Quarterly report
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Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 June 30, 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 ofincorporation or organization) (I.R.S. Employer Identification No.) 9668 Bujacich Road, Gig Harbor, Washington 98332 (Address of Principal Executive Offices) (Zip Code) (253) 509-0008Registrant’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 12months (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 (§ 232.405of 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
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Table of Contents 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 financialaccounting 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 August 13, 2025, was 26,239,027.
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Table of Contents Table of Contents Page Part I - Financial Information Item 1. Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 43 Item 3. Quantitative and Qualitative Disclosures About Market Risk 71 Item 4. Controls and Procedures 71 Part II - Other Information Item 1. Legal Proceedings 73 Item 1A. Risk Factors 73 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 73 Item 3. Defaults Upon Senior Securities 74 Item 4. Mine Safety Disclosures 74 Item 5. Other Information 74 Item 6. Exhibits 74 Signatures 77 2
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Table of Contents Part I - Financial Information Item 1. Financial Statements HERITAGE DISTILLING HOLDING COMPANY, INC.CONSOLIDATED FINANCIAL STATEMENTS Index to Consolidated Financial Statements PageUnaudited Interim Condensed Consolidated Financial Statements for the Three and Six Month Periods ended June 30, 2025 and 2024 Condensed Consolidated Balance Sheets as of June 30, 2025 and December 31, 2024 4Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2025 and 2024 5Condensed Consolidated Statements of Stockholders’ Equity/(Deficit) for the Three and Six Months ended June 30, 2025 and 2024 6Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2025 and 2024 7Notes to Unaudited Condensed Consolidated Financial Statements 8 3
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Table of Contents Heritage Distilling Holding Company, Inc.Condensed Consolidated Balance Sheets(unaudited) June 30, 2025 December 31, 2024ASSETS Current Assets Cash $ 185,953 $ 453,162 Accounts Receivable 210,708 638,890 Inventory 2,315,452 2,471,567 Other Current Assets 391,899 355,928 Total Current Assets 3,104,012 3,919,547 Long Term Assets Property and Equipment, net of Accumulated Depreciation 4,832,975 5,449,412 Operating Lease Right-of-Use Assets, net 3,284,292 3,303,158 Investment in Flavored Bourbon LLC 14,285,222 14,285,222 Intangible Assets (Note 8) 403,165 421,151 Goodwill (Note 8) 589,870 589,870 Other Long Term Assets 38,565 31,666 Total Long Term Assets 23,434,089 24,080,479 Total Assets $ 26,538,101 $ 28,000,026 LIABILITIES & STOCKHOLDERS’ EQUITY / (DEFICIT) Current Liabilities Accounts Payable $ 6,881,484 $ 4,979,353 Accrued Payroll 1,808,650 950,974 Accrued Tax Liability 1,611,678 1,535,628 Other Current Liabilities 760,950 1,253,052 Operating Lease Liabilities, Current 1,208,917 1,131,545 Notes Payable, Current 3,989,991 3,758,595 Accrued Interest 181,057 202,367 Total Current Liabilities 16,442,727 13,811,514 Long Term Liabilities Operating Lease Liabilities, net of Current Portion 2,698,046 2,810,015 Notes Payable, net of Current Portion 8,989,438 9,482,339 Accrued Interest, net of Current Portion 1,167,414 977,316 Other Long Term Liabilities 127,075 127,075 Total Long-Term Liabilities 12,981,973 13,396,745 Total Liabilities 29,424,700 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; 210,700 shares issued and outstanding as of June 30, 2025 andDecember 31, 2024 21 49 Series B Convertible, 850,000 and 0 shares designated; 744,354 and 0 shares issued and outstanding as of June 30,2025 and December 31, 2024, respectively 74 — Common Stock, par value $0.0001 per share; 490,000,000 shares authorized; 12,727,886 and 5,273,611 shares issued andoutstanding as of June 30, 2025 and December 31, 2024, respectively 1,299 556 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 Liabilities & Stockholders’ Equity / (Deficit) $ 26,538,101 $ 28,000,026 The accompanying notes are an integral part of these condensed consolidated financial statements. 4
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Table of Contents Heritage Distilling Holding Company, Inc.Condensed Consolidated Statement of Operations(unaudited) For the Three Months Ended June 30,For the Six Months EndedJune 30, 2025 2024 2025 2024 NET SALES Products $ 1,060,443 $ 1,444,035 $ 1,898,498 $ 2,675,858 Services 261,379 398,280 515,307 872,616 Total Net Sales 1,321,822 1,842,315 2,413,805 3,548,474 COST OF SALES Products 1,082,943 1,097,898 1,897,152 2,311,463 Services 11,791 (3,380) 17,680 80,677 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 OPERATING EXPENSES Sales and Marketing 1,971,923 1,297,796 3,287,310 2,487,650 General and Administrative 4,904,126 1,747,694 6,311,802 3,193,246 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) OTHER INCOME / (EXPENSE) Interest Expense (595,309) (634,650) (1,118,522) (1,235,656) Gain on Investment — — — 3,421,222 Change in Fair Value of Convertible Notes — 9,615,837 — 9,044,748 Change in Fair Value of Warrant Liabilities — 1,274,812 — 1,705,020 Change in Fair Value of Contingency Liability — 457,127 — 457,127 Other Income / (Expense) (47,686) 218 (106,342) 592 Total Other Income / (Expense) (642,995) 10,713,344 (1,224,864) 13,393,053 Income / (Loss) Before Income Taxes (7,291,956) 8,415,651 (10,325,003) 8,868,491 Income Taxes (3,122) (9,150) (3,122) (9,150) 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 Weighted Average Common Shares Outstanding, Basic 11,000,519 421,799 10,335,057 421,799 Net Income / (Loss) Per Share, Diluted (See Note 13) $ (0.77) $ 1.29 $ (1.16) $ (2.44) Weighted Average Common Shares Outstanding, Diluted 11,000,519 4,573,063 10,335,057 4,573,063 The accompanying notes are an integral part of these condensed consolidated financial statements. 5
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Table of Contents Heritage Distilling Holding Company, Inc.Condensed Consolidated Statements of Stockholders’ Equity / (Deficit)(unaudited) Common Stock Preferred Stock - Series A Preferred Stock - Series B AccumulatedEquity / (Deficit) TotalStock-holders’Equity / (Deficit)Number ofShares Par Value Number ofShares Par Value Number ofShares Par Value AdditionalPaid-inCapital Beginning Balance March 31,2025 6,921,564 $ 721 494,840 $ 49 167,981 $ 17 $ 76,837,302 $ (77,167,065) $ (328,976) Private Placement of SeriesB Preferred Stock (andwarrants) (See Note 7) — — — — 111,200 11 1,111,990 — 1,112,001 ELOC Agreement Sales ofCommon Stock 1,107,439 111 — — — — 497,537 — 497,648 Exercise of PrepaidWarrants to PurchaseCommon Stock 1,815,999 182 — — — — (182) — — Exercise of CommonWarrants to PurchaseCommon Stock 109,945 11 — — — — (11) — — Exchange of PrepaidWarrants to PurchaseCommon Stock forSeries B Preferred Stock — — — — 55,917 4 (4) — — Exchange of Series APreferred Stock andRelated Warrants forSeries B Preferred Stock — — (284,140) (28) 409,256 42 (14) — — RSUs Vested 2,772,939 275 — — — — (275) — — RSU Share-basedCompensation — — — — — — 3,127,807 — 3,127,807 Net Income / (Loss) —$ — — — — — — (7,295,078) (7,295,078) Ending Balance June 30,2025 12,727,886 $ 1,299 210,700 $ 21 744,354 $ 74 $ 81,574,150 $ (84,462,143) $ (2,886,599) Common Stock Preferred Stock - Series A Preferred Stock - Series B AccumulatedEquity / (Deficit) TotalStock-holders’Equity / (Deficit)Number ofShares Par Value Number ofShares Par Value Number ofShares Par Value AdditionalPaid-inCapital Beginning Balance December31, 2024 5,273,611 $ 556 494,840 $ 49 —$ — $ 74,925,181 $ (74,134,018) $ 791,767 Private Placement of Series BPreferred Stock (andwarrants) (See Note 7) — — — — 167,981 28 2,791,782 — 2,791,810 Exercise of ELOCCommitment Warrant 67,162 7 — — — — 60 — 67 ELOC Agreement Sales ofCommon Stock 330,014 144 — — — — 729,930 — 730,074 Exercise of Prepaid Warrantsto Purchase CommonStock 3,066,776 307 — — — — (307) — — Exercise of CommonWarrants to PurchaseCommon Stock 109,945 11 — — — — (11) — — Exchange of Prepaid Warrantsto Purchase CommonStock for Series BPreferred Stock — — — — 55,917 4 (4) — — Exchange of Series APreferred Stock andRelated Warrants forSeries B Preferred Stock — — (284,140) (28) 409,256 42 (14) — — RSUs Vested 2,772,939 275 — — — — (275) — — RSU Share-basedCompensation — — — — — — 3,127,807 — 3,127,807 Net Income / (Loss) — — — — — — — (10,328,125) (10,328,125) Ending Balance June 30, 2025 12,727,886 $ 1,299 210,700 $ 21 744,354 $ 74 $ 81,574,150 $ (84,462,143) $ (2,886,599)
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Common Stock Preferred Stock - Series A AdditionalPaid-inCapital Accumulated Equity /(Deficit) TotalStockholders’ Equity /(Deficit)Number ofShares Par Value Number ofShares Par Value Beginning Balance March 31, 2024 432,442 $ 72 — $ — $ 31,421,948 $ (74,391,636) $ (42,969,616) Acquisition of Thinking Tree Spirits 14 — — — — — — Preferred Stock Issued — — 183,000 18 1,550,982 — 1,551,000 Shares Repurchased (14) — — — (2,430) — (2,430) Warrants Issued — — — — 279,000 — 279,000 Warrants Exercised 9,493 — — — — — — Net Income / (Loss) — — — — — 8,406,501 8,406,501 Ending Balance June 30, 2024 441,935 $ 72 183,000 $ 18 $ 33,249,500 $ (65,985,135) $ (32,735,545) Common Stock Preferred Stock - Series A AdditionalPaid-inCapital Accumulated Equity /(Deficit) TotalStockholders’ Equity /(Deficit)Number ofShares Par Value Number ofShares Par Value Beginning Balance December 31, 2023 381,484 $ 67 — $ — $ 31,421,953 $ (74,844,476) $ (43,422,456) Acquisition of Thinking Tree Spirits 50,972 5 — — (5) — — Preferred Stock Issued — — 183,000 18 1,550,982 — 1,551,000 Shares Repurchased (14) — — — (2,430) — (2,430) Warrants Issued — — — — 279,000 — 279,000 Warrants Exercised 9,493 — — — — — — Net Income / (Loss) — — — — — 8,859,341 8,859,341 Ending Balance June 30, 2024 441,935 $ 72 183,000 $ 18 $ 33,249,500 $ (65,985,135) $ (32,735,545) The accompanying notes are an integral part of these condensed consolidated financial statements. 6
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Table of Contents Heritage Distilling Holding Company, Inc.Condensed Consolidated Statements of Cash Flows(unaudited)
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For the Six Months EndedJune 30, 2025 2024 Net Income / (Loss) $ (10,328,125) $ 8,859,341 Adjustments to Reconcile Net Income / (Loss) to Net Cash Used in Operating Activities: Depreciation Expense 570,456 655,262 Amortization of operating lease right-of-use assets 200,727 257,470 Loss on disposal of property and equipment 8,661 27,311 Gain on Investment — (3,421,222) Change in Fair Value of Convertible Notes — (9,044,748) Change in Fair Value of Warrant Liabilities — (1,705,020) Change in Fair Value of Contingency Liabilities — (457,127) Non-cash Interest Expense 207,282 163,318 Non-cash Share-based Compensation 3,127,807 — Changes in Operating Assets and Liabilities: Accounts Receivable 428,182 254,581 Inventory 156,115 (522,335) Other Current Assets (35,971) 112,611 Other Long Term Assets (6,900) — Accounts Payable 1,902,131 339,235 Other Current Liabilities 441,625 (593,197) Operating Lease Liabilities (216,457) (308,089) Net Cash Used in Operating Activities (3,544,467) (5,382,609) Cash Flow from Investing Activities Proceeds from Purchase of Thinking Tree Spirits — 5,090 Purchase of Property and Equipment (28,596) (292,000) Proceeds from Sale of Asset 83,902 — Net Cash Provided by / (Used in) Investing Activities 55,306 (286,910) Cash Flow from Financing Activities Proceeds from Notes Payable — 438,914 Proceeds from Whiskey Notes (including proceeds from related party Whiskey Notes of $0 and $1,433,000 for the six monthsended June 30, 2025 and 2024, respectively) — 3,655,870 Repayment of Notes Payable (300,000) (85,774) Common Stock Shares Repurchased — (2,430) Proceeds from Private Placement of Series A Preferred Stock (and warrants) 1,830,000 Proceeds from Private Placement of Series B Preferred Stock (and warrants) (Note 7) 2,791,810 — Proceeds from ELOC Sales of Common Stock 730,074 — Proceeds from Warrants Exercised 67 — Deferred Transaction Costs associated with S-1 Filing — (92,326) Net Cash Provided by / (Used in) Financing Activities 3,221,951 5,744,254 Net Increase / (Decrease) in Cash (267,209) 74,735 Cash – Beginning of Period 453,162 76,878 Cash – End of Period $ 185,953 $ 151,613 Supplemental Cash Flow Information related to Interest Paid & Income Taxes Paid: Cash Paid during the Period for: Interest Expense $ 911,240 $ 1,072,338 Income Tax Expense $ 3,122 $ 9,150 Supplemental Schedule of Non-cash Investing and Financing Activities: Series B Preferred Stock Issued in Exchange for Series A Preferred Stock $ 4,092,567 $ — Series B Preferred Stock Issued in Exchange for Prepaid Warrants $ 559,180 $ — Exercise of Prepaid Warrants to Purchase Common Stock $ 11 $ — Exercise of Common Warrants to Purchase Common Stock $ 7 $ — Exchange of Prepaid Warrants to Purchase Common Stock for Series B Preferred Stock $ 4 $ — Exchange of Series A Preferred Stock and Related Warrants for Series B Preferred Stock $ 42 $ — RSUs Vested $ 275 $ — 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 $ — $ 246,308 The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(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 onewholly 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 distillerytasting 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 perwarrant. (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 maximumof 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 grosspurchase 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 PurchaseAgreement, 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, 2025under 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 beneficialownership 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 exercisedthe Commitment Warrants for $67. On June 13, 2025, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933 to register up to a maximum of an additional 10,000,000 ELOCShares (the “June 2025 ELOC Registration Statement”), for an aggregate of 15,000,000 ELOC Shares available under the ELOC Purchase Agreement, which was approved by theshareholders on June 24, 2025. Business Combination Agreement — On December 9, 2022, the Company entered into a business combination agreement (as amended, the “Business CombinationAgreement”) with a publicly-traded special purpose acquisition company (“SPAC”). On May 18, 2023, the Business Combination Agreement was terminated and deferred expensesrelated to the transaction were expensed. Subsequent to the termination of the Business Combination, the Company successfully consummated an initial public offering (“IPO”) onNovember 25, 2024. Basis of Presentation — The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted inthe United States of America (“U.S. GAAP”) and include the Company’s wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in theconsolidation 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 thenet 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 shareand 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 June 30, 2025, the condensed consolidated statement ofoperations and the condensed consolidated statements of stockholders’ deficit, for the three and six months ended June 30, 2025 and 2024, and the condensed consolidatedstatement of cash flows for the six months ended June 30, 2025 and 2024 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared onthe same basis as the audited annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, 8
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.) necessary for the fair statement of the Company’s financial position as of June 30, 2025 and the results of its operations for the three and six months ended June 30, 2025 and 2024and cash flows for the six months ended June 30, 2025 and 2024. The financial data and other information disclosed in these notes related to the three and six months endedJune 30, 2025 and 2024 are also unaudited. The results for the three and six months ended June 30, 2025 are not necessarily indicative of results to be expected for the year endingDecember 31, 2024, 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 endedDecember 31, 2024. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statementsfor 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 contemplatecontinuation of the Company as a going concern. The Company’s recurring net losses, negative working capital, increased accumulated deficit and stockholders’ deficit, raisesubstantial doubt about its ability to continue as a going concern. During the three months ended June 30, 2025, the Company recorded net (loss) of approximately $(7.3) million.During the six months ended June 30, 2025, the Company recorded net (loss) of approximately $(10.3) million. During the six months ended June 30, 2025, the Company reportednet cash used in operations of approximately $3.5 million. On June 30, 2025, the accumulated deficit was approximately $84.5 million and the stockholders’ deficit wasapproximately $2.9 million. In connection with these condensed consolidated financial statements, management evaluated whether there were conditions and events, considered inthe 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 condensedconsolidated financial statements. Management assessed that there were such conditions and events, including a history of recurring operating losses, and negative cash flows fromoperating 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 June 30, 2025, the Company believes its current cash balances coupled with anticipated cash flow from operating activities may not be sufficient to meet its workingcapital 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 raiseadditional 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 SeriesB 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 optionsunrelated 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 toevaluate the best path forward. Subsequent to June 30, 2025, on August 11, 2025, the Company entered into subscription agreements with certain institutional and accredited investors (collectively the“Investors”) for a private placement of an aggregate of 183,478,891 shares (the “Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”),and pre-funded warrants (the “Pre-Funded Warrants”) to acquire in the aggregate up to 186,900,000 shares of Common Stock. The purchase price for the Shares was $0.6043 pershare (the “Share Price”) and the purchase price for the Pre-Funded Warrants was equal to the Share Price less $0.0001, or $0.6042 per Pre-Funded Warrant. In connection with theannouncement of the Offering, the Company announced the launch of its digital asset treasury reserve strategy, effective upon the closing of the Offering, pursuant to which theCompany plans to use $IP Tokens as its primary treasury reserve asset on an ongoing basis. The is no assurance that the Company will be able to close on this transaction, or that ifit does close the transaction, that it will be with substantially the same terms as described herein. If the transaction closes, the Company will disclose the final details in a related 8-K filing. The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplatesthe 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 recoverabilityand 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. 9
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.) 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 countervailingtariffs 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 andsaber 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 cargoships 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 escalationof armed conflict between India and Pakistan is adding to this uncertainty, and is particularly concerning given that India stands to become a significant trade partner as the UnitedStates 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, thesedisruptions 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 theUkraine 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 thethreatening military activity between China and Taiwan. The Company used to primarily source its glass bottles from vendors who used suppliers in China. Given the risksassociated with tariffs increases, the Company asked its suppliers to begin looking for glass suppliers in other countries, and that effort remains ongoing. Finally, the ongoingstandoff 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 andother 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 overallcosts 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 itsproducts. 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 thatthey do not deem to be essential, thereby impacting the Company’s growth plans. Likewise, labor pressures could continue to increase as employees become increasingly focusedon 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 oncost 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 tothose 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 theinput 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 inmarket 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 oftariffs 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 10
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 1 — DESCRIPTION OF OPERATIONS AND BASIS OF PRESENTATION (cont.) 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 thefirst 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 mostpremium 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 oftariffs. 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 firstquarter 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 printitems 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 grossmargin 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 reportedamounts 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 ofexpenses 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 incircumstances, 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 participantsat 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 inactive 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 andliabilities 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 approximatesfair 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 andwarrant 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 describedabove. During the six months ended June 30, 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, accountspayable and bank demand deposits that may, from time to time, exceed Federal Depository Insurance Corporation (“FDIC”) insurance limits. To mitigate the risks associated with 11
