Heritage Distilling Holding Co Inc(CASK) - 2025 Q2 - Quarterly Report

Part I - Financial Information This section provides the company's unaudited interim condensed consolidated financial statements and management's analysis of financial performance Item 1. Financial Statements This section presents the unaudited interim condensed consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, with detailed accounting notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates | Metric | June 30, 2025 ($) | December 31, 2024 ($) | | :----------------------------------- | :------------ | :---------------- | | Assets | | | | Cash | $185,953 | $453,162 | | Total Current Assets | $3,104,012 | $3,919,547 | | Total Long Term Assets | $23,434,089 | $24,080,479 | | Total Assets | $26,538,101 | $28,000,026 | | Liabilities & Stockholders' Equity / (Deficit) | | | | Total Current Liabilities | $16,442,727 | $13,811,514 | | Total Long-Term Liabilities | $12,981,973 | $13,396,745 | | Total Liabilities | $29,424,700 | $27,208,259 | | Total Stockholders' Equity / (Deficit) | $(2,886,599) | $791,767 | - The company's cash balance decreased by approximately 59% from $453,162 at December 31, 2024, to $185,953 at June 30, 2025. Total assets decreased by 5.2% from $28,000,026 to $26,538,101 during the same period[14] - Total liabilities increased by 8.1% from $27,208,259 at December 31, 2024, to $29,424,700 at June 30, 2025. Stockholders' equity shifted from a positive $791,767 to a deficit of $(2,886,599), indicating a significant deterioration in equity position[14] Condensed Consolidated Statements of Operations This section details the company's revenues, costs, and expenses, culminating in net income or loss for the specified periods | Metric | Three Months Ended June 30, 2025 ($) | Three Months Ended June 30, 2024 ($) | Six Months Ended June 30, 2025 ($) | Six Months Ended June 30, 2024 ($) | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Net Sales | $1,321,822 | $1,842,315 | $2,413,805 | $3,548,474 | | Total Cost of Sales | $1,094,734 | $1,094,518 | $1,914,832 | $2,392,140 | | Gross Profit | $227,088 | $747,797 | $498,973 | $1,156,334 | | Total Operating Expenses | $6,876,049 | $3,045,490 | $9,599,112 | $5,680,896 | | Operating Loss | $(6,648,961) | $(2,297,693) | $(9,100,139) | $(4,524,562) | | Total Other Income / (Expense) | $(642,995) | $10,713,344 | $(1,224,864) | $13,393,053 | | Net Income / (Loss) | $(7,295,078) | $8,406,501 | $(10,328,125) | $8,859,341 | | Net Income / (Loss) Per Share, Basic | $(0.77) | $19.90 | $(1.16) | $20.97 | | Net Income / (Loss) Per Share, Diluted | $(0.77) | $1.29 | $(1.16) | $(2.44) | - Net sales decreased significantly, by 28.37% for the three months ended June 30, 2025, and by 31.97% for the six months ended June 30, 2025, compared to the same periods in 2024[17] - The company reported a substantial net loss of $(7,295,078) for the three months and $(10,328,125) for the six months ended June 30, 2025, a sharp decline from net income in the prior year, primarily due to increased operating expenses and a lack of significant 'Change in Fair Value' gains seen in 2024[17] Condensed Consolidated Statements of Stockholders' Equity / (Deficit) This section outlines changes in the company's equity, including common stock, preferred stock, additional paid-in capital, and accumulated deficit | Metric | June 30, 2025 ($) | December 31, 2024 ($) | | :----------------------------------- | :------------ | :---------------- | | Common Stock Par Value | $1,299 | $556 | | Preferred Stock - Series A Par Value | $21 | $49 | | Preferred Stock - Series B Par Value | $74 | $0 | | Additional Paid-in Capital | $81,574,150 | $74,925,180 | | Accumulated Deficit | $(84,462,143) | $(74,134,018) | | Total Stockholders' Equity / (Deficit) | $(2,886,599) | $791,767 | - Total Stockholders' Equity shifted from a positive balance of $791,767 at December 31, 2024, to a deficit of $(2,886,599) at June 30, 2025, driven by an increase in accumulated deficit[14][20][21] - The accumulated deficit increased significantly from $(74,134,018) at December 31, 2024, to $(84,462,143) at June 30, 2025, reflecting the net losses incurred during the period[14][20][21] Condensed Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the reported periods | Metric | Six Months Ended June 30, 2025 ($) | Six Months Ended June 30, 2024 ($) | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net Income / (Loss) | $(10,328,125) | $8,859,341 | | Net Cash Used in Operating Activities | $(3,544,467) | $(5,382,609) | | Net Cash Provided by / (Used in) Investing Activities | $55,306 | $(286,910) | | Net Cash Provided by / (Used in) Financing Activities | $3,221,951 | $5,744,254 | | Net Increase / (Decrease) in Cash | $(267,209) | $74,735 | | Cash – End of Period | $185,953 | $151,613 | - Net cash used in operating activities decreased from $(5,382,609) in H1 2024 to $(3,544,467) in H1 2025, indicating a reduction in cash burn from operations despite increased net losses[24] - Net cash provided by financing