LQR House Inc. 10-Q

ITEM 2. 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 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 March 31, 2025. 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. (the “Company”), 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 Note 5 to our unaudited condensed consolidated financial statements for further disclosure. Recent Developments On September 13, 2024, the Company entered into an at-the-market offering agreement (“ATM Agreement”) with H.C. Wainwright & Co., LLC, as sales agent (“HCW”), relating to the sale of common stock. During the first quarter of 2025 ended March 31, 2025, the Company issued an aggregate of 413,520 shares of common stock pursuant to such ATM Agreement for net proceeds of $5,178,821. The Company paid the sales agent compensation with respect to the sale of such shares in the amount of $161,608. On April 1, 2025, we entered into a Supplementary Distribution Agreement (the “Supplementary Distribution Agreement”) with Of The Earth Distribution Corp., a Canadian corporation (the “Distributor”), pursuant to which the Company granted to Distributor the exclusive right to distribute, market, and sell SWOL Tequila products within Thailand and Greece until June 28, 2029. The Supplementary Distribution Agreement also amends Supplier Agreement between the Company and the Distributor, dated June 28, 2024, by providing the Distributor exclusive distribution rights to sell SWOL Tequila in all of Canada without any territorial limitations. On April 2, 2025, David Lazar resigned as President and as member of our Board of Directors (the “Board”), effective immediately. In connection with such resignation, the Company issued Mr. Lazar 2,857 shares of common stock (on post-split basis), in accordance with his separation agreement with the Company. On April 16, 2025, the Board approved and recommended for stockholder approval at the 2025 Annual Meeting of Stockholders, the proposal to adopt a Certificate of Amendment to our Articles of Incorporation (the “Certificate of Amendment”), to increase the number of authorized shares of common stock of the Company from 10,000,000 shares to 350,000,000 shares, each share of common stock having a par value of $0.0001. The Board also set the date for the Company’s 2025 Annual Meeting of Stockholders for May 30, 2025. The Certificate of Amendment will become effective upon stockholder approval. On April 21, 2025, the Company effected a one-for-thirty-five reverse stock split of its issued, outstanding and authorized common stock (the “Reverse Stock Split”). The Reverse Stock Split became effective at 12:01 a.m. Eastern Time on April 21, 2025, and our common stock began trading on a post-split basis on April 21, 2025. No fractional shares were issued in connection with the Reverse Stock Split and fractional amounts were rounded up to the next highest whole number at the participant level. On April 23, 2025, the Audit Committee of the Board accepted the resignation of dbbmckennon and approved the engagement of Enrome LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2025, effective immediately. 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. 19 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. ● 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. 20 Results of Operations Comparison of Three Months Ended March 31, 2025 and March 31, 2024 The following table sets forth key components of our results of operations during the three months ended March 31, 2025 and March 31, 2024. Three Months Ended March 31, 2025 2024 Var. $ Var. % Revenue - services $ 77,356 $ 43,791 $ 33,565 77 % Revenue - product 351,984 437,303 (85,319 ) -20 % Total revenues 429,340 481,094 (51,754 ) -11 % Cost of revenue - services 1,400 37,208 (35,808 ) -96 % Cost of revenue - product 397,782 523,383 (125,601 ) -24 % Total cost of revenue 399,182 560,591 (161,409 ) -29 % Gross profit (loss) 30,158 (79,497 ) 109,655 -138 % Operating expenses: General and administrative 2,023,161 1,606,461 416,700 26 % Sales and marketing 406,853 786,415 (379,562 ) -48 % Total operating expenses 2,430,014 2,392,876 37,138 2 % Loss from operations (2,399,856 ) (2,472,373 ) 72,517 -3 % Other income (expense): Other income 10,206 44,981 (34,775 ) -77 % Total other income 10,206 44,981 (34,775 ) 100 % Provision for income taxes - - - Net loss $ (2,389,650 ) $ (2,427,392 ) $ 37,742 -2 % Revenue For the three months ended March 31, 2025 and 2024, service revenues were $77,356 and $43,791, 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 increased by $33,565 primarily driven by a higher volume of marketing services provided. For the three months ended March 31, 2025, product revenues were $351,984 compared to $437,303 in the similar 2024 period. The decrease by $85,319 compared to 2024 was primarily attributable to a decrease in sales volume through the CWS Platform during the quarter. The reduction in revenue reflects lower customer traffic and order activity on cwsspirits.com, which the Company believes was driven by seasonal fluctuations and less promotional activity compared to the prior year period. 