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) 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 theCompany 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 insuredmaximum 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 theCompany’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 programis approximately $150 million. The Company considers the concentration of credit risk associated with its accounts receivable to be commercially reasonable and believes that such concentration does notresult in the significant risk of near-term severe adverse impacts. As of June 30, 2025 and December 31, 2024, the Company had customers that individually represented 10% ormore of the Company’s accounts receivable. There were three and two individual customers that together represented 93% and 77% of total accounts receivable, as of June 30,2025 and December 31, 2024, respectively. There were four and four individual customer accounts that together represented 91% and 75% of total revenue for the three monthsended June 30, 2025 and 2024, respectively. There were five and three individual customer accounts that together represented 89% and 57% of total revenue for the six monthsended June 30, 2025 and 2024, respectively. There were two and two individual suppliers that represented 26% and 34% of total accounts payable, as of June 30, 2025 andDecember 31, 2024, respectively. Concentration of Revenues Three Months Ended June 30, Six Months Ended June 30, 2025 2024 2025 2024 Customer A 37 % 14 % 28 % — % Customer B 20 % 22 % 22 % 18 % Customer C 13 % 29 % 14 % 23 % Customer D — % — % 13 % — % Customer E — % — % — % 16 % Customer F — % 10 % — % — % Customer G 21 % — % 12 % — % 91 % 75 % 89 % 57 % Accounts receivable — Accounts receivable are reported at net realizable value. Receivables consist of amounts due from distributors. In evaluating the collectability ofindividual receivable balances, the Company considers several factors, including the age of the balance, the customers’ historical payment history, its credit worthiness andeconomic trends. There was no allowance for credit losses as of June 30, 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 rawmaterials inventory includes the supplier cost, shipping charges, import fees, and federal excise taxes. Management routinely monitors inventory and periodically writes offdamaged and unsellable inventory. There was no valuation allowance as of June 30, 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, allbarreled 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 toamortization, 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 likelythan not that the 12
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) 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 reportingunit 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 thereporting 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 isrecognized 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 anytax-deductible goodwill on the carrying amount of the reporting unit are considered when measuring the goodwill impairment loss, if applicable. Finite-Lived Intangible Assets — Intangible assets are recorded at cost less any accumulated amortization and any accumulated impairment losses. Intangible assetsacquired 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 basisover the projected pattern of economic benefits. Finite-lived intangible assets are reviewed for impairment annually, or more frequently when events or changes in circumstancesindicate 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 estimateduseful 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 theterm 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 statementof 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 Companydetermines 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 leaseliabilities represent the Company’s obligation to make lease payments arising from a lease. Operating lease ROU assets and lease liabilities are recognized at the commencementdate 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 overthe 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 leasemodification or a separate contract. Lease modifications are reassessed as of the effective date of the modification. For modified leases, the Company also reassess the leaseclassification 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 theCompany’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 andpayments, 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 itshistoric arm’s-length secured borrowing facility and estimating an appropriate credit rating for similar secured debt instruments. The Company’s calculated credit rating on secureddebt 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. 13
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) 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 exercisethat 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 ortermination, 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 todetermine the operating lease term. The Company generally uses the base, non- cancelable lease term when determining the operating lease ROU assets and lease liabilities. TheROU asset is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable in accordance with AccountingStandards 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 theconsolidated 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 indicatethat the carrying amounts may not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include: significant underperformance ofthe 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 eventoccurs, 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 thecarrying 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 impairmentlosses on long-lived assets for the six months ended June 30, 2025 and 2024. Investments / Investment in Flavored Bourbon LLC — Non-marketable equity investments of privately held companies are accounted for as equity securities withoutreadily determinable fair value at cost minus impairment, as adjusted for observable price changes in orderly transactions for identical or similar investment of the same issuepursuant to Accounting Standards Codification (“ASC”) Topic 321 Investments — Equity Securities (“ASC 321”) as the Company does not exert any significant influence over theoperations of the investee company. The Company performs a qualitative assessment at each reporting period considering impairment indicators to evaluate whether the investment is impaired. Impairmentindicators 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 ofthe investee, ii) a significant adverse change in the regulatory, economic, or technological environment of the investee, iii) a significant adverse change in the general marketcondition 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 auctionprocess 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 abilityto 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 June 30, 2025 and December 31, 2024, the Company had a 12.2% ownership interest in Flavored Bourbon, LLC., respectively, and did not record any impairmentcharges 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 sharesto 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 sharesfrom 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 theremaining 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 beenretired. For the six months ended June 30, 2025 and 2024, the Company repurchased 0 and 14 shares of common stock, respectively. 14
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) 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 beenfulfilled, 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 theamount 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 aresubsequently 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 theCompany. Amounts billed to customers for shipping and handling are included in sales. The results of operations are affected by economic conditions, which can vary significantlyby 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 roomsand through the internet (e-commerce). Spirits club membership sales are made under contracts with customers, which specify the quantity and timing of future shipments. Customer credit cards are charged inadvance of quarterly shipments in accordance with each contract. The Company transfers control and recognizes revenue for these contracts upon shipment of the spirits to thecustomer. 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 productis 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 tastingrooms 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 uponshipment of the spirits from the Company’s warehouse facilities. Payment terms to wholesale distributors typically range from 30 to 45 days. The Company pays depletionallowances to its wholesale distributors based on their sales to their customers which are recorded as a reduction of wholesale product revenue. The Company also payscertain incentives to distributors which are reflected net within revenues as variable consideration. The total amount of depletion allowances and sales incentives for threemonths ended June 30, 2025 and 2024 was $5,971 and $17,383, respectively. The total amount of depletion allowances and sales incentives for six months ended June 30,2025 and 2024 was $10,020 and $35,489, 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 thefuture 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 finishedspirits were produced and supplied to the customer. In most cases, the barrels are stored during aging for the customer at a fee. As of June 30, 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 performanceobligations 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 consultingand 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 arecompleted. The Company recorded 261,379 and $398,280 in service revenue in the condensed consolidated statements of operations for the three months ended June 30, 2025and 2024, respectively. The Company recorded $515,307 and $872,616 in service revenue in the condensed consolidated statements of operations for the six months endedJune 30, 2025 and 2024, respectively. There is no contractually committed service revenue that would give rise to an unsatisfied performance obligation at the end of eachreporting period. 15
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) The following table presents revenue disaggregated by sales channel: For the Three Months EndedJune 30, 2025 For the Six Months EndedJune 30, 2025 2024 2024 2024 Direct to Consumer $ 602,983 $ 939,170 $ 1,171,697 $ 1,681,613 Wholesale 457,460 488,703 726,800 806,860 Third Party — 16,162 — 187,385 Total Products Net Sales 1,060,443 1,444,035 1,898,497 2,675,858 Services 261,379 398,280 515,307 872,616 Total Net Sales $ 1,321,822 $ 1,842,315 $ 2,413,805 $ 3,548,474 Substantially all revenue is recognized from sales of goods or services transferred when contract performance obligations are met. As such, the accompanying condensedconsolidated financial statements present financial information in a format which does not further disaggregate revenue, as there are no significant variations in economic factorsaffecting the nature, amount, timing, and uncertainty of cash flows. Excise taxes — Excise taxes are levied on alcoholic beverages by governmental agencies. For imported alcoholic beverages, excise taxes are levied at the time of removalfrom 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 timeof 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 areinstead 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, whichtotaled $39,687 and $47,225 for the three months ended June 30, 2025 and 2024, respectively; and $70,263 and $93,067 for the six months ended June 30, 2025 and 2024,respectively. Shipping and handling costs — Shipping and handling costs of $27,339 and $19,518 were included in “Cost of Sales” within the condensed consolidated statements ofoperations for the three months ended June 30, 2025 and 2024, respectively. Shipping and handling costs of $81,110 and $109,444 were included in “Cost of Sales” within thecondensed consolidated statements of operations for the six months ended June 30, 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 theservice period on a straight-line basis for awards expected to vest. (See also Note 7: stock options; and, restricted stock units.) 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 incalculating 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 thecalculation, 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, whetherforfeited or not, is not reversed. During the six months ended June 30, 2025 and 2024, the Company did not grant any stock option awards. The Company has not granted any stock options since 2019, whenthe 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 publicoffering (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 ofcommon stock. On June 24, 2025, the shareholders approved an increase in the number of shares authorized for issuance under the 2024 Plan to up to 5,000,000 shares of commonstock. As of June 30, 2025, the Company had made grants of 2,527,500 shares of common stock under the 2024 Plan, and 2,472,500 shares remained authorized for grant. 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-basedpayment awards that is ultimately expected to vest and become 16
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) exercisable during the period. The Company recognizes compensation expense for all stock-based payment awards made to employees, directors, and non-employees using astraight-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$46,539 and $159,910 for the three months ended June 30, 2025 and 2024, respectively; and $235,834 and $245,187 for the six months ended June 30, 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 andclassifying 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 acomponent 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 taxconsequences of events that have been included in the condensed consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based onthe 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 toreverse. 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. Net income / (loss) per share attributable to common stockholders — The Company computed basic net income / (loss) per share attributable to common stockholders bydividing net income / (loss) attributable to common stockholders by the weighted-average number of common stock outstanding for the period, without consideration for potentiallydilutive securities. The Company computes diluted net income / (loss) per common share after giving consideration to all potentially dilutive common stock, including stockoptions, RSU awards, and warrants to purchase common stock outstanding during the period determined using the treasury-stock method as well as the convertible notesoutstanding 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 regularlyby 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 ChiefExecutive 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 regardingresource allocation and performance assessment. Additionally, the Company’s CODM regularly reviews the Company’s expenses on a consolidated basis. The financial metricsused by the CODM help make key operating decisions, such as allocation of budgets between the following significant segment expenses: cost of revenues; general andadministrative; 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 separatedby federal and individual jurisdiction, and the amount of income/(loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state, andforeign. 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 theimpact 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 expensesincluded 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, asclarified 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 earlyadoption permitted. The Company is currently evaluating the impact these standards will have on its financial statements. 17
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 3 — INVENTORIES Inventories consisted of the following: 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 NOTE 4 — PROPERTY AND EQUIPMENT, NET Property and equipment, net consisted of the following: EstimatedUseful Lives(in years) June 30,2025 December 31,2024 Machinery and Equipment 5 to 20 $ 3,405,942 $ 3,478,062 Leasehold Improvements Lease term 6,930,585 6,930,585 Computer and Office Equipment 3 to 10 2,452,774 2,460,632 Vehicles 5 274,559 274,559 Construction in Progress N/A 84,954 84,957 Total Property and Equipment 13,148,814 13,228,795 Less: Accumulated Depreciation (8,315,839) (7,779,383) Property and Equipment, net of Accumulated Depreciation $ 4,832,975 $ 5,449,412 Depreciation expense related to property and equipment for the three months ended June 30, 2025 and 2024 was 273,928 and 334,797 respectively; and for the six monthsended June 30, 2025 and 2024 was $570,456 and $655,262 respectively. NOTE 5 — BORROWINGS Borrowings of the Company consisted of the following: 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) $ 12,979,429 $ 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 anaggregate 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 Loanmodification 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 portionwas 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 19 monthanniversary of the closing date, the Silverview Loan accrues interest at a fixed rate of 15.0% through maturity. Interest payable in cash th 18
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 5 — BORROWINGS (cont.) 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 theobligations 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 containedcertain financial and other debt covenants that, among other things, imposed certain restrictions on indebtedness, liens, investments and capital expenditures. The financialcovenants 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 coverageratio 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 maintainliquidity of not less than $500,000. The Silverview Loan may be used for general corporate purposes, including working capital needs and capital expenditures. As of June 30, 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 financialstatements 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 tocomplete 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 onNovember 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 theCompany to preserve cash, as follows: $2,050,000 (including December 2024 interest of $182,438) due December 31, 2024 (which was paid $300,000 in January 2025 and$1,750,000 in December 2024), $700,000 due June 30, 2025 (which was deferred to the third quarter of 2025) and then $500,000 due every six months thereafter; 3) increase in thecoupon 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 interestpayments 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) anadditional 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 ratiotests; 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 existingcovenant 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 underthe Silverview Loan within one year of June 30, 2025 is classified as a current liability, and the amount due subsequent to one year from June 30, 2025 is classified as a non-currentliability as of June 30, 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 theCoronavirus 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 beused 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 inaccordance 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 twoyears 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 waspartially 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 theterms of the PPP loan, the Company has also recorded interest expense on the PPP loan at the rate of 1%, for a total of $5,658 and $5,658 for the three months ended June 30, 2025and 2024, respectively; $11,254 and $11,254 for the six months ended June 30, 2025 and 2024, respectively. Accrued interest payable on the PPP loan was $118,509 and $107,255as of June 30, 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 agreementstate 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 PartnersLoan”) 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 2023Channel Partners Loan matured and was paid in full on October 5, 2024. During its term the 2023 Channel Partners Loan accrued interest at a fixed rate of 13.34%, and hadpayments of $16,944, principal plus interest was payable monthly. The Company 19
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 5 — BORROWINGS (cont.) had an option to prepay the 2023 Channel Partners Loan with a prepayment discount of 5.0%. As of both June 30, 2025 and December 31, 2024, the outstanding balance of the2023 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 matureon 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 onSeptember 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.) 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 factoringarrangement, 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 inconjunction 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 accruedfees 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 lesserof $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 wasexchanged 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 19,983warrants 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 andreissued 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 issued83,333 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 for27,700 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 thecommon 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 wererecalculated and reissued as 15,625 warrants at $4.00 per share. As of June 30, 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 thesecondensed consolidated financial statements. The outstanding principal repayments due within the next 12 months of $3,989,991 and 3,758,595, respectively, net of debt issuancecosts of $70,574 and 140,082, respectively, was classified as a current liability on the Company’s consolidated balance sheet as of June 30, 2025 and December 31, 2024. Theoutstanding principal repayments due after the next 12 months of $8,989,438, net of debt issuance cost of $50,261, was classified as a long-term liability on the Company’sconsolidated balance sheet as of June 30, 2025. The following table represents principal repayments from 2025 and the years through 2029 and thereafter: Years Ending Amount 2025 3,544,917 2026 9,230,229 2027 66,789 2028 239,081 2029 — thereafter — $ 13,081,016 20
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 5 — BORROWINGS (cont.) Liabilities for Deferred Revenue — During 2023, the Company entered into a distilled spirits barreling production agreement with a related party for production of 1,200barrels 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 theconsummation 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 theFebruary 29, 2024 exchange of Whiskey Notes for common stock. 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 2023Convertible 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 both June 30, 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 usingLevel 3 inputs during the six months ended June 30, 2025: 2022 and 2023ConvertibleNotes WhiskeySpecial OpsNotes 2022NotesWarrantLiabilities WhiskeySpecial OpsNotes WarrantLiabilities AcquisitionContingency Liabilities Balance as of January 1, 2024 $ 36,283,890 $ 1,452,562 $ 794,868 $ 1,512,692 $ — Issuances — 3,353,850 — 302,020 584,203 Change in Fair Value (18,216,803) 9,172,055 89,314 (1,794,334) (457,127) Balance as of June 30, 2024 $ 18,067,087 $ 13,978,467 $ 884,182 $ 20,378 $ 127,076 There were no financial instruments for which fair value is determined using Level 3 inputs for the six months ended June 30, 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 sharenumbers 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 $4.00per 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 stockwarrants 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 insuch 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 offeringless 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 andcommission 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 ofCommon 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, atthe 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 CommonWarrants 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 Companywithout violating the purchaser concentration rules of Nasdaq applicable to initial public offerings of common stock. The Common Warrants and the shares of common stockissuable upon exercise of such warrants were not registered under the Securities Act of 1933, as 21
