LQR House Inc

NOTES TO CONSOLDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

LQR House Inc. (“LQR” or the “Company”) was incorporated on January 11, 2021, in the state of Delaware. The Company operates primarily in the beverage alcohol industry owning specialty brands, providing marketing and distribution services.

Reorganization and Reverse Stock Split

On February 3, 2023, the Company changed its state of incorporation to the State of Nevada by merging into LQR House Inc., a Nevada corporation. On February 3, in accordance with our reincorporation to Nevada, the Company’s authorized capital stock changed from 100,000,000 shares of common stock, $0.001 par value, to 350,000,000 shares, consisting of 300,000,000 shares of common stock, par value $0.0001 per share, and 50,000,000 shares of preferred stock, par value $0.0001 per share. At the same time, the Company also completed a 1-for-6 reverse stock split of its outstanding common stock through the merger by issuing one share of common stock for every six previously outstanding shares of common stock of the predecessor Delaware company. The accompanying financial statements and related disclosures have been presented to retroactively reflect the Reorganization.* *

Reverse Stock Split

On November 30, 2023, the Company effected a 1-for-60 reverse stock split of its outstanding common stock. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. There was no effect on the number of shares of common stock or preferred stock authorized for issuance under the Company’s certificate of incorporation or the par value of such securities.

Initial Public Offering

On August 9, 2023, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton, division of Benchmark Investments, LLC (“EF Hutton”), relating to the Company’s initial public offering (the “Offering” or “IPO”) of 28,750 shares (the “Shares”) of the Company’s common stock which included the exercise by the underwriters in full of the over-allotment option to purchase an additional 2,500 shares of the Company’s common stock, at an offering price of $300 per share. The closing of the IPO took place on August 11, 2023. Total gross proceeds, including the exercise of the over-allotment option, was $5.75 million. The aggregate net proceeds to the Company from the IPO were approximately $4.5 million after deducting underwriting discounts and commissions and total offering expenses.

Country Wine & Spirits (“CWS”) Platform

On November 1, 2023, LQR House Acquisition Corp. (the “Buyer”), a subsidiary of the Company, and SSquared Spirits LLC (the “Seller”) entered into a Domain Name Transfer Agreement (“Agreement”). Pursuant to the Agreement, the Seller irrevocably sold, assigned, transferred, and conveyed to the Buyer (a) all right, title, and interest in and to the domain name www.cwspirits.com (the “Domain Name”, “CWS Platform”), including its current registration and (b) any other rights (including, but not limited to, trademark rights associated with the Domain Name in any jurisdiction, all Internet traffic through the Domain Name and all Website Content (as defined in the Agreement) the Seller may have in the Domain Name, together with any goodwill associated therewith in exchange for the payment by the Buyer of the purchase price of $10,000. See Note 4.

The Company’s Chief Executive Officer, Sean Dollinger, owns 50% of the equity of the Seller, and the other 50% is owned by a minority shareholder of the Company. A Special Committee of the Company’s Board of Directors consisting of all independent directors approved the terms of the Agreement on November 1, 2023. See Note 8.

Stock Dividend in the Form of Stock Split

In February 2024, the Board of Directors declared a 50% stock dividend for distribution to all of the Company’s shareholders of record at the close of business on February 12, 2024. On March 1, 2024,1,609,817 shares were issued per the dividend (see Note 11). As a result of the stock dividend, a 3:2 stock split was effected. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the stock split.

2. GOING CONCERN

The Company has evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.

The accompanying 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 sustained net losses of $15,747,724 and $1,842,175 during the years ended December 31, 2023 and 2022, respectively, and had cash used in operations of $9,113,855 during the year ended December 31, 2023. 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 IPO (Note 1) and an additional $16.6 million from its public offerings in October and November 2023 (see Note 7). 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 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.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”). The Company’s fiscal year end is December 31.

The Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act and has elected to comply with certain reduced public company reporting requirements, however, the Company may adopt accounting standards based on the effective dates for public entities when early adoption is permitted.

Principles of Consolidation

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, LQR House Acquisition Corp. All inter-company transactions and balances have been eliminated on consolidation.

