stock including accrued dividends of $304,462,
excluding the 284,140
shares of Series A Preferred Stock subsequently exchanged for Series B Preferred Stock on May 1, 2025, as discussed in Note 14.).
The
Company received subscriptions for $4,948,478
of Series A Preferred Stock (of which $1,831,265
was from a related party), including $2,025,000
in cash (of which $834,000
was from a related party); $1,155,000
in the form of 525
barrels of aged whiskey (with an average value of $2,200
per barrel and with $259,875
allocated to barrel fixed assets and $895,125
allocated to whiskey inventory); $110,600
was paid by the sale of and transfer to the Company by a related party of an aggregate of 50
barrels of premium aged whiskey (with an average value of $2,212
per barrel and with $24,750
allocated to barrel fixed assets and $85,850
allocated to whiskey inventory); and, $719,919
was paid by the cancellation of outstanding indebtedness (factoring agreements) (of which $296,619
was from a related party). In addition, the Series A Preferred Stockholders who were issued Series A Preferred Stock in July through September
2024 received an additional 510,315
warrants with an exercise price of $6.00
per share as part of the Series A Preferred Stock subscriptions (the “$6.00
Warrants”) (of which 321,026
of the $6.00
Warrants were issued to a related party). In September 2024, the 510,315
$6.00
Warrants (including 321,026
$6.00
Warrants from a related party) were exchanged for 93,789
shares of Series A Preferred Stock that did not include any related warrants (including 59,001
shares of Series A Preferred Stock that did not include any related warrants for a related party). The value assigned to the $6.00
Warrants exchanged for Series A Preferred Stock that did not include any warrants was negotiated to be $937,959
(including $590,045
from a related party), or $1.838
per $6.00
Warrant using a Black-Scholes Valuation model with a then estimated IPO stock price of $5.00
per share and exercise price of $6.00
per share. The Company allocated the net proceeds between the warrants and the Series A Preferred Stock using the relative fair value
method.
In
connection with the $4,948,478
of Series A Preferred Stock, the Company also issued 197,013
warrants to purchase common stock at the lesser of $5.00
per share or the price per share at which the common stock is sold in the Company’s initial public offering (of which 60,563
of the $5.00
Warrants were issued to a related party). Upon the November 25, 2024 initial public offering at $4.00
per share, the 197,013
warrants at $5.00
per share were recalculated and reissued as 246,267
warrants at $4.00
per share (and the 60,563
related party warrants at $5.00
per share were recalculated and reissued as 75,705
warrants at $4.00
per share).
The
Series A Preferred Stock has a liquidation preference equal to the greater of (i) 110%
of the sum of (a) the Series A Preferred Stock Stated Value, plus (b) the amount of the aggregate dividends then accrued on such share
of Series A Preferred Stock and not previously paid, or (ii) such amount per share as would have been payable had all shares of Series
A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. Accordingly, the
Series A Preferred Stock liquidation preference as of March 31, 2025 (with 494,840
shares outstanding and a stated value of $5,938,080)
was $7,318,436.
In
consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders subsequent to March 31, 2025, on May
1, 2025, an aggregate of 284,140
outstanding shares of Series A Preferred Stock and 116,263
warrants to purchase shares of common stock at $4.00
per share (of which 183,122
shares of Series A Preferred Stock and 75,702
related warrants to purchase common stock at $4.00
per share were of a related party) was exchanged for Series B Preferred Stock. See Preferred Stock - Series B below. (See also Note 14.)
Preferred
Stock — Series B
— By written consent dated January 23, 2025 (pursuant to authority conferred upon the Board of Directors by the Company’s
second amended and restated certificate of incorporation), the Board of Directors designated 750,000
shares of authorized but unissued Preferred Stock as Series B Convertible Preferred Stock (the “Series
26
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
B
Preferred Stock”). The shares of Series B Preferred Stock, par value $0.0001
per share have a Subscription Price of $10
per share and a stated value of $12
per share (the “Series B Stated Value”). The Series B Preferred Stock is entitled to receive, out of funds legally available
therefor, cumulative dividends at the rate of 15%
per annum of the Series B Stated Value (or $1.80
per share) payable if and when declared by the Board of Directors of the Company or upon conversion or redemption of the Series B
Preferred Stock.
Dividends
on the Series B Preferred Stock may be paid by the Company in cash, by delivery of shares of common stock or through a combination
of cash and shares of common stock. If paid in common stock, the holder shall receive a number of shares of common stock equal to the
quotient of 110%
of the accrued dividends to be paid in common stock divided by the Conversion Price (as defined below). The Company may make payments
of dividends in common stock only if the average closing price of the common stock over the five trading days preceding the dividend
payment date is at or above the Conversion Price. Holders of the Series B Preferred Stock have no voting rights except as required
by law.
Each
share of Series B Preferred Stock may be converted at any time at the election of the holder into a number of shares of common stock
determined by dividing (a) an amount equal to 110%
of the sum of (i) the Series B Stated Value plus (ii) the amount of all accrued dividends, by (b) the then applicable Conversion
Price (equal to the VWAP of the common stock on the trading day immediately preceding the original issuance date or such shares of Series
B Preferred Stock). Each share of Series B Preferred Stock will automatically be converted on the 36
month anniversary of the original issuance date into a number of shares of common stock determined by dividing (a) an amount equal
to 110%
of the sum of (i) the Series B Stated Value plus (ii) the amount of all accrued dividends, by (b) the then-applicable Conversion
Price.
Any
time on or after the 90
day anniversary or the original issue date of such shares of Series B Preferred Stock, the Company shall have the right to redeem some
or all of the outstanding shares of Series B Preferred Stock from funds legally available therefor, upon at least 30
days prior written notice to the holders of the Series B Preferred Stock, at a redemption price per share equal to 110%
of the sum of the Stated Amount plus all accrued and unpaid dividends on such shares of Series B Preferred Stock.
In
connection with the initial aggregate $250,000
of non-ELOC Investor Series B Preferred Stock subscriptions (of which $125,000
was with a related party), the Company also issued 119,207
warrants to purchase common stock at $0.01
per share (of which 53,418
of the warrants were to a related party).
As
of March 31, 2025, the Company had received subscriptions for $1,679,810
(67,162
shares) of Series B Preferred Stock, of which: $250,000
was from a related party); and $1,150,000
was from the ELOC Investor, of which $1,000,000
was purchased in January 2025 in conjunction with the execution and registration of the ELOC Purchase Agreement.
Subsequent
to March 31, 2025, the Company received subscriptions for an additional $4,914,567
(491,456
shares) of Series B Preferred Stock, of which: $4,092,567
or 409,256
shares was from the exchange of Series A Preferred Stock and related warrants for Series B Preferred Stock (of which $2,640,437
or 264,043
shares was from a related party; $392,000
or 39,200
shares was from the exchange of 700,000
prepaid warrants at a VWAP of $0.56
per prepaid warrant; and $430,000
or 43,000
shares was from other investors (of which $55,000
or 5,500
shares was from a related party, and one other investor subscription of $100,000
or 10,000
shares included a negotiated 327,868
prepaid warrants to purchase common stock at $0.001
per share).). (See Note 14.)
The
Series B Preferred Stock has a liquidation preference equal to the greater of (i) 110%
of the sum of (a) the Series B Preferred Stock Stated Value, plus (b) the amount of the aggregate dividends then accrued on such share
of Series B Preferred Stock and not previously paid, or (ii) such amount per share as would have been payable had all shares of Series
B Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. Accordingly, the
Series B Preferred Stock liquidation preference as of March 31, 2025 (with 167,981
shares outstanding and a stated value of $2,015,772)
was $2,289,003.
Subsequent to March 31, 2025, the Series B Preferred liquidation preference (with 659,437
shares outstanding and a stated value of $7,913,244)
was $8,814,351.
In
consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders subsequent to March 31, 2025, on May
1, 2025, certain shareholders agreed to exchange an aggregate of 284,140
shares of Series A
27
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
Preferred
Stock at a negotiated aggregate value of $4,092,560
of Series A Preferred Stock (at Stated Value of $12
per share and including accrued dividends) and 116,263
related warrants to purchase common stock at $4.00
per share into 409,256
shares of Series B Preferred Stock (including $2,640,430
or 183,122
shares of Series A Preferred Stock and 75,702
warrants to purchase common stock at $4.00
per share converted into 264,043
shares of Series B Preferred Stock of a related party). The value of Series A Preferred Stock and related warrants exchanged for Series
B Preferred Stock was negotiated based upon: the related Stated Value of the Series A Preferred Stock (or 284,140
shares at $12
Stated Value = $3,409,680)
and accrued dividends thereon (of $343,392)
through May 1, 2025; plus the value of the related warrants to purchase common stock (calculated using a Black Scholes valuation model).
Subsequent to the exchange, there were outstanding: 659,437
shares of Series B Preferred Stock; 210,700
shares of Series A Preferred Stock; and, 129,998
warrants to purchase common stock at $4.00
per share related to the Series A Preferred Stock, (See also Note 14.)
Stock
options —
The Company’s 2018 Equity Incentive Plan was approved by the HDC Board and the HDC shareholders in March 2018. On April 27, 2019,
in anticipation of the Company’s reorganization on May 1, 2019, the HDHC Board and the HDHC sole stockholder approved HDHC’s
2019 Equity Incentive Plan (the “2019 Plan”). Upon the closing of the Company’s initial public offering (which occurred
on November 25, 2024), the 2024 Equity Incentive Plan (the “2024 Plan”) became effective, authorizing the issuance of
up to 2,500,000
shares of common stock. As of March 31, 2025, the Company had made no
grants under the 2024 Plan.
The
2024 Plan allows for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock
appreciation rights (“SARs”), restricted stock, RSU awards, performance shares, and performance units to eligible participants
for ten (10)
years (until November 2034).
The
2019 Plan allows for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock
appreciation rights (“SARs”), restricted stock, RSU awards, performance shares, and performance units to eligible participants
for ten (10)
years (until April 2029). The cost of awards under the 2019 Plan generally is based on the fair value of the award on its grant date.
The maximum number of shares that may be utilized for awards under the 2019 Plan as of March 31, 2025 is 256,600.
The
following sets forth the outstanding ISOs and related activity for the three months ended March 31, 2025:
| Options Outstanding | Number
of Shares |
Weighted-
Average Exercise Price Per Share |
Weighted-
Average Remaining Contractual Term (in years) |
Aggregate
Intrinsic Value | ||||||||||||||||||||||
| Outstanding at December 31, 2024 | 6,011 | $ | 157.89 | 0.86 | $ | 0.00 | ||||||||||||||||||||
| Exercisable at December 31, 2024 | 6,011 | $ | 157.89 | 0.86 | $ | 0.00 | ||||||||||||||||||||
| Forfeited | 0 | $ | 157.89 | |||||||||||||||||||||||
| Outstanding at March 31, 2025 | 6,011 | $ | 157.89 | 0.61 | $ | 0.00 | ||||||||||||||||||||
| Exercisable at March 31, 2025 | 6,011 | $ | 157.89 | 0.61 | $ | 0.00 | ||||||||||||||||||||
| Remaining unvested at March 31, 2025 | — | $ | 157.89 | |||||||||||||||||||||||
ISOs
require a recipient to remain in service to the Company, ISOs generally vest ratably over periods ranging from one
to four
years from the vesting start date of the grant and vesting of ISOs ceases upon termination of service to the Company.
Vested ISOs are exercisable for three
months after the date of termination of service. The terms and conditions of any ISO shall comply in all respects with
Section 422 of the Code, or any successor provision, and any applicable regulations thereunder. The exercise price of each ISO is the
fair market value of the Company’s stock on the applicable date of grant. The Company used the mean volatility estimate from Varga’s
409A valuation based on the median 5-year
volumes of select peer companies. Fair value is estimated based on a combination of shares being sold at $157.89
up through February of 2019 and the most recent 409A completed when these ISOs were issued in April of 2018 valuing the Company’s
stock at $157.89
per share. No
ISOs may be granted more than ten (10)
years after the earlier of the approval by the Board, or the stockholders, of the 2019 Plan.
28
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
There
were no
grants in the three months ended March 31, 2025 and the year ended December 31, 2024. As of March 31, 2025, the Company
had $0
of unrecognized compensation expense related to ISOs expected to vest over a weighted average period of 0.0
years. The weighted average remaining contractual life of outstanding and exercisable ISOs is 0.61
years.
Restricted
stock units —
The RSU awards granted in 2019 under the 2019 Plan were granted at the fair market value of the Company’s stock on the applicable
date of grant. RSU awards generally vest ratably over periods ranging from one to four
years from the grant’s start date. Upon termination of service to the Company, vesting of RSU awards ceases, and
most RSU grants are forfeited by the participant, unless the award agreement indicates otherwise. The majority of RSU awards are “double
trigger” and both the service-based component, and the liquidity-event component (including applicable lock-up periods) must be
satisfied prior to an award being settled. Upon settlement, the RSU awards are paid in shares of common stock. The Company recognizes
the compensation expense for the restricted stock units based on the fair value of the shares at the grant date amortized over the stated
period for only those shares that are not subject to the double trigger.
The
following table summarizes the RSU activity for the three months ended March 31, 2025 and 2024:
| Restricted
Stock Units |
Weighted
Average Exercise Price Per Share | ||||||||||
| Vested and Outstanding at December 31, 2024 | 245,439 | $ | 10.93 | ||||||||
| Granted | — | ||||||||||
| Forfeited/Canceled/Expired | — | ||||||||||
| Vested and Outstanding at March 31, 2025 | 245,439 | $ | 10.93 | ||||||||
During
the three months ended March 31, 2025 and 2024, the Company recognized $0
and $0,
respectively, of stock-based compensation expense in connection with RSU awards granted under the plans. Compensation expense for RSU
awards is recognized upon meeting both the time-vesting condition and the triggering event condition. As of March 31, 2025, 0
restricted stock units (“RSUs”) were forfeited. In May 2024, 105,360
RSUs were voluntarily terminated, and 2,500
were issued, leaving 11,064
issued RSUs to settle at a grant value of $157.89
per unit. In May 2024, the Board of Directors approved awarding 234,525
RSUs to employees, directors and consultants with a fair grant value of $4.00
per unit. These RSUs contain a double trigger and, upon grant, were deemed to have met their time-based service requirements for vesting.
They will settle on the expiration of the Market Stand-off provision in the 2019 stock incentive plan (or May 24, 2025, which is 180
days from the November 25, 2024 closing of the Company’s initial public offering).
Equity-classified
warrants —
The Company estimates the fair values of equity warrants using the Black-Scholes option-pricing model on the date of issuance with Monte
Carlo simulations to determine the probability of warrants being exercisable.
Contingent
Legacy Shareholder Warrants
— On October 30, 2024, the Company issued warrants to purchase common stock that became contingently exercisable upon the closing
of an initial public offering (which occurred on November 25, 2024), at the price per share of the Company’s initial public offering
(or $4.00
per share) to its common shareholders of record as of May 31, 2023 (the “Contingent Legacy Shareholder Warrants”), that will
be exercisable, if at all, provided / contingent upon: if the warrant holder continuously holds the shares such holder owned on May 31,
2023 through the date the warrant is exercised; and if the common stock attains a specified volume weighted average price per share (“VWAP”)
over a 10-trading-day
period (the “10-Trading-Day VWAP”) before expiring:
•Tranche
1 - for up to 762,488
shares of common stock (of which up to 128,358
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 200%
of the $4.00
per share initial public offering price (or $8
per share), and that will expire on the 24-month
anniversary of the Company’s initial public offering (the “$8
Contingent Legacy Shareholder Warrants”);
29
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
•Tranche
2 - for up to 1,524,976
shares of common stock (of which up to 256,716
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 300%
of the $4.00
per share initial public offering price (or $12
per share), and that will expire on the 42-month
anniversary of the Company’s initial public offering (the “$12
Contingent Legacy Shareholder Warrants”); and,
•Tranche
3 - for up to 1,906,220
shares of common stock (of which up to 320,895
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 500%
of the $4.00
per share initial public offering price (or $20
per share), and that will expire on the 60-month
anniversary of the Company’s initial public offering (the “$20
Contingent Legacy Shareholder Warrants”).
