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 consolidated financial statements and the other information included in our Annual Report on Form 10-K, filed with the SEC on April 15, 2026. 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. Following the acquisition of a controlling interest in Fusion Five Continents Securities Limited (“Fusion Five”) on June 1, 2026, we also operate a New Zealand financial services company operating an AI-powered cross-border securities trading platform with proprietary USDT-based funding and settlement capabilities that enable clients internationally to buy and sell securities electronically and to make stablecoin deposits for the trading of Hong Kong and United States equities. Our business accordingly consists of two operating segments: beverage alcohol and financial services. See Note 15 — Segment Reporting. Through our wholly owned subsidiary SWOL Holdings Inc., we develop and market SWOL Tequila. Through our wholly owned subsidiary YHC Online Limited, we entered into joint venture agreements in December 2025 to cooperate in the creation and monetization of multi-channel network content for digital platforms; in April 2026, all such joint venture agreements were terminated. See Note 8 — Investment in Joint Ventures and Note 4 — Business Combination. Recent Developments Reincorporation in Delaware and Increase in Authorized Shares On March 2, 2026, the Company’s stockholders approved the reincorporation of the Company from the State of Nevada to the State of Delaware, which was effected on the same date. In connection with the special meeting, stockholders also approved an increase in the number of authorized shares of common stock from 350,000,000 to 1,500,000,000 shares, par value $0.0001 per share. At-the-Market Offering On March 11, 2026, the Company entered into a sales agreement with A.G.P./Alliance Global Partners, pursuant to which the Company may sell shares of its common stock having an aggregate offering price of up to $50,273,610 from time to time in at-the-market transactions. The sales agent is entitled to a commission of 3.0% of gross proceeds per share sold. During the three months ended June 30, 2026, the Company issued 1,619 shares of common stock under the agreement for net proceeds of $165,999. Termination of Joint Venture Agreements In April 2026, all four joint venture agreements entered into in December 2025 by YHC Online Limited were terminated. In connection with the terminations, all amounts previously funded, aggregating $18,494,000, were returned to the Company in the form of USDT, a digital asset, and, together with USDT received from other sources, applied toward the consideration for the acquisition of Fusion Five. See Note 4 — Business Combination. Termination of Distribution and Marketing Service Agreements In April 2026, both distribution and marketing service agreements entered into during 2025 with two Hong Kong entities were terminated. In connection with the terminations, all amounts previously paid under the agreements, aggregating $3,279,000, were returned to the Company in the form of USDT, a digital asset, and, together with USDT received from other sources, applied toward the consideration for the acquisition of Fusion Five. See Note 4 — Business Combination. 30 Fusion Five Continents Securities Limited Share Purchase Agreement On April 11, 2026, the Company entered into a share purchase agreement with Fusion Five Continents Securities Limited, a New Zealand limited company, and with its controlling shareholder, pursuant to which the Company agreed to acquire all of the issued and outstanding shares of the company in multiple closings, at a total consideration of $126,880,000, payable in Tether (USDT). On April 24, 2026, the Company completed the initial closing, acquiring 24% of the outstanding shares for $28,080,000. On June 1, 2026, the Company completed an additional closing, acquiring a further 30% of the outstanding shares for $39,000,000, bringing its aggregate holding to 54% and obtaining control of Fusion Five, which has been consolidated from that date. The remaining 46% of the outstanding shares are to be acquired in one or more subsequent closings for $59,800,000, subject to receipt of required regulatory approvals. The Company expects to require additional financing to fund the remaining closings. Failure to secure adequate financing could delay or prevent the consummation of the remaining closings. The acquisition represents a significant use of capital, and the Company’s ability to meet its other operational and liquidity needs will depend on its ability to raise additional funds. See Note 4 — Business Combination. Reverse Stock Split On July 9, 2026, the Company filed a Certificate of Amendment to its Certificate of Incorporation to effect a one-for-one hundred (1-for-100) reverse stock split of its issued and outstanding common stock, which became effective on July 13, 2026. All share and per-share amounts in this Quarterly Report have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented. See Note 1 — Nature of Operations and Note 18 — Subsequent