LQR House Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and the other information set forth in the Registration Statement. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the SEC. Business Overview Our company, LQR House Inc., intends to become the full-service digital marketing and brand development face of the alcoholic beverage space. We also intend to integrate the supply, sales, and marketing facets of the alcoholic beverage space into one easy to use platform and become the one-stop-shop for everything related to alcohol. To date, our primary business includes the development of premium limited batch spirit brands and marketing internal and external brands through an exclusive agreement with a U.S.-based e-commerce portal. Additionally, we are in the process of establishing an exclusive wine club. We believe that the marketing and brand management services we provide to our wholly owned and third-party clients will increase brand recognition thereof, and drive sales thereof through our e-commerce platform partner. The Services and Brands We Market The following products and services constitute the core elements of our business model and allow us to serve various types of customers in the alcohol industry, including individual consumers, wholesalers, and third-party alcohol brands: ● SWOL Tequila is a limited-edition blend of Añejo Tequila made in exclusive batches of up to 10,000 bottles and represents the first installment under our “SWOL” trademark with application number 2345291 and registration number 2141431 which was originally owned by Dollinger Innovations and transferred over to us pursuant to the Tequila Asset Purchase Agreement. Pursuant to the Tequila Asset Purchase Agreement, we purchased all of the right, title and interest in the trademarks SWOL and all associated trade dress and intellectual property rights and all labels, logos and other branding bearing the SWOL marks or any mark substantially similar to the same. Tequila bearing the “SWOL” trademark is produced by Casa Cava de Oro S.A., an authentic tequila distillery in Jalisco, Mexico, imported into the United States through Rilo by CWS and sold to retail customers in the United States via the CWS Platform and in CWS’s physical locations. ● Vault is the exclusive membership program for the CWS Platform, which is offered and managed by the Company. We receive the subscriptions fees generated by this program. Through the CWS Platform, users can sign up for this exclusive membership where they will have access to all products available through CWS combined with special membership benefits. ● Soleil Vino will be a wine subscription service marketed on the CWS Platform that will offer a selection of vintage and limited production wines. Through the CWS Platform, users will be able to sign up for this exclusive membership where they will have access to curated selections of wine from around the world. With Soleil Vino, we intend to create the premium wine subscription service on the market with high qualities and diverse selections of wine offerings. Pursuant to an asset purchase agreement, dated May 31, 2021, between us and Dollinger Holdings LLC, LQR House Inc. purchased all of the right, title and interest in all trademarks regardless of registration status for Soleil Vino and all associated trade dress and intellectual property rights, all labels, logos and other branding bearing the Soleil Vino marks or any mark substantially similar to the same, and all website and all related digital and social media content including but not limited to influencer networks, http://www.soleilvino.com, and all related content, and all related sales channels was transferred. 16 ● LQR House Marketing is a marketing service in which we utilize our marketing expertise to help our wholly owned brands and third-party clients market their products to consumers. For example, by engaging us for our marketing services, our clients gain the ability to advertise and sell their brand on the CWS Platform. Principal Factors Affecting Our Financial Performance Our operating results are primarily affected by the following factors: ● our ability to acquire new customers and users or retain existing customers and users; ● our ability to offer competitive pricing; ● our ability to broaden product or service offerings; ● industry demand and competition; ● our ability to leverage technology and use and develop efficient processes; ● our ability to attract and maintain a network of influencers with a relevant audience; ● our ability to attract and retain talented employees and contractors; and ● market conditions and our market position; and ● ability to monitor cash expenditures Our Growth Strategies The key elements of our strategy to expand our business include the following: ● Collaborative Marketing. We intend to develop leading brands for up-and-coming companies and start-ups and align with celebrities and influencers with significant followings to enhance their online marketing presence. ● Expand Our Brand. We intend to continue expanding and developing our existing SWOL brand by purchasing and selling larger amounts of SWOL products to accelerate brand recognition and increasing our marketing presence. ● Opportunistic Acquisitions. We intend to pursue opportunistic acquisitions with existing alcohol brands and companies that have distribution licenses and physical storage locations and acquire technology that complements our business. 