Use of Estimates

The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to the valuation of assets acquired and liabilities assumed pursuant to business combinations, and stock-based compensation. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Significant Risks and Uncertainties

The Company is subject to customary risks and uncertainties including, but not limited to, the need for protection of proprietary technology, dependence on key personnel, costs of services provided by third parties and limited operating history.

Variable Interest Entities

The Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”), and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is consolidated. The Company evaluated whether it was the primary beneficiary in its common control asset acquisitions and related party agreements and determined it is not the primary beneficiary of any entities.

Concentrations of Credit Risk

The Company maintains its cash with a major financial institution located in the United States of America which it believes to be credit worthy. Balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At times, the Company maintains balances in excess of the federally insured limits.

Concentrations

The Company’s ability to derive revenue is reliant on its relationship with CWS who currently handles product for the CWS Platform and fulfills the products sold by clientele using our marketing services. The discontinuance of such relationship or termination of the CWS Platform agreements would have a material negative impact on the Company’s operations.

Furthermore, the Company relies and expects to continue to rely on a small number of vendors. The loss of one of these vendors may have a negative short-term impact on the Company’s operations. However, the Company believes there are acceptable substitute vendors that can be utilized longer term.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The carrying values of the Company’s accounts receivable and accounts payable approximate their fair values due to the short maturity of these instruments. The Company believes the carrying amount of its advances to related parties approximate fair value due to its short-term maturity.

Accounts Receivable

Accounts receivable are derived from services and products delivered to customers and are stated at their net realizable value. Each month, the Company reviews its receivables on a customer-by-customer basis and evaluates whether an allowance for doubtful accounts is necessary based on any known or perceived collection issues. Any balances that are eventually deemed uncollectible are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Intangible Assets

Intangible assets are amortized over the respective estimated lives on a straight-line basis, unless the lives are determined to be indefinite and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable. The Company owns domain names indefinitely. Costs to renew domains are expensed as incurred.

Impairment of Long-Lived Assets

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

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. The Company discloses related party transactions that are outside of normal compensatory agreements, such as salaries. The Company follows ASC 850,Related Party Disclosures, for the identification of related parties and disclosure of related party transactions.

Revenue Recognition

In accordance with FASB ASC 606,Revenue from Contracts with Customers¸ the Company determines revenue recognition through the following steps:

Revenue is recognized when performance obligations are satisfied through the transfer of control of promised goods to the Company’s 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.

The Company derives its revenue from marketing services, sales via the CWS Platform, distribution of its SWOL Tequila product to CWS and subscription-based membership revenue. Revenue is reported net of discounts.

Marketing Services

The Company contracts with third-party alcoholic beverage brands to utilize access to the CWS Platform. The Company and the brands enter into a commercial relationship. The Company performs services such as creating a marketing campaign strategy, developing promotional materials and advertising promotional materials through the CWS Platform. 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. Marketing campaigns generally range from one to three months.

CWS Platform

Cwsspirits.com is an e-commerce platform that sells in wine and spirits in the USA. The Company is responsible for contracting with CWS and customers to fulfill orders through the website. The Company has the ability to direct customers to CWS to fulfill the order. The Company, though not legally able to own alcohol inventory, does take on financial inventory risk. The Company is solely responsible for any risk of loss of the end customer and paying to replenish the loss order. Additionally, the Company enters into minimum guaranteed purchase commitments with its vendor that require the Company to pay for any inventory not sold during the year. The Company establishes the price and selection of products to be sold on the CWS Platform, and directs all marketing activities pertaining to the Platform. As such, the Company is the primary obligor for transactions with customers on the CWS Platform and records gross revenue. Revenue is recognized at the point in time when products are delivered to the end customer, when LQR has fulfilled its performance obligation, net of returns.

Product Sales

The Company wholly owns SWOL Tequila, a tequila made in limited batches from a third-party producer located in Mexico. The Company facilitates all efforts to get the product delivered to CWS for retail distribution in the United States, including advancing costs for production, shipping and other importing and delivery charges. The Company is entitled to payment of cost plus an additional 20% on each bottle of SWOL Tequila sold to CWS. Revenue is recognized at the point in which the products are delivered to CWS, when LQR has fulfilled its performance obligation. Due to certain restrictions on the delivery and custodianship of alcoholic beverage, CWS is requires to take ownership of the product at time of delivery, and there is no recourse or right of return. The Company records gross revenue as it’s the primary obligor in the transaction.