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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 toequity for the following private transactions were lifted as a result of the IPO (see Notes 5 and 6): • 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 purchasecommon 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 and546,927 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 relatedwarrants, 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 27,700shares 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 underwritersnamed 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, anexercise 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 from3,000,000 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 (whichFounders 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 beendeclared 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 wereentitled 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 allcommon 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'sinitial 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 Notesand 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 reclassifiedfrom 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 theclosing 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 2023Convertible 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 theCompany’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 actualunconditional 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 theCompany's initial public offering) was reclassified from Convertible 22
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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 theCompany’s initial public offering — which occurred on November 25, 2024) and was the remaining prerequisite for the unconditional exchange of the Whiskey Special OperationConvertible Notes for equity. As of June 30, 2025, the Company had 12,727,886 shares of common stock issued and outstanding, including the 3,312,148 shares of common stock related to the conversionof 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 stockexchanged 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 2,946,015shares of common stock, net of: 546,927; and subsequently, 1,422,265 additional shares of common stock exchanged for prepaid warrants). During the three and six months endedJune 30, 2025 and the year ended December 31, 2024, respectively, the Company repurchased 0, 0 and 21 shares of common stock and 1,925,944, 3,243,883 and 317,853 warrantsto 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 restatedcertificate of incorporation in preparation for the Company’s initial public offering (which occurred on November 25, 2024) (the “Actions and Amendments”). These Actions andAmendments, 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 from10,000,000 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 sharesincluded provision for the additional shares to be issued with the Company’s anticipated IPO, including those discussed in the following paragraphs, and other futureequity 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 stockto 75,000,000 shares, including 5,000,000 shares of preferred stock. In the second quarter of 2025, the Company’s Board of Directors and shareholders took certain additional actions and approved an amendment to the Company’s secondamended and restated certificate of incorporation (the “Second Quarter 2025 Actions and Amendments”). These Second Quarter 2025 Actions and Amendments included, amongother things: • filing a Certificate of Amendment to the Certificate of Designations, Preferences, Powers and Rights of the Series B Convertible Preferred Stock on June 12, 2025 toincrease the number of authorized shares of Series B Preferred Stock from 750,000 shares to 850,000 shares; and • filing a first amendment to the Company’s second amended and restated certificate of incorporation on June 24, 2025 to increase the total number of authorized shares ofcapital stock of the Company to 495,000,000 shares, consisting of 490,000,000 shares of common stock and 5,000,000 shares of preferred stock, each with a par value of$0.0001 per share. ELOC Agreement — On January 23, 2025, the Company entered into 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 wassubsequently filed on January 24, 2025) 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 theCompany’s common stock (subject to certain limitations and conditions. The amount of sales of common stock to the investor under the ELOC Purchase Agreement (the “ELOCShares”), 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 netproceeds from any sales under the ELOC Purchase Agreement 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, the Company issued prepaid warrants exercisable to purchase $75,000 worth of common stock priced at the VWAP pershare for the trading day preceding the date such documents are 23
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) executed (the “Commitment Warrants”). The Commitment Warrants had an exercise price of $0.001 per share and could not be exercised if such exercise into common stock, whencombined 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 theCommitment 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 isequal 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 intothe ELOC Purchase Agreement. In February 2025, the Company issued 67,162 Commitment Warrants to the ELOC Investor. In February 2025, the Investor exercised theCommitment Warrants for $67. On June 13, 2025, the Company filed a Form S-1 Registration Statement under the Securities Act of 1933 to register up to a maximum of an additional 10,000,000 ELOCShares (the “June 2025 ELOC Registration Statement”), for an aggregate of 15,000,000 ELOC Shares available under the ELOC Purchase Agreement, which was approved by theshareholders on June 24, 2025. 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 bepurchased, 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 secondtranche 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 Statementis declared effective by the SEC. Each share of Series B Preferred Stock will have a purchase price of $10.00 per share and a stated value of $12.00 per share, will pay dividends atthe 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 90 day following the date of effectiveness of theELOC 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) thestated 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 WeightedAverage 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 theCompany 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 suchredemption 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 dividendsthereon. The shares of common stock that could result from any conversion of Series B Preferred Stock are anticipated to be registered in the Registration Statement resulting fromthe August 11, 2025 subscription agreements for a private placement. Additional shares of the Company’s Series B Preferred Stock may be sold after the date the ELOCRegistration Statement becomes effective. As of January 24, 2025, the Conversion Price was $1.10 per share, and subsequently adjusted to between $0.4763 and $1.12 per sharebased on the price of our stock when the respective investors subsequently executed documents and purchased their shares. In accordance with the Company’s obligations under the ELOC Purchase Agreement and the Registration Rights Agreement, dated as of January 23, 2025, between theCompany and the Investor (the “ELOC Registration Rights Agreement”), the Company filed 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, and subsequently an additional 10,000,000 shares of common stock under the June 2025 ELOCRegistration Statement) 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 Dateunder the ELOC Purchase Agreement, and (ii) 67,162 Commitment Shares that would result from the exercise of the Commitment Warrants. Unless earlier terminated, the ELOCPurchase 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 PurchaseAgreement, (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 boththe 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 aggregatedwith 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 theCompany’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 andRegistration 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 5,000,000shares of th 24
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) common stock, and subsequently an additional 10,000,000 shares of common stock under the June 2025 ELOC Registration Statement, and 67,162 shares of common stockissuable upon the exercise of the related Commitment Warrants. In February 2025, the Investor exercised the Commitment Warrants for $67. In the six months ended June 30, 2025, an aggregate of 1,437,453 shares of common stock had been sold to the investor under the ELOC Purchase Agreement for aggregategross proceeds to the Company of $730,074. Subsequent to June 30, 2025, an additional 10,525,357 shares of common stock had been sold to the investor under the ELOCPurchase Agreement for aggregate gross proceeds of $4,087,161. Prepaid Warrants to Purchase Common Stock — Prepaid warrants will be eligible for exercise without the payment of additional consideration at any time that therespective 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 thatwould cause the holder to beneficially own 9.99% of the Company’s outstanding shares of common, and having no expiration date. In the six months ended June 30, 2025:1,027,868 prepaid warrants were exchanged for 55,917 shares of Series B Preferred Stock (See also Preferred Stock - Series B below); 327,868 prepaid warrants were issued inconnection with the issuance of Series B Preferred Stock, and 3,071,992 prepaid warrants were exercised for common stock (including 2,321,342 from a related party), leaving100,000 prepaid warrants outstanding (including 0 prepaid warrants outstanding of the related party). Subsequent to June 30, 2025, 100,000 prepaid warrants were exercised,leaving 0 prepaid warrants outstanding. The following sets forth the outstanding prepaid warrants and common warrants as of June 30, 2025: Prepaid Warrants CommonWarrants Balance December 31, 2024 3,871,992 382,205 Exercise of Warrants in Exchange for Common Stock (3,071,992) (112,144)Exercise of Warrants in Exchange for Series B Preferred Stock (1,027,868) — Warrants Issued with Series B Preferred Stock 327,868 — Balance June 30, 2025 100,000 270,061 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 abovebecame 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 withthe initial aggregate $250,000 of non-ELOC Investor Series B Preferred Stock subscriptions (see Preferred Stock - Series B below). In the six months ended June 30, 2025, 3,071,992 prepaid warrants (with an exercise price of $0.001 each) were exercised cashlessly for 3,066,776 shares of common stock(including related party cashlessly exercised 2,321,342 prepaid warrants for 2,317,452 shares of common stock) leaving 100,000 prepaid warrants remaining outstanding. Inaddition, 1,027,868 prepaid warrants (with an exercise price of $0.001 each) were exercised cashlessly for 55,917 shares of Series B Preferred Stock Subsequent to June 30, 2025, 270,061 common warrants were exercised (including 251,265 by a related party) leaving 0 common warrants outstanding (including 0 commonwarrants 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 AConvertible 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 “StatedValue”), 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 equalto 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 publicoffering on November 25, 2024, the exercise price was set at the initial public offering price of $4.00 per share.) The warrants expire 25
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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 orabove 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 of15% 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 APreferred 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 ofcommon 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 commonstock 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 stockover 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 requiredby 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) anamount 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” wasinitially 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 initialConversion Price (and was fixed at $4.00 per share upon the November 25, 2024 initial public offering at $4.00 per share). Each share of Series A Preferred Stock willautomatically 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 availabletherefor, 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 $7,566,104, including accrued dividends of $940,196 as of June 30, 2025) (or$3,221,603 on 210,700 shares of Series A Preferred Stock including accrued dividends of $400,330, excluding the 284,140 shares of Series A Preferred Stock subsequentlyexchanged for Series B Preferred Stock on May 1, 2025. See also Preferred Stock - Series B below). 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 fixedassets 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 agedwhiskey (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 thecancellation of outstanding indebtedness (factoring agreements) (of which $296,619 was from a related party). In addition, the Series A Preferred Stockholders who were issuedSeries 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 Stocksubscriptions (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 APreferred 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 includeany 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 estimatedIPO 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 therelative 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 theprice 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 theNovember 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 the60,563 related party warrants at $5.00 per share were recalculated and reissued as 75,705 warrants at $4.00 per share). 26
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) In consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders, on May 1, 2025, an aggregate of 284,140 outstanding shares of Series APreferred 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 topurchase common stock at $4.00 per share were of a related party) was exchanged for Series B Preferred Stock. See also Preferred Stock - Series B below. 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 ofthe 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 ofSeries A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. Accordingly, the Series A Preferred Stock liquidationpreference as of June 30, 2025 (with 210,700 shares outstanding ,of which 0 were to a related party, and a stated value of $2,528,400) was $3,221,603. 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 amendedand 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 B Preferred Stock”). In June 2025, the Company’s Board of Directors and Shareholders approved an increase in the authorized shares of Series B Preferred Stock from750,000 shares to 850,000 shares. 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 theSeries 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 PreferredStock. 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 ofcommon 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 commonstock 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 stockover 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 requiredby 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) anamount 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 ofthe 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 willautomatically 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 theoutstanding 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 aredemption 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 Companyalso 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). In consideration of purchases of Series B Preferred Stock by certain Series A Preferred Stock holders, on May 1, 2025, certain shareholders agreed to exchange an aggregateof 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 accrueddividends) 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 ofSeries 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 valueof Series A Preferred Stock and related warrants exchanged for Series B Preferred Stock was negotiated based upon: the 27
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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; plusthe value of the related warrants to purchase common stock (calculated using a Black Scholes valuation model). Subsequent to the exchange, there were outstanding: 659,437shares 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 PreferredStock, As of June 30, 2025, the Company had received subscriptions for $7,443,557 (744,354 shares) of Series B Preferred Stock (of which $2,995,437 was from a related party)which included: $4,092,560 or 409,256 shares from the exchange of Series A Preferred Stock and related warrants at a negotiated aggregate value (of which $2,640,437 or 264,043shares was from a related party); $392,000 or 55,917 shares was from the exchange of 700,000 prepaid warrants at a VWAP of $0.56 per prepaid warrant; $167,180 or 16,717shares was from the exchange of 327,868 prepaid warrants at a VWAP of $0.510 per prepaid warrant; $1,150,000 or 115,000 shares was from the ELOC Investor, of which$499,991 was purchased in January 2025 in conjunction with the execution and registration of the ELOC Purchase Agreement; and $1,641,810 or 164,181 shares was from otherinvestors (of which $355,000 or 35,500 shares was from a related party, of which, one other investor subscription of $100,000 or 10,000 shares included a negotiated 327,868prepaid warrants to purchase common stock at $0.001 per share). 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 ofthe 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 ofSeries B Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution or winding up. Accordingly, the Series B Preferred Stock liquidationpreference as of June 30, 2025 (with 744,354 shares outstanding and a stated value of $8,932,248) was $10,072,005, or 20,737,012. shares of common stock based on the respectiveConversion Prices with a high of $1.12, a low of $0.4736, and a weighted average of $0.49. Subsequent to June 30, 2025, the Series B Preferred liquidation preference (with756,854 shares outstanding and a stated value of $9,082,248) was $10,405,553. Subsequent to June 30, 2025, 56,462 shares of Series B Preferred Stock converted into 1,521,175shares of common stock. In conjunction with, and contingent upon, the August 11, 2025 Subscription Agreement discussed in Note 14, 629,873 shares of Series B Preferred Stock that would have beeneligible to be converted into 17,897,336 shares of common stock will be exchanged for: 894,856 shares of common stock; 8,948,676 prepaid warrants with an exercise price of$0.01 per share that are exerciseable for common stock at the earlier of (i) when the common stock closes at $1.50 per share or higher during a regular trading day or (ii) on the 3month anniversary of the warrant issuance date; and, 8,053,804 prepaid warrants with an exercise price of $0.01 per share that are exerciseable for common stock at the earlier of (i)when the common stock closes at $2.00 per share or higher during a regular trading day or (ii) on the 6 month anniversary of the warrant issuance date. (A related party portionthereof being 299,543 shares of Series B Preferred Stock that would be eligible to be converted into 8,635,864 shares of common stock will be exchanged for: 431,791 shares ofcommon stock; 4,317,934 prepaid warrants with an exercise price of $0.01 per share that are exerciseable for common stock at the earlier of (i) when the common stock closes at$1.50 per share or higher during a regular trading day or (ii) on the 3 month anniversary of the warrant issuance date; and, 3,886,139 prepaid warrants with an exercise price of$0.01 per share that are exerciseable for common stock at the earlier of (i) when the common stock closes at $2.00 per share or higher during a regular trading day or (ii) on the 6month anniversary of the warrant issuance date.) (See 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 anticipationof 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 theclosing of the Company’s initial public offering (which occurred on November 25, 2024), the 2024 Equity Incentive Plan (the “2024 Plan”) became effective, authorizing theissuance of up to 2,500,000 shares of common stock. On June 24, 2025, the shareholders approved an increase in the number of shares authorized for issuance under the 2024 Planto up to 5,000,000 shares on common stock. As of June 30, 2025, the Company had made grants of 2,527,500 shares of common stock under the 2024 Plan, and 2,472,500 sharesremained authorized for grant. The 2024 Plan allows for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, RSUawards, performance shares, and performance units to eligible participants for ten (10) years (until November 2034). 28
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) The 2019 Plan allows for the grant of incentive stock options (“ISOs”), nonqualified stock options (“NQSOs”), stock appreciation rights (“SARs”), restricted stock, RSUawards, 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 thefair 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 June 30, 2025 is 254,087. The following sets forth the outstanding ISOs and related activity for the six months ended June 30, 2025: Options Outstanding Number ofShares Weighted-AverageExercise PricePer Share Weighted-AverageRemainingContractualTerm (in years) AggregateIntrinsic 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 (3,598) $ 157.89 Outstanding at June 30, 2025 2,413 $ 157.89 0.93 $ 0.00 Exercisable at June 30, 2025 2,413 $ 157.89 0.93 $ 0.00 Remaining unvested at June 30, 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 grantand 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 andconditions 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 eachISO 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 themedian 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 recent409A 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 earlierof the approval by the Board, or the stockholders, of the 2019 Plan. There were no grants in the six months ended June 30, 2025 and the year ended December 31, 2024. As of June 30, 2025, the Company had $0 of unrecognized compensationexpense 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 0.92years. 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 awardsceases, 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 theservice-based component, and the liquidity-event component (including applicable lock-up periods) must be satisfied prior to an award being settled. Upon settlement, the RSUawards are paid in shares of common stock. The Company recognizes the compensation expense for the restricted stock units based on the fair 29