21 Cost of Revenue and Gross Profit (Loss) For the three months ended March 31, 2025 and 2024, service cost of revenues were $1,400 and $37,208, respectively. Cost of service revenues decreased by $35,808 in 2025 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 $397,782 and $523,383 during the three months ended March 31, 2025 and 2024. The decrease was primarily due to the decline in product revenue during the period, resulting from lower sales volume on the CWS Platform. Gross profit (loss) was $30,158 and ($79,497) for the three months ended March 31, 2025 and 2024. 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. General and Administrative For the three months ended March 31, 2025 and 2024, general and administrative expenses were $2,023,161 and $1,606,461, respectively. The increase was primarily attributable to higher professional fees and personnel-related costs incurred during the current period. In addition, the Company recognized approximately $868,000 in non-cash stock-based compensation expense in 2025, compared to approximately $720,000 in the prior-year period. Sales and Marketing For the three months ended March 31, 2025 and 2024, sales and marketing expenses were $406,853 and $786,415 respectively. The decrease was primarily due to the absence of website development costs in the current period. In the first quarter of 2024, the Company recorded significant expenses related to a website development agreement with X-Media entered into in October 2023, which was fully written off during 2024. The absence of similar charges in 2025 contributed to the decline in sales and marketing expenses. Net Loss Net loss for the three months ended March 31, 2025 and 2024 was $2,389,650 and $2,427,392, respectively. 22 Liquidity and Capital Resources As of March 31, 2025 and December 31, 2024, we had cash and cash equivalents of $7,889,597 and $5,386,789 respectively. To date, we have financed our operations primarily through issuances of common stock and sales of our products and services. During the three months ended March 31, 2025, the Company raised an aggregate of $9,230,236 in net proceeds through issuance of commons stock. The Company issued 413,520 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 $5,178,821. Additionally, the Company received net proceeds of $4,051,415 from the issuance of 210,463 shares of common stock pursuant to exercise of warrants. 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 $2,389,650 and $2,427,392 for the three months ended March 31, 2025 and 2024, and has negative cash flows from operations of $6,619,374 for the three months ended March 31, 2025. 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. Cash Flow Activities The following table presents selected captions from our condensed statement of cash flows for the three months ended March 31, 2025 and 2024: Three Months Ended March 31, 2025 2024 Net cash used in operating activities $ (6,619,373 ) $ (1,374,040 ) Net cash used in investing activities $ - $ (3,360,986 ) Net cash provided by (used in) financing activities $ 9,122,181 $ (547,415 ) Net change in cash and cash equivalents $ 2,502,808 $ (5,282,441 ) Net Cash Used in Operating Activities Net cash used in operating activities for the three months ended March 31, 2025 was $6,619,373, primarily due to our net loss of $2,389,650 partially offset by non-cash charges of $868,189 and changes in our operating assets and liabilities of $5,097,912. 23 Net Cash Used in Investing Activities Net cash used in investing activities for the three months ended March 31, 2025 and 2024 were $0 and $3,360,986, 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. Net Cash Provided By (Used in) Financing Activities Net cash provided by (used in) financing activities for the three months ended March 31, 2025 and 2024 was $9,122,181 and ($547,515) respectively. In 2025, the Company received $4,051,415 from exercise of warrants and $5,070,767 from issuance of shares pursuant to ATM Agreement. In 2024, the Company paid $547,515 for repurchase of shares. 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 8 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2024. 24 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.