Vault

Vault is the exclusive membership program for CWS Platform customers. Through the CWS Platform, users can sign up for membership where they will have access to all products available through CWS combined with special membership benefits including discounted products, free shipping and promotional offers. Prior to the acquisition of the CWS Platform, the Company marketed this membership program on the CWS Platform and was entitled to 50% of the revenue from the subscriptions as the agent of the transaction. Upon the acquisition of the CWS Platform, the Company records gross revenue as it is the principal in the transaction. The Company records a reserve for chargebacks and cancellations at the time of the transaction based on historical experience. During the years ended December 31, 2023 and 2022, revenue from Vault memberships totaled $31,386 and $20,524, respectively.

Disaggregation of Revenue

The following is a summary of the disaggregation of revenue for the years ended December 31, 2023 and 2022:

Contract Balances

Accounts receivable represent amounts owed from marketing and product sales invoiced, but not yet received.

Contract liabilities represent obligations to transfer services to a customer for which the Company has already received consideration. Payments for marketing services are generally received upfront in advance of the Company satisfying the related performance obligation and are recorded as accrued expenses. The accrued expenses are reduced as the services are performed and the revenue is recognized. As of December 31, 2023 and 2022, the Company had nominal amounts in accrued expenses.

Cost of Revenue

Cost of revenue consists of all direct costs attributable to performing marketing services and the Company’s product sales. Cost of revenue includes product costs, affiliate payouts, contracted marketing services, direct advertising costs for marketing campaigns, packaging, shipping and other importing and delivery charges. Cost of revenue also includes customer service personnel and amortization of the Company’s marketing license asset (see Note 4).

Sales and Marketing

Sales and marketing costs primarily consist of advertising, promotional expenses and marketing consulting and advisory services. Sales and marketing costs also include sales commissions.

Deferred Offering Costs

The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs are capitalized. The deferred offering costs are charged to additional paid-in capital or as a discount to debt, as applicable, upon the completion of an offering or to expense if the offering is not completed. As of December 31, 2023 and 2022, the Company has no deferred offering costs.

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.

The Company classifies equity-based compensation expense in its statement of operations in the same manner in which the award recipient’s payroll or contractor costs are classified or in which the award recipient’s service payments are classified.

Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is unlikely that the deferred tax assets will not be realized. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.

Net Loss per Share

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share. Diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period, adjusted for potentially dilutive securities outstanding. Potentially dilutive securities are excluded from the computation of the diluted net loss per share if their inclusion would be anti-dilutive. As all potentially dilutive securities are anti-dilutive as of December 31, 2023, diluted net loss per share is the same as basic net loss per share. Potentially dilutive items outstanding as of December 31, 2023 include the Company’s outstanding restricted stock units (See Note 7).

Recently Issued and Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard establishes an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in a timelier recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components of the guidance require modified retrospective or prospective adoption.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which amends and clarifies several provisions of Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the fair value option to be elected for certain financial instruments upon adoption. ASU 2019-10 extended the effective date of ASU 2016-13 until December 15, 2022. The Company adopted this new guidance, including the subsequent updates to Topic 326, on January 1, 2023 and the adoption did not have a material impact on the Company’s financial statements and related disclosures.

Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

4. ACQUISITION OF CWS PLATFORM

On November 1, 2023, LQR House Acquisition Corp. (the “Buyer”), a subsidiary of the Company, and SSquared Spirits LLC (the “Seller”, “SSquared”) entered into a Domain Name Transfer Agreement (“Agreement”). Pursuant to the Agreement, the Seller irrevocably sold, assigned, transferred, and conveyed to the Buyer (a) all right, title, and interest in and to the domain name www.cwspirits.com (the “Domain Name”, “CWS Platform”), including its current registration and (b) any other rights (including, but not limited to, trademark rights associated with the Domain Name in any jurisdiction, all Internet traffic through the Domain Name and all Website Content (as defined in the Agreement) the Seller may have in the Domain Name, together with any goodwill associated therewith in exchange for the payment by the Buyer of the purchase price of $10,000.