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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 six months ended June 30, 2025 and 2024: RestrictedStockUnits Weighted AverageExercise PricePer Share Vested and Outstanding at December 31, 2024 245,439 $ 10.93 Granted 2,527,500 $ 1.24 Settled (2,772,939) $ 2.10 Forfeited/Canceled/Expired — Vested and Outstanding at June 30, 2025 —$ — During the three months ended June 30, 2025 and 2024, the Company recognized $3,127,807 and $0, respectively; and during the six months ended June 30, 2025 and 2024,the Company recognized $3,127,807 and $0, respectively, of stock-based compensation expense in connection with RSU awards granted under the plans. Compensation expensefor RSU awards is recognized upon meeting both the time-vesting condition and the triggering event condition. As of June 30, 2025, 0 restricted stock units (“RSUs”) wereforfeited. 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 stockincentive plan (or May 24, 2025, which is 180 days from the November 25, 2024 closing of the Company’s initial public offering). The following table presents stock-based compensation expense included in the condensed consolidates statements of operations related to RSUs issued under the 2024 Plan: For the Six Months EndedJune 30, 2025 2024 Cost of Sales $ 121,107 $ Sales and Marketing 647,295 General and Administrative 2,359,406 Total Share-based Compensation $ 3,127,807 $ 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 MonteCarlo 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 theclosing 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 commonshareholders 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 holdercontinuously 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 averageprice 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 reaches200% of the $4.00 per share initial public offering price (or 30
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) $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 reaches300% 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 reaches500% 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 pricingmodel. 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 June 30, 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 1.33years, 2.83 years, and 4.59 years, respectively. 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 commonstock 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 weresubject 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 NoteShareholder Warrants”). The Whiskey Note Shareholder Warrants will be exercisable if the warrant holder continuously holds all shares of common stock such holder owned on thedate 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 recorded the fair value of the Whiskey Note Shareholder Warrants of$152.90 in the three months ended June 30, 2025 based on a Black Scholes option pricing model and Monte Carlo simulation analysis. Other equity classified warrants — During the three months ended June 30, 2025 and 2024, respectively, the Company issued a total of 1,617,351 and 183,000 warrants,including: 733,192 and 0 warrants to purchase common stock at $0.01 per share issued in connection with the issuance of Series B Preferred Stock (of which, 49,019 and 0 were toa related party); and 884,159 and 0 Whiskey Note Shareholder Warrants to purchase common stock at $4.00 per share (of which 0 and 0 were to a related party). During the sixmonths ended June 30, 2025 and 2024, respectively, the Company issued a total of 1,803,720 and 91,500 warrants, including: 852,399 and 0 warrants to purchase common stock at$0.01 per share issued in connection with the issuance of Series B Preferred Stock (of which, 102,437 and 0 were to a related party); 884,159 and 0 Whiskey Note ShareholderWarrants to purchase common stock at $4.00 per share; and, 67,162 and 0 Commitment Warrants to purchase common stock at $0.001 per share issued in connection with theELOC Agreement (that were exercised in February, 2025). 31
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 7 — STOCKHOLDERS’ EQUITY / (DEFICIT) (cont.) 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 equityclassified warrants, including: 83,333 warrants at $6.00 per share in conjunction with July 2024 accounts receivable factoring agreement; 84,377 Underwriter Warrants inconjunction 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 issuanceof 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 as246,267 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 sixmonths ended June 30, 2025, and the year ended December 31, 2024, the assumptions used in the Black-Scholes option pricing model were as follows: For the Six Months EndedJune 30, 2025 For the Year EndedDecember 31, 2024 Weighted Average Expected Volatility 70% 70% Expected Dividends —% —% Weighted Average Expected Term (in years) 5 5 Risk-Free Interest Rate 3.88% - 4.66% 4.22% As of June 30, 2025 and December 31, 2024, in addition to the Contingent Legacy Shareholder Warrants discussed above, there were outstanding and exercisable warrants topurchase 2,304,327 and 796,176, respectively, shares of common stock, As of June 30, 2025, the weighted-average remaining contractual term was 3.91 years for the outstandingand 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 publicoffering 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 mayincrease 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. To date, the underwriter has notexercised 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 asuccessful 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 theirdeferred 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 Companyrecorded $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 liabilitiesas of June 30, 2025. Accordingly, as of June 30, 2025, upon the expiration of the 6 month post-IPO lockup period (in May 2025) the Company issued approximately $1,894,615 inequity compensation (in the form of 473,652 RSUs) in settlement of the deferred compensation liability. During the six months ended June 30, 2025 certain senior level employeeselected to defer an additional $79,275 of their salary, resulting in $470,454 remaining to be paid as of June 30, 2025. Subsequent to June 30, 2025, the Company paid $236,907 ofthe deferred compensation, leaving a balance of $233,547 remaining to be paid. (See also Note 14.) 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 abusiness 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 thecontingent 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 anoperating 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 sharesof 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-upprovision (to the price per share of the Company’s anticipated IPO, if lower — which, as of September 30, 2024, was $5.00 32
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 8 — ACQUISITION OF THINKING TREE SPIRITS (cont.) 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 underOregon 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 TreeSpirits 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 publicoffering 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 issuinga 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 theThinking 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 thetrue-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 (whichoccurred 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 inaccordance with ASC 480, and was reclassified to equity. The estimated fair value of the $127,076 in estimated future contingent values (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, atwhich 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 resultingentity. 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 judiciallydetermined 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 assumptionsare 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. Theamount 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 theyare 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 hasmade 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 weassumed 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 theCompany 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 agreedupon 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 commonstock 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 consideredoutstanding. 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 anddocumentation 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 objectionfrom 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 ofOregon 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 theamount being sought is without merit and grossly overinflates the value of the enterprise, and we intend to vigorously defend this matter. We have reached a settlement in principalon this matter, relinquishing all of Mr. McAlister’s claims in exchange 33
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 8 — ACQUISITION OF THINKING TREE SPIRITS (cont.) for $140,000 and are awaiting final execution of the settlement documents. Further, we believe we have counterclaims against the plaintiff for actions taken by him before, duringand 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 ofnetting 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 theremaining 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 suchshares 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 advisedby 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 thatoption 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 ortermination, 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 todetermine the operating lease term. The Company generally uses the base, non-cancelable lease term when determining the operating lease ROU assets and lease liabilities. TheROU asset is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable in accordance with AccountingStandards 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. Themonthly 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 anoption for a three year extension. The change in ROU assets and related liabilities both for the terminated lease and the new warehouse lease were captured on the March 31, 2025balance sheet. The Company also negotiated the reduction of warehouse space of its largest warehouse effective September 15, 2025, reducing annualized expenses for that spaceby approximately two-thirds. The following table presents the consolidated lease cost for amounts included in the measurement of lease liabilities for operating leases for the three and six months endedJune 30, 2025 and 2024, respectively: Three Months EndedJune 30, Six Months EndedJune 30, 2025 2024 2025 2024 Lease Cost: Amortization of Right-of-Use Assets $ 105,070 $ 113,086 $ 200,727 $ 257,470 Interest on Lease Liabilities 222,933 242,939 455,278 467,115 Operating lease cost 27,983 19,333 57,627 19,333 Total lease cost $ 355,986 $ 375,358 $ 713,632 $ 743,918 ____________ (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 June 30, 2025 and 2024,respectively: June 30, 2025 2024 Weighted-average remaining lease term – operating leases (in years) 4.8 5.8 Weighted-average discount rate – operating leases 22% 22% (1) 34
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 9 — LEASES (cont.) The Company’s ROU assets and liabilities for operating leases were $3,284,292 and $3,906,963, respectively, as of June 30, 2025. The ROU assets and liabilities foroperating 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-UseAssets, net” in the accompanying consolidated balance sheets. The liabilities for operating leases were included in the “Operating Lease Liabilities, Current” and “Operating LeaseLiabilities, net of Current Portion” in the accompanying consolidated balance sheets. Maturities of lease liabilities for the remainder of 2025 and the years through 2029 and thereafter are as follows: 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 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 receivefrom 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-partyinfringement 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, andparties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless againstspecified 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 purposesinfringe 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 ofliability 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 beinvolved in each claim. Litigation — CFGI — On January 31, 2025, CFGI, LLC (“CFGI”) commenced a litigation against the Company in the Superior Court, Suffolk County, Massachusettsasserting claims arising under a November 1, 2022 written engagement letter agreement whereby CFGI agreed to provide financial, accounting and tax consulting services to theCompany. CFGI contended that it fully performed its obligations under such agreement, but that the parties amended the agreement on or about May 22, 2023 when the Companyfell behind in its payments. CFGI alleged further that, while the Company made some payments under the amended agreement, CFGI was 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 filed an answer to that complaint on May 12and answers to interrogatories on June 10 to stay current with the litigation process while it worked to negotiate a settlement. As of December 31, 2024 the Company had accruedthe entire amount payable to CFGI and the Company was in negotiations with CFGI on alternate payment terms that would have allowed the Company to pay the amounts due toCFGI over time. On July 30, 2025 the parties entered into a 35
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 10 — COMMITMENTS AND CONTINGENCIES (cont.) settlement agreement whereby the Company paid $500,000 in full settlement of all amounts claimed by the plaintiff in the litigation and the litigation was terminated. (See alsoNote 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 Oregonagainst 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 amountbeing 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 againstthe 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’sinvestment in Thinking Tree Spirits. The parties reached agreement on August 8, 2025 whereby the dissenter relinquished his claims in exchange for $140,000, ending the matter.(See also Note 14.) As of June 30, 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 Companywas 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 $1.00per 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 theNasdaq 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) consecutivebusiness 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, theCompany 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 Marketwith 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 suchsecond 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’sstaff 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 todelisting 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 andregain 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 theMinimum 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 BidPrice 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 ofemployment. No contributions have been made by the Company during the six months ended June 30, 2025 and 2024. 36
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) 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 Companylocation in Eugene, Oregon. The Company engaged Summit Distillery, Inc. to manage the Eugene location for an annual management fee. The principals and sole owners ofSummit Distillery, Inc., are also shareholders of HDHC. For each of the three months ended June 30, 2025 and 2024, the Company expensed a management fee of $45,000, and foreach of the six months ended June 30, 2025 and 2024, the Company expensed a management fee of $90,000 that was paid to Summit Distilling, Inc. The fee is based upon apercentage 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 thenumber of common stock shares and pre-paid warrants to purchase common stock held by the party. As of June 30, 2025, the related party owned less than 4.99% of the outstandingcommon 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 beexercised 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% reportingthreshold. 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 notespayable, 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 prepaymentused to purchase a Whiskey Note in the principal amount of $672,500 and subsequently exchanged (contingent upon the consummation of this offering, which occurred onNovember 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 commonstock 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 $1,000for 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 accountsreceivable; 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 toexchange 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 sharesof 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 “$5.00Warrants”), 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 5,000warrants 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 factoringarrangement 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 investorsreceived 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 thetotal 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: within3 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 toexchange 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, 14,983warrants to purchase shares of 37
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 12 — RELATED-PARTY TRANSACTIONS (cont.) 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 PreferredStock, 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 pershare 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 10,416warrants at $4.00 per share. 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 SeriesA 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). Thevalue 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 relatedparty), 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 APreferred 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 theCompany’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 as6,913 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 barrelsback 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 relatedparty 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 theCompany 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 250,000prepaid warrants to purchase common stock. In the three and six months ended June 30, 2025, the related party exercised 1,203,783 and 2,321,342 prepaid warrants, respectively, (with an exercise price of $0.001 each)cashlessly for 1,201,543 and 2,317,452 shares of common stock, leaving 0 prepaid warrants outstanding as of June 30, 2025. Related Party Contingent Legacy Shareholder Warrants (See also Note 7) — On October 30, 2024, the Company issued warrants to purchase common stock that becamecontingently 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 / contingentupon: 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 specifiedvolume 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 reaches200% 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 reaches300% 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 reaches500% of the $4.00 per share initial public offering price (or 38
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 12 — RELATED-PARTY TRANSACTIONS (cont.) $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 June 30, 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). 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 outstandingduring 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 sharesoutstanding during the period, plus the dilutive effect of the stock options, RSU awards and exercisable common stock warrants, as applicable pursuant to the treasury stockmethod, 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) pershare: For the Three Months EndedJune 30, For the Six Months EndedJune 30, 2025 2024 2025 2024 Basic earnings per share of common stock: Numerator: Net Income / (Loss) for the period $ (7,295,078) $ 8,406,501 $ (10,328,125) $ 8,859,341 Preferred stock dividend (1,178,544) (13,537) (1,650,573) (13,537) Net Income / (Loss) for the period – basic $ (8,473,622) $ 8,392,964 $ (11,978,698) $ 8,845,804 Denominator: Weighted average number of shares of common stock - basic 11,000,519 421,799 10,335,057 421,799 Net Income / (Loss) per share of common stock - basic $ (0.77) $ 19.90 $ (1.16) $ 20.97 Diluted earnings per share of common stock: Numerator: Net Income / (Loss) for the period - basic $ (8,473,622) $ 8,392,964 $ (11,978,698) $ 8,845,804 Change in fair value of dilutive convertible notes — (1,941,370) — (18,216,803)Change in fair value of dilutive warrants — (546,672) — (1,794,334)Net Income / (Loss) for the period - diluted $ (8,473,622) $ 5,904,922 $ (11,978,698) $ (11,165,333) Denominator: Weighted average number of shares of common stock - basic 11,000,519 421,799 10,335,057 421,799 Conversion of Convertible Notes into Common Stock — 3,819,542 — 3,819,542 Conversion of Warrants into Common Stock — 331,722 — 331,722 Weighted average number of shares of common stock - diluted 11,000,519 4,573,063 10,335,057 4,573,063 Net Income / (Loss) per share of common stock - diluted $ (0.77) $ 1.29 $ (1.16) $ (2.44) (1) Includes 100,000 prepaid warrants for the period ended June 30, 2025. (1) (1) 39
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 13 — BASIC AND DILUTED NET LOSS PER SHARE (cont.) Diluted earnings / (loss) per share reflect the potential dilution of securities that could share in the earnings of an entity. For the three and six months ended June 30, 2024, thecalculation 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 gainsfrom 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 outstandingpotentially dilutive securities were excluded from the computation of diluted net income / (loss) per share attributable to common stockholders for the periods presented becauseincluding them would have been antidilutive: For the Three and SixMonths EndedJune 30, 2024 2024 ISOs 2,413 6,164 RSU Awards — 243,089 Equity-classified Warrants 2,942,600 148,649 Liability-classified Warrants — 908,334 Legacy Warrants 3,439,953 — Warrants issued with Preferred Stock (Series B) 852,399 — Convertible Notes — 3,072,906 Preferred Stock (Series A) 805,288 486,097 Preferred Stock (Series B) 20,737,012 — Total 28,779,665 4,865,239 NOTE 14 — SUBSEQUENT EVENTS For its condensed consolidated financial statements as of June 30, 2025 and for the period then ended, the Company evaluated subsequent events through the date on whichthose 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 thedate the condensed consolidated financial statements were available to be issued. Private Placement of Common Stock (Private Investment in Public Equity (“PIPE”)) — On August 11, 2025, Heritage Distilling Holding Company, Inc. (the“Company”) entered into subscription agreements (each, a “Subscription Agreement” and collectively the “Subscription Agreements”) with certain institutional and accreditedinvestors (each, an “Investor” and collectively, the “Investors”), pursuant to which the Company, subject to the restrictions and satisfaction of the conditions in the SubscriptionAgreements, has agreed to sell in a private placement (the “Offering”) to the Investors an aggregate of $183,478,891 shares (the “Shares”) of the Company’s common stock, parvalue $0.0001 per share (the “Common Stock”), and pre-funded warrants (the “Pre-Funded Warrants”) to acquire in the aggregate up to 186,900,000 shares of Common Stock. Thepurchase price for the Shares is $0.6043 per share (the “Share Price”) and the purchase price for the Pre-Funded Warrants is equal to the Share Price less $0.0001, or $0.6042 perPre-Funded Warrant. Included among the Investors in the Offering are Story Foundation, the entity behind the Story Network (“Story Foundation”), which has agreed to purchase 9,295,141 Sharesand Pre-Funded Warrants to purchase 85,000,000 shares of Common Stock; Justin Stiefel, the Company’s Chairman and Chief Executive Officer, who has agreed to purchase3,309,614 Shares; and Andrew Varga, a director of the Company, who has agreed to purchase 300,000 Shares. 40