Events. Common Stock Issuances Between July 1, 2026 and July 8, 2026, the Company issued an aggregate of 1,088,503 shares of common stock for net proceeds of $7,316,687, pursuant to its at-the-market offering program. See Note 18 — Subsequent Events. Results of Operations Comparison of Three Months Ended June 30, 2026 and June 30, 2025 The following table sets forth key components of our results of operations during the three months ended June 30, 2026 and 2025. Three Months Ended June 30, 2026 2025 Var. $ Var. % Revenue - services $ 3,781 $ 15,319 $ (11,538 ) -75 % Revenue - product 304,416 483,209 (178,793 ) -37 % Revenue - brokerage 37,778 - 37,778 n/a Total revenues 345,975 498,528 (152,553 ) -31 % Cost of revenue - services - - - n/a Cost of revenue - product 295,333 414,022 (118,689 ) -29 % Cost of revenue - brokerage 4,740 - 4,740 n/a Total cost of revenue 300,073 414,022 (113,949 ) -28 % Gross (loss) profit 45,902 84,506 (38,604 ) -46 % Operating expenses: General and administrative 1,263,129 2,207,612 (944,483 ) -43 % Sales and marketing - 80,676 (80,676 ) -100 % Total operating expenses 1,263,129 2,288,288 (1,025,159 ) -45 % Loss from operations (1,217,227 ) (2,203,782 ) 986,555 -45 % Other income (expense): Interest expense (263,014 ) - (263,014 ) n/a Loss on disposition of assets (25,136 ) - (25,136 ) n/a Gain on remeasurement of previously held equity interest 4,206,055 - 4,206,055 n/a Other income 1,237 1,400 (163 ) -12 % Total other income 3,919,142 1,400 3,917,742 279839 % Income tax expense - - - n/a Net income (loss) $ 2,701,915 $ (2,202,382 ) $ 4,904,297 -223 % 31 Revenue Service revenues were $3,781 for the three months ended June 30, 2026, compared to $15,319 for the three months ended June 30, 2025, a decrease of $11,538, or approximately 75 %. The decrease was attributable primarily to fewer marketing service engagements through the CWS Platform and lower Vault membership subscription revenue. Product revenues were $304,416 for the three months ended June 30, 2026, compared to $483,209 for the three months ended June 30, 2025, a decrease of $178,793, or approximately 37 %. The decline reflects lower customer traffic and order activity through the CWS Platform, consistent with management’s strategic focus on profitability with the existing customer base rather than top-line growth. Brokerage revenues were $37,778 for the three months ended June 30, 2026, with no comparable revenue in the 2025 period. Brokerage revenue represents commissions and platform income earned by Fusion Five Continents Securities Limited (“Fusion Five”), following the Company’s acquisition of a controlling interest in Fusion Five on June 1, 2026. See Note 4 — Business Combination. Cost of Revenue and Gross Profit (Loss) Service cost of revenues was $0 for both the three months ended June 30, 2026 and 2025. Product cost of revenues was $295,333 for the three months ended June 30, 2026, compared to $414,022 for the three months ended June 30, 2025, a decrease of $118,689, or approximately 29%, consistent with the decline in product revenue described above. Brokerage cost of revenues was $4,740 for the three months ended June 30, 2026, with no comparable amount in the 2025 period, representing fees paid to Fusion Five’s Execution Broker and other third parties for trade execution, clearing, and settlement services attributable to the post-acquisition period. Gross profit was $45,902 for the three months ended June 30, 2026, compared to $84,506 for the three months ended June 30, 2025, a decrease of $38,604, or approximately 46%. The decrease was primarily attributable to the decline in product gross profit, partially offset by the gross profit contribution from Fusion Five’s brokerage operations following the acquisition. General and Administrative General and administrative expenses were $1,263,129 for the three months ended June 30, 2026, compared to $2,207,612 for the three months ended June 30, 2025, a decrease of $944,483, or approximately 43%. The decrease was primarily attributable to lower professional fees and administrative costs in the Company’s beverage alcohol operations during the current period. Sales and Marketing Sales and marketing expenses were $0 for the three months ended June 30, 2026, compared to $80,676 for the three months ended June 30, 2025, a decrease of $80,676, or 100%, reflecting the continued absence of discretionary advertising and promotional spending during the current period. Other Income (Expense) Interest expense was $263,014 for the three months ended June 30, 2026, with no comparable expense in the 2025 period, representing interest on the promissory notes issued in May 2026. See Note 12 — Notes Payable. The Company recognized a loss on disposition of assets of $25,136 for the three months ended June 30, 2026, with no comparable amount in the 2025 period, in connection with the disposal of the Company’s motor vehicle. See Note 5 — Property and Equipment, Net. The Company recognized a gain on remeasurement of the previously held equity interest of $4,206,055 for the three months ended June 30, 2026, with no comparable amount in the 