In connection with the Company’s purchase of the Domain Name, on November 1, 2023, the Company entered into a product handling agreement (“Product Handling Agreement”) with KBROS LLC (“KBROS”). Pursuant to the Product Handling Agreement:

Commencing as of the Effective Date of this Agreement, Product Handler shall provide to the Company the following services relating to the purchase and delivery (“Handling”) of spirits and other beverage products (referred to herein as “Product” and the “Products”) purchased by customers of the Company through or in relation to websites associated with the Domain:

Under Regulation S-X 3-05, management determined that the CWS Platform acquisition constituted a business combination as the revenue producing activity (e-commerce sales) is expected to be similar both pre and post-domain name acquisition. As such, the Company recorded an intangible asset of $10,000 for the purchase price consideration of the domain name as acquired assets and liabilities were nominal.

Management assessed the fair value of the Domain Name and CWS Platform in determining to allocate the $10,000 to the domain name. In making such determination, management considered the related party nature of the transaction, the current environment for direct-to-consumer alcoholic beverage companies and the related competition in which they operate, and the fact that the initial and continued operation of the CWS platform is completely dependent on the relationship between the Company, our CEO and a minority shareholder, who co-owned SSquared and operates KBROS, the Company’s contracted product handler. Without such relationship, which can be terminated in certain circumstances, the underlying CWS Platform would be unable to operate as intended until a suitable alterative product handler would be identified. Therefore, no fair value in excess of the consideration provided was considered.

The Company has consolidated the results of operations of the CWS Platform since November 1, 2023.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the Company’s financial results as if the CWS Platform acquisition had occurred as of January 1, 2022. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would have been had the acquisitions been completed on this date. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the Company’s future financial results. The pro forma information does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisition:

5. OTHER ASSETS

Intangible Assets* *

CWS Exclusive Marketing Agreement

On April 1, 2021, the Company, CWS Platform, and another related entity, Ssquared, entered into an exclusive marketing agreement (the “CWS Agreement”). Pursuant to this agreement, CWS and Ssquared granted the Company the exclusive right to promote and market spirits and other beverage products through the CWS website (cwspirtis.com) for sale to customers located within Canada, Mexico and the United States. The Company had the sole right to manage and make decisions with regard to user facing content on the website, including the placement and removal of products and the creation and management of promotional initiatives. The term of the CWS Agreement was ten years. Pursuant to the agreement, the Company issued 41,667 shares of common stock to the members of Ssquared.

The Company capitalized the fair value of the consideration transferred, $2,500,000 (or $60 per share), as an intangible asset which was to be amortized over the term agreement of ten (10) years. During the years ended December 31, 2023 and 2022, the Company amortized $208,333 and $250,000, respectively, which is included in cost of revenue – services in the statement of operations.

Upon the acquisition of the CWS Platform (see Note 4), the Company determined that the license under the CWS Agreement was no longer applicable as the Company now maintained ownership over the CWS Platform and the relevant marketing efforts. As such, the Company recorded an impairment of the remaining carrying value of $1,875,000, which is included in operating expenses in the consolidated statements of operations.

Deposits in Escrow

As of December 31, 2023, the Company had $5,470,000 in deposits held in escrow for potential investments. In 2024, the Company received $670,000 back from an investment it was no longer pursuing. The remaining $4,800,000 is subject to an escrow share agreement for a potential investment into a third party entity. While the terms of the investment have not been finalized, the agreement indicates the funds are to only be used for an investment in the target company and is not subject to return to the Company unless otherwise agreed upon.

6. NOTE PAYABLE

In August and September 2023, the Company entered into several loan agreements for aggregate proceeds of $950,000. The loans bore interest at 18% and were payable on demand, regardless of whether paid before the anniversary of the loan agreements. On September 27, 2023, the Company entered into debt settlement agreements with the noteholders in full settlement of the loan amounts, including interest, using the closing price of $17.58 of the Company’s common stock on September 27, 2023. As such, a total amount of $1,121,000, including principal of $950,000 and accrued interest of $171,000, was converted into 63,766 shares of the Company’s common stock.

