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 audited consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. 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. In May 2024, we acquired a minority stake of common shares of Cannon Estate Winery Ltd., a British Columbia corporation, an owner of Cannon Estate Winery. In June 2024, we acquired a minority stake of common shares of DRNK Beverage Corp., a British Columbia corporation (which became Chase Mocktails Ltd.), operating in the non-alcoholic and ready-to-drink beverage markets. As of December 31, 2024, the Company has recorded an impairment based on its evaluation of the investee. Refer to the consolidated financial statements for further disclosure. The Services and Brands We Market LQR House is an American online retailer of alcohol products. The CWS Platform is an American online retailer specializing in selling 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 tequila made in exclusive batches of up to 10,000 bottles 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 and in CWS’s physical locations. 41 ● 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, 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. ● ability to make profitable investments in complimentary business. 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. 42 Results of Operations Comparison of Years Ended December 31, 2024 and 2023 The following table sets forth key components of our results of operations during the years ended December 31, 2024 and 2023. Year Ended December 31, 2024 2023 Var. $ Var. % Revenue - services $ 117,965 $ 474,048 $ (356,083 ) -75 % Revenue - product 2,383,695 646,574 1,737,121 269 % Total revenues 2,501,660 1,120,622 1,381,038 123 % Cost of revenue - services 178,851 351,823 (172,972 ) -49 % Cost of revenue - product 2,635,984 563,775 2,072,209 368 % Total cost of revenue 2,814,835 915,598 1,899,237 207 % Gross profit (loss) (313,175 ) 205,024 (518,199 ) -253 % Operating expenses: General and administrative 14,556,220 11,426,747 3,129,473 27 % Sales and marketing 3,617,924 2,480,001 1,137,923 46 % Impairment of intangible asset - 1,875,000 (1,875,000 ) -100 % Total operating expenses 18,174,144 15,781,748 2,392,396 15 % Loss from operations (18,487,319 ) (15,576,724 ) (2,910,595 ) 19 % Other income (expense): Interest expense - (171,000 ) 171,000 -100 % Impairment of investment (4,500,000 ) - (4,500,000 ) 100 % Other income 227,467 - 227,467 100 % Realized gain/(loss) on securities 5,674 - 5,674 100 % Total other income (4,266,859 ) (171,000 ) 4,095,859 2,395 % Provision for income taxes - - - Net loss $ (22,754,178 ) $ (15,747,724 ) $ (7,006,454 ) 44 % Revenue For the years ended December 31, 2024 and 2023, service revenues were $117,965 and $474,048, 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 $356,083 as more focus was emphasized on the CWS Platform. For the year ended December 31, 2024, product revenues were $2,383,695 compared to $646,574 in the similar 2023. The increase of $1,737,121 in revenues is due to product sales via the CWS Platform after the acquisition in November 2023. Cost of Revenue and Gross Profit (Loss) For the years ended December 31, 2024 and 2023, service cost of revenues was $178,851 and $351,823, respectively. Cost of revenues decreased by $172,972 in 2024 due to decrease in service revenue. In 2023, cost of revenues included amortization of the marketing license, which was impaired as of December 31, 2023. Product cost of revenues was $2,635,984 and $563,775 in the years ended December 31, 2024 and 2023, respectively. The increase was due to product and shipping costs associated with the product sales via the CWS Platform, which was acquired in November 2023. Gross profit (loss) was ($313,175) and $205,024 for the years ended December 31, 2024 and 2023. The Company has incurred gross losses in 2024 as it transitions its strategies from marketing to the CWS Platform. Management is exploring various strategies, including customer acquisition and new partnerships, to increase volume in order to achieve better gross margins in 2025. 43 General and Administrative For the years ended December 31, 2024 and 2023, general and administrative expenses were $14,556,220 and $11,426,747, respectively. General and administrative expenses increased by $3,129,473 in 2024 as compared to 2023. In 2024, the Company recorded $2,533,256 in non-cash stock-based compensation expense pertaining to the issuance of restricted stock units as compared to $1,091,648 recorded in 2023. General and administrative expenses also increased due to personnel costs as the Company entered into several settlement, bonus and retention agreements totaling $8,021,000 in late 2024 most of which were paid to insiders and related parties of the Company. Bonus and retention agreements reflect strategic decisions made by the Company to retain key talent and incentivize critical personnel. These bonus and retention agreements were based on strategic decisions made by the Company to retain key talent and incentivize critical personnel. These were designed to ensure continuity in leadership and support the Company’s long-term goals, even though the Company is not currently profitable. Sales and Marketing For the years ended December 31, 2024 and 2023, sales and marketing expenses were $3,617,924 and $2,480,001, respectively. The increase of $1,137,923 was primarily due to advertising and marketing and investor relation campaigns the Company entered into in late 2023, which extended throughout 2024. Lastly, The Company determined it was no longer pursuing the website development services as per its October 2023 agreement with X-Media. As such, the full amount of the prepaid was written of during the year, representing an expense of $2,150,000. The amount was included in sales and marketing expenses in the consolidated statements of operations. Impairments For the year ended December 31, 2024, the Company recognized an impairment expense $4,500,000 related to its investment in DRNK Beverage Corp, which was included in other income (expense) in the consolidated statements of operations. The impairment was triggered by a significant decline in the fair value of the Company’s investment upon management’s review and monitoring of the investee. 