The
Company recorded a value of $8,828
for the Contingent Legacy Shareholder Warrants as of the October 30, 2024 grant date based on a Black Scholes option pricing model. The
assumptions used in the Black-Scholes option pricing model for the Contingent Legacy Shareholder Warrants were as follows:
| Weighted Average Expected Volatility | 70 | % | ||||||
| Expected Dividends | — | % | ||||||
| Weighted Average Expected Term (in years) | 5 | |||||||
| Risk-Free Interest Rate | 4.22 | % | ||||||
| Probability Scenarios of meeting contingencies | ||||||||
|
Shareholder
holds shares owned on May 31, 2023 through warrant exercise date |
95%
to 75% | |||||||
| Common stock attains a specified 10-Trading-Day VWAP price before expiring |
0.025%
to 2.25% | |||||||
As
of March 31, 2025, there were outstanding and exercisable: 625,446
$8
Contingent Legacy Shareholder Warrants; 1,250,892
$12
Contingent Legacy Shareholder Warrants; and 1,563,615
$20
Contingent Legacy Shareholder Warrants, (of which 0;
0;
and 0,
respectively were to a related party) with weighted-average remaining contractual terms of 1.58
years, 3.08
years, and 4.59
years, respectively.
Other
equity classified warrants
— For the three months ended March 31, 2025 the Company issued a total of 186,369
warrants, including: 119,207
warrants to purchase common stock at $0.01
per share issued in connection with the issuance of Series B Preferred Stock (of which, 53,418
were to a related party); and, 67,162
Commitment Warrants to purchase common stock at $0.001
per share issued in connection with the ELOC Agreement (that were exercised in February, 2025). Subsequent to March 31, 2025, the
Company issued 884,159
Whiskey Note Shareholder Warrants and 327,868
prepaid warrants (see Note 14).
In
addition to the Contingent Legacy Shareholder Warrants discussed above, during the year ended December 31, 2024, the Company issued
a total of 413,971
equity classified warrants, including: 83,333
warrants at $6.00
per share in conjunction with July 2024 accounts receivable factoring agreement; 84,377
Underwriter Warrants in conjunction with the Company’s initial public offering; and, 197,013
warrants to purchase common stock, (of which, 60,563
were to a related party) in connection with the issuance of Series A Preferred Stock. Upon the November 25, 2024 initial public offering
at $4.00
per share, the 197,013
warrants at $5.00
per share were recalculated and reissued as 246,267
warrants at $4.00
per share (and the 60,563
related party warrants at $5.00
per share were recalculated and reissued as 75,705
warrants at $4.00
per share.). During three months ended March 31, 2025, and the year ended December 31,
2024, the assumptions used in the Black-Scholes option pricing model were as follows:
| For
the Three Months Ended March 31, 2025 |
For
the Year Ended December 31, 2024 | ||||||||||
| Weighted Average Expected Volatility | 70% | 70% | |||||||||
| Expected Dividends | —% | —% | |||||||||
| Weighted Average Expected Term (in years) | 5 | 5 | |||||||||
| Risk-Free Interest Rate | 4.12% | 4.22% | |||||||||
30
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 7 —
STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.)
As
of March 31, 2025 and December 31, 2024, in addition to the Contingent Legacy Shareholder Warrants discussed above, there were
outstanding and exercisable warrants to purchase 915,383
and 796,176,
respectively, shares of common stock, As of March 31, 2025, the weighted-average remaining contractual term was 1.52
years for the outstanding and exercisable warrants.
The
Underwriting Agreement and the related warrants granted to the Underwriter equal 5%
of the total proceeds raised in the Company’s November 25, 2024 initial public offering at an exercise price equal to the offering
price, or warrants for 84,377
shares at $4.00
per share (the “Underwriter Warrants”). The number of Underwriter Warrants may increase by up to 15%
(to warrants for 97,034
shares at $4.00
per share) if the Underwriter elects to utilize the overallotment rights of the Offering. As of May 19, 2025, the underwriter has
not exercised any Underwriter Warrants.
Deferred
Compensation —
Beginning in May 2023, certain senior level employees elected to defer a portion of their salary until such time as the Company completed
a successful public registration of its stock (which occurred on November 25, 2024). Upon success of the Company's initial public
offering, each employee was then to be paid their deferred salary plus a range of matching dollars in RSUs (under the new 2024 Plan noted
above) for every $1 dollar of deferred salary. As of December 31, 2024, the Company recorded $848,908
of such deferred payroll expense, including $457,730
paid in cash in December 2024, and $391,179
remaining to be paid which is included in accrued liabilities as of March 31, 2025. Accordingly, as of March 31, 2025, upon
the expiration of the 6 month post-IPO lockup period (in May 2025) the Company has also committed to issue approximately $1,894,615
in equity compensation (in the form of RSUs or stock options) related to the deferred compensation.
NOTE
8 — ACQUISITION
OF THINKING TREE SPIRITS
Business
Combinations — On
February 21, 2024, the Company purchased all the outstanding stock of Thinking Tree Spirits, Inc. (“TTS”), which was
accounted for as a business combination, requiring assets and liabilities assumed to be measured and recorded at their acquisition date
fair values as of the acquisition date. The resolution of the contingent earn out payments will be reviewed at each subsequent reporting
period, and any increases or decreases in fair value will be recorded in the income statement as an operating gain or loss.
Under
the terms of the stock sale, the Company paid the shareholders of TTS $670,686
($720,686,
net of $50,000
held back for post-closing accounting true-ups) using shares of common stock of the Company. The $670,686
was paid using common stock of the Company at a negotiated price of $13.16
per share (or 50,958
shares), subject to a true-up provision (to the price per share of the Company’s anticipated IPO, if lower — which, as of
September 30, 2024, was $5.00
per share or 134,137
shares) that expired on August 31, 2024, but which was subsequently extended by the Parties to after the conclusion of the dissenters
rights process under Oregon law (See below).
In
September 2024, the Company extended the true-up provision under the terms of the TTS stock sale from August 31, 2024 to the date
of settlement of the Thinking Tree Spirits Dissenters Rights Process, resulting in the delay in reclassifying the TTS purchase price liability
to equity (under ASC-480). Upon the November 25, 2024 initial public offering at $4.00
per share, the true-up provision related to the $670,686
at $4.00
per share equaled 167,671
shares, an increase of 116,713
shares over the original 50,958
shares, but subject to any reductions for payments made to dissenters. (See below).
ASC 480
requires a financial instrument to be classified as a liability if such financial instrument contains a conditional obligation that the
issuer must or may settle by issuing a variable number of its equity securities if, at inception, the monetary value of the obligation
is predominantly based on a known fixed monetary amount. In September 2024, under the terms of the TTS stock sale, the true-up provision
for the $670,686
purchase price payment in the form of common stock was extended through the settlement of the Thinking Tree Spirits Dissenters Rights
Process (See below). Once the final determination is made on the amount owed to dissenters, if any, that amount will be deducted from
the true-up amount and the resulting number of shares of common stock will be issued at the price per share of the common stock in the
Company’s initial public offering (which occurred on November 25, 2024, at $4.00
per share), at which time, the conversion price became fixed and the purchase price no longer qualified to be classified as a liability
in accordance with ASC 480, and was reclassified to equity. The estimated fair value of the $127,076
in estimated future contingent values
31
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE 8 —
ACQUISITION OF THINKING TREE SPIRITS (cont.)
(discussed
also below) is recorded as a (long term) liability until such time as their obligation for potential payment becomes established as something
more than zero and the payment number of shares is established, at which time, such future contingent payments will likewise be reclassified
from liabilities to equity in accordance with ASC 480.
Thinking
Tree Spirits Dissenters’ Rights Process
-- In July 2024 three Thinking Tree Spirits shareholders served their notice to exercise dissenters’ rights under Oregon law. Dissenters’
rights statutes allow a party opposed to certain transactions to demand payment in cash for the value of their interests held rather than
receive shares in the resulting entity. Parties can either agree upon a negotiated value or a dissenter who does not believe they are
being fairly compensated for the value of their interests may seek a judicially determined value. In the case of a private entity, or
a transaction involving private companies with no public clearing price for their stock, certain methods, models and assumptions are used
to attempt to estimate or derive a fair market value. The statutory deadline has passed for any other Thinking Tree Spirits shareholders
to claim dissenter’s rights.
The
amount being sought by the dissenters would consume most, if not all, of the amount in stock paid in the transaction, and management believes
the amount of compensation they are seeking is too high.
Because
this process creates uncertainty related to how many net shares of common stock are owed to the remaining Thinking Tree Spirits shareholders,
management has made the decision to place any shares of stock that were to go to Thinking Tree Spirits shareholders in escrow until the
matter is resolved. Likewise, any make-up shares that we assumed were to be issued at the close of the Company’s initial public
offering will also be held in escrow until the same final value determination is made. This is to ensure that the Company is not double
paying for the company in both shares and cash.
To
the extent any amount of cash is due to the three dissenters from the Company, said amount will be deducted from the total amount of consideration
that had been agreed upon for the Thinking Tree Spirits acquisition, and the remaining amount due to the remaining Thinking Tree Spirits
shareholders, if any, will be then paid in shares of common stock at the agreed upon transaction price per share in the original transaction.
Any unused shares of common stock will be returned to the treasury and will not be considered outstanding. So long as these shares are
held in escrow they will not be eligible for trading or voting.
Subsequent
to November 25, 2024, the Company settled with two of the three TTS dissenters and sent the remaining dissenter the statutorily required
payment offer and documentation to attempt to wind down the dissenters process. The statutorily required thirty (30) day review period
for those offers passed on January 6, 2025 with an objection from the remaining dissenter. On April 16, 2025, Kaylon McAlister, a former
co-founder of Thinking Tree Spirits and the lone remaining dissenter, filed suit in the Circuit Court of Oregon against Thinking Tree
Spirits and the Company seeking $470,000
under the Oregon dissenter rights statute, plus interest. While we are reviewing the matter, we believe the amount being sought is without
merit and grossly overinflates the value of the enterprise, and we intend to vigorously defend this matter. Further, we believe we have
counterclaims against the plaintiff for actions taken by him before, during and after the closing of the acquisition transaction that
adversely effected the valuation of the acquisition and the Company’s investment in Thinking Tree Spirits. As a result of netting
out the amount paid to such dissenters from the makeup provisions of the acquisition agreement with the remaining TTS shareholders, the
Company believes it will issue the remaining TTS shareholders up to a maximum of an additional 83,407
shares of unregistered common stock which will be subject to lockup agreements that do not allow such shares to be sold until after the
one hundred and eighty (180) day anniversary of the date of their grant. The granting of such shares shall occur after the Company has
been advised by outside counsel that the final dissenter matter is concluded.
NOTE
9 — LEASES
The
Company has operating leases for corporate offices, warehouses, distilleries, tasting rooms and certain equipment which have been accounted
for using ASC Topic 842. The Company’s operating lease terms include periods under options to extend or terminate the operating
lease when it is reasonably certain that the Company will exercise that option in the measurement of its operating lease ROU assets and
liabilities. The Company considers contractual-based factors such as the nature and terms of the renewal or termination, asset-based factors
such as the physical location of the asset and entity-based factors such as the importance of the leased asset to the Company’s
operations to determine the operating lease term. The Company generally uses the base, non-cancelable lease term when determining the
operating lease ROU assets and
32
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
9 — LEASES (cont.)
lease
liabilities. The ROU asset is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be fully recoverable in accordance with Accounting Standards Codification Topic 360, Property,
Plant, and Equipment.
In
January 2025, the Company terminated one
warehouse lease in Eugene, Oregon, moving from a 33,000
square feet to an approximately 8,000
square feet lease. The monthly expenses associated with the new lease were reduced from approximately $18,000
per month down to $7,700
per month. The new lease expires in January 2028, with an option for a three
year extension. The change in ROU assets and related liabilities both for the terminated lease and the new warehouse lease
have been captured on the March 31, 2025 balance sheet.
The
following table presents the consolidated lease cost for amounts included in the measurement of lease liabilities for operating leases
for the three months ended March 31, 2025 and 2024, respectively:
| Three
Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Lease Cost: | |||||||||||
| Amortization of Right-of-Use Assets | $ | 95,657 | $ | 7,152 | |||||||
| Interest on Lease Liabilities | 232,345 | — | |||||||||
| Operating lease cost | 29,644 | 370,682 | |||||||||
|
Total
lease cost(1) |
$ | 357,646 | $ | 377,834 | |||||||
____________
(1)Included
in “Cost of sales”, “Sales and Marketing” and “General and Administrative “expenses in the accompanying
consolidated statements of operations.
The
following table presents weighted-average remaining lease terms and weighted-average discount rates for the consolidated operating leases
as of March 31, 2025 and 2024, respectively:
| March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Weighted-average remaining lease term – operating leases (in years) | 5 | 5.9 | |||||||||
| Weighted-average discount rate – operating leases | 22 | % | 22 | % | |||||||
The
Company’s ROU assets and liabilities for operating leases were $3,389,361
and $4,023,485,
respectively, as of March 31, 2025. The ROU assets and liabilities for operating leases were $3,303,158
and $3,941,560,
respectively, as of December 31, 2024. The ROU assets for operating leases were included in “Operating Lease Right-of-Use Assets,
net” in our accompanying consolidated balance sheets. The liabilities for operating leases were included in the “Operating
Lease Liabilities, Current” and “Operating Lease Liabilities, net of Current Portion” in the accompanying consolidated
balance sheets.
33
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
9 — LEASES (cont.)
Maturities
of lease liabilities for the remainder of 2025 and the years through 2029 and thereafter are as follows:
| Years Ending | Amounts | |||||||
| 2025 | $ | 1,022,140 | ||||||
| 2026 | 1,345,203 | |||||||
| 2027 | 1,329,535 | |||||||
| 2028 | 1,225,326 | |||||||
| 2029 | 1,203,001 | |||||||
| thereafter | 684,779 | |||||||
| Total lease payments | $ | 6,809,984 | ||||||
| Less: Interest | (2,786,499) | |||||||
| Total Lease Liabilities | $ | 4,023,485 | ||||||
NOTE
10 — COMMITMENTS
AND CONTINGENCIES
As
an inducement to obtain financing in 2022 and 2023 through convertible notes, the Company agreed to pay a portion of certain future revenues
the Company may receive from the sale of FBLLC or the Flavored Bourbon brand to the investors in such financings in the amount of 150%
of their subscription amount for an aggregate of approximately $24,495,000.
The
Company maintains operating leases for various facilities. See Note 9, Leases, for further information.
Litigation
— From
time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to
third-party infringement claims.
In
the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including
customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under
certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations
or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual
property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum
potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification
claims and the unique facts and circumstances that are likely to be involved in each claim.
Litigation
— CFGI
— On January 31, 2025, CFGI, LLC (“CFGI”) commenced a litigation against the Company in the Superior Court, Suffolk
County, Massachusetts asserting claims arising under a November 1, 2022 written engagement letter agreement whereby CFGI agreed to provide
financial, accounting and tax consulting services to the Company. CFGI contends that it fully performed its obligations under such agreement,
but that the parties amended the agreement on or about May 22, 2023 when the Company fell behind in its payments. CFGI alleges further
that, while the Company made some payments under the amended agreement, CFGI is currently owed approximately $730,000,
plus interest.
The
Company’s response to the complaint was due on or before April 21, 2025 but was extended to May 12, 2025. The Company has filed
an answer to that complaint on May 12 to stay current with the litigation process while it works to negotiate a settlement. As of December
31, 2024 the Company had accrued the entire amount payable to CFGI and the Company is in negotiations with CFGI on alternate payment terms
that will allow the Company to pay the amounts due to CFGI over time. (See also Note 14.)
Litigation
— Thinking Tree Dissenter
— On April 16, 2025, Kaylon McAlister, a former co-founder of Thinking Tree Spirits, filed suit in the Circuit Court of Oregon against
Thinking Tree Spirits and the Company seeking $470,000
under the Oregon dissenter rights statute, plus interest. While we are reviewing the matter, we believe the amount being sought is without
merit and grossly overinflates the value of the enterprise, and we intend to vigorously defend this matter. Further, we believe we have
counterclaims against the plaintiff for actions taken by him before, during and after the closing
34
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
10 — COMMITMENTS AND CONTINGENCIES (cont.)
of
the acquisition transaction that adversely effected the valuation of the acquisition and the Company’s investment in Thinking Tree
Spirits. (See also Note 14.)
As
of March 31, 2025 and December 31, 2024, the Company has not
been subject to any other pending litigation claims.
Notice
from Nasdaq
— On April 14, 2025, the Company received a notice (the “Notice”) from the Nasdaq Stock Market LLC (“Nasdaq”),
which indicated that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”),
as the Company’s closing bid price for its common stock was below $1.00
per share for the prior thirty (30)
consecutive business days.
Pursuant
to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been granted a 180-calendar
day compliance period, or until October 13, 2025 (the “Compliance Period”), to regain compliance with the Minimum Bid Price
Requirement. During the compliance period, the Company’s shares of Common Stock will continue to be listed and traded on the Nasdaq
Capital Market. If at any time during the Compliance Period, the bid price of the Common Stock closes at or above $1.00
per share for a minimum of ten (10)
consecutive business days, Nasdaq will provide the Company with written confirmation of compliance with the Minimum Bid Price Requirement
and the matter will be closed.
