LQR House Inc. 10-K

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis are 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 Registration Statement 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 our ownership of the CWS Platform. 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 LQR House is an American online retailer of alcohol products. The CWS Platform is a leading American online retailer specializing in alcohol products, striving to become the most trusted and convenient destination for online alcohol purchases. Combining the personalized service of a neighborhood alcohol shop with the efficiency of e-commerce, we offer a wide selection of products, including our exclusive brand, SWOL Tequila, all at competitive prices with fast shipping and around-the-clock convenience. At the heart of our brand is a commitment to exceptional customer service, driving us to continuously innovate our operations for an enhanced shopping experience. From user-friendly website navigation and a top-rated mobile app to detailed order tracking and personalized product recommendations, we are revolution izing the online alcohol shopping experience, ensuring customer satisfaction remains paramount in all our endeavors. 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. 39 ● 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 a 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 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. ● 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. 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. 40 Results of Operations Comparison of Years Ended December 31, 2023 and 2022 The following table sets forth key components of our results of operations during the years ended December 31, 2023 and 2022. Year Ended December 31, 2023 2022 Amount % of Revenues Amount % of Revenues Revenue - services $ 474,048 42 % $ 470,359 78 % Revenue - product 646,574 58 % 130,772 22 % Total revenues 1,120,622 100 % 601,131 100 % Cost of revenue - services 351,823 31 % 668,654 111 % Cost of revenue - product 563,775 50 % 134,490 22 % Total cost of revenue 915,598 82 % 803,144 134 % Gross profit (loss) 205,024 18 % (202,013 ) -34 % Operating expenses: General and administrative 11,426,747 1,020 % 985,011 164 % Sales and marketing 2,480,001 221 % 655,151 109 % Impairment expense 1,875,000 167 % - 0 % Total operating expenses 15,781,748 1,408 % 1,640,162 273 % Loss from operations (15,576,724 ) -1,390 % (1,842,175 ) -306 % Total other expense (171,000 ) -15 % - 0 % Net loss $ (15,747,724 ) -1,405 % $ (1,842,175 ) -306 % Revenue For the years ended December 31, 2023 and 2022, service revenues were $474,048 and $470,359, 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 $3,689 as we slightly grew our marketing customer base with beverage brands. For the year ended December 31, 2023, product revenues were $646,574 compared to $130,772 in 2022. The increase was due to $485,571 in revenues generated from the CWS Platform after the acquisition in November 2023. Cost of Revenue For the years ended December 31, 2023 and 2022, service cost of revenues was $351,823 and $668,654, respectively. Cost of revenues decreased by $316,831 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 was $563,775 and $134,490 in the years ended December 31, 2023 and 2022, respectively. The increase was due to product and shipping costs associated with the CWS Platform acquisition in November 2023. General and Administrative For the years ended December 31, 2023 and 2022, general and administrative expenses were $11,426,747 and $985,011, 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 and $1,091,648 pertaining to the issuance of restricted stock units. General and administrative expenses also increased due to professional fees, personnel costs and other public company expenses as our operations scaled upon the IPO. 41 Sales and Marketing For the years ended December 31, 2023 and 2022, sales and marketing expenses were $2,480,001 and $655,151, respectively. The increase of $1,824,850 was primarily due to advertising and marketing and investor relation campaigns the Company entered into in the third and fourth quarter of 2023. Impairment Expense Upon the acquisition of the CWS Platform, the Company determined that the license under the CWS Agreement was no longer applicable as the Company now maintained ownership over the Platform and the relevant marketing efforts. As such, the Company recorded an impairment of the remaining carrying value of $1,875,000. Other Expense For the years ended December 31, 2023 and 2022, other expense was $171,000 and $0, respectively. The other expense in 2023 was due to interest on the Company’s note payable issued in August and September 2023. Net Loss Net loss for the years ended December 31, 2023 and 2022 was $15,747,724 and $1,842,175, respectively. Liquidity and Capital Resources As of December 31, 2023 and 2022, we had cash and cash equivalents of $7,064,348 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 $15,747,724 and $1,842,175 for the years ended December 31, 2023 and 2022, and has negative cash flows from operations for the years ended December 31, 2023 and 2022. The Company has raised funds from the IPO (Note 1) and an additional $16.6 million from its public offerings in October and November 2023 (see Note 9). 