activities decreased from $5,744,254 in H1 2024 to $3,221,951 in H1 2025, primarily due to lower proceeds from notes payable and preferred stock sales compared to the prior year[24] Notes to Unaudited Condensed Consolidated Financial Statements This section provides comprehensive details and explanations for the figures presented in the condensed consolidated financial statements NOTE 1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION This note describes the company's business, its recent IPO, and addresses the going concern uncertainty and subsequent financing activities - Heritage Distilling Holding Company, Inc. (HDHC) is a Delaware corporation focused on the production, sale, or distribution of alcoholic beverages, operating through its wholly-owned subsidiary, Heritage Distilling Company, Inc. (HDC), which has been a craft distillery since 2011[27] - The company completed an Initial Public Offering (IPO) on November 25, 2024, selling 1,687,500 shares of common stock at $4.00 per share, and concurrently a private offering of 382,205 common warrants[29] - The company faces substantial doubt about its ability to continue as a going concern due to recurring net losses, negative working capital, and increased accumulated deficit and stockholders' deficit. Management is exploring additional financing options, including an equity line of credit (ELOC) and private placements[38][39] - Subsequent to June 30, 2025, on August 11, 2025, the Company entered into subscription agreements for a private placement of common stock and pre-funded warrants, with a significant portion of the purchase price expected to be paid in cryptocurrency (USDC and $IP Tokens). The company plans to use $IP Tokens as its primary treasury reserve asset[40] - The company monitors global conflicts, international relations, and market reactions, including tariffs, inflation, and legislative changes, which could impact supply costs, consumer spending, and labor costs. Efforts are underway to diversify glass bottle suppliers away from high-tariff zones[43][44][45][46][47][50] NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details the key accounting principles, estimates, and policies used in preparing the financial statements, including fair value measurements and revenue recognition - The company uses U.S. GAAP and makes estimates for financial statements, with significant assumptions in valuing common stock, warrants, convertible notes, and stock options. Fair value measurements are categorized into Level 1, 2, or 3 based on input transparency, with convertible notes and warrant liabilities using Level 3 inputs[52][53][54][55][57] - Credit risk concentration exists with a few customers representing a large portion of accounts receivable and revenue (e.g., three customers for 93% of accounts receivable as of June 30, 2025, and five customers for 89% of total revenue for the six months ended June 30, 2025)[60][61] - Inventories are valued at the lower of cost or net realizable value using the weighted average method, with barreled whiskey classified as current assets despite long aging periods, consistent with industry practice[62][63] - Revenue is primarily from domestic spirit sales (Direct to Consumer, Wholesale, Third Party) and services, recognized when control transfers or services are completed. Excise taxes and shipping/handling costs are included in Cost of Sales[84][85][86][87][88][89][90][91][94][95] - Stock-based compensation is measured at fair value on the grant date and expensed over the service period. The 2024 Equity Incentive Plan authorized up to 5,000,000 shares, with 2,527,500 shares granted as of June 30, 2025[96][97] - The company operates as a single segment, with the CEO as the chief operating decision maker, evaluating performance based on consolidated net income/(loss) and expenses[105] NOTE 3 — INVENTORIES This note provides a breakdown of the company's inventory categories and their respective values at the end of the reporting periods | Inventory Category | June 30, 2025 ($) | December 31, 2024 ($) | | :----------------- | :------------ | :---------------- | | Finished Goods | $515,422 | $461,254 | | Work-in-Process | $815,031 | $936,181 | | Raw Materials | $984,999 | $1,074,132 | | Total Inventory | $2,315,452 | $2,471,567 | - Total inventory decreased by 6.3% from $2,471,567 at December 31, 2024, to $2,315,452 at June 30, 2025, primarily driven by reductions in work-in-process and raw materials[109] NOTE 4 — PROPERTY AND EQUIPMENT, NET This note details the company's property and equipment, including gross values, accumulated depreciation, and depreciation expense for the periods | Asset Category | June 30, 2025 ($) | December 31, 2024 ($) | | :----------------------------------- | :------------ | :---------------- | | Total Property and Equipment (Gross) | $13,148,814 | $13,228,795 | | Less: Accumulated Depreciation | $(8,315,839) | $(7,779,383) | | Property and Equipment, net | $4,832,975 | $5,449,412 | | Depreciation Expense (3 months) | $273,928 | $334,797 | | Depreciation Expense (6 months) | $570,456 | $655,262 | - Net property and equipment decreased by 11.3% from $5,449,412 at December 31, 2024, to $4,832,975 at June 30, 2025, mainly due to accumulated depreciation[110] - Depreciation expense for the three and six months ended June 30, 2025, decreased compared to the same periods in 2024[110] NOTE 5 — BORROWINGS This note provides details on the company's various loan agreements, including balances, interest rates, maturity dates, and repayment schedules | Loan Type | June 30, 2025 ($) | 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 | $(101,587) | $(140,082) | | Net Borrowings | $12,979,429 | $13,240,934 | - Total notes payable decreased slightly from $13,381,016 at December 31, 2024, to $13,081,016 at June 30, 2025, primarily due to repayments on the Silverview Loan[111][115] - The Silverview Loan maturity was extended to October 25, 2026, with an increased interest rate of 16.5% and a revised amortization schedule to preserve cash. The company was previously in violation of covenants, which were waived[111][113][114][116] - The PPP Loan balance remains at $2,269,456, with the company disputing a portion of the rescinded forgiveness. The City of Eugene loan, acquired in February 2024, has a 0% interest rate until August 1, 2025, then 5%[117][121] | Years Ending | Amount ($) | | :----------- | :------- | | 2025 | $3,544,917 | | 2026 | $9,230,229 | | 2027 | $66,789 | | 2028 | $239,081 | | 2029 | $0 | | thereafter | $0 | | Total | $13,081,016 | NOTE 6 — FAIR VALUE MEASUREMENT This note explains the fair value measurements of financial instruments, particularly the reclassification of convertible notes and warrant liabilities to equity post-IPO - Upon the IPO on November 25, 2024, convertible notes, warrant liabilities, and Whiskey Special Ops notes were exchanged and reclassified from liabilities to equity, resulting in a fair value of $0 for these instruments as of June 30, 2025, and December 31, 2024[127] | Financial Instrument | Balance as of January 1, 2024 ($) | Issuances ($) | Change in Fair Value ($) | Balance as of June 30, 2024 ($) | | :----------------------------------- | :---------------------------- | :-------- | :------------------- | :-------------------------- | | 2022 and 2023 Convertible Notes | $36,283,890 | $0 | $(18,216,803) | $18,067,087 | | Whiskey Special Ops Notes | $1,452,562 | $3,353,850 | $9,172,055 | $13,978,467 | | 2022 Notes Warrant Liabilities | $794,868 | $0 | $89,314 | $884,182 | | Whiskey Special Ops Notes Warrant Liabilities | $1,512,692 | $302,020 | $(1,794,334) | $20,378 | | Acquisition Contingency Liabilities | $0 | $584,203 | $(457,127) | $127,076 | NOTE 7 — STOCKHOLDERS' EQUITY / (DEFICIT) This note details changes in stockholders' equity, including stock splits, IPO details, authorized capital, ELOC, preferred stock, and stock-based compensation - A 0.57-for-1 reverse stock split was effected on May 14, 2024. The company completed its IPO on November 25, 2024, selling 1,687,500 common shares at $4.00/share and 382,205 common warrants at $3.99/warrant[128][129][130] - Authorized capital stock was significantly increased in 2024 and 2025, reaching 495,000,000 shares (490,000,000 common, 5,000,000 preferred) by June 24, 2025[143] - An Equity Line of Credit (ELOC) agreement was established on January 23, 2025, allowing the company to sell up to $15,000,000 of common stock to an investor. As of June 30, 2025, $730,074 gross proceeds were received from ELOC sales[142][146][147][152] - Series A Preferred Stock, with a subscription price of $10/share and stated value of $12/share, pays 15% cumulative dividends. Series B Preferred Stock, also with a $10/share subscription price and $12/share stated value, pays 15% cumulative dividends and is convertible into common stock[157][159][161][168][170] - Stock-based compensation expense for RSUs was $3,127,807 for the six months ended June 30, 2025, with 2,527,500 shares granted under the 2024 Plan. Contingent Legacy Shareholder Warrants and Whiskey Note Shareholder Warrants were issued, exercisable upon specific stock price thresholds[185][186][187][190][192] - Deferred compensation for senior employees, totaling $470,454 as of June 30, 2025, was partially settled with equity compensation (RSUs) after the IPO lockup period[196] NOTE 8 — ACQUISITION OF THINKING TREE SPIRITS This note details the acquisition of Thinking Tree Spirits, including the purchase price, payment in common stock, and ongoing dissenters' rights litigation - On February 21, 2024, the company acquired Thinking Tree Spirits, Inc. (TTS) for $670,686, paid in common stock at a negotiated price of $13.16 per share, subject to a true-up provision to the IPO price ($4.00 per share)[197][198][201] - The acquisition involved a dissenters' rights process under Oregon law, with one remaining dissenter filing a lawsuit seeking $470,000. A settlement in principle for $140,000 was reached, with the company planning to issue additional unregistered common stock to remaining