7. STOCKHOLDERS’ EQUITY

Reorganization

Prior to the Reorganization described in Note 1, the Company was authorized to issue up to 100,000,000 shares of common stock, par value $0.001 per share. Upon the Reorganization in the first quarter of 2023 (see Note 1), the Company was authorized to issue 300,000,000 shares of common stock and 50,000,000 shares of preferred stock, par value $0.0001 per share.

Amendment to Articles of Incorporation

Dual Class Share Structure

On March 29, 2023, the Company amended its articles of incorporation to institute a dual class share structure consisting of Class A Common Stock, and Class B Common Stock, and any number of classes of preferred stock. Class A Common Stock was entitled to twenty (20) votes per share on proposals requiring or requesting stockholder approval, and Class B Common Stock was entitled to one (1) vote on any such matter. A share of Class A Common Stock could have been voluntarily converted into a share of Class B Common Stock. A transfer of a share of Class A Common Stock would have resulted in its automatic conversion into Common Stock upon such transfer, subject to certain exceptions, including that the transfer of shares of Class A Common Stock to another holder of Class A Common Stock would not have resulted in such automatic conversion. Class B Common Stock was not convertible. Other than as to voting and conversion rights, Class A Common Stock and Class B Common Stock had the same rights and preferences and ranked equally, shared ratably and were identical in all respects as to all matters.

Due to this amendment, the Company’s authorized capital stock became 350,000,000 shares, consisting of:(i) 300,000,000 shares of common stock, par value $0.0001 per share, of which 20,000,000 shares were designated Class A Common Stock, $0.0001 par value per share, and 280,000,000 shares were designated as Class B Common Stock, $0.0001 par value per share; and (ii) 50,000,000 shares of preferred stock, $0.0001 par value per share. All 153,340 shares of common stock issued and outstanding at the time of the amendment became shares of Class B Common Stock.

Single Common Stock Structure

On June 5, 2023, the Company further amended its articles of incorporation to amend the share structure by(i) eliminating a dual class share structure consisting of the Class A Common Stock and Class B Common Stock and establishing a single common stock structure consisting of shares of common stock only, with 350,000,000 authorized shares being all designated as common stock with a par value of $0.0001 per share (the “Single Common Stock Structure”), entitled to one (1) vote per share; and by (ii) eliminating all authorized shares of preferred stock. All shares of Class B Common Stock issued and outstanding at the time of the amendment became shares of common stock. The accompanying financial statements reflect the single common stock structure in place as of December 31, 2023.

The Company filed on November 28, 2023 a Certificate of Change to the Articles of Incorporation of the Company with the Secretary of State of the State of Nevada (the “Certificate of Change”) that provides for a 1-for-60 reverse stock split (the “Split”) of its shares of common stock, par value $0.0001 per share (the “Common Stock”) that became effective on November 30, 2023. No fractional shares were issued in connection with the Split and fractional amounts were rounded up to one whole share.

The Company filed on February 13, 2024 a Certificate of Amendment to the Articles of Incorporation of the Company with the Secretary of State of the State of Nevada increasing its authorized shares to 350,000,000 shares of common stock.

2023 Private Placement

From April to June 2023, the Company conducted a private placement of and entered into certain subscription agreements with several accredited investors. Pursuant to the agreements, the Company issued 23,875 shares of common stock at $60 per share for a total of $955,000.

Advisor and Consulting Agreements

In June 2023, the Company entered into advisor agreements with certain advisors, pursuant to which the advisors will provide business and corporate advice in connection with the Offering to the Company. In consideration for the advisor’s services, the Company issued 12,500 shares of common stock to six individuals and entities, for an aggregate of 75,000 shares. The Company recorded an expense of $3,000,000, or fair value of $40 per share, pertaining to these issuances, which is included in general and administrative expense in the statements of operations. The fair value was determined based on recent sales of stock under the 2023 Private Placement disclosure noted above.