If
the Company is not in compliance by October 13, 2025, the Company may be afforded a second 180-calendar
day compliance period. To qualify for this additional time, the Company will be required to meet the continued listing requirement for
market value of publicly-held shares and all other initial listing standards for the Nasdaq Capital Market with the exception of the Minimum
Bid Price Requirement, and will need to provide written notice to Nasdaq of its intent to regain compliance with such requirement during
such second compliance period.
If
the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq,
or if it appears to Nasdaq’s staff that the Company will not be able to cure the deficiency, or if the Company is otherwise not
eligible, Nasdaq will provide notice that the Common Stock will be subject to delisting from the Nasdaq Capital Market. At that time,
the Company may appeal any such delisting determination to a Nasdaq hearings panel.
The
Company intends to continuously monitor the closing bid price for its Common Stock and is in the process of considering various measures
to resolve the deficiency and regain compliance with the Minimum Bid Price Requirement. However, there can be no assurance that the Company
will be able to regain or maintain compliance with the Minimum Bid Price Requirement or any other Nasdaq listing standards, that Nasdaq
will grant the Company any extension of time to regain compliance with the Minimum Bid Price Requirement or any other Nasdaq listing requirements,
or that any such appeal to the Nasdaq hearings panel will be successful, as applicable. (See also Note 14.)
Management
Fee —
The Company is required to pay a monthly management fee to Summit Distillery, Inc (see Note 12).
NOTE
11 — RETIREMENT
PLANS
The
Company sponsors a traditional 401(k), Roth 401(k) and profit-sharing plan (the “Plan”), in which all eligible employees may
participate after completing 3 months of employment. No contributions have been made by the Company during the three months ended March 31,
2025 and 2024.
NOTE
12 — RELATED-PARTY
TRANSACTIONS
Management
Agreement
On
October 6, 2014, the Company entered into a management agreement with Summit Distillery, Inc., an Oregon corporation, to open a new Heritage
Distilling Company location in Eugene, Oregon. The Company engaged Summit Distillery, Inc. to manage the Eugene location for an annual
management fee. The principals and sole owners of Summit Distillery, Inc., are also shareholders of HDHC. For each of the three months
ended March 31, 2025 and 2024, the
35
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
12 — RELATED-PARTY TRANSACTIONS (cont.)
Company
expensed a management fee of $45,000
that was paid to Summit Distilling, Inc. The fee is based upon a percentage of the Company’s trailing twelve months earnings before
interest, taxes and depreciation expense, as defined in the management agreement.
Other
Related Party Transactions
Beginning
in 2022, the Company began a series of financings with a party that is considered a related party for the years ended December 31, 2024
and 2023 by virtue of the number of common stock shares and pre-paid warrants to purchase common stock held by the party. As of March 31,
2025, the related party owned less than 4.99%
of the outstanding common stock of the Company, but enough, when combined with its prepaid warrants, would exceed the 4.99%
reporting threshold if all such prepaid warrants were to be exercised into common stock. The prepaid warrants contain a 4.99%
blocker prohibiting the exercise of such warrants if it would put the party’s ownership over the 4.99%
reporting threshold. The related party is not required to report the number of prepaid warrants held. Below are details of the transactions
with the related party, including those related to notes payable, equity transactions and other activities.2023
Barrel Production Contract
During
2023, the Company entered into a distilled spirits barreling production agreement with the related party for production of 1,200
barrels of distilled spirits over time. There was a prepayment of $1,000,000
made in January 2023. In March 2024, the agreement was amended to 600
barrels for $500,000,
with the then $500,000
excess prepayment used to purchase a Whiskey Note in the principal amount of $672,500
and subsequently exchanged (contingent upon the consummation of this offering, which occurred on November 25, 2024) under the terms
of a Subscription Exchange Agreement for common stock in conjunction with the February 29, 2024 exchange of Whiskey Notes for common stock
in conjunction with the February 29, 2024 exchange of Whiskey Notes for common stock.
Factoring
Agreement(s)
In
May 2024, the Company raised $100,000
under the terms of an accounts receivable factoring arrangement with the related party, with fees of 10%
(or $10,000)
and $1,000
for every 2 weeks payment remains overdue. Payment under the factoring agreement is due the earlier of: within 3 days of receipt
of payment under the factored accounts receivable; the achievement of certain fundraising milestones; or June 15, 2024. As of June 30,
2024 the factoring agreement remained unpaid. In July 2024, the investor agreed to exchange his interest in the factoring agreement of
$113,285
into a subscription for the purchase of 11,328
shares of Series A Preferred Stock and 5,000
warrants to purchase shares of common stock at the lesser of $5.00
per share or the price per shares at which the Company’s common stock is sold in the Company’s initial public offering (the
“$5.00
Warrants”), and 29,705
warrants at $6.00
per share (the “$6.00
Warrants”) and related warrants. Upon the November 25, 2024 initial public offering at $4.00
per share, the 5,000
warrants at $5.00
per share were recalculated and reissued as 6,250
warrants at $4.00
per share.
As
of July 1, 2024, the Company raised an additional aggregate of $299,667
between two separate investors under the terms of a July 2024 accounts receivable factoring arrangement with fees of 10%
(or $29,966)
and $1,000
(separately, to each of the two investors) for every 2 weeks payment remains overdue. Additionally, the two investors received five
year warrants to purchase an aggregate of 66,549
shares of common stock at $6.00
per share (or cashlessly following a standard cashless exercise formula). Of the total July 2024 accounts receivable factoring agreement,
$166,667
and 44,333
of the warrants are with the related party. Payment under the factoring is due the earlier of: within 3 days of receipt of payment
under the factored receivable; the achievement of certain fundraising milestones; or August 15, 2024. Effective July 31, 2024, the
investors agreed to exchange their interests in the factoring agreement of $329,633,
including accrued fees and related warrants, for an aggregate of 32,963
shares of Series A Preferred Stock, 14,983
warrants to purchase shares of common stock at the lesser of $5.00
per share or the price per share at which the Company’s common stock is sold in the Company’s initial public offering (the
“$5.00
Warrants”), and 86,864
warrants at $6.00
per share (the “$6.00
Warrants”). (Including $166,667
received from the related party, which was exchanged for 18,333
shares of Series A Preferred Stock, 8,333
related $5.00
Warrants, and 48,073
related $6.00
Warrants.) Upon the November 25, 2024 initial public offering at $4.00
per share, the 14,983
warrants at $5.00
per share were recalculated and reissued as 18,728
warrants at $4.00
per share, and the 8,333
related party warrants at $5.00
per share were recalculated and reissued as 10,416
warrants at $4.00
per share.
36
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
12 — RELATED-PARTY TRANSACTIONS (cont.)
In
September 2024, the $6.00
Warrants discussed above and in Note 7 (including 321,026
$6.00
Warrants from the related party) were exchanged for 93,789
shares of Series A Preferred Stock that did not include any related warrants (including 59,001
shares of Series A Preferred Stock that did not include any related warrants for a related party). The value assigned to the $6.00
Warrants exchanged for Series A preferred Stock that did not include any warrants was negotiated to be $937,959
(including $590,045
from a related party), or $1.838
per $6.00
Warrant, using a Black-Scholes Valuation model with an estimated IPO stock price of $5.00
per share and exercise price of $6.00
per share.
In
September 2024, the Company purchased 50
barrels of premium aged whiskey from the related party for $110,600,
or $2,212
per barrel (comprised of $495
per barrel and $1,717
of spirits, for an aggregate total of $24,750
to fixed assets and $85,850
to inventory). The $110,600
was paid by the Company in the form of 11,060
shares of Series A Preferred Stock and 5,530
related warrants to purchase common stock at the lesser of $5.00
per share or the price per shares at which the Company’s common stock is sold in the Company’s initial public offering. Upon
the November 25, 2024 initial public offering at $4.00
per share, the 5,530
warrants at $5.00
per share were recalculated and reissued as 6,913
warrants at $4.00
per share.
In
October 2024, the Company sold 250
barrels of aged whiskey to the related party for $166,667.
Under the terms of the sale, in the event the related party resells the barrels back to the Company, the resell prices shall be the price
paid per barrel under the agreement plus a 15%
simple annual interest rate of 1.25%
per month from the date the related party purchased the barrels from the Company. The Company also agreed to store the barrels for the
related party at no fee until the related party sells the barrels to either the Company or a third party.
On
November 22, 2024 (prior to the Company’s initial public offering on November 25, 2024), the related party exchanged 250,000
shares of common stock for 250,000
prepaid warrants to purchase common stock.
In
the three months ended March 31, 2025, the related party exercised 1,117,559
prepaid warrants (with an exercise price of $0.001
each) cashlessly for 1,115,909
shares of common stock, leaving 1,203,783
prepaid warrants outstanding as of March 31, 2025.
Related
Party Contingent Legacy Shareholder Warrants
(See also Note 7) — On October 30, 2024, the Company issued warrants to purchase common stock that became contingently exercisable
upon the closing of an initial public offering (which occurred on November 25, 2024), at the price per share of the Company’s initial
public offering (or $4.00
per share) to its common shareholders of record as of May 31, 2023 (the “Contingent Legacy Shareholder Warrants”), that will
be exercisable, if at all, provided / contingent upon: the warrant holder continuously holds the shares such holder owned on May 31, 2023
through the date the warrant is exercised; and the common stock attains a specified volume weighted average price per share (“VWAP”)
over a 10-trading-day
period (the “10-Trading-Day VWAP”) before expiring:
•Tranche
1 - for up to 762,488
shares of common stock (of which up to 128,358
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 200%
of the $4.00
per share initial public offering price (or $8
per share), and that will expire on the 24-month
anniversary of the Company’s initial public offering (the “$8
Contingent Legacy Shareholder Warrants”);
•Tranche
2 - for up to 1,524,976
shares of common stock (of which up to 256,716
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 300%
of the $4.00
per share initial public offering price (or $12
per share), and that will expire on the 42-month
anniversary of the Company’s initial public offering (the “$12
Contingent Legacy Shareholder Warrants”); and,
•Tranche
3 - for up to 1,906,220
shares of common stock (of which up to 320,895
were to a related party) when the 10-Trading-Day
VWAP of the common stock reaches 500%
of the $4.00
per share initial public offering price (or $20
per share), and that will expire on the 60-month
anniversary of the Company’s initial public offering (the “$20
Contingent Legacy Shareholder Warrants”).
As
of March 31, 2025, there were outstanding and exercisable: 625,446
$8
Contingent Legacy Shareholder Warrants; 1,250,892
$12
Contingent Legacy Shareholder Warrants; and 1,563,615
$20
Contingent Legacy Shareholder Warrants, (of which 0;
0;
and 0,
respectively were to a related party).
37
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
13 — BASIC
AND DILUTED NET INCOME / (LOSS) PER SHARE
The
Company computes basic net income / (loss) per share by dividing net income / (loss) for the period by the weighted-average number of
common shares outstanding during the period. The Company computes diluted net income / (loss) per share by dividing net income / (loss)
for the period by the weighted-average number of common shares outstanding during the period, plus the dilutive effect of the stock options,
RSU awards and exercisable common stock warrants, as applicable pursuant to the treasury stock method, and the convertible notes, as applicable
pursuant to the if-converted method. The
following table sets forth the computation of basic and diluted net income / (loss) per share:
| For
the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| Basic earnings per share of common stock: | |||||||||||
| Numerator: | |||||||||||
| Net Income / (Loss) for the period | $ | (3,033,047) | $ | 452,839 | |||||||
| Preferred stock dividend | (222,678) | — | |||||||||
| Net Income / (Loss) for the period – basic | $ | (3,255,725) | $ | 452,839 | |||||||
| Denominator: | |||||||||||
| Weighted average number of shares of common stock - basic | 9,662,201 | 403,329 | |||||||||
| Net Income / (Loss) per share of common stock - basic | $ | (0.34) | $ | 1.12 | |||||||
| Diluted earnings per share of common stock: | |||||||||||
| Numerator: | |||||||||||
| Net Income / (Loss) for the period - basic | $ | (3,255,725) | $ | 452,839 | |||||||
| Net Income / (Loss) for the period - diluted | $ | (3,255,725) | $ | 452,839 | |||||||
| Denominator: | |||||||||||
|
Weighted average
number of shares of common stock - basic(1) |
9,662,201 | 403,329 | |||||||||
|
Conversion of
Convertible Notes into Common Stock |
— | 3,070,503 | |||||||||
|
Weighted average
number of shares of common stock - diluted(1) |
9,662,201 | 3,473,832 | |||||||||
| Net Income / (Loss) per share of common stock - diluted | $ | (0.34) | $ | 0.13 | |||||||
(1)Includes
3,627,918
prepaid warrants
Diluted
earnings / (loss) per share reflect the potential dilution of securities that could share in the earnings of an entity. For the three
months ended March 31, 2024, the calculation of diluted earnings per share includes the dilutive effect of shares issued for the
conversion of the convertible notes and related warrants and subtracts the related gains from changes in their respective fair values
from net income / (loss). The following number of shares of common stock from the
potential exercise or conversion of outstanding potentially dilutive securities were excluded from the computation of
38
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
13 — BASIC AND DILUTED NET LOSS PER SHARE (cont.)
diluted
net income / (loss) per share attributable to common stockholders for the periods presented because including them would have been antidilutive:
| For
the Three Months Ended March 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| ISOs | 6,011 | 6,164 | |||||||||
| Equity-classified Warrants | 1,441,512 | 116,928 | |||||||||
| Liability-classified Warrants | — | 2,020,139 | |||||||||
| Legacy Warrants | 3,439,953 | — | |||||||||
|
Preferred Stock
(Series A) |
1,663,281 | — | |||||||||
|
Preferred Stock
(Series B) |
3,929,289 | — | |||||||||
| RSU Awards | 245,439 | 116,581 | |||||||||
| Total | 10,725,485 | 2,259,812 | |||||||||
NOTE
14 — SUBSEQUENT
EVENTS
For
its condensed condensed consolidated financial statements as of March 31, 2025 and for the period then ended, the Company evaluated
subsequent events through the date on which those condensed consolidated financial statements were issued. Other than the items noted
below and in Note 10, there were no subsequent events identified for disclosure as of the date the condensed consolidated financial statements
were available to be issued.
ELOC
Agreement
— Subsequent to March 31, 2025, through
May 19,
2025 an aggregate of 857,439
shares of common stock had been sold to the investor under the ELOC Purchase Agreement for aggregate gross proceeds to the Company of
$412,647.
Preferred
Stock —
Series A —
and Related Warrants —
In consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders subsequent to March 31, 2025, on
May 1, 2025, an aggregate of 284,140
outstanding shares of Series A Preferred Stock and 116,263
warrants to purchase shares of common stock at $4.00
per share (of which 183,122
shares of Series A Preferred Stock and 75,702
related warrants to purchase common stock at $4.00
per share were of a related party) was exchanged for Series B Preferred Stock, See Preferred Stock - Series B below.
Preferred
Stock — Series B
— Subsequent to March 31, 2025, the Company received subscriptions for an additional $4,914,567
(491,456
shares) of Series B Preferred Stock, of which: $4,092,567
or 409,256
shares was from the exchange of Series A Preferred Stock and related warrants for Series B Preferred Stock (of which $2,640,437
or 264,043
shares was from a related party); $392,000
or 39,200
shares was from the exchange of 700,000
prepaid warrants at a VWAP of $0.56
per prepaid warrant; and $430,000
or 43,000
shares was from other investors (of which $55,000
or 5,500
shares was from a related party, and one other investor subscription of $100,000
or 10,000
shares included a negotiated 327,868
prepaid warrants to purchase common stock at $0.001
per share).
In
consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders subsequent to March 31, 2025, on May
1, 2025, certain shareholders agreed to exchange an aggregate of 284,140
shares of Series A Preferred Stock at a negotiated aggregate value of $4,092,560
of Series A Preferred Stock (at Stated Value of $12
per share and including accrued dividends) and 116,263
related warrants to purchase common stock at $4.00
per share into 409,256
shares of Series B Preferred Stock (including $2,640,430
or 183,122
shares of Series A Preferred Stock and 75,702
warrants to purchase common stock at $4.00
per share converted into 264,043
shares of Series B Preferred Stock of a related party). The value of Series A Preferred Stock and related warrants exchanged for Series
B Preferred Stock was negotiated based upon: the related Stated Value of the Series A Preferred Stock (or 284,140
shares at $12
Stated Value = $3,409,680)
and accrued dividends thereon (of $343,392)
through May 1, 2025; plus the value of the related warrants to purchase common stock (calculated using a Black Scholes valuation model).