TTS shareholders after the matter is concluded[203][206][208] NOTE 9 — LEASES This note outlines the company's operating lease arrangements for various facilities, including lease terms, ROU assets, and liabilities - The company holds operating leases for corporate offices, warehouses, distilleries, and tasting rooms, accounted for under ASC Topic 842. Lease terms include extension/termination options when reasonably certain[72][75][209] - In January 2025, the company terminated a warehouse lease in Eugene, Oregon, reducing monthly expenses from $18,000 to $7,700, and also negotiated a reduction in space for its largest warehouse effective September 15, 2025[210] | Lease Metric | June 30, 2025 ($) | December 31, 2024 ($) | | :----------------------------------- | :------------ | :---------------- | | ROU Assets for Operating Leases | $3,284,292 | $3,303,158 | | Liabilities for Operating Leases | $3,906,963 | $3,941,560 | | Weighted-average remaining lease term | 4.8 years | 5.8 years | | Weighted-average discount rate | 22% | 22% | | Years Ending | Amounts ($) | | :----------- | :------- | | 2025 | $682,685 | | 2026 | $1,345,203 | | 2027 | $1,329,535 | | 2028 | $1,225,326 | | 2029 | $1,203,001 | | thereafter | $684,779 | | Total Lease Payments | $6,470,529 | | Less: Interest | $(2,563,566) | | Total Lease Liabilities | $3,906,963 | NOTE 10 — COMMITMENTS AND CONTINGENCIES This note details the company's financial commitments, recent litigation settlements, and the Nasdaq minimum bid price non-compliance notice - The company is committed to pay 150% of subscription amounts (approximately $24,495,000) to investors in 2022 and 2023 financings from future revenues from the sale of FBLLC or the Flavored Bourbon brand[217] - A litigation with CFGI, LLC for $730,000 was settled on July 30, 2025, with the company paying $500,000[220][221][223] - A lawsuit from a former co-founder of Thinking Tree Spirits seeking $470,000 was settled on August 8, 2025, for $140,000[223] - The company received a Nasdaq notice on April 14, 2025, for non-compliance with the minimum bid price requirement ($1.00 per share) and has until October 13, 2025, to regain compliance[224][225] NOTE 11 — RETIREMENT PLANS This note describes the company's sponsored 401(k) and profit-sharing plans, noting no company contributions during the reported periods - The company sponsors a traditional 401(k), Roth 401(k), and profit-sharing plan for eligible employees, but no contributions were made by the company during the six months ended June 30, 2025, and 2024[229] NOTE 12 — RELATED-PARTY TRANSACTIONS This note details various transactions with related parties, including management fees, barrel production agreements, factoring, and warrant exercises - The company pays Summit Distillery, Inc., a related party, an annual management fee of $90,000 for managing its Eugene, Oregon location[231] - A 2023 barrel production agreement with a related party was amended in March 2024, with a $500,000 excess prepayment used to purchase a Whiskey Note, later exchanged for common stock[232] - Factoring agreements with related parties in May and July 2024, totaling $266,667, were exchanged for Series A Preferred Stock and warrants[233][234][236] - In September 2024, the company purchased 50 barrels of aged whiskey from a related party for $110,600, paid in Series A Preferred Stock and warrants[238] - Related parties exercised 2,317,452 prepaid warrants for common stock in the six months ended June 30, 2025. Related Party Contingent Legacy Shareholder Warrants were issued in October 2024, exercisable upon specific stock price thresholds[240][241][243] NOTE 13 — BASIC AND DILUTED NET INCOME / (LOSS) PER SHARE This note presents the calculation of basic and diluted net income or loss per share, including the impact of potentially dilutive securities | Metric | Three Months Ended June 30, 2025 ($) | Three Months Ended June 30, 2024 ($) | Six Months Ended June 30, 2025 ($) | Six Months Ended June 30, 2024 ($) | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income / (Loss) for the period – basic | $(8,473,622) | $8,392,964 | $(11,978,698) | $8,845,804 | | Weighted average common shares outstanding - basic | 11,000,519 | 421,799 | 10,335,057 | 421,799 | | Net Income / (Loss) per share - basic | $(0.77) | $19.90 | $(1.16) | $20.97 | | Net Income / (Loss) for the period - diluted | $(8,473,622) | $5,904,922 | $(11,978,698) | $(11,165,333) | | Weighted average common shares outstanding - diluted | 11,000,519 | 4,573,063 | 10,335,057 | 4,573,063 | | Net Income / (Loss) per share - diluted | $(0.77) | $1.29 | $(1.16) | $(2.44) | - Basic and diluted EPS for the three and six months ended June 30, 2025, were negative, reflecting the net losses incurred. This is a significant change from positive basic EPS in the prior year, though diluted EPS was negative in H1 2024 due to fair value changes[244] | Potentially Dilutive Securities Excluded | Three and Six Months Ended June 30, 2024 (Shares) | | :--------------------------------------- | :--------------------------------------- | | ISOs | 2,413 / 6,164 | | RSU Awards | 0 / 243,089 | | Equity-classified Warrants | 2,942,600 / 148,649 | | Liability-classified Warrants | 0 / 908,334 | | Legacy Warrants | 3,439,953 / 0 | | Warrants issued with Preferred Stock (Series B) | 852,399 / 0 | | Convertible Notes | 0 / 3,072,906 | | Preferred Stock (Series A) | 805,288 / 486,097 | | Preferred Stock (Series B) | 20,737,012 / 0 | | Total | 28,779,665 / 4,865,239 | NOTE 14 — SUBSEQUENT EVENTS This note discloses significant events occurring after the reporting period, including a major private placement, debt settlements, and further equity sales - On August 11, 2025, the company entered into subscription agreements for a private placement (PIPE) of 183,478,891 common shares and pre-funded warrants for up to 186,900,000 shares. The total purchase price of $223,819,964 is expected to be paid in cash, USDC, and $IP Tokens[248][251] - Net proceeds from the PIPE will be used for general corporate purposes ($4.0M), working capital ($0.6M), and at least $80.0M to purchase $IP Tokens from Story Foundation, establishing a digital asset treasury reserve strategy[252] - 629,873 shares of Series B Preferred Stock will be exchanged for common stock and prepaid warrants, contingent on the August 11, 2025, Subscription Agreement[254] - Negotiated settlements with secured and unsecured creditors, contingent on the PIPE closing, will result in $8,989,438 of secured notes payable being settled for $7,000,000 cash and $2,848,000 in Settlement Equity (warrants), recognizing a gain of $2,635,507. Unsecured payables of $3,792,767 will be settled for $1,816,250 cash and $605,795 in Settlement Equity[255][257] - Subsequent to June 30, 2025, an additional 10,525,357 common shares were sold under the ELOC for $4,087,161, and 100,000 prepaid warrants and 18,796 common warrants were exercised[258][259] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results, covering business overview, key factors, detailed analysis, liquidity, and critical accounting estimates Business Overview This section introduces Heritage Distilling as a craft spirits producer, highlighting its market position, growth strategy, and product offerings - Heritage Distilling is a craft distiller producing whiskeys, vodkas, gins, rums, and ready-to-drink cocktails, recognized with numerous awards from the American Distilling Institute[263][265] - The company operates in the rapidly growing craft spirits segment, which had over $21.4 billion in revenue in 2023 and is projected to grow at a CAGR of 29.4% between 2024 and 2030[264] - Growth strategy focuses on three primary areas: increasing direct-to-consumer (DtC) sales via online platforms in 46 states, growing wholesale volume through national accounts, and expanding the Tribal Beverage Network (TBN) model in collaboration with Native American tribes[267][268][269] Key Factors Affecting Our Operating Results This section discusses the primary internal and external factors influencing the company's financial performance, including sales mix, inflation, tariffs, and product innovation - The company's financial performance is influenced by sales mix across different markets and efficient scaling. Inflation in raw inputs (grains, bottles, cans, barrels) and freight costs, along with labor pressures, pose challenges[270][271][273][274][275] - New tariffs on aluminum and imported glass bottles from Asia could increase costs, though the company believes the impact on gross margin for premium products will not be material due to source diversification efforts[271][272] - An excess of quality aged bourbon in Kentucky has led to falling wholesale barrel prices, creating an arbitrage opportunity for the company's Salute Series line of spirits[276] - Continued investment in beverage product innovation is crucial for long-term revenue growth, especially in the premium and ultra-premium segments, to respond to evolving consumer trends and demand for novel taste experiences[278] Key Components of Results of Operations This section defines the main components of the company's income statement, including net sales, cost of sales, operating expenses, and other income/expense items - Net sales primarily derive from domestic spirit sales (wholesale, direct-to-consumer) and value-added services, recognized when performance obligations are met[279] - Cost of sales includes product manufacturing, duties, shipping, packaging, and allocated management/personnel expenses. Gross profit and margin are affected by market conditions, cost structure, and capacity utilization[280][281] - Operating expenses include sales and marketing (employee costs, tasting room expenses, advertising) and general and administrative (executive, finance, legal, professional fees). These are expected to increase with business growth and public company operations[283][284] - Interest expense covers secured debt, notes payable, and leased assets. Changes in fair value of convertible notes and warrant liabilities, previously