17 Results of Operations Comparison of Three Months Ended September 30, 2023 and 2022 The following table sets forth key components of our results of operations during the three months ended September 30, 2023 and 2022. Three Months Ended September 30, 2023 2022 Amount % of Revenues Amount % of Revenues Revenue - services $ 101,414 59 % $ 129,567 100 % Revenue - product 69,097 41 % - 0 % Total revenues 170,511 100 % 129,567 100 % Cost of revenue - services 97,504 57 % 62,500 48 % Cost of revenue - product 65,388 38 % 27,040 21 % Total cost of revenue 162,892 96 % 89,540 69 % Gross profit 7,619 4 % 40,027 31 % Operating expenses: General and administrative 4,803,821 2,817 % 351,738 271 % Sales and marketing 574,026 337 % 139,513 108 % Total operating expenses 5,377,847 3,154 % 491,251 379 % Loss from operations (5,370,228 ) (3,149 )% (451,224 ) (348 )% Total other expense 171,000 100 % - 0 % Net loss $ (5,541,228 ) (3,250 )% $ (451,224 ) (348 )% Revenue For the three months ended September 30, 2023 and 2022, service revenues were $101,414 and $129,567, respectively. Service revenues are earned as we contract with third-party alcoholic beverage brands to utilize access to the CWS Platform, as well as vault memberships beginning in late 2022. Service revenues decreased by $28,153 due to the Company’s focused efforts on the IPO in August 2023. For the three months ended September 30, 2023, product revenues were $69,097 compared to $0 in the similar 2022 period, due to a SWOL tequila batch that was delivered to CWS. Cost of Revenue For the three months ended September 30, 2023 and 2022, service cost of revenues was $97,504 and $62,500, respectively. Cost of revenues increased by $35,004 in 2023 due to increased spend to dedicated personnel to support campaigns. Product cost of revenues related to the SWOL batch was $65,388 and $27,040 in the three months ended September 30, 2023 and 2022, respectively. General and Administrative For the three months ended September 30, 2023 and 2022, general and administrative expenses were $4,803,821 and $351,738, respectively. In September 2023, the Company recorded $2,552,500 in non-cash stock-based compensation expense due to the issuance of common shares for services. General and administrative expenses also increased due to professional fees, investor relations, personnel costs and other public company expenses as our operations scaled upon the IPO. Sales and Marketing For the three months ended September 30, 2023 and 2022, sales and marketing expenses were $574,026 and $139,513, respectively. The increase of $434,513 was primarily due to advertising and marketing campaigns the Company entered into in the third quarter of 2023. Other Expense For the three months ended September 30, 2023 and 2022, other expense was $171,000 and $0, respectively. The other expense during three months ended September 30, 2023 was due to interest on the Company’s note payable issued in August and September 2023. Net Loss Net loss for the three months ended September 30, 2023 and 2022 was $5,541,228 and $451,224, respectively. 18 Comparison of Nine Months Ended September 30, 2023 and 2022 The following table sets forth key components of our results of operations during the nine months ended September 30, 2023 and 2022. Nine Months Ended September 30, 2023 2022 Amount % of Revenues Amount % of Revenues Revenue - services $ 395,212 77 % $ 232,792 100 % Revenue - product 116,884 23 % - 0 % Total revenues 512,096 100 % 232,792 100 % Cost of revenue - services 296,331 58 % 579,519 249 % Cost of revenue - product 105,519 21 % 27,040 12 % Total cost of revenue 401,850 78 % 606,559 261 % Gross profit (loss) 110,246 22 % (373,767 ) -161 % Operating expenses: General and administrative 8,684,826 1,696 % 853,327 367 % Sales and marketing 674,213 132 % 472,390 203 % Total operating expenses 9,359,039 1,828 % 1,325,717 569 % Loss from operations (9,248,793 ) (1,806 )% (1,699,484 ) (730 )% Total other expense 171,000 33 % - Net loss $ (9,419,793 ) (1,839 )% $ (1,699,484 ) (730 )% Revenue For the nine months ended September 30, 2023 and 2022, service revenues were $395,212 and $232,792, respectively. Service revenues are earned as we contract with third-party alcoholic beverage brands to utilize access to the CWS Platform, as well as vault memberships beginning in late 2022. Service revenues increased by $162,420 as we grew our marketing customer base with beverage brands. For the nine months ended September 30, 2023, product revenues were $116,884 compared to $0 in the similar 2022 period, due to a SWOL batch that was delivered to CWS. Cost of Revenue For the nine months ended September 30, 2023 and 2022, service cost of revenues was $296,331 and $579,519, respectively. Cost of revenues decreased by $283,188 in 2023 due to our ability to support marketing campaigns via dedicated personnel and ceased certain digital ad costs to support campaigns. Product cost of revenues related to the SWOL batch was $105,519 and $27,040 in the nine months ended September 30, 2023 and 2022, respectively. General and Administrative For the nine months ended September 30, 2023 and 2022, general and administrative expenses were $8,684,826 and $853,327, respectively. In 2023, the Company recorded $5,552,500 in non-cash stock-based compensation expense due to the issuance of common shares for services. General and administrative expenses also increased due to professional fees, investor relations, personnel costs and other public company expenses as our operations scaled upon the IPO. Sales and Marketing For the nine months ended September 30, 2023 and 2022, sales and marketing expenses were $674,213 and $472,390, respectively. The increase of $201,823 was primarily due to advertising and marketing campaigns the Company entered into in the third quarter of 2023. Other Expense For the nine months ended September 30, 2023 and 2022, other expense was $171,000 and $0, respectively. The other expense during nine months ended September 30, 2023 was due to interest on the Company’s notes payable issued in August and September 2023. Net Loss Net loss for the nine months ended September 30, 2023 and 2022 was $9,419,793 and $1,699,484, respectively, primarily due to the higher operating expenses incurred. 