2025 period, in connection with the remeasurement of the Company’s previously held 24% equity interest in Fusion Five to its acquisition-date fair value upon obtaining control on June 1, 2026. See Note 4 — Business Combination. Other income was $1,237 for the three months ended June 30, 2026, compared to $1,400 for the three months ended June 30, 2025, a decrease of $163, or approximately 12%. Net Income (Loss) Net income was $2,701,915 for the three months ended June 30, 2026, compared to a net loss of $2,202,382 for the three months ended June 30, 2025, an improvement of $4,904,297. The improvement was primarily attributable to the $4,206,055 gain on remeasurement of the previously held equity interest in Fusion Five and the decrease in general and administrative expenses, partially offset by interest expense on the promissory notes and the loss on disposition of the Company’s motor vehicle. 32 Comparison of Six Months Ended June 30, 2026 and June 30, 2025 The following table sets forth key components of our results of operations during the six months ended June 30, 2026 and 2025. Six Months Ended June 30, 2026 2025 Var. $ Var. % Revenue - services $ 16,353 $ 92,675 $ (76,322 ) -82 % Revenue - product 514,527 835,193 (320,666 ) -38 % Revenue - brokerage 37,778 - 37,778 n/a Total revenues 568,658 927,868 (359,210 ) -39 % Cost of revenue - services 13,553 1,400 12,153 868 % Cost of revenue - product 526,699 811,804 (285,105 ) -35 % Cost of revenue - brokerage 4,740 - 4,740 n/a Total cost of revenue 544,992 813,204 (268,212 ) -33 % Gross (loss) profit 23,666 114,664 (90,998 ) -79 % Operating expenses: General and administrative 4,044,029 4,230,773 (186,744 ) -4 % Sales and marketing 105,000 487,529 (382,529 ) -78 % Total operating expenses 4,149,029 4,718,302 (569,273 ) -12 % Loss from operations (4,125,363 ) (4,603,638 ) 478,275 -10 % Other income (expense): Interest expense (263,014 ) - (263,014 ) n/a Loss on disposition of assets (25,136 ) - (25,136 ) n/a Gain on remeasurement of previously held equity interest 4,206,055 - 4,206,055 n/a Other income 1,994,404 11,606 1,982,798 17084 % Total other income 5,912,309 11,606 5,900,703 50842 % Income tax expense - - - n/a Net income (loss) $ 1,786,946 $ (4,592,032 ) $ 6,378,978 -139 % Revenue Service revenues were $16,353 for the six months ended June 30, 2026, compared to $92,675 for the six months ended June 30, 2025, a decrease of $76,322, or approximately 82%. The decrease was primarily attributable to lower marketing service engagements through the CWS Platform and reduced Vault membership subscription revenue. Product revenues were $514,527 for the six months ended June 30, 2026, compared to $835,193 for the six months ended June 30, 2025, a decrease of $320,666, or approximately 38%, reflecting continued lower customer traffic and order activity through the CWS Platform, consistent with management’s strategic focus on profitability with the existing customer base rather than top-line growth. Brokerage revenues were $37,778 for the six months ended June 30, 2026, with no comparable revenue in the 2025 period, representing commissions and platform income earned by Fusion Five Continents Securities Limited (“Fusion Five”) since the Company’s acquisition of a controlling interest on June 1, 2026. See Note 4 — Business Combination. Cost of Revenue and Gross Profit (Loss) Service cost of revenues was $13,553 for the six months ended June 30, 2026, compared to $1,400 for the six months ended June 30, 2025, an increase of $12,153. The increase reflects a fixed cost retainer that commenced in July 2025, which has no corresponding expense in the 2025 period. Product cost of revenues was $526,699 for the six months ended June 30, 2026, compared to $811,804 for the six months ended June 30, 2025, a decrease of $285,105, or approximately 35%, consistent with the decline in product revenue described above. 33 Brokerage cost of revenues was $4,740 for the six months ended June 30, 2026, with no comparable amount in the 2025 period, representing fees paid to Fusion Five’s Execution Broker and other third parties for trade execution, clearing, and settlement services attributable to the post-acquisition period. Gross profit was $23,666 for the six months ended June 30, 2026, compared to $114,664 for the six months ended June 30, 2025, a decrease of $90,998, or approximately 79%. The decrease was primarily attributable to the decline in product gross profit and the increase in service cost of revenue described above. General and Administrative General and administrative expenses were $4,044,029 for the six months ended June 30, 2026, compared to $4,230,773 for the six months ended June 30, 2025, a decrease of $186,744, or approximately 4%. The net decrease reflects a $944,483 decline in general and administrative expenses during the second quarter of 2026, due to lower professional fees and administrative costs in the Company’s beverage alcohol operations, substantially offset by $1,150,000 of indemnification and related legal charges recorded in the first quarter of 2026, with no comparable amounts in the prior-year period. Sales