reported in other income/expense, were reclassified to equity upon the IPO[286][287][289][291][292][293][294][295][296] - The investment in Flavored Bourbon, LLC was adjusted to $14,285,000 in January 2024, resulting in a $3,421,000 gain, following a capital call where the company chose not to participate but retained its ownership and recovery rights[290] Comparison of the Results of Operations for the Three Months Ended June 30, 2025 and 2024 This section analyzes the company's financial performance for the three months ended June 30, 2025, compared to the same period in 2024, highlighting key revenue, cost, and profit changes | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | Change ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | :------- | | Total Net Sales | $1,321,822 | $1,842,315 | $(520,493) | | Total Cost of Sales | $1,094,734 | $1,094,518 | $216 | | Gross Profit | $227,088 | $747,797 | $(520,709) | | Total Operating Expenses | $6,876,049 | $3,045,490 | $3,830,559 | | Operating Loss | $(6,648,961) | $(2,297,693) | $(4,351,268) | | Net Income / (Loss) | $(7,295,078) | $8,406,501 | $(15,701,579) | - Net sales decreased by 28.4% YoY, primarily due to a $385,000 decrease in product sales (retail and third-party) and a $138,000 decrease in service sales (retail services and consulting)[301][302][303] - Gross profit decreased by 70% YoY to $227,088, largely impacted by $607,000 in unabsorbed overhead costs. Excluding unabsorbed overhead, gross margin was 55.0% in Q2 2025, down from 59.1% in Q2 2024[305][307][310][312][313] - Total operating expenses increased by $3,830,559 YoY, driven by a $675,000 increase in sales and marketing (mainly share-based compensation) and a $2,677,000 increase in general and administrative expenses (also largely share-based compensation and professional fees)[300][316][317][321] - Net loss was $(7,295,078) in Q2 2025, a significant decline from net income of $8,406,501 in Q2 2024, primarily due to the absence of large 'Change in Fair Value' gains from convertible notes and warrants seen in the prior year[300] Comparison of the Results of Operations for the Six Months Ended June 30, 2025 and 2024 This section analyzes the company's financial performance for the six months ended June 30, 2025, compared to the same period in 2024, detailing changes in sales, costs, and overall profitability | Metric | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | Change ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | :------- | | Total Net Sales | $2,413,805 | $3,548,474 | $(1,134,669) | | Total Cost of Sales | $1,914,832 | $2,392,140 | $(477,308) | | Gross Profit | $498,973 | $1,156,334 | $(657,361) | | Total Operating Expenses | $9,599,112 | $5,680,896 | $3,918,216 | | Operating Loss | $(9,100,139) | $(4,524,562) | $(4,575,577) | | Net Income / (Loss) | $(10,328,125) | $8,859,341 | $(19,187,466) | - Net sales decreased by 32.0% YoY, primarily due to a $777,000 decrease in product sales (retail, third-party, and wholesale) and a $358,000 decrease in service sales (third-party production, retail services, and consulting)[323][324][326][327][330] - Gross profit decreased by 56.9% YoY to $498,973, significantly impacted by $1,043,000 in unabsorbed overhead costs. Excluding unabsorbed overhead, gross margin was 63.9% in H1 2025, slightly down from 65.6% in H1 2024[332][334][336][337] - Total operating expenses increased by $3,918,216 YoY, driven by a $799,000 increase in sales and marketing (mainly share-based compensation) and a $3,118,000 increase in general and administrative expenses (also largely share-based compensation and professional fees)[322][339][340][341][342][347] - Net loss was $(10,328,125) in H1 2025, a substantial shift from net income of $8,859,341 in H1 2024, primarily due to the absence of significant 'Change in Fair Value' gains and investment gains from the prior year[322] SELECTED FINANCIAL INFORMATION This section provides a summary of key balance sheet data, offering a quick overview of the company's financial position at different reporting dates | Balance Sheet Data | June 30, 2025 ($) | December 31, 2024 ($) | December 31, 2023 ($) | | :------------------- | :------------ | :---------------- | :---------------- | | Cash | $185,953 | $453,162 | $76,878 | | Total assets | $26,538,101 | $28,000,026 | $26,268,232 | | Current liabilities | $16,442,727 | $13,811,514 | $62,848,642 | | Long-term liabilities | $12,981,973 | $13,396,745 | $6,842,046 | | Total liabilities | $29,424,700 | $27,208,259 | $69,690,688 | | Total stockholders' equity/(deficit) | $(2,886,599) | $791,767 | $(43,422,456) | - Cash decreased significantly from $453,162 at December 31, 2024, to $185,953 at June 30, 2025. Total assets also saw a slight decrease[348] - Total liabilities increased from $27,208,259 at December 31, 2024, to $29,424,700 at June 30, 2025. Stockholders' equity shifted from a positive balance to a deficit[348] Non-GAAP Financial Measures This section presents non-GAAP financial measures, such as Adjusted Gross