Subsequent to the exchange, there were
39
Heritage
Distilling Holding Company, Inc.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
(unaudited)
NOTE
14 — SUBSEQUENT EVENTS (cont.)
outstanding:
659,437
shares of Series B Preferred Stock; 210,700
shares of Series A Preferred Stock; and, 129,998
warrants to purchase common stock at $4.00
per share related to the Series A Preferred Stock.
Prepaid
Warrants —
Subsequent to March 31, 2025, through May 19, 2025: 700,000
prepaid warrants were exchanged for 39,200
shares of Series B Preferred Stock; 327,868
prepaid warrants were issued in connection with the issuance of Series B Preferred Stock, and 1,072,960
prepaid warrants were exercised for common stock (including 341,658
from a related party), leaving 1,874,341
prepaid warrants outstanding (including 862,125
prepaid warrants outstanding of the related party).
Whiskey
Note Shareholder Warrants
— On April 1, 2025, the Company issued warrants with an expiration date of April 1, 2028 to purchase 884,159
shares of common stock with an exercise price of $4.00
per share to common shareholders of record who acquired their common stock through the exchange of Whiskey Notes and whose shares were
subject to 100% lockup for 6
months post-IPO, as was disclosed as a pending item in the Company’s February 4, 2025 prospectus filed with the commission (the
“Whiskey Note Shareholder Warrants”). The Whiskey Note Shareholder Warrants will be exercisable if the warrant holder continuously
holds all shares of common stock such holder owned on the date of the Company’s IPO through the date the warrant is exercised, and
then only if the common stock attains a specified volume weighted average price of $8.00
per share (“VWAP”) over a 10-trading-day
period (the “10-Trading-Day VWAP”) before expiring. The Company will record the fair value of the Whiskey Note Shareholder
Warrants as of the April 1, 2025 grant date based on a Black Scholes option pricing model and Monte Carlo simulation analysis.
40
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed
consolidated financial statements and the related notes and other financial information included elsewhere in this filing and the section
of this filing entitled “Information about Heritage.” In addition to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section titled “Risk Factors” and elsewhere in this filing. Unless the context otherwise
requires, for the purposes of this section, “Heritage,” “we,” “us,” “our,” or the “Company”
refer to Heritage Distilling Holding Company, Inc. and its subsidiaries.
Business
Overview
We
are a craft distiller producing, marketing and selling a diverse line of award-winning craft spirits, including whiskeys, vodkas, gins,
rums, and “ready-to-drink” canned cocktails. We recognize that taste and innovation are key criteria for consumer choices
in spirits and innovate new products for trial in our company-owned distilleries and tasting rooms. We believe we have developed differentiated
products that are responsive to consumer desires for rewarding and novel taste experiences.
We
compete in the craft spirits segment, which is the most rapidly-growing segment of the overall $288 billion spirits market. According
to the American Craft Spirits Association, a craft distillery is defined generally as a distillery that produces fewer than 750,000 gallons
annually and holds an ownership interest of 51% or more of a distilled spirits plant that is licensed by the Alcohol and Tobacco Tax and
Trade Bureau of the U.S. Department of the Treasury. According to the Craft Spirits Global Market Report 2023 of Grand View Research,
the craft spirits segment had revenues of more than $21.4 billion in 2023 and is estimated to grow at a compound annual growth rate (“CAGR”)
of 29.4% between 2024 and 2030. We believe we are well positioned to grow more than the growth rate of the market by increasing our marketing
efforts, increasing the size of our sales teams and broadening our wholesale distribution.
Out
of the more than 2,600 craft producers in North America, we have been recognized with more awards for our products from the American Distilling
Institute, the leading independent spirits association in the U.S., than any other North American craft distiller for each of the last
ten years. Plus, numerous other Best of Class, Double Gold and Gold medals from multiple national and international spirits competitions.
We are one of the largest craft spirits producers on the West Coast based on revenues and are developing a national reach in the U.S.
through traditional sales channels (wholesale, on-premises and e-commerce) and our unique and recently-developed Tribal Beverage Network
(“TBN”) sales channel. Based upon our revenues and our continued track record of winning industry awards in an increasingly
competitive environment, we believe we are one of the leading craft spirits producers in the United States.
We
sell our products through wholesale distribution, directly to consumers through our five distilleries and tasting rooms we own and operate
in Washington and Oregon and by shipping directly to consumers online where legal. Currently, we sell products primarily in the Pacific
Northwest with limited distribution in other states throughout the U.S. In addition, in collaboration with Native American tribes, we
have recently developed a new sales, manufacturing and distribution channel on tribal lands that we expect will increase and broaden the
recognition of our brand as that network expands nationally.
Our
growth strategy is based on three primary areas. First, we are focused on growing our direct-to-consumer (“DtC”) sales via
shipping to legal purchasers to their homes where allowed. We currently use a three-tier compliant, third-party platform to conduct these
sales and deliveries in 46 states in which approximately 96.8% of the U.S. population reside. This allows us to develop a relationship
directly with the consumer through higher-margin sales while collecting valuable data about our best performing products. We can then
use this data to target the consumer based on location, age, key demographics and product types. With the data collected, we can also
retarget and resell to them generating more revenue.
Our
DtC sales also support our second growth area, which entails growing our wholesale volume with our distributors through key national accounts
both on-premises and off-premises. By building brand recognition for key products in selected regions or states through DtC sales, we
can better support the wholesale launch, marketing and product pull-through of those products in partnership with wholesalers in those
targeted states. While DtC sales result in singular high-margin sales, growing volume through wholesale distribution is the most efficient
way to drive large-scale growth across retail chains.
41
Third,
we are focused on expanded growth of our collaboration with Native American tribes through the TBN model we created. In concert with tribal
partners, this sales channel includes Heritage-branded micro production hubs, Heritage-branded stores and tasting rooms and the sale of
our products and new tribally-branded products. In the typical TBN collaboration, the tribes will own these businesses and we will receive
a royalty on gross sales through licenses we grant to use our brands, products, recipes, programs, IP, new product development, on-going
compliance support and the other support we provide. The TBN is expected to form a network of regional production hubs that will support
product trials and sampling, and will generate sales of finished, intermediate and bulk spirits depending on location, equipment and market.
Importantly, because these premium spirits will be produced locally, we believe the TBN will promote the positioning of our brands as
local and regional. We expect that, as the brands grow and the TBN footprint expands, there will be an important synergy with increased
adoption and growth through our wholesale channels in the regions where the TBN locations are driving trial and awareness. Similarly,
as demand for our products grows through our wholesale channels, there should be a positive effect on the demand for our products through
the tribal distilleries.
Key
Factors Affecting Our Operating Results
Management
believes that our performance and future success depend on many factors that present significant opportunities, but also pose challenges,
including the following:
Pricing,
Product Cost and Margins
To
date, most of our revenue has been generated by retail sales of our spirits in our retail tasting rooms and through our eCommerce platform.
Having completed the construction of our existing production facilities and contracted with established distributors, we now intend to
focus our production capacity, record of success in developing award-winning products, and a portion of the net proceeds from our initial
public offering (“IPO”) on the growth of our wholesale channel. Going forward, we expect to sell our products in a variety
of vertical industry markets in partnership with our distributors across states and geographic regions. Pricing may vary by region due
to market-specific dynamics and various layers of taxes applied by the states at the different steps of distribution and retail sales.
As a result, our financial performance will depend, in part, on the mix of our sales in different markets during a given period and our
ability to scale efficiently.
We
have experienced inflation in some of our raw inputs, particularly in grains, bottles, cans and barrels. Some of these price increases
began to moderate beginning in the second half of 2021, such as in grain. Grain prices increased due to supply chain issues associated
with the war in Ukraine and the increased input cost of fertilizers tied to high natural gas prices. Grain prices have moderated as some
additional sources of supply opened up and the market price for grain has come down from its recent historic highs. Aluminum prices for
cans and bottles increased in 2021 and early 2022, but began to decline in the second half of 2022, and we were able to achieve more favorable
pricing based on larger order quantities in late 2022. In the first quarter of 2025, the Trump administration announced the imposition
of 25% tariff on aluminum, which could increase prices for aluminum cans. In late March and early April the Trump administration instituted
blanket tariffs of varying amounts on virtually all countries, resulting in market and consumer apprehension and retaliatory tariffs from
many nations on American made goods. We remain firm that our exposure to the cost of tariffs on our direct inputs remains low, and retaliatory
tariffs on American products has no impact on our current customer base or revenue as we do not export. It is too soon to tell what the
trickle down or secondary cost impacts will be for our general business operations as a result of the changing tariff landscape.
While
glass bottle prices also increased between 2022 and 2023, we were able to lock in pricing for two years at favorable prices in 2021. In
2023, our suppliers indicated their price increases were moderating and their supply chains were returning to normal. During the uncertain
periods in 2021 and 2022, we elected to take possession of glass bottle quantities designed to last two years at favorable prices, insulating
these costs to a measurable degree moving into 2024. The cost of glass bottles did not materially appreciate in 2024. Our suppliers source
some of our glass bottles from markets in Asia subject to recent tariff increases announced by the Trump administration in the first quarter
of 2025. We do not believe these tariffs will materially impact our gross margin as these glass bottles are used to make our most premium
and highest priced products.
The
cost of oak barrels necessary for the aging of spirits escalated by approximately 30% since the beginning of 2022 due to the growing demand
for barrels needed to age whiskey and constraints in the raw oak market. In 2024 those prices began to stabilize.
While
constraints in the freight market caused historically high shipping rates, those shipping rates were returning to their previous levels
until the subsequent bankruptcy announcements by several freight companies in the U.S. announced over the lat two quarters. Those bankruptcies,
when combined with high diesel prices and a lack of licensed drivers,
42
continued
to cause uncertainty in the freight markets. More recently, we have seen freight prices moderate. Likewise, employees are facing financial
stress as inflation hits them at home, and their desire for more compensation creates higher cost pressures on overall operations absent
finding offsetting cost efficiencies. In addition, the annual minimum wage increases for hourly retail and production staff in the states
in which we operate are higher than other parts of the U.S. Unlike singular commodity spikes in the recent past due to an isolated incident,
or short-term supply chain issues, the confluences of these factors created pressure across all parts of our operations, requiring us
to manage each aspect carefully. Finally, we have begun to see a change in the buying habits of consumers who are looking for “experiences”
rather than buying “things,” and we believe consumers are electing to buy fewer but more premium items. As a result, we must
re-examine how we engage with consumers at retail and online to ensure we stay relevant.
On
the positive side, there is an excess of quality aged bourbon in Kentucky in which barrels have accumulated to never before seen levels
as investors piled into the idea of owning barrels of whiskey and bourbon to capitalize on their price appreciation. As a result of the
buildup of inventory, we are seeing prices fall for wholesale barrel sales, which works in our favor as we look to expand our Salute
Series line
of spirits. In some cases, the price for barrels of quality aged Kentucky bourbon in bulk have fallen by more than half, reducing our
input costs for our most premium products. We view this as a tremendous arbitrage opportunity that works in our favor just as we expand
our offerings under the Salute
Series.
We
source some labels and printed collateral from trusted suppliers in Canada, and recent tariffs announced by the Trump administration on
Canadian imports in the first quarter of 2025 could impact those items. However, these labels and print collateral items typically have
a cost ranging from 10 cents to $1.00 each, and because these labels and print items are used for our most expensive and premium products,
we do not believe the imposition of tariffs on those items will have a material effect on our gross margin for those products.
Continued
Investment and Innovation
Our
performance is dependent on our ability to continue to develop products that resonate with consumers. It is essential that we continually
identify and respond to rapidly-evolving consumer trends, develop and introduce innovative new products, enhance our existing products,
and generate consumer demand for our products. Management believes that investment in beverage product innovation will contribute to long-term
revenue growth, especially in the premium and ultra-premium segments.
Key
Components of Results of Operations
Net
Sales
Our
net sales consist primarily of the sale of spirits and services domestically in the United States. Customers consist primarily of wholesale
distributors and direct consumers. Substantially all revenue is recognized from products transferred at a point in time when control is
transferred, and contract performance obligations are met. Service revenue represents fees for distinct value-added services that we provide
to third parties, including production, bottling, marketing, consulting and other services, including for the TBN, aimed at growing and
improving brands and sales. Service revenue is recognized over the period in which the service is provided.
Cost
of Sales
We
recognize the cost of sales in the same manner that the related revenue is recognized. Our cost of sales consists of product costs, including
manufacturing costs, duties and other applicable importing costs, shipping and handling costs, packaging, warranty replacement costs,
fulfillment costs, warehousing costs, and certain allocated costs related to management, facilities and personnel-related expenses associated
with supply chain logistics.
Gross
Profit and Gross Margin
Our
gross profit is the difference between our revenues and cost of sales. Gross margin percentage is obtained by dividing gross profit by
our revenue. Our gross profit and gross margin are, or may be, influenced by several factors, including:
•Market
conditions that may impact our pricing;
•Our
cost structure for manufacturing operations, including contract manufacturers, relative to volume, and our product support obligations;
•Our
capacity utilization and overhead cost absorption rates;
43
•Our
ability to maintain our costs on the components that go into the manufacture of our products; and
•Seasonal
sales offerings or product promotions in conjunction with plans created with our distributors or retail channels.
We
expect our gross margins to fluctuate over time, depending on the factors described above.
Sales
and Marketing
Sales
and marketing expenses consist primarily of employee-related costs for individuals working in our sales and marketing departments, our
tasting room general managers and Cask Club directors, our hourly tasting room sales associates, the executives to whom all general managers
report, and the executives whose primary function is sales or marketing, and rent and associated costs for running each tasting room.
The expenses include our personnel responsible for managing our e-commerce platform, wages, commissions and bonuses for our outside sales
team members who market and sell our products to distributors and retail end users and the associated costs of such sales. Sales and marketing
expenses also include the costs of sports and venue sponsorships, radio, television, social media, influencers, direct mail and other
traditional marketing costs, costs related to trade shows and events and an allocated portion of overhead costs. We expect our sales and
marketing costs will increase as we expand our headcount, open new locations in partnership with tribes, expand our wholesale distribution
footprint and initiate new marketing campaigns.
General
and Administrative
General
and administrative expenses consist primarily of personnel-related expenses associated with our executive, finance, legal, insurance,
information technology and human resources functions, as well as professional fees for legal, audit, accounting and other consulting services,
and an allocated portion of overhead costs. We expect our general and administrative expenses will increase on an absolute dollar basis
as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies
listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of
the SEC, as well as increased expenses for general and director and officer insurance, investor relations, directors fees and other administrative
and professional services. In addition, we expect to incur additional costs as we hire additional personnel and enhance our infrastructure
to support the anticipated growth of our business. We expect that the one-time large costs associated with preparing our initial public
offering will not need to be recurring expenses, allowing us to focus on baseline costs.
As
of March 31, 2025, we had outstanding restricted stock units (“RSUs”) that, upon vesting, will settle into an aggregate
of 11,064 shares based upon the grant date with a fair value of $157.89, and 234,375 shares based upon the grant date with a fair value
of $4.00. We recognized an aggregate of $2,684,395 of previously-unrecognized compensation expense for RSU awards upon completion of our
IPO. Included above are an aggregate of 234,525 RSUs to employees, directors and consultants that the Board of Directors approved in May
2024, with a fair grant value of $4.00 per unit. These RSUs contain a double trigger and, upon grant, were deemed to have met their time-based
service requirements for vesting. They will settle on the six month anniversary of our initial public offering, which was completed in
November 2024.
Interest
Expense
Interest
expenses include cash interest accrued on our secured debt, cash interest and non-cash interest paid or accrued on our notes payable,
interest on leased equipment or assets, and costs and interest on credit cards.
Change
in Fair Value of Convertible Notes and Warrant Liabilities
We
elected the fair value option for the convertible notes we issued in 2022 and 2023 (the “Convertible Notes”) and the warrants
that were issued in connection with the Convertible Notes under ASC Topic 825, Financial
Instruments,
with changes in fair value reported in our consolidated statements of operations as a component of other income (expense). We believe
the fair value option better reflects the underlying economics of the Convertible Notes and the related warrants given their embedded
conversion or exercise features. As a result, the Convertible Notes and the related warrants were recorded at fair value upon issuance
and were subsequently remeasured at each reporting date until they were converted upon the occurrence of our IPO on November 25, 2024.
Accordingly, the Convertible Notes and the related warrants are recognized initially and subsequently (through and including their exchange
for common stock, or in the case of the warrants, the fixing of their exercise price) at fair value, inclusive of their respective accrued
interest at their stated interest rates, which were included in convertible notes on our consolidated balance sheets. The changes in the
fair value of the Convertible Notes and related warrants were recorded as “changes in fair value” as a component of other
income (expenses) in our consolidated statements of operations. The changes in fair value related to the accrued interest
44
components
of the Convertible Notes were also included within the single line of change in fair value of convertible notes on our consolidated statements
of operations. Upon the initial public offering of our common stock (on November 25, 2024), the fair value of the Convertible Notes
and related warrants were converted to equity effective November 25, 2024.