In August 2023, the board of directors approved an issuance of and the Company issued an aggregate total of 62,501 shares of the Company’s common stock under the LQR House Inc. Stock Option and Incentive Plan (“2021 Plan”) to certain consultants with whom the Company entered into independent contractor agreements, in consideration for their providing consulting services to the Company. The Company recognized stock-based compensation expense of $2,552,500, or $40.80 per share based on the fair value of the Company’s common stock at the time of the agreements, for the year ended December 31, 2023. The amount was included in general and administrative expenses in the statements of operations.

Initial Public Offering

In the IPO, which closed on August 11, 2021, the Company issued and sold 28,750 shares of common stock, including the exercise of the over-allotment option, at a public offering price of $200 per share. Total gross proceeds to the Company from the IPO were $5.75 million. The aggregate net proceeds to the Company from the IPO were approximately $4.5 million after deducting underwriting discounts and commissions and total offering expenses.

In connection to the IPO, the Company agreed to issue the underwriters five-year warrants to purchase an aggregate of 1,437 shares of the Company’s common stock with an exercise price of $200 per share. The warrants are immediately exercisable.

Follow-On Public Offerings

On October 16, 2023, the Company completed a subsequent closing of the public offering and issued 710,526 shares of common stock for gross proceeds of $5.4 million, or $7.60 per share. The Company received $4.9 million in net proceeds. In connection with the October follow-on offering, the Company issued to the underwriters five-year warrants to purchase an aggregate of 35,526 shares of the Company’s common stock with an exercise price of $7.60 per share.

On November 13, 2023, the Company completed an additional closing of the public offering and issued 3,928,572 shares of common stock for gross proceeds of $11.0 million, or $2.80 per share. The Company received $5.3 million in net proceeds, as $4.8 million of the gross proceeds which were deposited in escrow for a potential investment. In connection with the November follow-on offering, the Company issued to the underwriters five-year warrants to purchase an aggregate of 196,428 shares of the Company’s common stock with an exercise price of $2.80 per share.

On December 27, 2023, the underwriters exercised their over-allotment option from the November offering and the Company issued an additional 589,286 shares of common stock for gross proceeds of $1.65 million, or $2.80 per share. The Company received $1.56 million in net proceeds.

Debt Settlement for Shares

On September 27, 2023, the Company issued 63,766 shares of common stock as settlement for outstanding principal on notes of $950,000 and accrued interest of $171,000 (see Note 5).

Cancellations

Stock cancellations

In June 2023, the Company entered into a Cancellation Agreement with four stockholders, who each owned 18,750 shares of common stock or an aggregate of 75,000 shares. The stockholders purchased these shares from the founder, Sean Dollinger, pursuant to a stock purchase agreement on January 12, 2023, between Mr. Dollinger and each of these four stockholders. As of the date these financial statements were available to be issued these shares were either cancelled or pending cancellation with the transfer agent. The Company repurchased the shares for $18,000.

Warrant cancellations

On December 16, 2023, the Company cancelled all outstanding warrants issued to the underwriter for consideration of $60,000.

Share Buyback

On September 1, 2023, the board of directors of the Company authorized a share buyback program for up to 20% of the Company’s common stock and approved an agreement entered by and between the Company and Dominari Securities LLC (“Dominari”) on August 28, 2023 to effect the share buyback program. From September 8, 2023 through December 22,203, the Company confirmed the acquisition of 865,070 shares of common stock for a total of $1,440,852, which was initially recorded as treasury stock on the balance sheet and statement of stockholders’ equity. On December 22, 2023, the 865,070 shares were sent to the Company’s transfer agent for retirement.

As of December 31, 2023, the Company had 4,829,438 shares issued and outstanding. As of December 31, 2022, the Company had 230,011 shares issued and outstanding.

Restricted Stock Units

In August 2023 the Company granted 31,250 restricted stock units (the Director RSU’s) which were to vest in eight equal quarterly installments commencing on October 1, 2023. On August 21, 2023, Jay Dhaliwal was added to the Board and was granted 500 Director RSUs which were to vest in eight equal quarterly installments commencing on October 1, 2023. On August 30, 2023, the Board authorized deferring the vesting of the Director RSUs until such date that the 2021 Plan is amended. The RSUs had a grant-date fair value of $6,266,533. During the year ended December 31, 2023, the Company recognized stock-based compensation expense of $1,091,648, which is included in general and administrative expenses in the statement of operations. As of December 31, 2023, there were 29,250 Director RSUs outstanding after cancellations.