19 Liquidity and Capital Resources As of September 30, 2023, and December 31, 2022, we had cash and cash equivalents of $1,863,835 and $7,565, respectively. To date, we have financed our operations primarily through issuances of common stock and sales of our products and services. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not generated profits since inception, has sustained net losses of $9,419,793 and has negative cash flows from operations of $4,568,848 for the nine months ended September 30, 2023 and 2022. The Company has raised $4.5 million from the IPO and an additional $15.0 million from its public offerings in October and November 2023. However, the Company expects that its cash and cash equivalents as of the date of issuance of these unaudited interim condensed financial statements may not be sufficient to fund its operating expenses and acquisition plans for at least one year. The Company’s ability to continue as a going concern for the next twelve months is dependent upon its ability to generate sufficient cash flows from operations to meet its obligations, which it has not been able to accomplish to date, or to obtain additional capital financing to support current negative cash flow trends. No assurance can be given that the Company will be successful in these efforts. Cash Flow Activities The following table presents selected captions from our condensed statement of cash flows for the nine months ended September 30, 2023 and 2022: Nine Months Ended June 30, 2023 2022 Net cash used in operating activities $ (4,568,848 ) $ (1,035,463 ) Net cash provided by (used in) investing activities 137,426 (74,086 ) Net cash provided by financing activities 6,287,692 - Net change in cash and cash equivalents $ 1,856,270 $ (1,109,549 ) Net Cash Used in Operating Activities Net cash used in operating activities for the nine months ended September 30, 2023 was $4,568,848, primarily due to our net loss of $9,419,793 and $977,433 in cash used in operating assets and liabilities, partially offset by non-cash charges of $5,828,378. Net cash used in operating activities for the nine months ended September 30, 2022 was $1,035,463, primarily due to our net loss of $1,699,484, partially offset by non-cash charges of $505,375 and $158,645 in cash used in operating assets and liabilities. Net Cash Provided by (Used in) Investing Activities Net cash provided by (used in) investing activities for the nine months ended September 30, 2023 and 2022 were $137,426 and ($74,086), respectively, pertaining to payments from CWS, partially offset by advances to Veg House Illinois in 2023. 20 Net Cash Provided By Financing Activities Net cash used in financing activities for the nine months ended September 30, 2023 and 2022 was $6,287,692 and $0, respectively. In 2023, the Company received $905,000 in proceeds from the private placement offering, $950,000 from notes and $4,494,156 in net proceeds pursuant to the IPO. The Company paid $114,464 for the shares buyback program and repurchase of shares. Contractual Obligations During the nine months ended September 30, 2023 and 2022, we had no significant cash requirements for capital expenditures or other cash needs under any contractual or other obligations . Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Critical Accounting Policies This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. 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 financial statements included elsewhere in this prospectus, we believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. We believe our most critical accounting policies and estimates relate to the following: Revenue Recognition In accordance with FASB ASC 606, Revenue from Contracts with Customers , the Company determines revenue recognition through the following steps: ● Identification of a contract with a customer; ● Identification of the performance obligations in the contract; ● Determination of the transaction price; ● Allocation of the transaction price to the performance obligations in the contract; and ● Recognition of revenue when or as the performance obligations are satisfied. Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to our customers in an amount that reflects the consideration expected to be received in exchange for transferring goods or services to customers. Control transfers once a customer has the ability to direct the use of, and obtain substantially all of the benefits from, the product. This includes the transfer of legal title, physical possession, the risks and rewards of ownership, and customer acceptance. Service revenue is recognized over a period time, as the marketing services are being continually provided on a daily and monthly basis over the life of an agreed upon campaign. Product revenue is recognized at the point in the products are delivered to CWS, when LQR House has fulfilled its performance obligation. 21 Related Parties Related parties are any entities or individuals that, through employment, ownership, or other means, possess the ability to direct or cause the direction of the management and policies of the Company. We disclose related party transactions that are outside of normal compensatory agreements, such as salaries. We follow ASC 850, Related Party Disclosures , for the identification of related parties and disclosure of related party transactions. Stock-Based Compensation Stock-based compensation is accounted for in accordance with ASC Topic 718-10, Compensation-Stock Compensation (“ASC 718-10”). The Company measures all equity-based awards granted to employees, independent contractors and advisors based on the fair value on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. We classify stock-based compensation expense in its statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and are not required to provide the information required under this item.