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 14 — SUBSEQUENT EVENTS (cont.) Of the total $223,819,964 purchase price for the Shares and the Pre-Funded Warrants, $50,862,166 is expected to be paid in cash, $49,137,833 is expected to be paid in thecryptocurrency stablecoin commonly referred to as USDC (“USDC”), based on a purchase price of $1.00 per USDC, and $123,819,949 is expected to be paid in the nativecryptocurrency of the Story Network, referred to as $IP Tokens (“$IP Tokens”), which will be valued for purpose of the Subscription Agreement at (i) $5.2413 (representing a 20%discount from the closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case of the Story Core Contributors (as defined in the SubscriptionAgreements), (ii) $3.40 (representing an approximate 48% discount from the closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case ofStory Foundation, or (iii) $6.5516 (the reported closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case of all other Investors. The Offering is anticipated to close in August, 2025, subject to the satisfaction of customary closing conditions, and subject to shareholder approval of specific parts of thetransaction. The Company intends to use (a) up to $4.0 million of the net proceeds from the Offering for general corporate purposes initiated after the closing, (b) up to $0.6 millionfor pre-existing working capital commitments or obligations, and (c) at least $80.0 million to purchase $IP Tokens from Story Foundation at a price per $IP Token of $3.40. Thebalance of the net proceeds will be used to purchase or otherwise acquire $IP Tokens and for the establishment of the Company’s cryptocurrency treasury operations to the extentconsistent with the Company’s investment policy as amended or otherwise modified from time to time. The Company shall not use more than $7.0 million of such proceeds: (i) forthe satisfaction of any portion of the Company’s debt (other than payment of trade payables in the ordinary course of the Company’s business and prior practices), (ii) for theredemption of any Common Stock or (iii) for the settlement of any outstanding litigation. In connection with the announcement of the Offering, the Company announced the launchof its digital asset treasury reserve strategy, to be effective upon the closing of the Offering, pursuant to which the Company plans to use $IP Tokens as its primary treasury reserveasset on an ongoing basis. The is no assurance that the Company will be able to close on this transaction, or that if it does close the transaction, that it will be with substantially thesame terms as described herein. If the transaction closes, the Company will disclose the final details in a related 8-K filing. Issuer shall have the option, with input from Foundation Investor on timing and amount, on the use of its currently registered and effective ELOC to raise capital for debtreduction and other corporate purpose related to its business. Series B Preferred Stock -- In conjunction with, and contingent upon, the August 11, 2025 Subscription Agreement discussed above, 629,873 shares of Series B PreferredStock that would have been eligible to be converted into 17,897,336 shares of common stock will be exchanged for: 894,856 shares of common stock; 8,948,676 prepaid warrantswith an exercise price of $0.01 per share that are exerciseable for common stock at the earlier of (i) when the common stock closes at $1.50 per share or higher during a regulartrading day or (ii) on the 3 month anniversary of the warrant issuance date; and, 8,053,804 prepaid warrants with an exercise price of $0.01 per share that are exerciseable forcommon stock at the earlier of (i) when the common stock closes at $2.00 per share or higher during a regular trading day or (ii) on the 6 month anniversary of the warrant issuancedate. (A related party portion thereof being 299,543 shares of Series B Preferred Stock that would be eligible to be converted into 8,635,864 shares of common stock will beexchanged for: 431,791 shares of common stock; 4,317,934 prepaid warrants with an exercise price of $0.01 per share that are exerciseable for common stock at the earlier of (i)when the common stock closes at $1.50 per share or higher during a regular trading day or (ii) on the 3 month anniversary of the warrant issuance date; and, 3,886,139 prepaidwarrants with an exercise price of $0.01 per share that are exerciseable for common stock at the earlier of (i) when the common stock closes at $2.00 per share or higher during aregular trading day or (ii) on the 6 month anniversary of the warrant issuance date.) (See also Note 7.) In conjunction with the August 11, 2025 Subscription Agreement discussed above,the Company also negotiated restructurings and settlement agreements with outstandingsecured notes and unsecured payables as discussed in more detail below. Negotiated Restructurings and Settlement Agreements with Outstanding Secured Notes and Unsecured Payables -- In July 2025, the Company negotiated terms withits secured notes payable creditor and a number of its unsecured creditors (the “Negotiated Settlements”), whereby, contingent and effective only upon the occurrence of: a) theclosing of a financing transaction between the Company and third party private investors in excess of $75 million dollars and involving a tradable cryptocurrency, token or othersimilar digital asset (the “Trigger Date”); b) the approval of Company’s stockholders of such transaction at a duly called Special Meeting; and c) effectiveness of a registrationstatement related to such transaction filed with the Securities and Exchange Commission in accordance with the Securities Act of 1933, as amended, that the Company will payagreed upon cash amounts due to the respective obligees, as agreed, in 41
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Table of Contents Heritage Distilling Holding Company, Inc.Notes to Condensed Consolidated Financial Statements(unaudited) NOTE 14 — SUBSEQUENT EVENTS (cont.) cash and or equity, in settlement of amounts owed to such obligees. The equity portion of the Negotiated Settlements is in the form of warrants to purchase common stock at $0.01per share, exercisable at the earlier of (i) 6-months or (ii) the day following the issue date of the respective warrants on which the closing price of the common stock equals orexceeds $1.50 per share, which were valued based on a Black Scholes valuation (the “Settlement Equity”). The result of the Negotiated Settlements with the secured and unsecuredcreditors was: a) $8,989,438 of the Company’s secured notes payable as of June 30, 2025 plus $995,474 of payoff related fees and expenses negotiated to be settled for $7,000,000in cash, $2,848,000 of Settlement Equity (in the form of 4,000,000 warrants) with the remaining $2,635,507 to be recognized as a gain on settlement in the statement of operations;and, b) an aggregate of $3,792,767 of the Company’s unsecured accounts payable as of June 30, 2025 was negotiated to be settled for $1,816,250 in cash, $605,795 in SettlementEquity (in the form of an aggregate of 1,527,820 warrants) with the remaining $1,138,541 to be recognized in the then current period (third quarter) statement of operations in therespective expense accounts to which the expenses were originally recorded. ELOC Agreement — Subsequent to June 30, 2025, an aggregate of 10,525,357 shares of common stock had been sold to the investor under the ELOC Purchase Agreementfor aggregate gross proceeds to the Company of $4,087,161. Exercise of Common Warrants and Prepaid Warrants — Subsequent to June 30, 2025, 100,000 prepaid warrants and 18,796 common warrants were exercised for $1,188,leaving 0 prepaid warrants outstanding and 0 common warrants outstanding (including 0 common warrants outstanding of the related party). Litigation — CFGI — On January 31, 2025, CFGI, LLC (“CFGI”) commenced a litigation against the Company in the Superior Court, Suffolk County, Massachusettsasserting claims arising under a November 1, 2022 written engagement letter agreement whereby CFGI agreed to provide financial, accounting and tax consulting services to theCompany. 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 Companyfell behind in its payments. CFGI alleges further that, while the Company made some payments under the amended agreement, CFGI was then owed approximately $730,000, plusinterest. On July 30, 2025, the parties entered into a settlement agreement whereby the Company paid $500,000 in exchange for closing out the balance owed and ending thelitigation. (See Note 10.) See also Negotiated Restructurings and Settlement Agreements and with Outstanding Secured Notes and Unsecured Payables above for additional details. 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 Oregonagainst 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 amountbeing 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 againstthe 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’sinvestment in Thinking Tree Spirits. The parties reached agreement dated August 4, 2025, whereby the dissenter relinquished his claims in exchange for $140,000, ending thematter. (See also Note 10.) 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 asuccessful public registration of its stock (which occurred on November 25, 2024). (See Note 5.) Subsequent to June 30, 2025, the Company paid $236,907 of the deferredcompensation, leaving a balance of $233,547 remaining to be paid. During the six months ended June 30, 2025 certain senior level employees elected to defer an additional $79,275of their salary, resulting in $470,454 remaining to be paid as of June 30, 2025. Subsequent to June 30, 2025, the Company paid $236,907 of the deferred compensation, leaving abalance of $233,547 remaining to be paid. (See also Note 7.) 42
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Table of Contents 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 statementsand 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 historicalconsolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differmaterially 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 thesection 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” cannedcocktails. 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 tastingrooms. 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 SpiritsAssociation, 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 distilledspirits 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 ofGrand 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 salesteams 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 leadingindependent 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 Goldmedals 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 anational 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 theleading 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 andby 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. Inaddition, in collaboration with Native American tribes, we have recently developed a new sales, manufacturing and distribution channel on tribal lands that we expect will increaseand 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 homeswhere 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. populationreside. 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 canthen 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 generatingmore 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 andoff-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 productpull-through of those products in partnership with wholesalers in those targeted states. While DtC sales result in singular high-margin sales, growing volume through wholesaledistribution is the most efficient way to drive large-scale growth across retail chains. 43
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Table of Contents 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 saleschannel 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 typicalTBN 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 supportproduct trials and sampling, and will generate sales of finished, intermediate and bulk spirits depending on location, equipment and market. Importantly, because these premiumspirits 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 footprintexpands, 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 andawareness. 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 tribaldistilleries. 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 thefollowing: 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 theconstruction of our existing production facilities and contracted with established distributors, we now intend to focus our production capacity, record of success in developingaward-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 ourproducts 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-specificdynamics 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 mixof 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 thesecond 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 highnatural 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 basedon 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 foraluminum cans. In late March and early April the Trump administration instituted blanket tariffs of varying amounts on virtually all countries, resulting in market and consumerapprehension 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, andretaliatory 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 costimpacts 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 indicatedtheir 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 bottlequantities 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 in2024. 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. Wedo 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 agewhiskey 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 bankruptcyannouncements 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 licenseddrivers, 44
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Table of Contents 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 athome, and their desire for more compensation creates higher cost pressures on overall operations absent finding offsetting cost efficiencies. In addition, the annual minimum wageincreases 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 anisolated 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 tobuy 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 ofowning 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, whichworks 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 thanhalf, 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 theSalute 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 firstquarter 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 andprint 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 forthose 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 believesthat 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 revenuerepresents 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 andother applicable importing costs, shipping and handling costs, packaging, warranty replacement costs, fulfillment costs, warehousing costs, and certain allocated costs related tomanagement, 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 andgross 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; 45
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Table of Contents • 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 managersand 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 ormarketing, 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 andmarketing expenses also include the costs of sports and venue sponsorships, radio, television, social media, influencers, direct mail and other traditional marketing costs, costsrelated 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 locationsin 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 andhuman 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 generaland 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 andregulations 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, aswell as increased expenses for general and director and officer insurance, investor relations, directors fees and other administrative and professional services. In addition, we expectto 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 costsassociated with preparing our initial public offering will not need to be recurring expenses, allowing us to focus on baseline costs. As of June 30, 2025, all restricted stock units (“RSUs”) had settled on the six month anniversary of our initial public offering, which was completed in November 2024,leaving zero outstanding. We recognized an aggregate of $2,684,395 of previously-unrecognized compensation expense for RSU awards upon completion of our IPO. Includedabove 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. TheseRSUs contained a double trigger and, upon grant, were deemed to have met their time-based service requirements for vesting. 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 orassets, 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 theConvertible 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 exercisefeatures. 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 theywere 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 interestat 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 relatedwarrants 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 theaccrued interest components of the Convertible Notes were also included within the single line of change in fair value of convertible notes 46
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Table of Contents 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 relatedwarrants were converted to equity effective November 25, 2024. Changes in Fair Value of Investment in Flavored Bourbon, LLC As of June 30, 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 anyimpairment 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 recoveryof 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, orwe 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 ofthe 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, inaccordance 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 ofour 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 ofoperations 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 numberof 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 pershare 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 andwas 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 theConvertible 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 $3,204,185recorded 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 warrantswere 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 thethen-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 (onNovember 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 aggregateamount 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 pershare 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 thoseconvertible 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 whichthe 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, theaggregate 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 tocommon stock was then satisfied. With the satisfaction of that remaining contingency, the exchange of the convertible notes payable for common stock qualified for equityclassification. 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 aliabilities on our consolidated balance sheet pursuant to ASC Topic 480 47
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Table of Contents 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 inour 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 onNovember 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 theexercise 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 taxpositions, changes in deferred tax assets and liabilities and changes in tax law. Comparison of the Results of Operations for the Three Months Ended June 30, 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 differencesbetween: aggregating the individually rounded component numbers; and the rounding of the total of the individual (non-rounded) component numbers. In cases where roundingoccurred, the amount of the rounding difference is generally $1,000 or less. Such differences are considered to be insignificant. The following table summarizes our results ofoperations for the three months ended June 30, 2025 and 2024. 48
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Table of Contents For the Three Months Ended June 30, 2025 2024 Change Net Sales Products $ 1,060,443 $ 1,444,035 $ (383,592) Services 261,379 398,280 (136,901) Total Net Sales 1,321,822 1,842,315 (520,493) Cost of Sales Products 1,082,943 1,097,898 (14,955) Services 11,791 (3,380) 15,171 Total Cost of Sales 1,094,734 1,094,518 216 Gross Profit 227,088 747,797 (520,709) Operating Expenses Sales and Marketing 1,971,923 1,297,796 674,127 General and Administrative 4,904,126 1,747,694 3,156,432 Total Operating Expenses 6,876,049 3,045,490 3,830,559 Operating Loss (6,648,961) (2,297,693) (4,351,268) Other Income (Expense) Interest Expense (595,309) (634,650) 39,341 Change in Fair Value of Convertible Notes — 9,615,837 (9,615,837) Change in Fair Value of Warrant Liabilities — 1,274,812 (1,274,812) Change in Fair Value of Contingency Liability — 457,127 (457,127) Other (Income) / Expense (47,686) 218 (47,904) Total Other Expense (642,995) 10,713,344 (11,356,339) Income/(Loss) Before Income Taxes (7,291,956) 8,415,651 (15,707,607) Income Taxes (3,122) (9,150) 6,028 Net Income / (Loss) $ (7,295,078) $ 8,406,501 $ (15,701,579) Net Income / (Loss) Per Share, Basic $ (0.77) $ 19.90 (20.67) Weighted Average Common Shares Outstanding, Basic 11,000,519 421,799 $ 10,578,720 Net Income/(Loss) Per Share, Diluted $ (0.77) $ 1.29 $ (2.06) Weighted Average Common Shares Outstanding, Diluted 11,000,519 4,573,063 6,427,456 49
