Financial Analysis

COMMITMENTS AND CONTINGENCIES As an inducement to obtain financing in 2022 and 2023 through convertible notes, the Company agreed to pay a portion of certain future revenues the Company may receive from the sale of FBLLC or the Flavored Bourbon brand to the investors in such financings in the amount of 150% of their subscription amount for an aggregate of approximately $24,495,000. See Note 5 Payment Upon Sale of Flavored Bourbon, LLC. The Company maintains operating leases for various facilities. See Note 12, Leases, for further information. Litigation From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims. In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Companys products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Co …

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BORROWINGS Borrowings of the Company, not including the Convertible Notes discussed in Note 5, consisted of the following: December 31, 2025 December 31, 2024 Silverview Loan $ $ 10,682,438 PPP Loan 2,269,456 2,269,456 COVID19 TTS Loan 22,354 39,247 City of Eugene 283,030 389,875 2023 Channel Partners Loan Total Notes Payable 2,574,840 13,381,016 Less: Debt Issuance Costs (140,082) $ 2,574,840 $ 13,240,934 In March and September 2021, the Company executed a secured term loan agreement and an amendment with Silverview Credit Partners, L.P. (the Silverview Loan) for an aggregate borrowing capacity of $15,000,000. As of December 31, 2025 and 2024, the outstanding balance of the Silverview Loan was $0 and $10,682,438, respectively. In July 2025, the Company negotiated terms with the Silverview Loan secured notes payable creditor, whereby upon closing the August 15, 2025 PIPE transaction, in settlement of the then-outstanding balance due of $12,666,439, the Company paid Silverview a total of $7,092,188 in cash and 200,000 warrants (with a value of $2,963,624) in exchange for the entire loan amount being considered to be paid in full. The remaining $2,610,627 balance that was otherwise due was recognized by the Company as a gain on settlement and was included as Extinguishment of Debt expense in the September 30, 2025 statement of operations. In April 2020, the Company was granted a loan under the Paycheck Protection Program offered by the Small Business Administration under the Co …

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The following table presents revenue disaggregated by sales channel: For the Years Ended December 31, 2025 2024 Crypto and Related Revenue $ 4,951,565 $ Direct to Consumer $ 2,958,081 $ 3,899,493 Wholesale 1,240,806 1,595,553 Third Party 1,119,887 Total Spirits Products Revenue 4,198,887 6,614,933 Spirits Services 968,935 1,787,555 Total Spirits Revenue from Contracts with Customers $ 5,167,822 $ 8,402,488 Total Revenue $ 10,119,387 $ 8,402,488 …

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FAIR VALUE MEASUREMENT Upon the consummation of the Companys initial public offering on November 25, 2024, the Notes Payable and Warrant Liabilities were exchanged and reclassified into equity (see Note 5), and were $0 as of both December 31, 2025 and 2024. In November of 2023, the 2022 and 2023 Convertible Notes were exchanged (contingent upon the consummation of the Company's initial public offering) for common stock and prepaid warrants effective as of June 30, 2023. (See Note 5.) Through November 25, 2024, the $21,005,722 decrease in fair value of the 2022 and 2023 Convertible Notes in 2024, was included as a gain in the change in fair value of convertible notes in the Companys 2024 consolidated statement of operations. As further discussed below, such valuation reflecting the fixed number of shares and prepaid warrants exchanged for the convertible notes as impacted by the valuation methodologies and inputs, including an estimated common stock share value of $263.20 per share as of March 31, 2024; as compared to a subsequent share value of $80 per share, upon the November 25, 2024 initial public offering at $80 per share. As of June 30, 2024, the then outstanding $13,978,467 in aggregate fair value, of the Whiskey Notes and related Warrants (Warrant Liability), in accordance with a Subscription Exchange Agreement, exchanged (contingent upon the consummation of the Companys initial public offering) for a total of 119,954 shares of common stock and 27,346 prepaid warrants …

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INCOME TAXES The tax effects of significant items comprising the Companys deferred taxes as of December 31 are as follows: December 31, 2025 2024 Deferred Tax Assets Reserves $ 101,238 $ 88,630 Deferred Wages 26,396 88,795 Lease Liability 478,328 894,703 Net Operating Loss Carryforwards 17,063,213 14,036,687 Credit Carryforwards 35,014 191,979 Fixed Asset Basis 741,479 996,625 Restricted Stock Units 1,654,883 1,110,471 Mark to Market Adjustment 26,088,606 Other Carryforwards 128,111 124,945 Total Deferred Tax Assets 46,317,268 17,532,835 Less: Valuation Allowance (43,435,894) (13,444,812) Deferred Tax Liabilities Investment in Flavored Bourbon LLC (2,412,199) (3,242,634) Right-of-Use Assets (469,175) (749,791) Intangible Assets (95,598) Total Deferred Tax Liabilities (2,881,374) (4,088,023) Net Deferred Tax Assets $ $ ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent on the Companys ability to generate sufficient taxable income within the carryforward period. Because of the Companys recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, the Company has provided a full valuation allowance. At December 31, 2025 a …