and Marketing Sales and marketing expenses were $105,000 for the six months ended June 30, 2026, compared to $487,529 for the six months ended June 30, 2025, a decrease of $382,529, or approximately 78%. The decrease was primarily attributable to reduced advertising and promotional expenditures as the Company continued to execute its strategy of minimizing marketing spend. Other Income (Expense) Interest expense was $263,014 for the six months ended June 30, 2026, with no comparable expense in the 2025 period, representing interest on the promissory notes issued in May 2026. See Note 12 — Notes Payable. The Company recognized a loss on disposition of assets of $25,136 for the six months ended June 30, 2026, with no comparable amount in the 2025 period, in connection with the disposal of the Company’s motor vehicle. See Note 5 — Property and Equipment, Net. The Company recognized a gain on remeasurement of the previously held equity interest of $4,206,055 for the six months ended June 30, 2026, with no comparable amount in the 2025 period, in connection with the remeasurement of the Company’s previously held 24% equity interest in Fusion Five to its acquisition-date fair value upon obtaining control on June 1, 2026. See Note 4 — Business Combination. Other income was $1,994,404 for the six months ended June 30, 2026, compared to $11,606 for the six months ended June 30, 2025, an increase of $1,982,798. The increase was primarily due to $1,944,603 of proceeds received under the Company’s directors and officers insurance policy during the three months ended March 31, 2026, with no comparable amount in the 2025 period. Net Income (Loss) Net income was $1,786,946 for the six months ended June 30, 2026, compared to a net loss of $4,592,032 for the six months ended June 30, 2025, an improvement of $6,378,978. The improvement was primarily attributable to the $4,206,055 gain on remeasurement of the previously held equity interest in Fusion Five and the $1,944,603 of directors and officers insurance proceeds received during the first quarter of 2026, partially offset by the $1,150,000 of indemnification and related legal charges recorded during the same period and interest expense on the promissory notes issued in May 2026. 34 Liquidity and Capital Resources As of June 30, 2026 and December 31, 2025, we had cash and cash equivalents of $144,642 and $5,975,408, respectively, excluding cash held on behalf of clients of $316,932 as of June 30, 2026, representing client monies held in segregated accounts by Fusion Five Continents Securities Limited (“Fusion Five”). To date, we have financed our operations primarily through issuances of common stock and sales of our products and services. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The indicators include: (i) net losses incurred since inception; (ii) an accumulated deficit of $66,058,548 as of June 30, 2026; and (iii) cash and cash equivalents of $144,642 as of June 30, 2026, notwithstanding net income of $ 1,786,946 for the six months ended June 30, 2026, which was driven substantially by the non-cash gain on remeasurement of the previously held equity interest in Fusion Five and non-recurring insurance proceeds, rather than by cash generated from operations. Net cash used in operating activities was $3,004,669 for the six months ended June 30, 2026. Management is actively monitoring its liquidity position and evaluating various strategies to address these conditions. See Note 2 — Going Concern. To fund future operations, the Company intends to pursue one or more of the following: additional equity or debt financings, proceeds from its at-the-market offering program, strategic partnerships, or other capital raising transactions. However, there can be no assurance that any such financing will be available on terms acceptable to the Company, or at all. If adequate capital cannot be secured, the Company may be required to curtail operations or take other measures to conserve cash. During the six months ended June 30, 2026, the Company raised $165,999 in net proceeds through the issuance of 1,619 shares of common stock under its at-the-market offering program. In April 2026, amounts previously funded under the Company’s joint venture agreements and distribution and marketing service agreements, aggregating $21,773,000, were returned to the Company in the form of USDT, a digital asset, and, together with USDT received from other sources, applied toward the consideration for the acquisition of Fusion Five. Subsequent to June 30, 2026, the Company issued an aggregate of 1,088,503 shares of common stock for net proceeds of $7,316,687. See Note 4 — Business Combination and Note 18 — Subsequent Events. On March 11, 2026, the Company entered into a sales agreement with A.G.P./Alliance Global Partners, pursuant to which the Company may sell shares of its common stock having an aggregate offering price of up to $50,273,610 from time to time in at-the-market transactions. Through June 30, 2026, the Company had issued 1,619 shares of common stock under the agreement for net proceeds of $165,999. The following table presents