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 included in our Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission (the “Commission”, or the “SEC”) on April 1, 2024. 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. (“LQR”, “LQR House”, or the “Company”), intends to become a prominent force in the wine and spirits e-commerce, sector epitomized by its flagship alcohol marketplace, CWSpirits.com (“CWS Platform”). This platform delivers a diverse range of spirits, wines, and champagnes from esteemed retail partners like Country Wine & Spirits. Beyond its role in the e-commerce sector, LQR is a marketing agency with a specialized focus on the alcohol industry. 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, 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. The Services and Brands We Market The CWS Platform is an 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 revolutionizing 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 Import & Export (“Rilo”) by Country Wine & Spirits LLC (“CWS”) and sold to retail customers in the United States via the CWS Platform. ● 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. 13 ● 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, we 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. 14 Results of Operations Comparison of Three Months Ended March 31, 2024 and March 31, 2023 The following table sets forth key components of our results of operations during the three months ended March 31, 2024 and March 31, 2023. Three Months Ended March 31, 2024 2023 Var. $ Var. % Revenue - services $ 43,791 $ 150,563 $ (106,772 ) -71 % Revenue - product 437,303 - 437,303 100 % Total revenues 481,094 150,563 330,531 220 % Cost of revenue - services 37,208 102,997 (65,789 ) -64 % Cost of revenue - product 523,383 - 523,383 100 % Total cost of revenue 560,591 102,997 457,594 444 % Gross profit (loss) (79,497 ) 47,566 (127,063 ) -267 % Operating expenses: General and administrative 1,606,461 321,317 1,285,144 400 % Sales and marketing 786,415 48,323 738,092 1527 % Total operating expenses 2,392,876 369,640 2,023,236 547 % Loss from operations (2,472,373 ) (322,074 ) (2,150,299 ) 668 % Other income: Dividend income 44,981 - 44,981 100 % Total other income 44,981 - 44,981 100 % Provision for income taxes - - - 0 % Net loss $ (2,427,392 ) $ (322,074 ) $ (2,105,318 ) 654 % Revenue For the three months ended March 31, 2024 and 2023, service revenues were $43,791 and $150,563, 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. Service revenues decreased by $106,772 as more focus was emphasized on the CWS Platform. For the three months ended March 31, 2024 product revenues were $437,303 compared to $0 in the similar 2023 period. 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 three months ended March 31, 2024 and 2023, service cost of revenues were $37,208 and $102,997, respectively. Cost of revenues services decreased by $65,789 in 2024, corresponding to the decreased revenues. In 2023, cost of revenues included amortization of the marketing license, which was impaired as of December 31, 2023. Product cost of revenues related to the SWOL batch was $523,383 in the three months ended March 31, 2024. The increase was due to product and shipping costs associated with the CWS Platform acquisition in November 2023. General and Administrative For the three months ended March 31, 2024 and 2023, general and administrative expenses were $1,606,461 and $321,317, respectively. General and administrative expenses increased due to professional fees, personnel costs and other public company expenses as our operations scaled upon our initial public offering in August 2023. In 2024, the Company recorded $720,842 in non-cash stock-based compensation expense due to vesting of restricted stock units. 15 Sales and Marketing For the three months ended March 31, 2024 and 2023, sales and marketing expenses were $786,415 and $48,323 respectively. The increase of $738,092 was primarily due to advertising and marketing and investor relation campaigns beginning in late 2023 and continuing in the first quarter of 2024. Net Loss Net loss for the three months ended March 31, 2024 and 2023 was $2,427,392 and $322,074 respectively. Liquidity and Capital Resources As of March 31, 2024 and December 31, 2023, we had cash and cash equivalents of $1,781,907 and $7,064,348 respectively. As of March 31, 2024, we also had $4,030,986 in mutual fund investments. To date, we have financed our operations primarily through issuances of common stock and sales of our products and services. The accompanying unaudited condensed consolidated 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 $2,427,392 and $322,074 for the three months ended March 31, 2024 and 2023, and has negative cash flows from operations of $1,374,040 for the three months ended March 31, 2024. The Company requires additional capital to operate and expects losses to continue for the foreseeable future. These factors raise substantial doubts about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern until it reaches profitability is dependent upon its ability to generate cash from operating activities and to raise additional capital to fund operations. Management plans to raise additional capital to fund operations through debt and/or equity financings. The Company has raised funds from the initial public offering in August 2023 and an additional $16.6 million from its public offerings in October and November 2023. Our failure to raise additional capital could have a negative impact on not only our financial condition but also our ability to execute our business plan. No assurance can be given that the Company will be successful in these efforts. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company may not be able to obtain financing on acceptable terms, or at all. Cash Flow Activities The following table presents selected captions from our condensed statement of cash flows for the three months ended March 31, 2024 and 2023: Three Month Ended March 31, 2024 2023 Net cash used in operating activities $ (1,374,040 ) $ (233,433 ) Net cash provided by (used in) investing activities $ (3,360,986 ) $ 308,708 Net cash used in financing activities $ (547,415 ) $ (59,259 ) Net change in cash and cash equivalents $ (5,282,441 ) $ 16,016 Net Cash Used in Operating Activities Net cash used in operating activities for the three months ended March 31, 2024 was $1,374,040, primarily due to our net loss of $2,427,392 partially offset by non-cash charges of $720,842 and changes in our operating assets and liabilities of $332,510. Net cash used in operating activities for the three months ended March 31, 2023 was $233,433, primarily due to our net loss of $322,074 partially offset by non-cash charges of $62,500 and changes in our operating assets and liabilities of $26,141. 16 Net Cash Provided by (Used in) Investing Activities Net cash provided by (used in) investing activities for the three months ended March 31, 2024 and 2023 were ($3,360,986) and $308,708, respectively. In 2024, the Company invested $4,030,986 in mutual fund investments, and received $670,000 back from an investment it was no longer pursuing. In 2023, the Company had repayments from CWS. Net Cash Provided By Financing Activities Net cash used in financing activities for the three months ended March 31, 2024 and 2023 was $547,415 and $59,259, respectively. In 2024, the Company repurchased shares of common stock. Cash used in 2023 pertained to deferred offering costs. Contractual Obligations and Related Party Transactions Funding Commitment Agreement On November 1, 2023, the Company entered into a Funding Commitment Agreement with KBROS, LLC, 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 7 to the accompanying unaudited condensed consolidated financial statements for further disclosure. 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. There have been no material changes in our critical accounting policies from those disclosed in our 2023 Annual Report on Form 10-K. 17 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.