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LEASES The Company has operated leases for corporate offices, warehouses, distilleries, tasting rooms and certain equipment which have been accounted for using ASC Topic 842. The Companys operating lease terms included periods under options to extend or terminate the operating lease when it was reasonably certain that the Company would exercise that option in the measurement of its operating lease ROU assets and liabilities. The Company considers contractual-based factors such as the nature and terms of the renewal or termination, asset-based factors such as the physical location of the asset and entity-based factors such as the importance of the leased asset to the Companys operations to determine the operating lease term. The Company generally uses the base, non-cancelable lease term when determining the operating lease ROU assets and lease liabilities. The ROU asset is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable in accordance with Accounting Standards Codification Topic 360, Property, Plant, and Equipment . On October 23, 2025, the Company announced the Restructuring. As of December 31, 2025 the Company wrote off and expensed $3,392,744 of: property and equipment; operating lease ROU assets and lease liabilities; and other related expenses as part of the Restructuring. See Note 18. In January 2025, the Company terminated one warehouse lease in Eugene, Oregon, moving from a 33,000 square fe …

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Recent accounting pronouncements In December 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 requires entities to disclose specific rate reconciliations, amount of income taxes separated by federal and individual jurisdiction, and the amount of income/(loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state, and foreign. The new standard is effective for the Company for its annual periods beginning January 1, 2025, with early adoption permitted. The Company adopted this standard prospectively during 2025. In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (ASU 2024-03), and in January 2025, the FASB issued ASU 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date (ASU 2025-01). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the statement of operations. ASU 2024-03, as clarified by ASU 2025-01, is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early a …

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RETIREMENT PLANS The Company sponsors a traditional 401(k), Roth 401(k) and profit-sharing plan, in which all eligible employees may participate after completing 3 months of employment. No contributions have been made by the Company during the years ended of December 31, 2025 and 2024.

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RELATED-PARTY TRANSACTIONS Management Agreement On October 6, 2014, the Company entered into a management agreement with Summit Distillery, Inc., an Oregon corporation, to open a new Heritage Distilling Company location in Eugene, Oregon. The Company engaged Summit Distillery, Inc., to manage the Eugene location for an annual management fee. The principals and sole owners of Summit Distillery, Inc., are also stockholders of IP Strategy. For each of the years ended December 31, 2025 and 2024, the Company expensed a management fee of $180,000 and $180,000, respectively, to Summit Distilling, Inc. The fee is based upon a percentage of the Companys trailing twelve months, earnings before interest, taxes and depreciation expense, as defined in the management agreement. Other Related Party Transactions Beginning in 2022, we began a series of financings with a party that is considered a related party for the years ended December 31, 2025 and 2024 by virtue of the number of common stock shares and pre-paid warrants to purchase common stock held by the party. As of December 31, 2025 and 2024 the related party owned less than 4.99% of the outstanding common stock of the Company, but as of December 31, 2024, enough, when combined with their prepaid warrants, would exceed the 4.99% reporting threshold if all such prepaid warrants were to be exercised into common stock. The prepaid warrants contain a 4.99% blocker prohibiting the exercise of such warrants if it would put the partys owners …

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RESTRUCTURING Closure of Tasting Rooms; Production Transition On October 23, 2025, the Company announced the Restructuring. As of December 31, 2025 the Company retired and expensed $2,146,790 of: property, plant and equipment, net; and terminated leases. The net loss and other related expenses are reflected as part of Restructuring. See Notes 4 and 12. The Company will continue to sell spirits through distributors and direct to consumers online, and will continue to work with Tribes to license the Heritage Distilling Company brand and its products for production and sale by Tribes in HDC-branded tasting rooms in or near their casino properties. Discontinuance of Thinking Tree Spirits Sales In conjunction with the Restructuring, the Company also terminated future production and sale of Thinking Tree Spirits (TTS) products. Accordingly, as of December 31, 2025, the Company wrote off the net assets related to TTS in conjunction with the Restructuring. As of December 31, 2025, the Company recorded expenses related to the Restructuring as follows: As of Restructuring Expense: December 31, 2025 Closure of Tasting Rooms; Production Transition Personnel Cash Wages and Severance $ 501,134 Write off of Obsolete Inventory 343,755 Write Off of Operating Lease Right of Use Assets, net (573,983) Write-Off of Property, Plant and Equipment, net 2,146,790 2,417,696 Discontinuance of Thinking Tree Spirits Sales: Write-off of Intangible assets, net 385,178 Write off of Goodwill 589,870 975,048 …