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Table of Contents Net Sales Three Months Ended June 30,(rounded to $000’s) Total Sales 2025 2024 Change Products $ 1,060,000 $ 1,445,000 $ (385,000) Services 261,000 399,000 (138,000) $ 1,321,000 $ 1,844,000 $ (523,000) Net sales were approximately $1,321,000 and $1,844,000 for the three months ended June 30, 2025 and 2024, respectively, a decrease of approximately $523,000, or 28.4%,period over period. The approximately $385,000 net decrease in products sales, period over period, included: Products Sales Three Months Ended June 30,(rounded to $000’s) 2025 2024 Change Wholesale $ 457,000 $ 489,000 $ (32,000) Retail 603,000 939,000 (336,000) Third Party — 17,000 (17,000) $ 1,060,000 $ 1,445,000 $ (385,000) • The Company was involved in reevaluating its options and opportunities in the second quarter related to several cryptocurrency treasury strategies visa vi its overallretail focus while working to reduce overhead and preserve cash as it evaluated several possible cryptocurrency transactions. As a result, the Company pulled back onsignificant marketing spend for its goods and services as it focused its attention on evaluating the cryptocurrency landscape. The year over year approximate 336,000decrease included second quarter 2024 DtC sales decrease from continued sales of the Salute Series Army initial edition and the launch of the D-Day Series whichincluded three products. DtC sales for second quarter 2025 was a more modest launch of two new editions, Green Beret and Iwo Jima. A portion of the reduction in retailrevenue in the three months ended June 30, 2025 versus 2024 was also from the continued reduction of hours in some of our brick and mortar retail locations Aprilthrough May, and the decision to close some locations on Mondays and Tuesdays to reduce labor expenses on our slowest retail sales days during the quarter. During thesame period in 2024 our retail locations were open seven days per week. We reopened those locations on Mondays and Tuesdays close to the Memorial Day holiday totake advantage of higher summer foot traffic. Also contributing to the decrease was the closure of our Thinking Tree Spirits location that was open in the second quarter2024. The approximately $139,000 decrease in net sales of services period over period included: Services Sales Three Months Ended June 30,(rounded to $000’s) 2025 2024 Change Third Party Production $ 7,000 $ 6,000 $ 1,000 Retail Services 247,000 365,000 (118,000) Consulting and Other 6,000 28,000 (22,000) $ 260,000 $ 399,000 $ (139,000) • The approximately $118,000 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 decisionto 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 retaillocations 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 advantageof higher summer foot traffic. 50
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Table of Contents • The approximately $22,000 decrease in consulting fees is related to TBN projects as we saw the successful completion and opening of the Stillaguamish project inOctober 2024 and we moved the announced Coquille and Tonto Apache projects that were in planning phase into construction phase in preparation for openings in late2025. Cost of Sales Cost of sales were approximately $1,095,000 and $1,098,000 for the three months ended June 30, 2025 and 2024, respectively, a decrease of approximately $(3,000), or21.0%, period over period. Cost of Sales for the three months ended June 30, 2025 includes approximately $121,000 of non-cash share-based compensation expenses related toRSU grant awards recognized in the three months ended June 30, 2025 for production employees compared to no such award recognition in 2024. Three Months Ended June 30,(rounded to $000’s) Cost of Sales 2025 2024 Change Products 1,083,000 1,101,000 $ (18,000) Services 12,000 (3,000) 15,000 $ 1,095,000 $ 1,098,000 $ (3,000) The approximately $18,000 decrease in net products cost of sales period over period included: a decrease in product cost of approximately $114,000 to approximately$476,000 for the three months ended June 30, 2025, from approximately $590,000 for the three months ended June 30, 2024, and a increase in unabsorbed overhead ofapproximately $96,000 to approximately $607,000 as of June 30, 2025 from approximately $511,000 as of June 30, 2024. We made the choice to move our sales focus onto highermargin 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 ofoverhead increases the unabsorbed overhead, and the associated cost per case, using standard cost accounting methodologies. Assuming all other factors remain steady in thebusiness, 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 highvolume production to higher margin products. Services cost of sales decreased by approximately $15,000 to approximately $12,000 for the three months ended June 30, 2025 from approximately $3,000 for the threemonths ended June 30, 2024 primarily resulting from us ending a low-margin third party production contract for another brand and the wind down of barrel production for thirdparties. Components of Products Cost of Sales Three Months Ended June 30,(rounded to $000’s) 2025 2024 Change Product Cost (from inventory) $ 476,000 $ 590,000 $ (114,000) Overhead – Unabsorbed 607,000 511,000 96,000 $ 1,083,000 $ 1,101,000 $ (18,000) Components of Products Cost of Sales Three Months Ended June 30,(rounded to $000’s) 2025 2024 Change Product Cost (from inventory) 44.0 % 53.6 % (9.6)% Overhead – Unabsorbed 56.0 % 46.4 % 9.6 % 100.0 % 100.0 % — % • Unabsorbed overhead as a component of Product Cost of 56.0% and 46.4% for the three months ended June 30, 2025 and 2024, respectively, are significant contributors toour 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 havesignificant opportunities to push this cost component 51
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Table of Contents 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 unabsorbedoverhead percentage in the three months ended June 30, 2025 compared to the fourth quarter 2024 is a reflection of the large product sales and volume we had during inthe fourth quarter of 2024 given fourth quarter of a year is typically the strongest quarter and the first quarter is typically the slowest quarter of the year in the spiritsindustry. (See below for our discussion on Gross Margins related to unabsorbed overhead in Non-GAAP Financial Measures). The approximately $18,000 decrease in net products cost of sales period over period is further detailed as follows: Cost of Sales Products Sales Three Months Ended June 30,(rounded to $000’s) 2025 2024 Change Spirits – Wholesale $ 303,000 $ 316,000 $ (13,000) Spirits – Retail 141,000 209,000 (68,000) Spirits – Third Party — 14,000 (14,000) Merchandise and Prepared Food 32,000 51,000 (19,000) Unabsorbed Overhead 607,000 511,000 96,000 $ 1,083,000 $ 1,101,000 $ (18,000) • The approximately $13,000 decrease in wholesale product cost of sales to approximately $303,000 for the three months ended June 30, 2025 compared to approximately$316,000 for the three months ended June 30, 2024 was primarily the result of the shifting of some wholesale orders from the first quarter to the second quarter based ontiming 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 June 30, 2025. • Our unabsorbed overhead, which is a measure of our capacity relative to our current utilization, increased by approximately $96,000 to approximately $607,000 for thethree months ended June 30, 2025 compared to approximately $511,000 for the three months ended June 30, 2024. The unabsorbed overhead expense indicates ourunderutilization of current production capacity as we move away from low-margin, high volume products into higher margin products. Our goal continues to be thereduction of unabsorbed overhead over time as our production volumes increase with increased sales and as we reduce overhead costs associated with excess productioncapacity, warehouse space and other real estate. The combined efforts of increasing high margin product sales and reducing general overhead costs are geared towardreducing our overhead expenses to have our remaining overhead right-sized to our strategy of focusing on producing and selling high margin super premium items. (Seebelow for our discussion on Gross Margins related to unabsorbed overhead in Non-GAAP Financial Measures). Gross Profit Gross profit was approximately $225,000 and $745,000 for the three months ended June 30, 2025 and 2024, respectively, a decrease of approximately $520,000, or 70%,period over period, and included: Total Gross Profit Three Months Ended June 30,(rounded to $000’s) Change2025 2024 Products $ (24,000) $ 343,000 $ (367,000) Services 249,000 402,000 (153,000) $ 225,000 $ 745,000 $ (520,000) 52
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Table of Contents Total Gross Margin Three Months Ended June 30,(rounded to $000’s) Change2025 2024 Products (2.3)% 23.7 % (26.0)% Services 95.4 % 100.8 % (5.3)% 17.0 % 40.4 % (23.4)% It is important to note that the approximately $(24,000) in Products Gross Profits, and the resulting low Gross Margin of (2.3)%,is after layering in the approximately$607,000 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 thefollowing analysis. Gross profit excluding unabsorbed overhead was approximately $583,000 and $854,000 for the three months ended June 30, 2025 and 2024, respectively, adecrease of approximately $271,000, or 31.7%, period over period, and included: Three Months Ended June 30,(rounded to $000’s) Total Gross Profit - Excluding Unabsorbed Overhead 2025 2024 Change Products $ (24,000) $ 343,000 $ (367,000) Add Back: Unabsorbed Overhead 607,000 511,000 96,000 Products Gross Profit Excluding Unabsorbed Overhead 583,000 854,000 (271,000) Services 249,000 402,000 (153,000) Total Gross Profit Excluding Unabsorbed Overhead $ 832,000 $ 1,256,000 $ (424,000) Three Months Ended June 30,(rounded to $000’s) Total Gross Margin - Excluding Unabsorbed Overhead 2025 2024 Change Products (2.3)% 23.7 % (26.0)% Add Back: Unabsorbed Overhead 57.3 % 35.4 % 21.9 % Products Gross Margin Excluding Unabsorbed Overhead 55.0 % 59.1 % (4.1)% Services 95.4 % 100.8 % (5.3)% Total Gross Margin Excluding Unabsorbed Overhead 63.0 % 68.1 % (5.1)% Gross Margin excluding unabsorbed overhead of 63.0% for the three months ended June 30, 2025 compared to 68.1% for the same period in 2024 is a significant increase,as is the improvement compared to the 55.6% we reported for the full year 2024, indicating our efforts aimed at reducing overhead expenses and focusing on high margin items arestarting to bear fruit. Gross Profit Analysis Gross Margin numbers above are based on the total sales for the three months ended June 30, 2025 and 2024 as follows: Total Sales Three Months Ended June 30,(rounded to $000’s) Change2025 2024 Products $ 1,060,000 $ 1,445,000 $ (385,000) Services 261,000 399,000 (138,000) $ 1,321,000 $ 1,844,000 $ (523,000) • Gross margin was approximately 17.0% and 40.4% (63.0% and 68.1%, excluding unabsorbed overhead) for the three months ended June 30, 2025 and 2024,respectively, based upon total net sales of approximately $1,321,000 and $1,844,000, respectively. As we add more Special Operations Salute sales via online channels, 53
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Table of Contents 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, ratherthan 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 expectthe 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 manufacturingcost accounting, which should increase our overall margins. Finally, our third-party production contracts were very low margin for us, which is why management madethe 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 (2.3)% (55.0% excluding unabsorbed overhead) for the three months ended June 30, 2025 compared to 23.7% (59.1% excludingunabsorbed overhead) for the three months ended June 30, 2024 are inclusive of low margin production contracts we ended in 2024, the significant amount ofunabsorbed overhead we booked (which drags down gross margin based on the amount of unused capacity in our system). As we work to shed some of our excesscapacity 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 commentsrelated to this in more detail in Non-GAAP Financial Measures). Sales and Marketing Expenses Sales and marketing expenses were approximately $1,973,000 for the three months ended June 30, 2025 compared to approximately $1,298,000 for the three months endedJune 30, 2024. This approximately $675,000 increase included: Sales and Marketing Expense Three Months Ended June 30,(rounded to $000’s) Change2025 2024 Personnel - Cash Wages and Related Expense $ 826,000 $ 664,000 $ 162,000 Personnel - Share-Based Compensation 647,000 — 647,000 Tasting Room 22,000 35,000 (13,000) Leases and Rentals 188,000 187,000 1,000 Sales and Marketing Expenses 82,000 181,000 (99,000) Other 208,000 231,000 (23,000) $ 1,973,000 $ 1,298,000 $ 675,000 • The approximately $647,000 of personnel - share-based compensation in the three months ended June 30, 2025, for which there was no such expense in the comparablethree months ended June 30, 2024 included; $511,000 grant of matching non-cash RSU compensation related to deferred compensation. (See Notes 2 and 7 of ourcondensed consolidated financial statements for the three months ended June 30, 2025 and 2024), plus additional RSU grants employee recognitions of $136,000. • The approximately $99,000 decrease in sales and marketing expenses included: an increase in digital advertising production expense to drive DtC sales of our highestmargin spirits brands, offset by decreases in sponsorships and print advertising as we shifted to a new third-party e-commerce platform. • The approximately $23,000 decrease in other sales and marketing expenses stems from decreased deals, discounts, rebates and incentives offered to wholesaledistributors for low margin products and the ending of a contract for an outside sales consultant as of December 31, 2024. 54
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Table of Contents General and Administrative Expenses General and administrative expenses were approximately $4,424,000 for the three months ended June 30, 2025, compared to approximately $1,747,000 for the three monthsended June 30, 2024. This approximately $2,677,000 increase included: General and Administrative Expense Three Months Ended June 30,(rounded to $000’s) Change2025 2024 Personnel - Cash Wages and Related Non-Cash Expense $ 504,000 $ 584,000 $ (80,000) Personnel - Share-Based Compensation 1,810,000 — 1,810,000 Recruiting and retention 2,000 7,000 (5,000) Professional Fees 760,000 485,000 275,000 Professional Fees - Share-Based Consulting Fees 212,000 — 212,000 Leases and Rentals 143,000 148,000 (5,000) Depreciation 228,000 272,000 (44,000) Other 428,000 251,000 177,000 Other - Share-Based Director Fees 337,000 — 337,000 $ 4,424,000 $ 1,747,000 $ 2,677,000 • The approximately $1,810,000 of personnel - share-based compensation in the three months ended June 30, 2025, for which there was no such expense in thecomparable three months ended June 30, 2024 included; $1,286,000 grant of matching non-cash RSU compensation related to deferred compensation. (See Notes 2 and7 of our condensed consolidated financial statements for the three months ended June 30, 2025 and 2024), plus additional RSU grants employee recognitions of$525,000. • The approximately $275,000 increase in professional fees expense was primarily the result of year end audit fees recognized in the three months ended June 30, 2025 forwhich there was no such expense in the comparable three months ended June 30, 2024, $221,000. • The approximately $212,000 of non-cash share-based compensation Professional fees expense recognized in the three months ended June 30, 2025, for which there wasno such expense in the comparable three months ended June 30, 2024 for RSU awards granted to outside consultants in lieu of cash. • The approximately $337,000 of non-cash share-based compensation other - director fees expense recognized in the three months ended June 30, 2025, for which therewas no such expense in the comparable three months ended June 30, 2024 for RSU awards granted to directors in lieu of cash. Interest Expense Interest expense decreased by approximately $39,000 to approximately $595,000 for the three months ended June 30, 2025, compared to approximately $635,000 for the threemonths ended June 30, 2024. The decrease included approximately $69,000 resulting from the decreased principal balance of the Silverview loan in 2025 compared to 2024, and anapproximately $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 June 30, 2025 and 2024 was immaterial, primarily as we were in a net loss position for those periods. Comparison of the Results of Operations for the Six Months Ended June 30, 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 differencesbetween: aggregating the individually rounded component numbers; and the rounding of the total of the individual (non-rounded) component numbers. In cases where roundingoccurred, the amount of the rounding difference is generally $1,000 or less. Such differences are considered to be insignificant. 55
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Table of Contents The following table summarizes our results of operations for the six months ended June 30, 2025 and 2024. For the Six Months EndedJune 30, 2025 2024 Change Net Sales Products $ 1,898,498 $ 2,675,858 $ (777,360) Services 515,307 872,616 (357,309) Total Net Sales 2,413,805 3,548,474 (1,134,669) Cost of Sales Products 1,897,152 2,311,463 (414,311) Services 17,680 80,677 (62,997) Total Cost of Sales 1,914,832 2,392,140 (477,308) Gross Profit 498,973 1,156,334 (657,361) Operating Expenses Sales and Marketing 3,287,310 2,487,650 799,660 General and Administrative 6,311,802 3,193,246 3,118,556 Total Operating Expenses 9,599,112 5,680,896 3,918,216 Operating Loss (9,100,139) (4,524,562) (4,575,577) Other Income (Expense) Interest Expense (1,118,522) (1,235,656) 117,134 Gain on Investment — 3,421,222 (3,421,222) Change in Fair Value of Convertible Notes — 9,044,748 (9,044,748) Change in Fair Value of Warrant Liabilities — 1,705,020 (1,705,020) Change in Fair Value of Contingency Liability — 457,127 (457,127) Other (Income) / Expense (106,342) 592 (106,934) Total Other Expense (1,224,864) 13,393,053 (14,617,917) Income/(Loss) Before Income Taxes (10,325,003) 8,868,491 (19,193,494) Income Taxes (3,122) (9,150) 6,028 Net Income / (Loss) $ (10,328,125) $ 8,859,341 $ (19,187,466) Net Income / (Loss) Per Share, Basic $ (1.16) $ 20.97 $ (22.13) Weighted Average Common Shares Outstanding, Basic 10,335,057 421,799 $ 9,913,258 Net Income/(Loss) Per Share, Diluted $ (1.16) $ (2.44) $ 1.28 Weighted Average Common Shares Outstanding, Diluted 10,335,057 4,573,063 5,761,994 56
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Table of Contents Net Sales Six Months Ended June 30,(rounded to $000’s) Total Sales 2025 2024 Change Products $ 1,899,000 $ 2,676,000 $ (777,000) Services 515,000 873,000 (358,000) $ 2,414,000 $ 3,549,000 $ (1,135,000) Net sales were approximately $2,414,000 and $3,549,000 for the six months ended June 30, 2025 and 2024, respectively, a decrease of approximately $1,135,000, or 32.0%,period over period. The approximately $777,000 net decrease in products sales, period over period, included: Products Sales Six Months Ended June 30,(rounded to $000’s) 2025 2024 Change Wholesale $ 727,000 $ 807,000 $ (80,000) Retail 1,172,000 1,682,000 (510,000) Third Party — 187,000 (187,000) $ 1,899,000 $ 2,676,000 $ (777,000) • The approximately $80,000 decrease in wholesale product sales was primarily the result of the timing of orders through the wholesale channel moved into secondquarter 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 newproduct line of approximately $331,000 and $695,000 for the six months ended June 30, 2025 and 2024,and which is an important part of our strategy as our margins onsales direct to consumers are highest for us. The year over year approximately $510,000 decrease included is the result of the timing of orders fulfilled through the DtCretailer 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 theirinventory 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 sixmonths ended June 30, 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 somelocations 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 wereopen 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 highersummer foot traffic. • The approximately $187,000 decrease in third-party products sales was primarily a result of winding down our contracts on producing bulk whiskey for third parties in2024 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 six months ended June 30, 2025 compared to the sixmonths ended June 30, 2024 reflected the Company’s increased focus on high-margin direct to consumer (“DtC”) and online sales period over period. The tables below report thesubstantial increase in the retail value of DtC products sold to consumers during the six months ended June 30, 2025 versus 2024 (sales from our online distributor’s inventory) asfollows (in dollars and units sold): 57
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Table of Contents The approximately $358,000 decrease in net sales of services period over period included: Services Sales Six Months Ended June 30,(rounded to $000’s) 2025 2024 Change Third Party Production $ 14,000 $ 117,000 $ (103,000) Retail Services 485,000 665,000 (180,000) Consulting and Other 16,000 91,000 (75,000) $ 515,000 $ 873,000 $ (358,000) • The approximately $103,000 decrease in third-party production resulted from the ending of a low-margin third-party bottling contract as of January 31, 2024. The bulkof 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 madethe 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 $180,000 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 decisionto 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 retaillocations 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 advantageof higher summer foot traffic. • The approximately $75,000 decrease in consulting fees is related to TBN projects as we saw the successful completion and opening of the Stillaguamish project inOctober 2024 and we moved the announced Coquille and Tonto Apache projects that were in planning phase into construction phase in preparation for openings in late2025. Cost of Sales Cost of sales were approximately $1,890,000 and $2,392,000 for the six months ended June 30, 2025 and 2024, respectively, a decrease of approximately $502,000, or 21.0%,period over period. Cost of Sales for the six months ended June 30, 2025 includes approximately $121,000 of non-cash share-based compensation expenses related to RSU grantawards recognized in the six months ended June 30, 2025 for production employees compared to no such award recognition in 2024. Six Months Ended June 30,(rounded to $000’s) Cost of Sales 2025 2024 Change Products $ 1,872,000 $ 2,311,000 $ (439,000) Services 18,000 81,000 (63,000) $ 1,890,000 $ 2,392,000 $ (502,000) The approximately $439,000 decrease in net products cost of sales period over period included: a decrease in product cost of approximately $310,000 to approximately$829,000 for the six months ended June 30, 2025, from approximately $1,139,000 for the six months ended June 30, 2024, and a decrease in unabsorbed overhead of approximately$129,000 to approximately $1,043,000 as of June 30, 2025 from approximately $1,172,000 as of June 30, 2024. We made the choice to move our sales focus onto higher marginproducts 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 overheadincreases the unabsorbed overhead, and the associated cost per case, using standard cost accounting methodologies. Assuming all other factors remain steady in the business, as wework 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 highergross 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 volumeproduction to higher margin products. 58