Changes
in Fair Value of Investment in Flavored Bourbon, LLC
As
of March 31, 2025 and December 31, 2024, respectively, we had a 12.2% and 12.2% ownership interest in Flavored Bourbon, LLC,
respectively, and did not record any impairment charges related to our investment in Flavored Bourbon, LLC for the year ended December
31, 2023. In January 2024, Flavored Bourbon LLC conducted a capital call, looking to raise $12 million from current and new investors
at the same valuation as its last raise. We chose not to participate in the raise, but still retained our rights to full recovery of our
capital account of $25.3 million, with the Company being guaranteed a pay out of this $25.3 million, which we must be paid in the event
the brand is sold to a third party, or we can block such sale. As of the end of 2024, a total of $9,791,360 of the $12 million had been
raised, and it was unclear if an effort would be made to round out the remainder of the initial targeted raise. We retain a 12.2% ownership
interest in this entity plus a 2.5% override in the waterfall of distributions. As a result of the January 2024 capital call, in accordance
with adjusting for observable price changes for similar investments of the same issuer pursuant to ASC 321 as noted above, we performed
a qualitative assessment of our Investment in Flavored Bourbon, LLC. On the basis of our analysis we determined that the fair value of
our Investment in Flavored Bourbon, LLC, should be adjusted to $14,285,000, with the resulting increase in fair value of $3,421,000 recorded
as gain on increase in value of Flavored Bourbon, LLC on our condensed consolidated statement of operations for the six months ended June
30, 2024, and recorded no further adjustment in the value of Flavored Bourbon, LLC through the remainder of 2024.
Changes
in Fair Value of Convertible Notes
As
of September 30, 2024, the fair value of the Convertible Notes that were issued in 2022 and 2023 and were exchanged in October and
November 2023 for a fixed number of shares of common stock and prepaid warrants, was revalued to $18,482,353, which reflected the impact
of the then-anticipated pricing of our initial public offering of $5.00 per share in the valuation calculation methodology. Upon the effectiveness
of our initial public offering (on November 25, 2024), the fair value of the Convertible Notes decreased and was reclassified from
a liability to equity in the amount of $15,278,168 (representing the 3,312,148 shares of common stock and 507,394 prepaid warrants for
which the Convertible Notes were exchanged multiplied by the price per share of our common stock of $4.00 in the November 25, 2024
initial public offering., with the remaining $3,204,185 recorded as a gain for the decrease in fair value of those Convertible Notes for
the period from September 30, 2024 to the date of our initial public offering (November 25, 2024), which is the date on which the
contingent treatment of the liability associated with such convertible notes is relieved and they were reclassified to equity.
As
of September 30, 2024, the fair value of the convertible notes issued in 2023 and 2024 (the “Whiskey Notes”) and related
warrant liabilities, which notes and warrants were exchanged for 2,399,090 shares of common stock and 546,927 prepaid warrants in April
2024, was $14,283,752 and $18,658, respectively, which reflected the impact of the then-anticipated pricing of our initial public offering
of $5.00 per share in the valuation calculation methodology. Upon the effectiveness of our initial public offering (on November 25,
2024), the fair value of such convertible promissory notes and related warrant liabilities decreased and was reclassified from a liability
to equity in the aggregate amount of $11,784,068 (representing the 2,399,090 shares of common stock and 546,927 prepaid warrants for which
the Whiskey Notes were exchanged multiplied by the price per share of our common stock of $4.00 in our November 25, 2024 initial
public offering, with the remaining $2,499,684 recorded as a gain for the decrease in fair value of those convertible notes and related
warrant liabilities for the period from September 30, 2024 to the date of our initial public offering (November 25, 2024), which
is the date on which the contingent treatment of the liability associated with such convertible notes is relieved and they were reclassified
to equity.
As
the exchange of the Convertible Notes to common stock was conditioned upon the closing of our initial public offering of common stock
prior to a specified date, the aggregate fair value of the Convertible Notes continued to be reflected as a liability on our consolidated
balance sheet until the closing of our initial public offering (November 25, 2024), at which time the Convertible Notes were reclassified
from convertible notes payable to equity, as the remaining contingency to the exchange of the Convertible Notes to common stock was then
satisfied. With the satisfaction of that remaining contingency, the exchange of the convertible notes payable for common stock qualified
for equity classification.
45
Changes
in Fair Value of Warrant Liabilities
We
issued certain warrants for the purchase of shares of our common stock in connection with the issuance of certain Convertible Notes and
classified such warrants as a liabilities on our consolidated balance sheet pursuant to ASC Topic 480 because, when issued, the warrants
were to settle by issuing a variable number of shares of our common stock based on the then-unknown price per share of our common stock
in our IPO. The warrant liabilities were initially recorded at fair value on the issuance date of each warrant and are subsequently remeasured
to fair value at each reporting date. Changes in the fair value of the warrant liabilities are recognized as a component of other income
(expense) in the consolidated statements of operations. As originally drafted, changes in the fair value of the warrant liabilities are
recognized until the warrants are exercised, expire or qualify for equity classification.
In
April 2024, certain of such warrants and the related Convertible Notes were exchanged (contingent upon the consummation of our initial
public offering, which occurred on November 25, 2024, which contingency is now lifted) for common stock. The remaining warrants,
which remain outstanding subsequent to the closing of our initial public offering, were amended to fix the exercise price at $6.00 per
share effective upon the closing of our initial public offering, thereby removing the floating price optionality. The fixing of the exercise
price allowed us to reclassify the warrant liabilities as equity on a pro forma basis, per ASC Topic 420 as of November 25, 2024
(the date of the our initial public offering).
Income
Taxes
Our
income tax provision consists of an estimate for U.S. federal and state income taxes based on enacted rates, as adjusted for allowable
credits, deductions, uncertain tax positions, changes in deferred tax assets and liabilities and changes in tax law.
Comparison
of the Results of Operations for the Three Months Ended March 31, 2025 and 2024
The
numbers presented below that have been rounded for presentation purposes have been rounded individually. As a result, totals may reflect
the effect of differences between: aggregating the individually rounded component numbers; and the rounding of the total of the individual
(non-rounded) component numbers. In cases where rounding occurred, the amount of the rounding difference is generally $1,000 or less.
Such differences are considered to be insignificant.
46
The
following table summarizes our results of operations for the three months ended March 31, 2025 and 2024.
| For
the Three Months Ended March 31, |
|||||||||||||||||
| 2025 | 2024 | Change | |||||||||||||||
| Net Sales | |||||||||||||||||
| Products | $ | 838,055 | $ | 1,231,823 | $ | (393,768) | |||||||||||
| Services | 253,928 | 474,336 | (220,408) | ||||||||||||||
| Total Net Sales | 1,091,983 | 1,706,159 | (614,176) | ||||||||||||||
| Cost of Sales | |||||||||||||||||
| Products | 814,209 | 1,213,565 | (399,356) | ||||||||||||||
| Services | 5,889 | 84,057 | (78,168) | ||||||||||||||
| Total Cost of Sales | 820,098 | 1,297,622 | (477,524) | ||||||||||||||
| Gross Profit | 271,885 | 408,537 | (136,652) | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Sales and Marketing | 1,315,386 | 1,189,854 | 125,532 | ||||||||||||||
| General and Administrative | 1,407,676 | 1,445,553 | (37,877) | ||||||||||||||
| Total Operating Expenses | 2,723,062 | 2,635,407 | 87,655 | ||||||||||||||
| Operating Loss | (2,451,177) | (2,226,870) | (224,307) | ||||||||||||||
| Other Income (Expense) | |||||||||||||||||
| Interest Expense | (523,214) | (601,006) | 77,792 | ||||||||||||||
|
Gain
on Investment |
— | 3,421,222 | (3,421,222) | ||||||||||||||
| Change in Fair Value of Convertible Notes | — | (571,089) | 571,089 | ||||||||||||||
| Change in Fair Value of Warrant Liabilities | — | 430,208 | (430,208) | ||||||||||||||
|
Other
(Income) / Expense |
(58,656) | 374 | (59,030) | ||||||||||||||
| Total Other Expense | (581,870) | 2,679,709 | (3,261,579) | ||||||||||||||
| Income/(Loss) Before Income Taxes | (3,033,047) | 452,839 | (3,485,886) | ||||||||||||||
| Income Taxes | — | ||||||||||||||||
|
Net
Income / (Loss) |
$ | (3,033,047) | $ | 452,839 | $ | (3,485,886) | |||||||||||
|
Net Income /
(Loss) Per Share, Basic |
$ | (0.34) | $ | 1.12 | $ | (1.46) | |||||||||||
| Weighted Average Common Shares Outstanding, Basic | 9,662,201 | 403,329 | $ | 9,258,872 | |||||||||||||
| Net Income/(Loss) Per Share, Diluted | $ | (0.34) | $ | 0.13 | $ | (0.47) | |||||||||||
| Weighted Average Common Shares Outstanding, Diluted | 9,662,201 | 3,473,832 | 6,188,369 | ||||||||||||||
47
Net
Sales
|
Three
Months Ended
March
31,
(rounded
to $000’s) |
||||||||||||||||||||
| Total Sales | 2025 | 2024 | Change | |||||||||||||||||
| Products | $ | 838,000 | $ | 1,232,000 | $ | (394,000) | ||||||||||||||
| Services | 254,000 | 474,000 | (220,000) | |||||||||||||||||
| $ | 1,092,000 | $ | 1,706,000 | $ | (614,000) | |||||||||||||||
Net
sales were approximately $1,092,000 and $1,706,000 for the three months ended March 31, 2025 and 2024, respectively, a decrease of
approximately $614,000, or 36.0%, period over period.
The
approximately $394,000 net decrease in products sales, period over period, included:
| Products Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
|||||||||||||||||||
| 2025 | 2024 | Change | ||||||||||||||||||
| Wholesale | $ | 269,000 | $ | 319,000 | $ | (50,000) | ||||||||||||||
| Retail | 569,000 | 742,000 | (173,000) | |||||||||||||||||
| Third Party | — | 171,000 | (171,000) | |||||||||||||||||
| $ | 838,000 | $ | 1,232,000 | $ | (394,000) | |||||||||||||||
•The
approximately $50,000 decrease in wholesale product sales was primarily the result of the timing of orders through the wholesale channel
moved into second quarter 2025 that occurred in first quarter 2024 and the reduction of sales of low margin spirits as we continue to
move our emphasis to higher margin items.
•Retail
products sales included the impact of sales from the launch of our Special
Operations Salute
product line in November 2023, with sales associated with that new product line of approximately $227,000 and $280,000 for the three months
ended March 31, 2025 and 2024,and which is an important part of our strategy as our margins on sales direct to consumers are highest
for us. The year over year approximately $173,000 decrease included is the result of the timing of orders fulfilled through the DtC retailer
channel, which consisted of large load in by the retailers in the fourth quarter 2024, modest reorders in the first quarter 2025 as the
retailers moved through their inventory and the movement of reorders into second quarter 2025 that occurred in first quarter 2024 for
DtC items. A portion of the reduction in retail revenue in three months ended March 31, 2025 versus 2024 was also from the reduction
of hours in some of our brick and mortar retail locations as we made the decision to close some locations on Mondays and Tuesday to reduce
labor expenses on our slowest retail sales days during the quarter. During the same period in 2024 our retail locations were open seven
days per week. We plan to reopen those locations on Mondays and Tuesdays as we get closer to the Memorial Day holiday to take advantage
of higher summer foot traffic.
•The
approximately $171,000 decrease in third-party products sales was primarily a result of winding down our contracts on producing bulk whiskey
for third parties in 2024 as we continue to shift our focus and resources into higher margin activities.
Online
DtC Product Sales from our online distributor’s inventory sold retailers for resale to retail customers for the three months ended
March 31, 2025 compared to the three months ended March 31, 2024 reflected the Company’s increased focus on high-margin
direct to consumer (“DtC”) and online sales period over period. The tables below report the substantial increase in the retail
value of DtC products sold to consumers during the three months ended March 31, 2025 versus 2024 (sales from our online distributor’s
inventory) as follows (in dollars and units sold):
48
|
Three
Months Ended
March
31,
(rounded
to $000’s) |
||||||||||||||||||||||||||
|
Products Sales
- DtC and online |
2025 | 2024 | Change |
%
Increase | ||||||||||||||||||||||
|
Salute Series
and Military DtC Spirits |
$ | 426,000 | $ | 241,000 | $ | 185,000 | 76.8% | |||||||||||||||||||
|
Other HDC DtC
Spirits |
13,000 | 7,000 | 6,000 | 85.7% | ||||||||||||||||||||||
| $ | 439,000 | $ | 248,000 | $ | 191,000 | 77.0% | ||||||||||||||||||||
|
Three
Months Ended
March
31,
(Units) |
||||||||||||||||||||||||||
| Products Sales - DtC and online | 2025 | 2024 | Change | % Increase | ||||||||||||||||||||||
|
Salute Series
and Military DtC Spirits |
4,253 | 2,047 | 2,206 | 107.8 | % | |||||||||||||||||||||
|
Other HDC DtC
Spirits |
317 | 225 | 92 | 40.9 | % | |||||||||||||||||||||
| 4,570 | 2,272 | 2,298 | 101.1 | % | ||||||||||||||||||||||
•The
difference in Salute Series and Military DtC Spirits growth of 107.8% for units sold of 107.8% year over year versus the 76.8% increase
in revenue for those same products is the result of us release more bottle only products at $95 per unit during the three months ended
March 31, 2025 versus 2024. In the first quarter 2024 we were primarily selling the Army SOF in tube for $125 at retail, whereas
during the same time period in 2025 we had a broader selection of spirits under the Salute Series banner, with more units selling for
$95.
•Since
the launch of the Army
SOF version in late October 2023, sales of our of Salute
Series products
directly to consumers in our tasting rooms and online, has increased approximately $185,000 to approximately $426,000 for the three months
ended March 31, 2025 compared to approximately $241,000 for the three months ended March 31, 2024.
The
approximately $220,000 decrease in net sales of services period over period included:
| Services Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
|||||||||||||||||||
| 2025 | 2024 | Change | ||||||||||||||||||
| Third Party Production | $ | 6,000 | $ | 111,000 | $ | (105,000) | ||||||||||||||
| Retail Services | 239,000 | 300,000 | (61,000) | |||||||||||||||||
| Consulting and Other | 9,000 | 63,000 | (54,000) | |||||||||||||||||
| $ | 254,000 | $ | 474,000 | $ | (220,000) | |||||||||||||||
•The
approximately $105,000 decrease in third-party production resulted from the ending of a low-margin third-party bottling contract as of
January 31, 2024. The bulk of our revenue in this category included production services revenue related to a contract we had to produce
a gin for a large international spirit brand owner as we made the choice to focus our time, energy and resources on higher margin activities.
Lesser amounts of revenue in this category in 2024 came from contract bottling services; and third-party barrel sales and storage revenues.
•The
approximately $61,000 decrease in retail services was the result of the reduction of hours in some of our brick and mortar retail locations
as we made the decision to close some locations on Mondays and Tuesday to reduce labor expenses on our slowest retail sales days during
the quarter. During the same period in 2024 our retail locations were open seven days per week. We plan to reopen those locations on Mondays
and Tuesdays as we get closer to the Memorial Day holiday to take advantage of higher summer foot traffic.
•The
approximately $54,000 decrease in consulting fees is related to TBN projects as we saw the successful completion and opening of the Stillaguamish
project in October 2024 and we moved the announced Coquille and Tonto Apache projects that were in planning phase into construction phase
in preparation for openings in late 2025.
49
Cost
of Sales
Cost
of sales were approximately $820,000 and $1,298,000 for the three months ended March 31, 2025 and 2024, respectively, a decrease
of approximately $478,000, or 36.8%, period over period.
|
Three
Months Ended
March
31,
(rounded
to $000’s) |
||||||||||||||||||||
| Cost of Sales | 2025 | 2024 | Change | |||||||||||||||||
| Products | 814,000 | 1,214,000 | $ | (400,000) | ||||||||||||||||
| Services | 6,000 | 84,000 | (78,000) | |||||||||||||||||
| $ | 820,000 | $ | 1,298,000 | $ | (478,000) | |||||||||||||||
The
approximately $400,000 decrease in net products cost of sales period over period included: a decrease in product cost of approximately
$199,000 to approximately $353,000 for the three months ended March 31, 2025, from approximately $552,000 for the three months ended
March 31, 2024, and a decrease in unabsorbed overhead of approximately $201,000 to approximately $461,000 as of March 31, 2025
from approximately $662,000 as of March 31, 2024. We made the choice to move our sales focus onto higher margin products and away
from low margin well-based products, resulting in fewer cases sold in 2024 relative to 2023. Fewer cases of production carrying the same
amount of overhead increases the unabsorbed overhead, and the associated cost per case, using standard cost accounting methodologies.