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SEGMENT REPORTING Due to the launch of the $IP Token treasury reserve strategy in August 2025 and continual assessment of the requirements under ASC 280, Segment Reporting, the Company has reassessed its segment conclusions and determined that effective with this Annual Report on Form 10-K, the Company is presenting two operating and reportable segments: one segment that manages the Companys intangible digital asset treasury (the IP Strategy Segment); and one reportable segment that produces and sells alcohol beverages under various brands (the Heritage Distilling Segment). In the IP Strategy Segment, the Companys $IP Token investments are maintained and managed to make a return on investment through validation and staking activities to generate revenue. In the Heritage Distilling Segment, all brands are predominantly beverages that are manufactured using similar production processes, have comparable alcohol content, generally fall under the same regulatory environment, and are sold to the same types of customers in similar size quantities at similar price points and with similar profit margins. The Companys CODM is the chief executive officer. The CODM assesses performance for each segment based on revenue and gross profit, which are reported in the consolidated statement of operations. Other costs and expenses of the Company are analyzed on an aggregate basis and not allocated to the segments. The accounting policies for segment reporting are the same as for the Companys co …

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates The presentation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include the valuation of common stock, common stock warrants, convertible notes, warrant liabilities, and stock options. Results could differ from those estimates. Estimates are periodically reviewed due to changes in circumstances, facts, and experience. Changes in estimates are recorded in the period in which they become known. Fair value option As permitted under ASC Topic 825, Financial Instruments (ASC Topic 825), the Company has elected the fair value option to account for its convertible notes issued in 2022 through 2025. In accordance with ASC Topic 825, the Company records the convertible notes at fair value with changes in fair value recorded as a component of other income (expense) in the consolidated statements of operations. As a result of applying the fair value option, direct costs and fees related to the convertible notes are expensed as incurred and are not deferred. The Company concluded it is appropriate to apply the fair v …

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STOCKHOLDERS EQUITY / (DEFICIT) On May 14, 2024, the Board and Shareholders of the Company approved a .57-for-1 reverse stock split. All share and per share numbers included in these financial statements as of and for all periods presented reflect the effect of that stock split unless otherwise noted. Additionally on September 18, 2025, the stockholders of the Company approved an amendment to the Certificate of Incorporation to effect a reverse stock split of the Companys common stock at a reverse stock split ratio ranging from 1:5 to 1:20, without reducing the authorized number of shares of common stock, and to authorize the Board to determine, at its discretion, the timing of the amendment and the specific ratio of the reverse stock split, without further approval or authorization of the Companys stockholders. On October 16, 2025, the Board approved, and on November 5, 2025 the Company effected, a 1-for-20 reverse stock split. All share and per share numbers included in these financial statements as of and for the years ended December 31, 2025 and 2024 and the years then ended all periods presented reflect the effect of that stock split unless otherwise noted. All share and per share numbers presented in these financial statements have been rounded individually. As a result, totals may reflect the effect of differences between: aggregating the individually rounded component numbers; and the rounding of the total of the individual component numbers. In cases where rounding o …

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SUBSEQUENT EVENTS For its consolidated financial statements as of December 31, 2025 and for the period then ended, the Company evaluated subsequent events through the date on which those financial statements were issued. Other than the items noted below, there were no subsequent events identified for disclosure as of the date the financial statements were available to be issued. Change of Name to IP Strategy Holdings, Inc. On February 17, 2026, the Company filed a Third Amended and Restated Certificate of Incorporation to change its name from Heritage Distilling Holding Company, Inc. to IP Strategy Holdings, Inc. The names of the Companys wholly owned subsidiaries, Heritage Distilling Company, Inc. and IP Strategy, LLC, remained unchanged. Share Repurchase Program On February 19, 2026, the Company announced the board of directors has authorized a share repurchase program whereby the Company may buy back up to 1 million shares of its outstanding shares of common stock through December 31, 2026. As of February 18, 2026, the Company had 10,259,226 shares of its common stock outstanding. Assuming the full execution of buying back 1 million shares, this would constitute an approximately 9.75% reduction in the number of outstanding stock. The Company may acquire shares through open market purchases or privately negotiated transactions, including through a Rule 10b5-1 plan, at the discretion of management and on terms that management determines to be advisable. Covered Call Contract …

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