selected captions from our consolidated statement of cash flows for the six months ended June 30, 2026 and 2025: Cash Flows Six Months Ended June 30, 2026 2025 Net cash used in operating activities $ (3,004,669 ) $ (8,263,348 ) Net cash used in investing activities $ (2,053,423 ) $ (8,166,988 ) Net cash (used in) provided by financing activities $ (454,571 ) $ 15,610,483 Net change in cash, cash equivalents and restricted cash $ (5,513,834 ) $ (819,853 ) Net Cash Used in Operating Activities Net cash used in operating activities was $3,004,969 for the six months ended June 30, 2026, compared to $8,263,348 for the six months ended June 30, 2025, a decrease in cash used of $4,718,109, or approximately 57%. The significant reduction was primarily attributable to the non-recurrence of $5,181,608 in cash payments made during the six months ended June 30, 2025 to settle accrued and other payables to related parties, representing retention, bonus, and settlement obligations that had been accrued in prior periods, compared to $134,787 of comparable payments during the six months ended June 30, 2026. Net income was $1,786,946 for the six months ended June 30, 2026, compared to a net loss of $4,592,032 for the six months ended June 30, 2025; however, the improvement in net income was substantially non-cash in nature, driven by the $4,206,055 gain on remeasurement of the previously held equity interest in Fusion Five Continents Securities Limited (“Fusion Five”), which is excluded from operating cash flows. No stock-based compensation or restricted stock unit vesting expense was recognized during the six months ended June 30, 2026, compared to $220,200 and $1,360,205, respectively, during the six months ended June 30, 2025, as all restricted stock units had been fully vested or forfeited as of December 31, 2025. 35 The most significant working capital movements during the six months ended June 30, 2026 were as follows: Accrued and other payables increased by $409,311, compared to a decrease of $542,309 in the corresponding 2025 period, reflecting legal, audit, and consulting fees accrued in connection with the Company’s SEC reporting obligations and ongoing corporate activities. Payables – Client funds decreased by $1,063,422, reflecting client-directed withdrawals of cash held on behalf of Fusion Five’s clients following the acquisition. Fusion Five’s short-term investment – broker dealer and related payable – broker dealer, and its digital assets – external trust company and related payable – external trust company, each moved by offsetting amounts during the period, as these assets are held for the benefit of Fusion Five’s clients and are not available for the Company’s general operating purposes; accordingly, these movements had no net effect on operating cash flows. Net Cash Used in Investing Activities Net cash used in investing activities was $2,053,423 for the six months ended June 30, 2026, compared to $8,166,988 for the six months ended June 30, 2025, a decrease in cash used of $6,113,565, or approximately 75%. The decrease was primarily attributable to the non-recurrence of $8,166,988 funded under the Company’s joint venture agreements during the six months ended June 30, 2025, with no comparable funding activity during the six months ended June 30, 2026, as those agreements were terminated in April 2026. See Note 8 — Investment in Joint Ventures. Investing activities during the six months ended June 30, 2026 consisted of $4,051,415 used to purchase digital assets (USDT), partially offset by $1,380,354 of cash held on behalf of clients acquired in the acquisition of Fusion Five Continents Securities Limited on June 1, 2026, $347,638 of proceeds from the conversion of digital assets to U.S. dollars, and $270,000 of proceeds from the disposal of the Company’s motor vehicle. See Note 5 — Property and Equipment, Net, Note 9 — Digital Assets, and Note 4 — Business Combination. Net Cash (Used in) Provided by Financing Activities For the six months ended June 30, 2026, net cash used in financing activities was $454,571, compared to net cash provided by financing activities of $15,610,483 for the six months ended June 30, 2025. Financing activities during the six months ended June 30, 2026 consisted of net advances to related parties of $540,570 and $80,000 of deferred offering costs related to the SWOL IPO, partially offset by $165,999 of net proceeds from the issuance of common stock under the Company's at-the-market offering program. For the six months ended June 30, 2025, net cash provided by financing activities was $15,610,483, consisting of $11,559,068 from the issuance of common stock pursuant to the Company’s at-the-market offering program and $4,051,415 from the exercise of outstanding warrants. Off-Balance Sheet Arrangements As of June 30, 2026, we had no off-balance sheet arrangements that had or were 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 Estimates The preparation of our unaudited condensed consolidated 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 unaudited condensed consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2025. 36