Assuming all other factors remain steady in the business, as we work to grow our Salute Series volume sales, which is our highest margin
item, we will begin to see reductions in our unabsorbed overhead overall and per case, leading to higher gross margins. This is purely
a function of how much excess capacity we have in our production system at the time while we transition from low margin, but high volume
production to higher margin products.
Services
cost of sales decreased by approximately $78,000 to approximately $6,000 for the three months ended March 31, 2025 from approximately
$84,000 for the three months ended March 31, 2024 primarily resulting from us ending a low-margin third party production contract
for another brand and the wind down of barrel production for third parties.
| Components of Products Cost of Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
|||||||||||||||||||
| 2025 | 2024 | Change | ||||||||||||||||||
| Product Cost (from inventory) | $ | 353,000 | $ | 552,000 | $ | (199,000) | ||||||||||||||
| Overhead – Unabsorbed | 461,000 | 662,000 | (201,000) | |||||||||||||||||
| $ | 814,000 | $ | 1,214,000 | $ | (400,000) | |||||||||||||||
| Components of Products Cost of Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
|||||||||||||||||||
| 2025 | 2024 | Change | ||||||||||||||||||
| Product Cost (from inventory) | 43.4 | % | 45.5 | % | (2.1) | % | ||||||||||||||
| Overhead – Unabsorbed | 56.6 | % | 54.5 | % | 2.1 | % | ||||||||||||||
| 100.0 | % | 100.0 | % | — | % | |||||||||||||||
•Unabsorbed
overhead as a component of Product Cost of 56.6% and 54.5% for the three months ended March 31, 2025 and 2024, respectively, are
significant contributors to our current overall low products gross margins. Unabsorbed overhead is a function of costs attributable to
the excess capacity and associated overhead in our system. While we made progress seeing this cost drop to 41.3% in the full year ended
December 31, 2024, from 44.6% in the full year ended December 31, 2023, we have significant opportunities to push this cost component
down further in 2025 and beyond by reducing unused capacity and reducing our real estate footprint to get leaner and more efficient. The
increase in the unabsorbed overhead percentage in the first quarter of of 2025 compared to the fourth quarter 2024 is a reflection of
the large product sales and volume we had during in the fourth quarter of 2024 given fourth quarter of a year is typically the strongest
quarter and the first quarter is typically the slowest
50
quarter
of the year in the spirits industry. (See below for our discussion on Gross Margins related to unabsorbed overhead in Non-GAAP
Financial Measures).
The
approximately $400,000 decrease in net products cost of sales period over period is further detailed as follows:
| Cost of Sales Products Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
|||||||||||||||||||
| 2025 | 2024 | Change | ||||||||||||||||||
| Spirits – Wholesale | $ | 174,000 | $ | 267,000 | $ | (93,000) | ||||||||||||||
| Spirits – Retail | 146,000 | 129,000 | 17,000 | |||||||||||||||||
| Spirits – Third Party | — | 99,000 | (99,000) | |||||||||||||||||
| Merchandise and Prepared Food | 33,000 | 57,000 | (24,000) | |||||||||||||||||
| Unabsorbed Overhead | 461,000 | 662,000 | (201,000) | |||||||||||||||||
| $ | 814,000 | $ | 1,214,000 | $ | (400,000) | |||||||||||||||
•The
approximately $93,000 decrease in wholesale product cost of sales to approximately $174,000 for the three months ended March 31,
2025 compared to approximately $267,000 for the three months ended March 31, 2024 was primarily the result of the shifting of some
wholesale orders from the first quarter to the second quarter based on timing of reorders in the wholesale channel and the continued reduction
of focus on our part on low margin items as we shift focus to higher margin items.
•The
decrease to $0 in third-party production costs is due to no such activity in the three months ended March 31, 2025.
•Our
unabsorbed overhead, which is a measure of our capacity relative to our current utilization, decreased by approximately $201,000 to approximately
$461,000 for the three months ended March 31, 2025 compared to approximately $662,000 for the three months ended March 31, 2024.
The unabsorbed overhead expense indicates our underutilization of current production capacity as we move away from low-margin, high volume
products into higher margin products. Our goal continues to be the reduction of unabsorbed overhead over time as our production volumes
increase with increased sales and as we reduce overhead costs associated with excess production capacity, warehouse space and other real
estate. The combined efforts of increasing high margin product sales and reducing general overhead costs are geared toward reducing our
overhead expenses to have our remaining overhead right-sized to our strategy of focusing on producing and selling high margin super premium
items. (See below for our discussion on Gross Margins related to unabsorbed overhead in Non-GAAP
Financial Measures).
Unabsorbed overhead includes approximately $2,000 in product inventory write downs and adjustments in the three months ended March 31,
2025 compared to approximately $79,000 in the three months ended March 31, 2024.
Gross
Profit
Gross
profit was approximately $272,000 and $409,000 for the three months ended March 31, 2025 and 2024, respectively, a decrease of approximately
$137,000, or 33.5%, period over period, and included:
| Total Gross Profit |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
| Products | $ | 24,000 | $ | 19,000 | $ | 5,000 | ||||||||||||||
| Services | 248,000 | 390,000 | (142,000) | |||||||||||||||||
| $ | 272,000 | $ | 409,000 | $ | (137,000) | |||||||||||||||
51
| Total Gross Margin |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
| Products | 2.8 | % | 1.5 | % | 1.3 | % | ||||||||||||||
| Services | 97.7 | % | 82.3 | % | 15.4 | % | ||||||||||||||
| 24.9 | % | 24.0 | % | 0.9 | % | |||||||||||||||
It
is important to note the $24,000 in Products Gross Profits, and the resulting low Gross Margin of 2.8%, is after layering in the $461,000
in unabsorbed overhead costs.
Gross
Profit - Analysis of Exclusion of Unabsorbed Overhead
To
provide a more detailed view to our performance for products and services based purely on the direct input costs we remove unabsorbed
overhead expenses for the following analysis. Gross profit excluding unabsorbed overhead was approximately $485,000 and $681,000 for the
three months ended March 31, 2025 and 2024, respectively, a decrease of approximately $196,000, or 28.8%, period over period, and
included:
|
Three
Months Ended
March
31,
(rounded
to $000’s) |
||||||||||||||||||||
|
Total Gross Profit
- Excluding Unabsorbed Overhead |
2025 | 2024 | Change | |||||||||||||||||
| Products | $ | 24,000 | $ | 19,000 | $ | 5,000 | ||||||||||||||
|
Add Back: Unabsorbed
Overhead |
461,000 | 662,000 | (201,000) | |||||||||||||||||
|
Products
Gross Profit Excluding Unabsorbed Overhead |
485,000 | 681,000 | (196,000) | |||||||||||||||||
| Services | 248,000 | 390,000 | (142,000) | |||||||||||||||||
|
Total
Gross Profit Excluding Unabsorbed Overhead |
$ | 733,000 | $ | 1,071,000 | $ | (338,000) | ||||||||||||||
|
Three
Months Ended
March
31,
(rounded
to $000’s) |
||||||||||||||||||||
| Total Gross Margin - Excluding Unabsorbed Overhead | 2025 | 2024 | Change | |||||||||||||||||
| Products | 2.8 | % | 1.5 | % | 1.3 | % | ||||||||||||||
|
Add Back: Unabsorbed
Overhead |
55.0 | % | 53.7 | % | 1.3 | % | ||||||||||||||
|
Products
Gross Margin Excluding Unabsorbed Overhead |
57.9 | % | 55.3 | % | 2.6 | % | ||||||||||||||
| Services | 97.7 | % | 82.3 | % | 15.4 | % | ||||||||||||||
|
Total
Gross Margin Excluding Unabsorbed Overhead |
67.1 | % | 62.8 | % | 4.3 | % | ||||||||||||||
Gross
Margin excluding unabsorbed overhead of 67.1% for the three months ended March 31, 2025 compared to 62.8% for the same period in
2024 is a significant increase, as is the improvement compared to the 55.6% we reported for
52
the
full year 2024, indicating our efforts aimed at reducing overhead expenses and focusing on high margin items are starting to bear fruit.
Gross
Profit Analysis
Gross
Margin numbers above are based on the total sales for the three months ended March 31, 2025 and 2024 as follows:
| Total Sales |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
| Products | $ | 838,000 | $ | 1,232,000 | $ | (394,000) | ||||||||||||||
| Services | 254,000 | 474,000 | (220,000) | |||||||||||||||||
| $ | 1,092,000 | $ | 1,706,000 | $ | (614,000) | |||||||||||||||
•Gross
margin was approximately 24.9% and 24.0% (67.1% and 62.8%, excluding unabsorbed overhead) for the three months ended March 31, 2025
and 2024, respectively, based upon total net sales of approximately $1,092,000 and $1,706,000, respectively. As we add more Special
Operations Salute
sales via online channels, we expect to see our overall gross margin increase. Likewise, as we add more states into our wholesale distribution
channel focused solely on high-margin items, rather than any low-margin well vodka in those states, we expect to see additional margin
increases. Also, as we add more cases of production through our system, we expect the unabsorbed overhead costs will be reduced as each
additive case of new sales volume begins to carry incremental overhead costs as part of the normal manufacturing cost accounting, which
should increase our overall margins. Finally, our third-party production contracts were very low margin for us, which is why management
made the decision to end those contracts at the end of January 2024 and phase out producing barrels of whiskey for third parties under
contract in late 2024. Moving forward, management will focus on higher-margin activities, which we expect will increase our overall margins.
•Gross
margin for Products of 2.8% (57.9% excluding unabsorbed overhead) for the three months ended March 31, 2025 compared to 1.5% (55.3%
excluding unabsorbed overhead) for the three months ended March 31, 2024 are inclusive of low margin production contracts we ended
in 2024, the significant amount of unabsorbed overhead we booked (which drags down gross margin based on the amount of unused capacity
in our system), and approximately $2,000 in product inventory write downs in the three months ended March 31, 2025 compared to approximately
$79,000 in product inventory write downs and adjustments in the three months ended March 31, 2024. As we work to shed some of our excess
capacity and overhead, and as we increase our sales of higher margin items, we expect this Products gross margin to increase significantly
(See
also below our comments related to this in more detail in Non-GAAP Financial Measures).
Sales
and Marketing Expenses
Sales
and marketing expenses were approximately $1,315,000 for the three months ended March 31, 2025 compared to approximately $1,190,000
for the three months ended March 31, 2024. This approximately $125,000 increase included:
| Sales and Marketing Expense |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
|
Personnel -
Cash Wages and Related Expense |
$ | 729,000 | $ | 645,000 | $ | 84,000 | ||||||||||||||
| Tasting Room | 22,000 | 34,000 | (12,000) | |||||||||||||||||
| Leases and Rentals | 190,000 | 166,000 | 24,000 | |||||||||||||||||
| Sales and Marketing Expenses | 206,000 | 96,000 | 110,000 | |||||||||||||||||
| Other | 168,000 | 249,000 | (81,000) | |||||||||||||||||
| $ | 1,315,000 | $ | 1,190,000 | $ | 125,000 | |||||||||||||||
•The
approximately $84,000 increase in personnel expense was primarily a result of moving a full time employee into the Salute Series sales
pipeline to drive more adoption and to grow the brand.
53
•The
approximately $110,000 increase in sales and marketing expenses included: an increase in digital advertising production expense to drive
DtC sales of our highest margin spirits brands, offset by decreases in sponsorships and print advertising as we shifted to a new third-party
e-commerce platform.
•The
approximately $81,000 decrease in other sales and marketing expenses stems from decreased deals, discounts, rebates and incentives offered
to wholesale distributors for low margin products and the ending of a contract for an outside sales consultant as of December 31, 2024.
•General
and Administrative Expenses
General
and administrative expenses were approximately $1,308,000 for the three months ended March 31, 2025, compared to approximately $1,447,000
for the three months ended March 31, 2024. This approximately $139,000 decrease included:
| General and Administrative Expense |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
|
Personnel -
Cash Wages and Related Non-Cash Expense |
$ | 409,000 | $ | 499,000 | $ | (90,000) | ||||||||||||||
| Recruiting and retention | 5,000 | 5,000 | — | |||||||||||||||||
| Professional Fees | 200,000 | 287,000 | (87,000) | |||||||||||||||||
| Leases and Rentals | 143,000 | 173,000 | (30,000) | |||||||||||||||||
| Depreciation | 249,000 | 259,000 | (10,000) | |||||||||||||||||
| Other | 302,000 | 224,000 | 78,000 | |||||||||||||||||
| $ | 1,308,000 | $ | 1,447,000 | $ | (139,000) | |||||||||||||||
•The
approximately $90,000 decrease in wages and related expenses was primarily the result of additional matching RSU compensation on a noncash
basis related to deferred compensation during the three months ended March 31, 2024 with no such deferred compensation or matching
program for the three months ended March 31, 2025. Beginning in May 2023, certain senior level employees elected to defer a portion
of their salary until such time as we completed a successful public offering of our common stock (which occurred on November 25,
2024), when the employees would then be paid their respective deferral, plus RSUs or stock options (under the existing 2019 Plan and the
new 2024 Plan discussed in Notes 2 and 7 of our condensed consolidated financial statements for the three months ended March 31,
2025 and 2024).
•The
approximately $30,000 decrease in leases and rentals was primarily the result of moving from a large warehouse in Eugene, Oregon to a
smaller warehouse starting in January 2025.
•The
approximately $78,000 increase in other general and administrative expenses included accumulative smaller changes in utilities, travel,
general insurance, public company related insurance and other administrative expenses, including board compensation.
•The
approximately $87,000 decrease in professional fees expense included:
| Professional Fees |
Three
Months Ended
March
31,
(rounded
to $000’s) |
Change | ||||||||||||||||||
| 2025 | 2024 | |||||||||||||||||||
| Accounting and Valuation Services | $ | 15,000 | $ | 163,000 | $ | (148,000) | ||||||||||||||
| Legal | 32,000 | 73,000 | (41,000) | |||||||||||||||||
| Consulting | — | 38,000 | (38,000) | |||||||||||||||||
| Other | 153,000 | 13,000 | 140,000 | |||||||||||||||||
| $ | 200,000 | $ | 287,000 | $ | (87,000) | |||||||||||||||
A
majority of our professional fees expense in the three months ended March 31, 2025 and 2024 were incurred as a result of: general
preparedness of our financial reporting and capital structure for our initial public offering and related SEC reporting, and the preparation
and filing of an S-1 related to the ELOC we put in place during the quarter. Accordingly,
54
within
that context, most of our professional fees expense and changes in expense levels between the respective year-over-year periods were as
follows:
•The
approximately $148,000 decrease in accounting and valuation services expenses were primarily the result of the end of the need for valuation
related services subsequent to the reclassification of convertible notes and liabilities (which were recorded at fair value) to equity
effective upon our IPO in November 2024.
•The
approximately $41,000 decrease in legal fees was primarily the result of legal work in the three months ended March 31, 2025 including
expenses related to our SEC filings, ELOC Agreement and Series B Preferred Stock, compared to legal work in the three months ended March 31,
2024 including expenses related to our Whiskey Notes offering, acquisition of Thinking Tree Spirits,and work on preparation for our initial
public offering (which began in late 2023).
•The
approximately $140,000 increase in other professional fees was primarily the result of related to third party investor relations and media
relations services and moving human resources and payroll to outside firms.
Beginning
in late 2023 we began exploring other funding options, including an initial public offering While the costs directly associated with this
activity were capitalized and deferred to the balance sheet to be recognized as a cost of the transaction upon a successful completion
or other disposition, we also incurred certain other expenses related to preparing for the transaction that did not directly qualify for
capitalization and deferral, such as the preparation of audited consolidated financial statements, and certain expenses for valuation
and other financial services. On November 25, 2024, we successfully completed our initial public offering, and recognized approximately
$2,368,000 of deferred offering expenses as a cost of the transaction.
Interest
Expense
Interest
expense decreased by approximately $78,000 to approximately $523,000 for the three months ended March 31, 2025, compared to approximately
$601,000 for the three months ended March 31, 2024. The decrease included approximately $69,000 resulting from the decreased principal
balance of the Silverview loan in 2025 compared to 2024, and an approximately $9,000 decrease in interest expense related to the channel
partners loan having been paid off in 2024.
Income
Taxes
The
provision for income taxes for the three months ended March 31, 2025 and 2024 was immaterial, primarily as we were in a net loss
position for those periods.