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, during the year ended December 31, 2023, the Company recorded an impairment of the remaining carrying value of $1,875,000. Net Loss Net loss for the years ended December 31, 2024 and 2023 was $22,754,178 and $15,747,724, respectively. Liquidity and Capital Resources As of December 31, 2024 and 2023, we had cash and cash equivalents of $5,386,789 and $7,064,348, respectively. To date, we have financed our operations primarily through issuances of common stock and sales of our products and services. During the year ended December 31, 2024, the Company issued an aggregate of 1,518,188 shares of common stock pursuant to at-the-market offering agreement, dated September 13, 2024, between the Company and H.C. Wainwright & Co., LLC, for net proceeds of $1,599,814. The Company paid to H.C. Wainwright & Co., LLC, as the sales agent a compensation with respect to sale of such shares in the amount of $48,018. In 2025, the Company has issued 13,816,082 shares of common stock pursuant to its ATM Agreement for net proceeds of $5,014,022. 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 $22,754,178 and $15,747,724 for the years ended December 31, 2024 and 2023, and has negative cash flows from operations $6,618,417 and $9,113,855 for the years ended December 31, 2024 and 2023 respectively. 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 is exploring various strategies, including customer acquisition and new partnerships, to increase volume in order to achieve better gross margins and profitability. The Company continues to seek investment and acquisition opportunities which will help achieve its strategies. 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 to fund operations through debt and/or equity financings. 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. 44 Cash Flow Activities The following table presents selected captions from our condensed statement of cash flows for the years ended December 31, 2024 and 2023: Year Ended December 31, 2024 2023 Net cash used in operating activities $ (6,618,417 ) $ (9,113,855 ) Net cash provided by (used in) investing activities $ 675,674 $ (5,342,574 ) Net cash provided by financing activities $ 4,265,184 $ 21,513,212 Net change in cash and cash equivalents $ (1,677,559 ) $ 7,056,783 Net Cash Used in Operating Activities Net cash used in operating activities for the year ended December 31, 2024 was $6,618,417, primarily due to our net loss of $22,754,178, partially offset by non-cash charges of $7,204,922 and $8,930,839 in cash provided by operating assets and liabilities. 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 Provided by (Used In) Investing Activities Net cash provided by (used in) investing activities for the years ended December 31, 2024 and 2023 were 675,674 and ($5,342,574), respectively. In 2024, the Company purchased marketable securities of $7,758,523, and sold securities of $7,764,197. The Company also received $670,000 back from an investment it was no longer pursuing. In 2023, the Company had repayments from CWS of $137,426, 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 by financing activities for the years ended December 31, 2024 and 2023 was $4,265,184 and $21,513,212, respectively. In 2024, the Company received $3,350,020 in proceeds from private placement offerings, $1,543,079 in net proceeds pursuant to public offerings, incurred $80,500 in offering cost. The Company paid $547,415 for repurchase of shares. 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 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 committed 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”). 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 a funding commitment, and not the purchase of products from Product Handler or Vendors. In October, 2024, the Company entered into a settlement and release agreement with KBROS, and its controlling stockholder, for an aggregate amount equal to $4,100,000, which is included in general and administrative expenses in the consolidated statements of operations. As of December 31, 2024, $3,600,000 remained unpaid and was included as accrued expenses on the consolidated balance sheet. Of this amount, $1,800,000 was paid in 2025 and $1,800,000 remained unpaid as of issuance date of these consolidated financial statements. The Company no longer maintains its funding commitment pursuant to the October 2024 settlement agreement. Related Party Transactions See Note 9 to the accompanying consolidated financial statements for further disclosure. 45 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. 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. 46 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. Investments, at Cost In accordance with FASB ASC Subtopic 321, Investments – Others – Cost Method Investments , investments where the Company does not have a significant influence are accounted for at cost. The Company reviews all material investments on an annual basis to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of the investment. In the event the fair value of the investment declines below the cost basis, the Company records an impairment. As of December 31, 2024, the Company recognized an impairment expense of $4,500,000 related to its investment in DRNK Beverage Corp, which was recorded within other income (expense) in the consolidated statements of operations. This impairment was triggered by company specific information and progress of the investee against expectations. The impairment also reflects the ongoing challenges in the marketplace and the reduced prospects for recovery of the carrying value of the investment. The Company continues to monitor the situation and will assess the need for any further adjustments in future periods. 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 Exchange Act and are not required to provide information required under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements are contained on pages F-1 through F-22, 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.