Profit/Margin and EBITDA/Adjusted EBITDA, used by management to assess core operational performance - The company uses non-GAAP measures like Adjusted Gross Profit/Margin (excluding unabsorbed overhead) and EBITDA/Adjusted EBITDA to evaluate core operating performance, understand underlying trends, and for planning purposes[349][350][351][352] | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | GAAP Total Net Sales | $1,321,000 | $1,844,000 | $2,414,000 | $3,549,000 | | GAAP Gross Profit | $225,000 | $745,000 | $499,000 | $1,157,000 | | Unabsorbed Overhead | $607,000 | $511,000 | $1,043,000 | $1,172,000 | | Adjusted Gross Profit excluding unabsorbed overhead | $834,000 | $1,259,000 | $1,542,000 | $2,329,000 | | GAAP Gross Margin | 17.2% | 40.6% | 20.7% | 32.6% | | Adjusted Gross Margin excluding unabsorbed overhead | 63.1% | 68.3% | 63.9% | 65.6% | - Adjusted Gross Margin excluding unabsorbed overhead remained strong at 63.1% for Q2 2025 and 63.9% for H1 2025, indicating healthy margins on direct input costs despite overall low GAAP gross margins due to unused production capacity[354] | Metric | 3 Months Ended June 30, 2025 ($) | 3 Months Ended June 30, 2024 ($) | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income / (Loss) | $(7,295,000) | $8,407,000 | $(10,328,000) | $8,859,000 | | EBITDA | $(6,423,000) | $9,386,000 | $(8,636,000) | $10,759,000 | | Adjusted EBITDA | $(6,423,000) | $(1,962,000) | $(8,636,000) | $(3,869,000) | - Adjusted EBITDA for Q2 2025 was $(6,423,000) and for H1 2025 was $(8,636,000), reflecting significant operating losses after adjusting for non-cash items and fair value changes[356] Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations, including cash flows, financing activities, and going concern considerations - The company's ability to continue as a going concern is in substantial doubt due to recurring net losses, negative cash flows from operations, and significant outstanding payables ($6,881,000 as of June 30, 2025)[357][358][360] - Primary capital sources have been equity placements, term loans, and convertible debt. The company expects to incur additional losses and higher operating expenses, requiring additional capital in 2025[357][360] - The Silverview Loan covenants were waived and simplified in October/November 2024, and a portion of IPO proceeds was used for repayment. The PPP loan balance of $2,269,456 is expected to be repaid within 12 months[359][374][375][376][377] - An Equity Line of Credit (ELOC) was established in February 2025, allowing the sale of up to $15,000,000 in common stock. A private placement (PIPE) of $223.8 million was entered into on August 11, 2025, expected to close in August 2025, with proceeds to be used for general corporate purposes and purchasing $IP Tokens[360][362][363][364][366][367] | Cash Flow Summary | 6 Months Ended June 30, 2025 ($) | 6 Months Ended June 30, 2024 ($) | | :----------------------------------- | :--------------------------- | :--------------------------- | | Net Cash Used in Operating Activities | $(3,544,000) | $(5,383,000) | | Net Cash Provided by Investing Activities | $55,000 | $(287,000) | | Net Cash Provided by Financing Activities | $3,222,000 | $5,744,000 | | Net increase / (decrease) in cash | $(267,000) | $75,000 | - Net cash used in operating activities decreased from $(5,383,000) in H1 2024 to $(3,544,000) in H1 2025. Net cash provided by financing activities decreased from $5,744,000 in H1 2024 to $3,222,000 in H1 2025[378][379][385] Off-Balance Sheet Arrangements This section confirms that the company had no off-balance sheet arrangements, obligations, assets, or liabilities during the reported periods - The company had no off-balance sheet arrangements, obligations, assets, or liabilities as of June 30, 2025, or for the periods presented[387] Recent Accounting Pronouncements This section refers to Note 2 for a discussion of recent accounting pronouncements relevant to the company's financial statements - A discussion of recent accounting pronouncements is included in Note 2 to the condensed consolidated financial statements[388] Critical Accounting Estimates This section highlights the significant estimates and judgments made by management in preparing financial statements, particularly regarding long-lived asset impairment - The preparation of financial statements requires management to make estimates and judgments, particularly regarding the impairment of long-lived assets. Assets are evaluated for impairment when circumstances indicate carrying amounts may not be recoverable[389][390][391][392] - No impairment losses on long-lived assets were recorded for the six months ended June 30, 2025, or 2024[392] Emerging Growth Company Status This section clarifies the company's status as an 'emerging growth company' under the JOBS Act and its implications for accounting standards and financial reporting comparability - The company is an 'emerging growth company' under the JOBS Act, allowing it to use an extended transition period for new accounting standards. This