Non-GAAP
Financial Measures
To
supplement our condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use certain non-GAAP
financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures,
which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding
of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP.
Adjusted
Gross Profit excluding unabsorbed overhead and Adjusted Gross Margin excluding unabsorbed overhead: Adjusted
gross profit excluding unabsorbed overhead represents GAAP gross profit adjusted for (excluding) unabsorbed overhead. Adjusted Gross Margin
excluding unabsorbed overhead represents Adjusted Gross Profit excluding unabsorbed overhead as a percentage of total net sales. We use
these measures (i) to compare operating performance on a consistent basis for the raw inputs, direct labor and direct overhead to a produce
a product removing unused production capacity or overhead, (ii) for planning purposes, including the preparation of our internal annual
operating budget, and (iii) to evaluate the performance and effectiveness of operational strategies as we work to reduce overhead.
Adjusted
Gross Profit and Adjusted Gross Margin: Adjusted
gross profit represents GAAP gross profit adjusted for any nonrecurring gains and losses. Adjusted Gross Margin represents Adjusted Gross
Profit as a percentage of total net sales. We use these measures (i) to compare operating performance on a consistent basis, (ii) for
planning purposes, including the preparation of our internal annual operating budget, and (iii) to evaluate the performance and effectiveness
of operational strategies.
EBITDA
and Adjusted EBITDA: EBITDA
represents GAAP net income / (loss) adjusted for (i) depreciation of property and equipment; (ii) interest expense; (iii) share-based
compensation; and (iv) provision for income taxes. Adjusted EBITDA represents EBITDA adjusted for the recognition of share-based compensation,
non recurring gains and losses;
55
and
other one-time items. We believe that EBITDA and adjusted EBITDA help identify underlying trends in our business that could otherwise
be masked by the effect of the expenses that we include in GAAP operating loss. These non-GAAP financial measures should not be considered
in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related
to the use of this non-GAAP financial measure compared to the closest comparable GAAP measure. Some of these limitations are that:
•Adjusted
Gross Profit, EBITDA and adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual
commitments;
•Adjusted
Gross Profit, EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•Adjusted
Gross Profit, EBITDA and adjusted EBITDA exclude certain recurring, non-cash charges such as depreciation of property and equipment and,
although this is a non-cash charge, the assets being depreciated may have to be replaced in the future;
•Adjusted
Gross Profit, EBITDA and adjusted EBITDA exclude income tax benefit (expense); and
•Other
companies in our industry may calculate non-GAAP financial measures differently than we do, limiting their usefulness as comparative measures.
The
following table presents a reconciliation of GAAP Gross Profit to Adjusted Gross Profit by removing unabsorbed overhead for the three
months ended March 31, 2025 and 2024. Adjusted Gross Margin excluding unabsorbed overhead is the percentage obtained by dividing
Adjusted Gross Profit after removing unabsorbed overhead by our GAAP total net sales. It is an analysis that assumes all excess production
capacity and space has been used in production and generating revenue, assigning all such overhead costs across all production and revenue.
It is especially important in forecasting to larger entities that may be looking to acquire brands or entities about the amount of inefficiencies
they can wring out of a products or production if such products or ventures were acquired and absorbed into their larger and more efficient
systems.
| Three
Months Ended March 31, (rounded to $000’s) | ||||||||||||||
| Gross Profit Analysis Excluding Unabsorbed Overhead | 2025 | 2024 | ||||||||||||
| GAAP Total Net Sales | $ | 1,092,000 | $ | 1,706,000 | ||||||||||
| GAAP Gross Profit | $ | 272,000 | $ | 409,000 | ||||||||||
| GAAP Gross Profit Additions/(Deductions): | ||||||||||||||
| Unabsorbed Overhead | 461,000 | 662,000 | ||||||||||||
| Adjusted Gross Profit excluding unabsorbed overhead | $ | 733,000 | $ | 1,071,000 | ||||||||||
| GAAP Gross Margin | 24.9 | % | 24.0 | % | ||||||||||
| Adjusted Gross Margin excluding unabsorbed overhead | 67.1 | % | 62.8 | % | ||||||||||
The
above Adjusted Gross Margin excluding unabsorbed overhead shows the cost of production of our products and services based on raw inputs
and direct labor and overhead, removing all unabsorbed overhead expenses for unused capacity. This allows us to examine the cost of each
product and its margin as we evaluate where our areas of product focus should be. Considering we had low margin activity in our portfolio
through early 2024 (for example, well vodka and third-party production) an Adjusted Gross Margin excluding unabsorbed overhead greater
than 50% is remarkable for a craft producer. As we increase the use of unused capacity, reduce capacity and continue to shift away from
low margin activities towards our focus on higher margin products, we would expect to see both the GAAP Gross Margin and the Adjusted
Gross Margin excluding unabsorbed overhead increase.
It
is important to note specifically that the Adjusted Gross Margin excluding unabsorbed overhead includes revenue from low margin barrel
production contracts we had through early 2024 and that we do not expect to be performing for the foreseeable future as we focus on higher
margin activities.
In
an ideal scenario a producer would be at 100% utilization and producing high margin items exclusively. Knowing this, we are examining
operations, assets and our existing real estate footprint to drive better utilization and reduce overhead with the goal of driving down
unabsorbed overhead and decreasing unused asset capacity.
56
The
following table presents a reconciliation of net income / (loss) to EBITDA and adjusted EBITDA for the three months ended March 31,
2025 and 2024:
| Three
Months Ended March 31, (rounded to $000’s) | ||||||||||||||
| EBITDA Analysis | 2025 | 2024 | ||||||||||||
|
Net Income /
(Loss) |
$ | (3,033,000) | $ | 453,000 | ||||||||||
| Add (Deduct): | ||||||||||||||
| Income Tax | — | — | ||||||||||||
| Interest Expense | 523,000 | 601,000 | ||||||||||||
| Depreciation and Amortization | 297,000 | 320,000 | ||||||||||||
| EBITDA | $ | (2,213,000) | $ | 1,374,000 | ||||||||||
| Change in fair value of convertible notes | — | 571,000 | ||||||||||||
| Change in fair value of warrant liabilities | — | (430,000) | ||||||||||||
| Investment (Gain) Loss | — | (3,421,000) | ||||||||||||
| Adjusted EBITDA | $ | (2,213,000) | $ | (1,906,000) | ||||||||||
Liquidity
and Capital Resources
We
have prepared our condensed consolidated financial statements assuming we will continue as a going concern. Since our inception, we have
incurred net losses and experienced negative cash flows from operations as we have invested in equipment, location buildout, inventory
buildout (including laying down barrels of whiskey for aging) and marketing to grow our presence and brands. To date, our primary sources
of capital have been private and public placements of equity securities, term loans, and convertible debt. During the three months ended
March 31, 2025 and 2024, we had net income / (loss) of approximately $(3,033,000) and $453,000, respectively (of which, approximately
$0 and $3,280,000, respectively, stemmed from the (increase)/decrease in fair value of certain convertible notes, warrants and contingencies,
and gain on investment). We expect to incur additional losses and higher operating expenses for the foreseeable future as we continue
to invest in inventory, assets, working capital and otherwise in the growth of our business.
At
March 31, 2025, we had outstanding aged payables to vendors in the aggregate amount of approximately $5,519,000, inclusive of accrued
amounts to service providers who were providing services for us related to our IPO. We reached agreements with most of these vendors,
including the vendors with some of the largest outstanding invoices, to be paid soon after the IPO or periodically on payment plans. Of
the aforementioned vendor obligations, approximately $1,364,817 were for services related to the preparation of our IPO. A significant
amount of the remaining payables relate to marketing and sports sponsorship fees that were agreed upon or contracted for prior to the
COVID-19 lockdowns, but were put on hold or held over during those lockdowns and then restarted after the COVID lockdowns ended pursuant
to the terms of the agreements. All of those sports marketing contracts have been completed as of the end of 2024 and will not be renewed,
and we expect to make payments to those vendors in a way that allows us to manage our cash on hand as we grow our higher-margin revenue
in 2025. Given our shift away from low-margin products and services, management believes the use of cash for higher-margin activities
and priorities, requiring fewer raw goods units to drive more top line revenue, and more profitable revenue, will also assist with reducing
and eventually eliminating our cash burn. While we believe we have put in place satisfactory payment terms for the payment of most of
our outstanding payables, there is a risk that one or more of our vendors could demand a more immediate payment or initiate litigation
against us in an attempt to force payment of the amounts owed. In such a case, the litigation could cause us to incur significant costs
defending such action, and any such payment could materially affect our business, financial condition or liquidity.
From
time to time, we were out of compliance with various financial and other debt covenants under the Silverview Loan, which is discussed
below, with respect to our failure to meet certain financial thresholds and tests and the furnishing of some of our consolidated financial
statements for quarterly periods in 2024 prior to the closing of our IPO and for the year ended December 31, 2023. As of October 1, 2024,
the lender waived any existing covenant compliance matters through the date of our IPO and agreed to forbear from exercising its rights
and remedies under the loan agreement for any covenant violations, defaults or breaches through the Silverview Loan through the period
ending on the closing date of our IPO. During the first three quarters of 2024, we were out of compliance with certain debt covenants
in connection with the furnishing of monthly income statements, meeting an EBITDA test, providing a monthly cash balance report, and providing
a monthly operational performance report, of which those covenant breaches were also waived in the October 1, 2024 Silverview Loan modification.
We executed an additional agreement with our lender that contained further
57
modifications
on November 19, 2024, that went
into effect
upon the closing of our IPO. It included, among other changes favorable to us, confirming the waiver of any past defaults and covenant
breaches, and reducing and simplifying our financial tests and reporting requirements under the loan agreement, making it easier for us
to remain in compliance as of December 31, 2024 as we focus on growing our business.
We
used a portion of the net proceeds of our IPO to repay a portion of the principal amount of the Silverview Loan as part of the loan modification
agreement. Our future capital requirements and the adequacy of available funds will depend on many factors. We believe we will need to
raise additional capital in 2025 to cover our expenses and to meet our growth objectives for the remainder of the year. Subject to meeting
certain conditions set forth in the securities purchase agreement, we have the ability to draw down on the equity line of credit (ELOC)
we put in place in February 2025 if market conditions are favorable for the use of the ELOC at times we seek to use it. However, we may
need to seek such additional financing through the offering of other instruments or securities. We will continue seeking additional financing
from time to time to meet our working capital requirements, make continued investment in research and development and make capital expenditures
needed for us to maintain and expand our business and expand our marketing and sales efforts. We do not have any credit facilities as
a source of future funds other than the recently completed equity line of credit, and there can be no assurance that we will be able to
raise sufficient additional capital on acceptable terms, or at all. We may not be able to obtain additional financing on terms favorable
to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we
expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business
challenges could be significantly limited, or we may have to cease or seriously curtail our operations. These factors, among others, raise
substantial doubt about our ability to continue as a going concern. If we raise additional funds through further issuances of equity,
convertible preferred stock or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity
securities we issue could have rights, preferences and privileges superior to those of holders of our common stock.
On
February 4, 2025, we completed a registration statement for an equity line of credit (“ELOC”). Under the ELOC, we registered
the resale of up to 5,000,000 shares of our common stock to be sold under the ELOC of of the up to $15,000,000 aggregate gross purchase
price of shares of common stock (the “ELOC Shares”), that have been or may be issued by us to the Investor pursuant to the
ELOC purchase agreement. The registration statement also included the resale of up to 67,162 shares of common stock that were issued to
the Investor upon the exercise of a stock purchase warrant with an exercise price of $0.001 per share (the “Commitment Warrant”)
that was issued to the Investor pursuant to the ELOC purchase agreement. In February 2025, the Investor exercised the Commitment Warrant
for $67.
On
April 14, 2025, we received a notice from the Nasdaq that indicated that we were not in compliance with Nasdaq’s minimum bid price
requirement as the closing bid price for our common stock was below $1.00 per share for the prior 30 consecutive business days. Pursuant
to the Nasdaq listing rules, we have been granted a 180-calendar day compliance period, or until October 13, 2025, to regain compliance
with the Nasdaq’s minimum bid price requirement. During such compliance period, our shares of common stock will continue to be listed
and traded on the Nasdaq Capital Market. If at any time during such compliance period, the bid price of our common stock closes at or
above $1.00 per share for a minimum of ten consecutive business days, Nasdaq will provide us with written confirmation of compliance with
the minimum bid price requirement and the matter will be closed. At the end of such compliance period, we may be granted an additional
180-calendar day compliance period to satisfy the minimum bid price requirement.
If
we do not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, our common
stock will be subject to delisting. Delisting from Nasdaq could adversely affect our ability to consummate a strategic transaction and
raise additional financing through the public or private sale of equity securities, and would significantly affect the ability of investors
to trade our securities and negatively affect the value and liquidity of our common stock. Delisting could also have other negative results,
including the potential loss of confidence by employees and the loss of institutional investor interest.
One
way to regain compliance with the minimum listing standard is to undergo a reverse stock split. If we were to undergo a reverse stock
split it could impact investors’ value in the investment they made in the company. There is also no guarantee that after undergoing
a reverse stock split that our stock’s trading price will remain above the minimum listing requirement for the exchange, in which
case the risks mentioned in the paragraphs above could remain in place or come back into being.
Line
of Credit and Debt Agreements
In
March 2021, we entered into a secured term loan agreement (the “Silverview Loan”)with Silverview Credit Partners, L.P. (“Silverview”)
for a secured term loan of up to $15,000,000. The Silverview Loan originally matured on
58
April
15, 2025, but was extended to October 25, 2026 in the October 1, 2024 Silverview Loan modification. The Silverview Loan initially accrued
interest through the 18-month anniversary of the closing date at (i) a fixed rate of 10.0% per annum, which portion was payable in cash,
and (ii) a fixed rate of 6.5% per annum, which portion was payable in kind and added to the outstanding obligations as principal. Commencing
in October 2022, the Silverview Loan began accruing interest at a fixed rate of 15.0% per annum through maturity. We had an option to
prepay the Silverview Loan with a prepayment premium up to 30.0% of the outstanding obligations during the first 24 months of the loan,
after which time we could prepay the loan with no premium due. We are now past that initial 24-month window and can prepay all or some
of the outstanding balance without penalty. The Silverview Loan is secured by substantially all of our assets.
The
original Silverview Loan contained certain financial and other debt covenants that, among other things, imposed certain restrictions on
indebtedness, liens, investments and capital expenditures. The financial covenants required that, at the end of each applicable fiscal
period, as defined pursuant to the Silverview Loan agreement, we either had (i) an EBITDA interest coverage ratio up to 2.00 to 1.00,
or (ii) a cash interest coverage ratio of not less than 1.25 to 1.00. Commencing with the fiscal quarter ending June 30, 2021, we were
required to maintain liquidity of not less than $500,000. The Silverview Loan was used for general corporate purposes, including working
capital needs and capital expenditures. The covenants and tests have since been deleted as part of the October 1, 2024 and November 19,
2024 loan modifications.
As
discussed above, in the past, we had violated various financial and other debt covenants in the Silverview Loan agreement, including our
failure to timely furnish to Silverview our consolidated financial statements for the months of 2024 prior to the completion of our IPO
and for the year ended December 31, 2023. Because we had reached an agreement in principal with Silverview in June 2024 on the treatment
of such waivers and the elimination of certain reporting requirements and covenants leading up to the IPO and we were working to paper
those modifications while working on the IPO, we determined that the Silverview Loan should be classified as a current liability as of
the date of our IPO. As of the date of our IPO (November 25, 2024) the outstanding principal balance on the Silverview Loan was $12,250,000,
with approximately $1,568,0000 having been paid towards principal subsequent to the closing of the IPO through December 31, 2024 leaving
an outstanding balance of the Silverview Loan of approximately $10,682,000 at December 31, 2024 In the three months ended March 31,
2025, approximately $300,000 was paid towards principal, leaving an outstanding balance on the Silverview Loan of approximately $10,382,438.
The
modification, first executed by the parties on October 1, 2024 and further modified on November 19, 2024, became effective upon the closing
of our initial public offering in November 2024, contained the following provisions:
1)extend
the maturity date by 18 months to October 25, 2026;
2)recast
the amortization schedule to reduce the amount paid each quarter to allow us to preserve cash, as follows: $300,000 due December 31, 2024,
$700,000 due June 30, 2025 and then $500,000 due every six months thereafter;
3)increase
the per annum interest rate from 15% to 16.5% commencing in December 2024, with monthly interest payments remaining in effect but allowing
us at our election to pay 100% of each interest payment in cash or to pay approximately 73.7% of such interest payment in cash and to
add the balance of such interest payment to the principal amount of the loan through the end of December 2025;
4)waive
any past missed amortization payments;
5)waive
any past covenant faults;
6)add
a 1% additional exit fee due at loan payoff;
7)add
an additional 1% exit fee due at payoff if we do not refinance or repay the entire loan by the original July 30, 2025 maturity date;
8)eliminate
the EBITDA coverage and interest coverage ratio tests; and
9)reduce
and simplify the reporting requirements to match the reporting we must make to the SEC as a public company.