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Table of Contents Services cost of sales decreased by approximately $63,000 to approximately $18,000 for the six months ended June 30, 2025 from approximately $81,000 for the six monthsended June 30, 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 Six Months Ended June 30,(rounded to $000’s) 2025 2024 Change Product Cost (from inventory) $ 829,000 $ 1,139,000 $ (310,000) Overhead – Unabsorbed 1,043,000 1,172,000 (129,000) $ 1,872,000 $ 2,311,000 $ (439,000) Components of Products Cost of Sales Six Months Ended June 30,(rounded to $000’s) 2025 2024 Change Product Cost (from inventory) 44.3 % 49.3 % (5.0)% Overhead – Unabsorbed 55.7 % 50.7 % 5.0 % 100.0 % 100.0 % — % • Unabsorbed overhead as a component of Product Cost of 55.7% and 50.7% for the six months ended June 30, 2025 and 2024, respectively, are significant contributors toour 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 havesignificant 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 andmore efficient. The increase in the unabsorbed overhead percentage in the first six months of of 2025 compared to the fourth quarter 2024 is a reflection of the largeproduct 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 theslowest 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 $439,000 decrease in net products cost of sales period over period is further detailed as follows: Cost of Sales Products Sales Six Months Ended June 30,(rounded to $000’s) 2025 2024 Change Spirits – Wholesale $ 477,000 $ 580,000 $ (103,000) Spirits – Retail 287,000 339,000 (52,000) Spirits – Third Party — 113,000 (113,000) Merchandise and Prepared Food 65,000 107,000 (42,000) Unabsorbed Overhead 1,043,000 1,172,000 (129,000) $ 1,872,000 $ 2,311,000 $ (439,000) • The approximately $103,000 decrease in wholesale product cost of sales to approximately $477,000 for the six months ended June 30, 2025 compared to approximately$580,000 for the six months ended June 30, 2024 was primarily the result of the shifting of some wholesale orders from the first quarter to the second quarter based ontiming 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 six months ended June 30, 2025. • Our unabsorbed overhead, which is a measure of our capacity relative to our current utilization, decreased by approximately $129,000 to approximately $1,043,000 forthe six months ended June 30, 2025 compared to approximately $1,172,000 for the six months ended June 30, 2024. The unabsorbed overhead expense indicates ourunderutilization of current production capacity as we move away from low-margin, high volume products 59
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Table of Contents 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 wereduce overhead costs associated with excess production capacity, warehouse space and other real estate. The combined efforts of increasing high margin product salesand reducing general overhead costs are geared toward reducing our overhead expenses to have our remaining overhead right-sized to our strategy of focusing onproducing and selling high margin super premium items. (See below for our discussion on Gross Margins related to unabsorbed overhead in Non-GAAP FinancialMeasures). Unabsorbed overhead includes approximately $2,000 in product inventory write downs and adjustments in the six months ended June 30, 2025 compared toapproximately $79,000 in the six months ended ended June 30, 2024. Gross Profit Gross profit was approximately $499,000 and $1,157,000 for the six months ended June 30, 2025 and 2024, respectively, a decrease of approximately $658,000, or 56.9%,period over period, and included: Total Gross Profit Six Months Ended June 30,(rounded to $000’s) Change2025 2024 Products $ 2,000 $ 365,000 $ (363,000) Services 497,000 792,000 (295,000) $ 499,000 $ 1,157,000 $ (658,000) Total Gross Margin Six Months Ended June 30,(rounded to $000’s) Change2025 2024 Products 0.1 % 13.6 % (13.5)% Services 96.5 % 90.7 % 5.8 % 20.7 % 32.6 % (11.9)% It is important to note that the approximately $2,000 in Products Gross Profits, and the resulting low Gross Margin of 0.1%, is after layering in the approximately$1,043,000 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 thefollowing analysis. Gross profit excluding unabsorbed overhead was 60
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Table of Contents approximately $1,045,000 and $1,537,000 for the six months ended June 30, 2025 and 2024, respectively, a decrease of approximately $492,000, or 32.0%, period over period, andincluded: Six Months Ended June 30,(rounded to $000’s) Total Gross Profit - Excluding Unabsorbed Overhead 2025 2024 Change Products $ 2,000 $ 365,000 $ (363,000) Add Back: Unabsorbed Overhead 1,043,000 1,172,000 (129,000) Products Gross Profit Excluding Unabsorbed Overhead 1,045,000 1,537,000 (492,000) Services 497,000 792,000 (295,000) Total Gross Profit Excluding Unabsorbed Overhead $ 1,542,000 $ 2,329,000 $ (787,000) Six Months Ended June 30,(rounded to $000’s) Total Gross Margin - Excluding Unabsorbed Overhead 2025 2024 Change Products 0.1 % 13.6 % (13.5)% Add Back: Unabsorbed Overhead 54.9 % 43.8 % 11.1 % Products Gross Margin Excluding Unabsorbed Overhead 55.0 % 57.4 % (2.4)% Services 96.5 % 90.7 % 5.8 % Total Gross Margin Excluding Unabsorbed Overhead 63.9 % 65.6 % (1.7)% Gross Margin excluding unabsorbed overhead of 63.9% for the six months ended June 30, 2025 compared to 65.6% for the same period in 2024 is a significant increase, asis the improvement compared to the 55.6% we reported for the full year 2024, indicating our efforts aimed at reducing overhead expenses and focusing on high margin items arestarting to bear fruit. Gross Profit Analysis Gross Margin numbers above are based on the total sales for the six months ended June 30, 2025 and 2024 as follows: Total Sales Six Months Ended June 30,(rounded to $000’s) Change2025 2024 Products $ 1,899,000 $ 2,676,000 $ (777,000) Services 515,000 873,000 (358,000) $ 2,414,000 $ 3,549,000 $ (1,135,000) • Gross margin was approximately 20.7% and 32.6% (63.9% and 65.6%, excluding unabsorbed overhead) for the six months ended June 30, 2025 and 2024, respectively,based upon total net sales of approximately $2,414,000 and $3,549,000, respectively. As we add more Special Operations Salute sales via online channels, we expect tosee 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 unabsorbedoverhead costs will be reduced as each additive case of new sales volume begins to carry incremental overhead costs as part of the normal manufacturing costaccounting, which should increase our overall margins. Finally, our third-party production contracts were very low margin for us, which is why management made thedecision 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 0.1% (55.0% excluding unabsorbed overhead) for the six months ended June 30, 2025 compared to 13.6% (57.4% excluding unabsorbedoverhead) for the six months ended June 30, 2024 are 61
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Table of Contents inclusive of low margin production contracts we ended in 2024, the significant amount of unabsorbed overhead we booked (which drags down gross margin based onthe amount of unused capacity in our system), and approximately $27,000 in product inventory write downs in the six months ended June 30, 2025 compared toapproximately $102,000 in product inventory write downs and adjustments in the six months ended June 30, 2024. As we work to shed some of our excess capacity andoverhead, 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 tothis in more detail in Non-GAAP Financial Measures). Sales and Marketing Expenses Sales and marketing expenses were approximately $3,287,000 for the six months ended June 30, 2025 compared to approximately $2,488,000 for the six months endedJune 30, 2024. This approximately $799,000 increase included: Sales and Marketing Expense Six Months Ended June 30,(rounded to $000’s) Change2025 2024 Personnel - Cash Wages and Related Expense $ 1,555,000 $ 1,309,000 $ 246,000 Personnel - Share-Based Compensation 647,000 — 647,000 Tasting Room 44,000 70,000 (26,000) Leases and Rentals 378,000 353,000 25,000 Sales and Marketing Expenses 288,000 277,000 11,000 Other 375,000 479,000 (104,000) $ 3,287,000 $ 2,488,000 $ 799,000 • The approximately $647,000 of personnel - share-based compensation in the three months ended June 30, 2025, for which there was no such expense in the comparablethree months ended June 30, 2024 included; $511,000 grant of matching non-cash RSU compensation related to deferred compensation. (See Notes 2 and 7 of ourcondensed consolidated financial statements for the three months ended June 30, 2025 and 2024), plus additional RSU grants employee recognitions of $136,000. • The approximately $26,000 decrease in tasting room expenses was the result of decrease in spending. • The approximately $104,000 decrease in other sales and marketing expenses stems from decreased deals, discounts, rebates and incentives offered to wholesaledistributors 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 $6,312,000 for the six months ended June 30, 2025, compared to approximately $3,194,000 for the six monthsended June 30, 2024. This approximately $3,118,000 increase included: General and Administrative Expense Six Months Ended June 30,(rounded to $000’s) Change2025 2024 Personnel - Cash Wages and Related Non-Cash Expense $ 1,394,000 $ 1,083,000 $ 311,000 Personnel - Share-Based Compensation 1,810,000 — 1,810,000 Recruiting and retention 7,000 12,000 (5,000) Professional Fees 960,000 772,000 188,000 Professional Fees - Share-Based Compensation 212,000 — 212,000 Leases and Rentals 285,000 321,000 (36,000) Depreciation 477,000 532,000 (55,000) Other 830,000 474,000 356,000 Other - Share-Based Director Fees 337,000 — 337,000 $ 6,312,000 $ 3,194,000 $ 3,118,000 • The approximately $311,000 increase in wages and related expenses was primarily the result of 62
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Table of Contents • The approximately $1,810,000 of personnel - share-based compensation in the six months ended June 30, 2025, for which there was no such expense in the comparablesix months ended June 30, 2024 included; $1,286,000 grant of matching non-cash RSU compensation related to deferred compensation. (See Notes 2 and 7 of ourcondensed consolidated financial statements for the six months ended June 30, 2025 and 2024), plus additional RSU grants employee recognitions of $525,000. • The approximately 188,000 increase in professional fees expense was primarily the result of year end audit fees recognized in the six months ended June 30, 2025 forwhich there was no such expense in the comparable six months ended June 30, 2024, $221,000. • The approximately $212,000 of non-cash share-based compensation Professional fees expense recognized in the three months ended June 30, 2025, for which there wasno such expense in the comparable three months ended June 30, 2024 for RSU awards granted to outside consultants in lieu of cash. • The approximately $36,000 decrease in leases and rentals was primarily the result of moving from a large warehouse in Eugene, Oregon to a smaller warehouse startingin January 2025. • The approximately $356,000 increase in other general and administrative expenses included accumulative smaller changes in utilities, travel, general insurance, publiccompany related insurance and other administrative expenses, including board compensation. • The approximately $337,000 of non-cash share-based compensation other - director fees expense recognized in the six months ended June 30, 2025, for which there wasno such expense in the comparable six months ended June 30, 2024 for RSU awards granted to directors in lieu of cash. 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 anddeferred 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 topreparing for the transaction that did not directly qualify for capitalization and deferral, such as the preparation of audited consolidated financial statements, and certain expensesfor valuation and other financial services. On November 25, 2024, we successfully completed our initial public offering, and recognized approximately $2,368,000 of deferredoffering expenses as a cost of the transaction. Interest Expense Interest expense decreased by approximately $117,000 to approximately $1,119,000 for the six months ended June 30, 2025, compared to approximately $1,236,000 for thesix months ended June 30, 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 six months ended June 30, 2025 and 2024 was immaterial, primarily as we were in a net loss position for those periods. SELECTED FINANCIAL INFORMATION The following table sets forth a summary of our historical financial data as of the dates indicated. The balance sheet data as of December 31, 2024 and 2023 has been derivedfrom our audited consolidated financial statements. The balance sheet data as of June 30, 2025 has been derived from our unaudited interim condensed consolidated financialstatements included elsewhere in this filing. The unaudited interim condensed consolidated financial statements were prepared on the same basis as our audited consolidatedfinancial statements. In our opinion, such financial statements include all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair presentationof the financial information for those periods. The summary financial data should be read with the financial statements and the accompanying notes included in this filing. Inaddition, the summary financial data should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in this filing. 63
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Table of Contents As ofJune 30, 2025 As of December 31, 2024 2023 Balance Sheet Data: 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) 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 byother companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financialinformation 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 overheadrepresents GAAP gross profit adjusted for (excluding) unabsorbed overhead. Adjusted Gross Margin excluding unabsorbed overhead represents Adjusted Gross Profit excludingunabsorbed 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 directoverhead 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 Marginrepresents 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-basedcompensation; and (iv) provision for income taxes. Adjusted EBITDA represents EBITDA adjusted for the recognition of share-based compensation, non recurring gains andlosses; 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 theexpenses that we include in GAAP operating loss. These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial informationprepared 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. Someof 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 isa 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. 64
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Table of Contents The following table presents a reconciliation of GAAP Gross Profit to Adjusted Gross Profit by removing unabsorbed overhead for the three and six months ended June 30,2025 and 2024. Adjusted Gross Margin excluding unabsorbed overhead is the percentage obtained by dividing Adjusted Gross Profit after removing unabsorbed overhead by ourGAAP 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 costsacross 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 theycan 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 June 30,(rounded to $000’s) Six Months Ended June 30,(rounded to $000’s) Gross Profit Analysis Excluding Unabsorbed Overhead 2025 2024 2025 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 GAAP Gross Profit Additions/(Deductions): 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 % 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 andoverhead, 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 ofproduct 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 GrossMargin 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 awayfrom 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 excludingunabsorbed 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 hadthrough 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 existingreal estate footprint to drive better utilization and reduce overhead with the goal of driving down unabsorbed overhead and decreasing unused asset capacity. The following table presents a reconciliation of net income / (loss) to EBITDA and adjusted EBITDA for the three and six months ended June 30, 2025 and 2024: Three Months Ended June 30,(rounded to $000’s) Six Months Ended June 30,(rounded to $000’s) EBITDA Analysis 2025 2024 2025 2024 Net Income / (Loss) $ (7,295,000) $ 8,407,000 $ (10,328,000) $ 8,859,000 Add (Deduct): Income Tax 3,000 9,000 3,000 9,000 Interest Expense 595,000 635,000 1,119,000 1,236,000 Depreciation and Amortization 274,000 $ 335,000 570,000 655,000 EBITDA $ (6,423,000) $ 9,386,000 $ (8,636,000) $ 10,759,000 Change in fair value of convertible notes — (9,616,000) — (9,045,000) Change in fair value of warrant liabilities — (1,275,000) — (1,705,000) Investment (Gain) Loss — — — (3,421,000) Adjusted EBITDA $ (6,423,000) $ (1,962,000) $ (8,636,000) $ (3,869,000) 65
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Table of Contents 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 andexperienced negative cash flows from operations as we have invested in equipment, location buildout, inventory buildout (including laying down barrels of whiskey for aging) andmarketing 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 six months ended June 30, 2025 and 2024, we had net income / (loss) of approximately $(10,328,000) and $8,859,000, respectively (of which, approximately $0 and$14,628,000, respectively, stemmed from the (increase)/decrease in fair value of certain convertible notes, warrants and contingencies, and gain on investment). We expect to incuradditional 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 June 30, 2025, we had outstanding aged payables to vendors in the aggregate amount of approximately $6,881,000, inclusive of accrued amounts to service providers whowere 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 bepaid 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 ourIPO. 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, butwere 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 marketingcontracts 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 handas 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 andpriorities, 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 coulddemand 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 incursignificant 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 ourfailure 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 IPOand 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 forbearfrom 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 theclosing 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 incomestatements, meeting an EBITDA test, providing a monthly cash balance report, and providing a monthly operational performance report, of which those covenant breaches werealso waived in the October 1, 2024 Silverview Loan modification. We executed an additional agreement with our lender that contained further 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, andreducing 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 wefocus 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 futurecapital 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 meetour 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 theequity 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 seeksuch additional financing through the offering of other instruments or securities. We will continue seeking additional financing from time to time to meet our working capitalrequirements, make continued investment in research and development and make capital expenditures needed for us to maintain and expand our business and expand our marketingand 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 beable 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 obtainadequate 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 ourbusiness 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, raisesubstantial doubt about our ability to continue as a going concern. If we raise additional funds through further issuances of equity, convertible 66
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Table of Contents preferred stock or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences andprivileges 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 ourcommon stock, and subsequently an additional 10,000,000 shares of common stock under the June 2025 ELOC Registration Statement (discussed below), to be sold under theELOC 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 pursuantto 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 astock 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. InFebruary 2025, the Investor exercised the Commitment Warrant for $67. On June 13, 2025, we filed a Form S-1 Registration Statement under the Securities Act of 1933 to register up to a maximum of an additional 10,000,000 ELOC Shares (the“June 2025 ELOC Registration Statement”), for an aggregate of 15,000,000 ELOC Shares available under the ELOC Purchase Agreement, which was approved by the shareholderson June 24, 2025. On August 11, 2025, we entered into subscription agreements (each, a “Subscription Agreement” and collectively the “Subscription Agreements”) with certain institutionaland accredited investors (each, an “Investor” and collectively, the “Investors”), pursuant to which we, subject to the restrictions and satisfaction of the conditions in the SubscriptionAgreements, agreed to sell in a private placement (the “Offering”) to the Investors an aggregate of 183,478,891 shares (the “Shares”) of our common stock, par value $0.0001 pershare (the “Common Stock”), and pre-funded warrants (the “Pre-Funded Warrants”) to acquire in the aggregate up to 186,900,000 shares of Common Stock. The purchase price forthe Shares is $0.6043 per share (the “Share Price”) and the purchase price for the Pre-Funded Warrants is equal to the Share Price less $0.0001, or $0.6042 per Pre-Funded Warrant. Included among the Investors in the Offering are Story Foundation, the entity behind the Story Network (“Story Foundation”), which has agreed to purchase 9,295,141 Sharesand Pre-Funded Warrants to purchase 85,000,000 shares of Common Stock; Justin Stiefel, the Company’s Chairman and Chief Executive Officer, who has agreed to purchase3,309,614 Shares; and Andrew Varga, a director of the Company, who has agreed to purchase 300,000 Shares. Of the total $223,819,964 purchase price for the Shares and the Pre-Funded Warrants, $50,862,166 is expected to be paid in cash, $49,137,833 is expected to be paid in thecryptocurrency stablecoin commonly referred to as USDC (“USDC”), based on a purchase price of $1.00 per USDC, and $123,819,949 is expected to be paid in the nativecryptocurrency of the Story Network, referred to as $IP Tokens (“$IP Tokens”), which will be valued for purpose of the Subscription Agreement at (i) $5.2413 (representing a 20%discount from the closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case of the Story Core Contributors (as defined in the SubscriptionAgreements), (ii) $3.40 (representing an approximate 48% discount from the closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case ofStory Foundation, or (iii) $6.5516 (the reported closing price of $IP Tokens on August 8, 2025 as reported by CoinMarketCap.com) in the case of all other Investors. The Offering is anticipated to close in August, 2025, subject to the satisfaction of customary closing conditions, and subject to shareholder approval of specific parts of thetransaction. We intend to use (a) up to $4.0 million of the net proceeds from the Offering for general corporate purposes initiated after the closing, (b) up to $0.6 million for pre-existing working capital commitments or obligations, and (c) at least $80.0 million to purchase $IP Tokens from Story Foundation at a price per $IP Token of $3.40. The balance ofthe net proceeds will be used to purchase or otherwise acquire $IP Tokens and for the establishment of our cryptocurrency treasury operations to the extent consistent with ourinvestment policy as amended or otherwise modified from time to time. We will not use more than $7.0 million of such proceeds: (i) for the satisfaction of any portion of theCompany’s debt (other than payment of trade payables in the ordinary course of our business and prior practices), (ii) for the redemption of any Common Stock or (iii) for thesettlement of any outstanding litigation. In connection with the announcement of the Offering, we announced the launch of our digital asset treasury reserve strategy, to be effectiveupon the closing of the Offering, pursuant to which we plan to use $IP Tokens as our primary treasury reserve asset on an ongoing basis. The is no assurance that the Company willbe able to close on this transaction, or that if it does close the transaction, that it will be with substantially the same terms as described herein. If the transaction closes, the Companywill disclose the final details in a related 8-K filing. 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 pricefor our common stock was below $1.00 per share for the 67