may result in financial statements not being comparable to other public companies[393] - The company will cease to be an emerging growth company based on revenue, fiscal year anniversary of IPO, nonconvertible debt issuance, or becoming a large accelerated filer[394] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from fluctuations in interest rates, which could negatively impact its operations and financial condition. Management aims to mitigate these risks through regular operating and financing activities - The company is exposed to market risks from interest rate fluctuations that may adversely affect its financial condition and results of operations[396] - These risks are managed through regular operating and financing activities[396] Item 4. Controls and Procedures Management concluded that as of June 30, 2025, the company's disclosure controls and procedures were not effective due to material weaknesses, specifically a lack of proper segregation of duties in financial reporting and insufficient personnel resources for review controls. The company is committed to improving its financial organization and increasing accounting personnel - As of June 30, 2025, disclosure controls and procedures were not effective due to material weaknesses[398] - Material weaknesses include a lack of proper segregation of duties in cash receipts/disbursements, purchase approvals, and accounts payable, and insufficient personnel for adequate review controls[398] - The company is committed to improving its financial organization and increasing personnel resources and technical accounting expertise[399] - No changes in internal control over financial reporting occurred during the period ended June 30, 2025, that materially affected or are reasonably likely to materially affect internal control over financial reporting[400] Part II - Other Information This part provides additional disclosures not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company has settled all previously disclosed litigation. A lawsuit from CFGI, LLC for $730,000 was settled for $500,000 on July 30, 2025. A separate lawsuit from a former co-founder of Thinking Tree Spirits seeking $470,000 was settled for $140,000 on August 4, 2025. No other material litigation is currently pending - All litigation disclosed in the Annual Report on Form 10-K for 2024 has been settled[402] - Litigation with CFGI, LLC for approximately $730,000 was settled on July 30, 2025, with the company paying $500,000[402][403] - A lawsuit from Kaylon McAlister, a former co-founder of Thinking Tree Spirits, seeking $470,000, was settled on August 4, 2025, for $140,000[404] Item 1A. Risk Factors As a 'smaller reporting company,' the registrant is not required to provide the information typically required by this Item, which would detail significant risks and uncertainties affecting the business - The company is a 'smaller reporting company' and is not required to provide risk factor disclosures[405] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2025, the company issued and sold 576,373 shares of Series B Convertible Preferred Stock and warrants to purchase 733,192 common shares to accredited investors for approximately $5,763,747 in gross proceeds, relying on exemptions from registration. Additionally, 629,873 shares of Series B Preferred Stock are expected to be exchanged for common stock and prepaid warrants contingent on a private placement anticipated to close in August 2025 - Issued and sold 576,373 shares of Series B Convertible Preferred Stock and warrants for 733,192 common shares to accredited investors for $5,763,747 gross proceeds in Q2 2025, under Section 4(a)(2) and Rule 506 of Regulation D[406] - 629,873 shares of Series B Preferred Stock are contingent on a private placement in August 2025 to be exchanged for 894,856 common shares and 17,002,480 prepaid warrants[407] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities for the period - No defaults upon senior securities were reported[408] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[409] Item 5. Other Information No other information was reported under this item - No other information was reported[410] Item 6. Exhibits This section lists all exhibits filed as part of the quarterly report on Form 10-Q, including organizational documents, warrant forms, loan agreements, equity incentive plans, and various certifications - The exhibit index includes organizational documents (Certificates of Incorporation, Bylaws), various warrant forms (common, prepaid, representative's, pre-funded, advisory, placement agent), loan agreements (Silverview), equity incentive plans (2019, 2024), and certifications (CEO, CFO)[411][413][414][415] Signatures This section contains the official signatures of the company's Chief Executive Officer and Chief Financial Officer, certifying the report - The report was signed on August 14, 2025, by Justin Stiefel, Chief Executive Officer, and Michael Carrosino, Chief Financial Officer and Principal Accounting Officer[418][419][420]