With
these changes and the net proceeds we receive from our initial public offering, we expect to remain in compliance with all financial covenants
in the Silverview Loan agreement. We used approximately $2,375,000 of the net proceeds of our initial public offering to repay a portion
of the principal and accrued interest of the Silverview Loan.
59
In
April 2020, we were granted a loan under the Paycheck Protection Program (“PPP”) offered by the Small Business Administration
(the “SBA”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), section 7(a)(36) of
the Small Business Act for $3,776,100. The proceeds from the PPP loan could only be used to retain workers and maintain payroll or make
mortgage interest, lease and utility payments and all or a portion of the loan could be forgiven if the proceeds are used in accordance
with the terms of the program within the eight or 24-week measurement period. The loan terms required the principal balance and 1% interest
to be paid back within two years of the date of the note. In June 2021, our bank approved forgiveness of the loan of $3,776,100. During
the year ended of December 31, 2021, the forgiveness was partially rescinded by the SBA and we recognized $1,506,644 as other income in
the consolidated statements of operations, resulting in $2,269,456 in PPP debt. Under the terms of the PPP loan, we have also recorded
interest on the PPP loan at the rate of 1%, for a total of $107,255 as of December 31, 2024. We are currently in the process of disputing
a portion if not all of the difference. The terms of the agreement state that we have 18-24 months to repay the PPP loan. Following the
date of the forgiveness, the remaining principal balance of the PPP loan of $2,269,456 is expected to be repaid in the next 12 months
with our general assets.
Cash
Flows
The
following table sets forth a summary of cash flows for the periods presented:
| Summary of Cash Flows |
Three
Months Ended
March
31,
(rounded
to $000’s) | |||||||||||||
| 2025 | 2024 | |||||||||||||
| Net Cash Used in Operating Activities | $ | (2,031,000) | $ | (2,660,000) | ||||||||||
| Net Cash Provided by Investing Activities | 65,000 | 5,000 | ||||||||||||
| Net Cash Provided by Financing Activities | 1,612,000 | 3,032,000 | ||||||||||||
|
Net increase
/ (decrease) in cash |
$ | (354,000) | $ | 377,000 | ||||||||||
Net
Cash Used in Operating Activities
During
the three months ended March 31, 2025 and 2024, net cash used in operating activities was approximately $(2,031,000) and $(2,660,000),
respectively, resulting primarily from net income / (loss) of approximately $(3,033,000) and $453,000, respectively. During the three
months ended March 31, 2025 and 2024, approximately $554,000 and $(400,000), respectively, of cash was (used) / generated by changes
in operating account balances of operating assets and liabilities. Non-cash adjustments to reconcile net income / (loss) to net cash used
in operating activities were approximately $447,000 and $(2,713,000) in the respective periods.
The
approximately $447,000 of non-cash adjustments for the three months ended March 31, 2025 consisted primarily of approximately: $297,000
of depreciation expense; $96,000 of non-cash amortization of operating lease right-of-use assets; $6,000 of loss on disposal of property
and equipment; and, $50,000 of non-cash interest expense primarily associated with our notes payable.
The
approximately $(2,713,000) of non-cash adjustments in the three months ended March 31, 2024 included approximately: $320,000 of depreciation
expense; $144,000 of non-cash amortization of operating lease right-of-use assets; $571,000 of loss on change in fair value of convertible
notes; and $84,000 of non-cash interest expense primarily associated with our notes payable, offset by: $3,421,000 of gain on change in
fair value of investment; and $430,000 of gain on change in fair value of warrant liabilities.
Net
Cash Provided by Investing Activities
During
the three months ended March 31, 2025 and 2024, net cash provided by investing activities was approximately $65,000 and $5,000, respectively,
related primarily to the purchase of property and equipment, net of amounts related to proceeds from sale of assets.
Net
Cash Provided By Financing Activities
During
the three months ended March 31, 2025 and 2024, net cash provided by financing activities was approximately $1,612,000 and $3,032,000,
respectively. The cash proceeds received in the three months ended March 31, 2025 were primarily comprised of approximately: $232,000
from the sale of common stock under the ELOC; $1,680,000
60
from
the sale of Series B Preferred Stock (and warrants for the first two non-ELOC Investor subscriptions); offset by repayment of notes payable
of $300,000. The cash proceeds received in the three months ended March 31, 2024 of approximately $3,032,000 were related to approximately:
proceeds from convertible notes of $3,116,000 (of which approximately $1,100,000 was from a related party); $39,000 proceeds from notes
payable; offset by deferred transaction costs associated with our IPO of $(82,000); and repayment of notes payable of $(41,000).
Supplemental
Cash Flow Information
During
the three months ended March 31, 2025, supplemental cash flow activity included approximately: $474,000 of cash paid for interest
expense; $182,000 of right-of-use assets obtained in exchange for new operating lease liabilities; and $8,000 of unpaid property and equipment
additions. For the three months ended March 31, 2024, supplemental cash flow activity included approximately: $517,000 of cash paid
for interest expense; and $77,000 of unpaid deferred transaction costs that were recorded as a deferred expense on the balance sheet and
recorded in accounts payable and other current liabilities.
Off-Balance
Sheet Arrangements
We
had no obligations, assets or liabilities that would be considered off-balance sheet arrangements as of March 31, 2025 or for the
periods presented. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships,
often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments
of other entities, or purchased any non-financial assets.
Recent
Accounting Pronouncements
A
discussion of recent accounting pronouncements is included in Note 2 to our condensed consolidated financial statements for the three
months ended March 31, 2025 and 2024 included elsewhere in this filing.
Critical
Accounting Estimates
Our
condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S. The preparation
of our condensed consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed
consolidated financial statements. We base our estimates on historical experience, known trends and events and various other factors that
we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis.
Our actual results may differ from these estimates under different assumptions or conditions.
While
our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements, we believe
that the following estimates are those most critical to the judgments and estimates used in the preparation of our condensed consolidated
financial statements.
Impairment
of Long-Lived Assets
All
long-lived assets used are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amounts may
not be recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of
the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes
in the use of the assets. When such an event occurs, future cash flows expected to result from the use of the asset and its eventual disposition
are estimated. If the undiscounted expected future cash flows are less than the carrying amount of the asset, an impairment loss is recognized
for the difference between the asset’s fair value and its carrying value. We did not record any impairment losses on long-lived
assets for the three months ended March 31, 2025 or 2024.
Emerging
Growth Company Status
The
JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with
new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We
have elected to use this extended transition period for complying with new or revised accounting standards that have different effective
dates for public and private companies until the earlier of the date we (i)
61
are
no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS
Act. As a result, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging
growth companies, and our condensed consolidated financial statements may not be comparable to other public companies that comply with
new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accounting
standards whenever such early adoption is permitted for private companies.
We
will cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in which we have total
annual gross revenues of $1.235 billion or more, (ii) the last day of our fiscal year following the fifth anniversary of the date of the
closing of our initial public offering (November 25, 2029), (iii) the date on which we have issued more than $1.0 billion in nonconvertible
debt during the previous three years or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Further,
even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which
would allow us to take advantage of many of the same exemptions from disclosure requirements, including reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock
less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may
be a less active trading market for our common stock and our share price may be more volatile.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We
are exposed to market risks from fluctuations in interest rates, which may adversely affect the results of operations and our financial
condition. We seek to minimize these risks through regular operating and financing activities.
Item 4.
Controls and Procedures
Evaluation
of disclosure controls and procedures.
Our
management, with the participation of our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 under the Exchange Act. 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.
Based
on management’s evaluation, our Chief Executive Officer concluded that, as a result of the material weaknesses described below,
as of March 31, 2025, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective
to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding
required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:
a)
due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where
we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable
invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements
of the condensed consolidated financial statements will not be prevented or detected on a timely basis; and
b)
the lack of the quantity of resources to implement an appropriate level of review controls to properly evaluate the completeness and accuracy
of transactions entered into by our company.
We
are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting
expertise within the accounting function to resolve non-routine or complex accounting matters.
62
Changes
in internal control over financial reporting.
There
were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2025 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
63
Part
II - Other Information
Item 1.
Legal Proceedings
We
may be subject to legal disputes and subject to claims that arise in the ordinary course of business. Although the results of such litigation
and claims in the ordinary course of business cannot be predicted with certainty, we believe that the final outcome of such matters will
not have a material adverse effect on our business, results of operations, cash flows or financial condition. Regardless of outcome, litigation
can have an adverse impact on us because of defense costs, diversion of management resources and other factors. Currently, there is no
litigation pending against our company that could materially affect our company, except as follows:
On
January 31, 2025, CFGI, LLC (“CFGI”) commenced a litigation against us in the Superior Court, Suffolk County, Massachusetts
asserting claims arising under a November 1, 2022 written engagement letter agreement whereby CFGI agreed to provide financial, accounting
and tax consulting services to us. CFGI contends that it fully performed its obligations under such agreement, but that the parties amended
the agreement on or about May 22, 2023 when we fell behind in our payments. CFGI alleges further that, while we made some payments under
the amended agreement, CFGI is currently owed approximately $730,000, plus interest.
Our
response to the complaint was due on or before April 21, 2025, but we have received a two week extension from CFGI. At December 31, 2024
we had accrued the entire amount payable to CFGI and the Company is in negotiations with CFGI on alternate payment terms that will allow
us to pay the amounts due to CFGI over time.
On
April 16, 2025, Kaylon McAlister, a former co-founder of Thinking Tree Spirits, filed suit in the Circuit Court of Oregon against Thinking
Tree Spirits and our company seeking $470,000
under the Oregon dissenter rights statute, plus interest. While we are reviewing the matter, we believe the amount being sought is without
merit and grossly overinflates the value of the enterprise, and we intend to vigorously defend this matter. Further, we believe we have
counterclaims against the plaintiff for actions taken by him before, during and after the closing of the acquisition transaction that
adversely effected the valuation of the acquisition and our investment in Thinking Tree Spirits.
Item
1A. Risk Factors
As
a “smaller reporting company,” we are not required to provide the information required by this Item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent
Sales of Unregistered Securities
We
did not issue any unregistered equity securities during the the period covered by this report.
Item
3. Defaults upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not
applicable.
Item
5. Other Information
None.
Item
6. Exhibits.
The
Exhibits listed in the Exhibit Index are filed as part of this quarterly report on Form 10-Q. Each management contract or compensatory
plan or agreement listed on the Exhibit Index is identified by a hashtag.
64
EXHIBIT
INDEX
| Exhibit | Incorporated by Reference | |||||||||||||||||||||||||||||||
| Number | Description of Exhibits | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 3.1 | 8-K | 001-42411 | 3.1 | November 26, 2024 | ||||||||||||||||||||||||||||
| 3.2 | 8-K | 001-42411 | 3.2 | November 26, 2024 | ||||||||||||||||||||||||||||
| 3.3 |
S-1/A |
333-279382 | 3.8 | October 3, 2024 | ||||||||||||||||||||||||||||
| 3.4 | 8-K | 001-42411 | 3.1 | January 24, 2025 | ||||||||||||||||||||||||||||
| 4.1 |
S-1/A |
333-279382 | 4.1 | August 28, 2024 | ||||||||||||||||||||||||||||
| 4.2 | 8-K | 001-42411 | 4.1 | November 26, 2024 | ||||||||||||||||||||||||||||
| 4.3 |
S-1/A |
333-279382 | 4.3 | July 5, 2024 | ||||||||||||||||||||||||||||
| 4.4 |
S-1/A |
333-279382 | 4.4 | August 28, 2024 | ||||||||||||||||||||||||||||
| 4.5 | S-1 | 333-279382 | 4.5 | May 13, 2024 | ||||||||||||||||||||||||||||
| 4.6 | S-1 | 333-279382 | 4.6 | May 13, 2024 | ||||||||||||||||||||||||||||
| 4.7 |
S-1/A |
333-279382 | 4.7 | July 5, 2024 | ||||||||||||||||||||||||||||
| 4.8 |
S-1/A |
333-279382 | 4.8 | October 25, 2024 | ||||||||||||||||||||||||||||
| 4.9 | 8-K | 001-42411 | 4.2 | November 26, 2024 | ||||||||||||||||||||||||||||
| 4.10 | 10-K | 001-42411 | 4.10 | April 28, 2025 | ||||||||||||||||||||||||||||
|
4.11 |
POS-AM |
333-284509 |
4.11 |
May 7, 2025 | ||||||||||||||||||||||||||||
| 10.1 | S-1 | 333-279382 | 10.1 | May 13, 2024 | ||||||||||||||||||||||||||||
| 10.2 | S-1 | 333-279382 | 10.2 | May 13, 2024 | ||||||||||||||||||||||||||||
65
| Exhibit | Incorporated by Reference | |||||||||||||||||||||||||||||||
| Number | Description of Exhibits | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 10.3 |
S-1/A |
333-279382 | 10.9 | October 3, 2024 | ||||||||||||||||||||||||||||
| 10.4 | S-1 | 333-284509 | 10.4 | January 27, 2025 | ||||||||||||||||||||||||||||
| 10.5 | S-1 | 333-2793852 | 10.4 | May 13, 2024 | ||||||||||||||||||||||||||||
| 10.6 |
S-1/A |
333-279382 | 10.5 | August 28, 2024 | ||||||||||||||||||||||||||||
| 10.7 |
S-1/A |
333-279382 | 10.6 | October 3, 2024 | ||||||||||||||||||||||||||||
| 10.8 |
S-1/A |
333-279382 | 10.7 | October 25, 2024 | ||||||||||||||||||||||||||||
| 10.9 |
S-1/A |
333-279382 | 10.11 | October 25, 2024 | ||||||||||||||||||||||||||||
| 10.10 |
S-1/A |
333-279382 | 10.8 | October 3, 2024 | ||||||||||||||||||||||||||||
| 10.11 | 8-K | 001-42411 | 10.1 | January 24, 2025 | ||||||||||||||||||||||||||||
| 10.12 | 8-K | 001-42411 | 10.2 | January 24, 2025 | ||||||||||||||||||||||||||||
| 31.1 | ||||||||||||||||||||||||||||||||
| 31.2 | ||||||||||||||||||||||||||||||||
| 32 | ||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document.† | |||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document.† | |||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.† | |||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.† | |||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.† | |||||||||||||||||||||||||||||||
66
| Exhibit | Incorporated by Reference | |||||||||||||||||||||||||||||||
| Number | Description of Exhibits | Form | File No. | Exhibit | Filing Date | |||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.† | |||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||||||||||||||||||||
#Indicates
a management contract or compensatory plan.
†Filed
herewith
67
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| HERITAGE DISTILLING HOLDING COMPANY, INC. | |||||||||||
|
Date: May 20,
2025 |
By: | /s/ Justin Stiefel | |||||||||
| Justin
Stiefel Chief Executive Officer | |||||||||||
|
Date: May 20,
2025 |
By: | /s/ Michael Carrosino | |||||||||
| Michael
Carrosino Chief Executive Officer Principal Financial Officer and Principal Accounting Officer | |||||||||||
68
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
PURSUANT
TO RULE 13A-14(A)
I,
Justin Stiefel, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Heritage Distilling Holding Company, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 20,
2025
| By: | /s/ Justin Stiefel | ||||||||||
| Name: | Justin Stiefel | ||||||||||
| Title: | Chief Executive Officer | ||||||||||
CERTIFICATION
OF PRINCIPAL FINANCIAL OFFICER
PURSUANT
TO RULE 13A-14(A)
I,
Michael Carrosino, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of Heritage Distilling Holding Company, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 20,
2025
| By: | /s/ Michael Carrosino | ||||||||||
| Name: | Michael Carrosino | ||||||||||
| Title: | Chief Financial Officer | ||||||||||
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Heritage
Distilling Holding Company, Inc., a Delaware corporation (the “Company”), hereby certifies that, to his knowledge:
(1)
The Quarterly Report on Form 10-Q of the Company for the first quarter ended March 31, 2025 (the “Report”),
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date:
May 20, 2025
| By: | /s/ Justin Stiefel | |||||||
| Name: | Justin Stiefel | |||||||
| Title: | Chief Executive Officer | |||||||
| By: | /s/ Michael Carrosino | |||||||
| Name: | Michael Carrosino | |||||||
| Title: | Chief Financial Officer | |||||||