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. 42 Cash Flow Activities The following table presents selected captions from our condensed statement of cash flows for the years ended December 31, 2023 and 2022: Year Ended December 31, 2023 2022 Net cash used in operating activities $ (9,113,855 ) $ (918,197 ) Net cash provided used in investing activities $ (5,342,574 ) $ (190,339 ) Net cash provided by financing activities $ 21,513,212 $ - Net change in cash and cash equivalents $ 7,056,783 $ (1,108,536 ) Net Cash Used in Operating Activities Net cash used in operating activities for the year ended December 31, 2023 was $9,113,855, primarily due to our net loss of $15,747,724, partially offset by non-cash charges of $8,727,481 and $2,093,612 in cash used in operating assets and liabilities. Net cash used in operating activities for the year ended December 31, 2022 was $918,197, primarily due to our net loss of $1,842,175, partially offset by non-cash charges of $567,875 and $356,103 in cash provided by operating assets and liabilities. Net Cash Provided Used In Investing Activities Net cash used in investing activities for the years ended December 31, 2023 and 2022 were $5,342,574 and $190,339, respectively, pertaining to repayments from (advances to) CWS of $137,426 and ($190,339), and deposits in escrow of $5,470,000 and acquisition of CWS Platform of $10,000 in 2023. Net Cash Provided By Financing Activities Net cash provided in financing activities for the years ended December 31, 2023 and 2022 was $21,513,212 and $0, respectively. In 2023, the Company received $955,000 in proceeds from the private placement offering, $950,000 from notes, $4,507,228 in net proceeds pursuant to the IPO and $16,619,836 in net proceeds from the October and November offerings. The Company paid $1,458,852 for the repurchase of shares, and $60,000 for the cancellation of warrants. Contractual Obligations and Related Party Transactions Funding Commitment Agreement On November 1, 2023, the Company entered into a Funding Commitment Agreement with KBROS, the Product Handler pursuant to the Product Handling Agreement as defined in Note 4. Pursuant to this agreement, the Company commits to provide annual funding to the Product Handler from time to time in the minimum amount of $2,500,000 to enable the Product Handler to purchase inventory from Company-approved vendors (“Vendors”) and for other purposes set forth in the Product Handling Agreement. The Company may combine all of the Company’s advances to Product Handler or on Product Handler’s behalf, whether under this Agreement or any other agreement. The Company may, without notice to Product Handler, elect not to advance funding for any inventory sold by particular Vendors with respect to which the Company reasonably feels insecure. This Agreement concerns funding commitment, and not the purchase of Products from Product Handler or Vendors. Related Party Transactions See Note 8 to the accompanying consolidated financial statements for further disclosure. 43 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 and Significant Judgements and Estimates 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. Significant estimates and assumptions reflected in these financial statements include, but are not limited to the valuation of assets acquired and liabilities assumed pursuant to business combinations (see Note 4 to the financial statements) and stock-based compensation as it applies to the private company valuation of common stock. 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 report, 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, when the Company has fulfilled its performance obligation. 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. 44 Acquisitions, Goodwill and Other Intangible Assets The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The Company uses a variety of information sources to determine the value of acquired assets and liabilities, including: identifiable intangibles. Goodwill and indefinite-lived intangibles are not amortized but are instead evaluated annually for impairment as part of the Company’s annual financial review, or when indicators of a potential impairment are present. The annual test for impairment performed for goodwill can be qualitative or quantitative, taking into consideration certain factors surrounding the fair value of the goodwill including, level by which fair value exceeded carrying value in the prior valuation, as well as macroeconomic factors, industry conditions and actual results at the test date. 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 7A. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements are contained on pages F-1 through F-20, which appear at the end of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.