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Table of Contents 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 regaincompliance 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 NasdaqCapital 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 businessdays, 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 todelisting. Delisting from Nasdaq could adversely affect our ability to consummate a strategic transaction and raise additional financing through the public or private sale of equitysecurities, 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 haveother 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 theminimum 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 April 15, 2025, but was extended to October 25, 2026 in the October 1, 2024 Silverview Loan modification. TheSilverview 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) afixed 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 beganaccruing 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 outstandingobligations 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 prepayall 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, investmentsand 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 capitalexpenditures. 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 toSilverview 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 anagreement 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 andwe 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 ourIPO. 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 paidtowards 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 atDecember 31, 2024 In the six months ended June 30, 2025, approximately $300,000 was paid towards principal, leaving an outstanding balance on the Silverview Loan ofapproximately $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 publicoffering in November 2024, contained the following provisions: 1) extend the maturity date by 18 months to October 25, 2026; 68
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Table of Contents 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 June30, 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 ourelection 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 tothe 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 Loanagreement. 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. 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 retainworkers 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 theterms 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 ofthe 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 SBAand 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 alsorecorded 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 thedifference. 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 PPPloan 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 For the Six Months EndedJune 30,(rounded to $000’s) 2025 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 During the six months ended June 30, 2025 and 2024, net cash used in operating activities was approximately $(3,544,000) and $(5,383,000), respectively, resulting primarilyfrom net income / (loss) of approximately $(10,328,000) and $8,859,000, respectively. During the six months ended June 30, 2025 and 2024, approximately $2,669,000 and$(717,000), respectively, of cash was (used) / generated by changes in operating account balances of operating assets and 69
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Table of Contents liabilities. Non-cash adjustments to reconcile net income / (loss) to net cash used in operating activities were approximately $4,115,000 and $(13,525,000) in the respective periods. The approximately $4,115,000 of changes in operating account balances of operating assets and liabilities for the six months ended June 30, 2025 consisted primarily ofapproximately: $570,000 of depreciation expense; $201,000 of non-cash amortization of operating lease right-of-use assets; $9,000 of loss on disposal of property and equipment;and, $207,000 of non-cash interest expense primarily associated with our notes payable. The approximately $(13,525,000) of changes in operating account balances of operating assets and liabilities for the six months ended June 30, 2024 included approximately:$655,000 of depreciation expense; $257,000 of non-cash amortization of operating lease right-of-use assets; $(9,045,000) of loss on change in fair value of convertible notes; and$163,000 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 $1,705,000 of gain onchange in fair value of warrant liabilities. Net Cash Provided by / (Used in) Investing Activities During the six months ended June 30, 2025 and 2024, net cash provided by / (used in) investing activities was approximately $55,000 and $(287,000), respectively, relatedprimarily 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 six months ended June 30, 2025 and 2024, net cash provided by financing activities was approximately $3,222,000 and $5,744,000, respectively. The cashproceeds received in the six months ended June 30, 2025 were primarily comprised of approximately: $730,000 from the sale of common stock under the ELOC; $2,792,000 fromthe 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 proceedsreceived in the six months ended June 30, 2024 of approximately $5,744,000 were related to approximately: proceeds from convertible notes of $3,656,000 (of whichapproximately $1,433,000 was from a related party); $439,000 proceeds from notes payable; offset by deferred transaction costs associated with our IPO of $92,000; and repaymentof notes payable of $86,000. Supplemental Cash Flow Information During the six months ended June 30, 2025, supplemental cash flow activity included approximately: $911,000 of cash paid for interest expense; $182,000 of right-of-useassets obtained in exchange for new operating lease liabilities; and $0 of unpaid property and equipment additions. For the six months ended June 30, 2024, supplemental cash flowactivity included approximately: $1,072,000 of cash paid for interest expense; and $246,000 of unpaid deferred transaction costs that were recorded as a deferred expense on thebalance 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 June 30, 2025 or for the periods presented. We do not participate intransactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements. We have not entered any off-balance sheet financing arrangements, established any special purpose entities, guaranteed anydebt 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 six months ended June 30, 2025 and 2024included 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 condensedconsolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, andthe disclosure of contingent assets and liabilities in our condensed consolidated financial statements. We base our estimates on historical experience, known trends and events andvarious other factors that we believe are reasonable under the 70
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Table of Contents 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. Weevaluate 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 estimatesare 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 thatwe consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry oreconomic 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 andits 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 thedifference between the asset’s fair value and its carrying value. We did not record any impairment losses on long-lived assets for the six months ended June 30, 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 standardsapplicable 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 orrevised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) 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 accountingstandards as other public companies that are not emerging growth companies, and our condensed consolidated financial statements may not be comparable to other publiccompanies that comply with new or revised accounting pronouncements as of public company effective dates. We may choose to early adopt any new or revised accountingstandards 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 $1.235billion 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 whichwe 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 rulesof 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 ofmany of the same exemptions from disclosure requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxystatements. 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 lessattractive 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 theserisks 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 underthe Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact thatthere 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. 71
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Table of Contents Based on management’s evaluation, our Chief Executive Officer concluded that, as a result of the material weaknesses described below, as of June 30, 2025, our disclosurecontrols 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 reportsthat 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 informationis accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. The materialweaknesses, 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 ofduties 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 byour company. We are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting expertise within theaccounting function to resolve non-routine or complex accounting matters. Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the period ended June 30, 2025 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting. 72
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Table of Contents 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 ofbusiness 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, cashflows 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, as all of the litigation that was disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2024 has been settled as follows: On January 31, 2025, CFGI, LLC (“CFGI”) commenced a litigation against us in the Superior Court, Suffolk County, Massachusetts asserting claims arisingunder a November 1, 2022 written engagement letter agreement whereby CFGI agreed to provide financial, accounting and tax consulting services to us. CFGI contendedthat 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 was, at the time of commencement of the litigation,owed approximately$730,000, plus interest. The Company filed an answer to that complaint on May 12, 2025 and answers to interrogatories on June 10, 2025 to stay current with the litigation process whileit worked to negotiate a settlement. As of December 31, 2024, the Company had accrued the entire amount payable to CFGI and the Company was in negotiations withCFGI on alternate payment terms that would have allowed the Company to pay the amounts due to CFGI over time. On July 30, 2025, the parties entered into a settlementagreement whereby the Company paid $500,000 in full satisfaction of all amounts owed to CFGI and the litigation was dismissed with prejudice. 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 ourcompany 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 meritand grossly overinflates the value of the enterprise, and we intend to vigorously defend this matter. Further, we believe we had counterclaims against the plaintiff foractions taken by him before, during and after the closing of the acquisition transaction that adversely effected the valuation of the acquisition and our investment inThinking Tree Spirits. The parties reached agreement on August 4, 2025 whereby the dissenter relinquished his claims in exchange for $140,000, ending the matter. 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 During the quarter ended June 30, 2025, the Company issued and sold an aggregate of 576,373 shares of its Series B Convertible Preferred Stock (the “Preferred Stock”) andwarrants to purchase up to 733,192 shares of the Company’s common stock (the “Warrants”) to accredited investors for aggregate gross proceeds of approximately $5,763,747. ThePreferred Stock and Warrants were issued in reliance upon exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”), and Rule 506 of Regulation D promulgated thereunder, as the transactions did not involve any public offering. In conjunction with, and contingent upon, a private placement of common stock anticipated to close in August 2025: 629,873 shares of Series B Preferred Stock will beexchanged for: 894,856 shares of common stock; and 17,002,480 prepaid warrants with an exercise price of $0.01 per share No underwriters were engaged in connection with these sales, and no underwriting discounts or commissions were paid. The shares of Preferred Stock and the Warrantscontain restrictions on transfer and may not be offered or sold in the United States absent registration or an applicable exemption from registration under the Securities Act andapplicable state securities laws. 73
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Table of Contents 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 theExhibit Index is identified by a hashtag. EXHIBIT INDEX Exhibit Incorporated by Reference Number Description of Exhibits Form File No. Exhibit Filing Date 3.1 Second Amended and Restated Certificate of Incorporation of HeritageDistilling Holding Company, Inc. 8-K 001-42411 3.1 November 26, 2024 3.2 First Amendment to Second Amended and Restated Certificate ofIncorporation of Heritage Distilling Holding Company, Inc. 8-K 001-42411 3.1 June 27, 2025 3.3 Amended and Restated Bylaws of Heritage Distilling Holding Company,Inc. 8-K 001-42411 3.2 November 26, 2024 3.4 Certificate of Designations, Preferences and Rights of the Series AConvertible Preferred Stock S-1/A 333-279382 3.8 October 3, 2024 3.5 Certificate of Designations, Preferences, Powers and Rights of the SeriesB Convertible Preferred Stock 8-K 001-42411 3.1 January 24, 2025 3.6 Certificate of Amendment to the Certificate of Designations, Preferences,Powers and Rights of Series B Convertible Preferred Stock S-1 333-288051 3.5 June 13, 2025 4.1 Specimen common stock certificate S-1/A 333-279382 4.1 August 28, 2024 4.2 Form of Representative’s Warrant from initial public offering 8-K 001-42411 4.1 November 26, 2024 4.3 Form of outstanding restricted stock units issued under the 2019 Planprior to January 1, 2024 S-1/A 333-279382 4.3 July 5, 2024 4.4 Form of outstanding restricted stock units issued under the 2019 Planafter January 1, 2024 S-1/A 333-279382 4.4 August 28, 2024 4.5 Form of outstanding warrants that expire in August 2028 S-1 333-279382 4.5 May 13, 2024 4.6 Form of outstanding prepaid warrants with no expiration date S-1 333-279382 4.6 May 13, 2024 4.7 Form of outstanding warrants that expire in June 2029 S-1/A 333-279382 4.7 July 5, 2024 4.8 Form of warrants that will expire on the 24 month, 42 month, and 60month anniversaries of November 25, 2024 S-1/A 333-279382 4.8 October 25, 2024 74
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Table of Contents Exhibit Incorporated by Reference Number Description of Exhibits Form File No. Exhibit Filing Date 4.9 Form of Common Warrant that expires November 21, 2029 8-K 001-42411 4.2 November 26, 2024 4.10 Form of outstanding warrants that expires April 1, 2028 10-K 001-42411 4.10 April 28, 2025 4.11 Form of outstanding warrants that expires February 21, 2030 POS-AM 333-284509 4.11 May 7, 2025 4.12 Form of Pre-Funded Common Stock Purchase Warrant 8-K 001-42411 4.1 August 11, 2025 4.13 Form of Advisory Warrant 8-K 001-42411 4.2 August 11, 2025 4.14 Form of Placement Agent Warrant 8-K 001-42411 4.3 August 11, 2025 10.1 Loan Agreement, dated as of March 29, 2021, by and among SilverviewCredit Partners, LP, as agent for the lenders, the financial institutions andother institutional investors from time-to-time party thereto as lenders,Heritage Distilling Company, Inc., as borrower, and Heritage DistillingHolding Company, Inc. S-1 333-279382 10.1 May 13, 2024 10.2 Amendment No. 1 to Loan Agreement, dated as of September 9, 2021, byand among Silverview Credit Partners, LP, as agent for the lenders, thefinancial institutions and other institutional investors from time-to-timeparty thereto as lenders, Heritage Distilling Company, Inc., as borrower,and Heritage Distilling Holding Company, Inc. S-1 333-279382 10.2 May 13, 2024 10.3 Amendment No. 2 to Loan Agreement, dated as of September 9, 2021, byand among Silverview Credit Partners, LP, as agent for the lenders, thefinancial institutions and other institutional investors from time-to-timeparty thereto as lenders, Heritage Distilling Company, Inc., as borrower,and Heritage Distilling Holding Company, Inc. S-1/A 333-279382 10.9 October 3, 2024 10.4 Amendment No. 3 to Loan Agreement dated as of September 9, 2021, byand among Silverview Credit Partners, LP, as agent for the lenders, thefinancial institutions and other institutional investors from time-to-timeparty thereto as lenders, Heritage Distilling Company, Inc., as borrower,and Heritage Distilling Holding Company, Inc. S-1 333-284509 10.4 January 27, 2025 10.5 2019 Equity Incentive Plan# S-1 333-2793852 10.4 May 13, 2024 10.6 2024 Equity Incentive Plan# S-1/A 333-279382 10.5 August 28, 2024 10.7 First Amendment to the Heritage Distilling Holding Company, Inc. 2024Equity Incentive Plan 8-K 001-42411 10.1 June 27, 2025 10.8 Form of October 2023 Exchange Agreement S-1/A 333-279382 10.6 October 3, 2024 10.9 Form of Amendment to October 2023 Exchange Agreement S-1/A 333-279382 10.7 October 25, 2024 10.10 Amendment dated October 24, 2024 to October 2023 ExchangeAgreement S-1/A 333-279382 10.11 October 25, 2024 10.11 Form of April 2024 Exchange Agreement S-1/A 333-279382 10.8 October 3, 2024 75
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Table of Contents Exhibit Incorporated by Reference Number Description of Exhibits Form File No. Exhibit Filing Date 10.12 Securities Purchase Agreement dated as of January 23, 2025 by andbetween Heritage Distilling Holding Company, Inc. and C/M CapitalMaster Fund, LP 8-K 001-42411 10.1 January 24, 2025 10.13 Registration Rights Agreement dated as of January 23, 2025, by andbetween Heritage Distilling Holding Company, Inc. and C/M CapitalMaster Fund, LP 8-K 001-42411 10.2 January 24, 2025 10.14 Form of Subscription Agreement, dated as of August 11, 2025, betweenthe Company and each Subscriber (as defined therein) 8-K 001-42411 10.1 August 11, 2025 10.15 Form of Registration Rights Agreement, dated as of August 11, 2025,between the Company and each Purchaser (as defined therein) 8-K 001-42411 10.2 August 11, 2025 10.16 Placement Agency Agreement, dated as of August 11, 2025, among theCompany, Cantor Fitzgerald & Co. and Roth Capital Partners, LLC 8-K 001-42411 10.3 August 11, 2025 31.1 Certification of the Chief Executive Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002† 31.2 Certification of the Chief Financial Officer pursuant to Exchange ActRules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002† 32 Certification of Chief Executive Officer and Chief Financial Officerpursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002† 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.† 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.† 104 Cover Page Interactive Data File (formatted as Inline XBRL andcontained in Exhibit 101). # Indicates a management contract or compensatory plan. † Filed herewith 76
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Table of Contents 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: August 14, 2025 By: /s/ Justin Stiefel Justin StiefelChief Executive Officer Date: August 14, 2025 By: /s/ Michael Carrosino Michael CarrosinoChief Executive OfficerPrincipal Financial Officer andPrincipal Accounting Officer 77
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Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT 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, inlight 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 Rules13a-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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich 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 providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure 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 (theregistrant’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 overfinancial 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’sauditors 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 toadversely 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 financialreporting. Date: August 14, 2025 By: /s/ Justin Stiefel Name: Justin Stiefel Title: Chief Executive Officer
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Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT 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, inlight 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 Rules13a-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 thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period inwhich 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 providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure 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 (theregistrant’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 overfinancial 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’sauditors 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 toadversely 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 financialreporting. Date: August 14, 2025 By: /s/ Michael Carrosino Name: Michael Carrosino Title: Chief Financial Officer
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Exhibit 32 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 DistillingHolding 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: August 14, 2025 By: /s/ Justin Stiefel Name: Justin Stiefel Title: Chief Executive Officer By: /s/ Michael Carrosino Name: Michael Carrosino Title: Chief Financial Officer