8. RELATED PARTY TRANSACTIONS

CWS and Ssquared Spirits LLC

The Company’s founder who is a stockholder and member of the board of directors has an economic interest in Ssquared Spirits LLC, the seller of the CWS Platform acquisition. The spouse of the Company’s former Chief Executive Officer and director, is the President and controlling stockholder of CWS, the managing member and director of Ssquared Spirits LLC, and a minority shareholder with the Company. In 2022, the former Chief Executive Officer resigned from the Company. See Note 4 for the CWS Platform acquisition from Squared.

SWOL Tequila

As of December 31, 2023 and 2022, the Company had $172,493 and $224,692, respectively, in accounts receivable, related party with CWS pertaining to SWOL product revenues.

Vault

During the years ended December 31, 2023 and 2022, revenue from Vault memberships totaled $31,386 and 20,524 as of December 31, 2023 and 2022, respectively.

Advances to CWS

During the years ended December 31, 2023 and 2022, the Company paid certain costs pertaining to alcoholic products on behalf of CWS in order finance the purchase of brand product for which the Company was promoting through marketing services. The advances totaled $7,340 and $190,340, respectively, during the years ended December 31, 2023 and 2022. As of December 31, 2023 and 2022, $7,340 and $314,766, respectively, remained unpaid and outstanding from CWS. The advances are non-interest bearing, unsecured and due on demand. The advances owed as of December 31, 2022 were collected in the year ended December 31, 2023.

Veg House Illinois

During the year ended December 31, 2023, the Company paid $170,000 to a contractor for assistance in completion of the food hall bar owned by a related party under common management with the Company’s CEO, Veg House Illinois, Inc.

Accounts Payable, Related Party

As of December 31, 2023 and 2022, the Company had accounts payable of $58,589 and $104,002, respectively, with related parties, including KBROS, the Company’s founder and Chief Executive Officer, and officers and directors.

Board of Directors

In September 2023, two directors resigned from the Board of Directors, and agreed to cancel 1,250 RSU’s each. The cancellation was formalized in October 2023.

Independent Contractor Agreement

In August 2023, the Company entered into an independent contractor agreement for investor relations and advisory services with an entity for up to $1,000,000, for which the Company paid $500,000 through December 31, 2023. The contractor co-owns a Company with the Company’s Chief Executive Officer, which is not controlled by LQR. Therefore the contractor and his related entities are considered affiliates.

9. INCOME TAXES

For the years ended December 31, 2023 and 2022, the Company did not record a current or deferred income tax expense or benefit due to current and historical losses incurred by the Company. The Company’s losses before income taxes consist solely of losses from domestic operations.

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The following table presents the deferred tax assets and liabilities by source:

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The Company assessed the need for a valuation allowance against its net deferred tax assets and determined a full valuation allowance is required due, cumulative losses through December 31, 2023, and no history of generating taxable income. Therefore, valuation allowances of $2,714,847 and $765,808, respectively, were recorded as of December 31, 2023 and 2022. Valuation allowance increased by $1,949,039 and $356,192 during the years ended December 31, 2023 and 2022, respectively. Deferred tax assets were calculated using the Company’s combined effective tax rate, which it estimated to be approximately 28.0%. The effective rate is reduced to 0% for 2023 and 2022 due to the full valuation allowance on its net deferred tax assets.

The Company’s ability to utilize net operating loss carryforwards will depend on its ability to generate adequate future taxable income. At December 31, 2023 and 2022, the Company had net operating loss carryforwards available to offset future taxable income in the amounts of approximately $9,712,000 and $2,740,000, respectively, which can be carried forward indefinitely. Certain changes in ownership can result in a limitation on the amount of net operating loss and tax credit carryovers that can be utilized each year. As of December 31, 2023, management has not determined the extent of any such limitations, if any.

The Company has evaluated its income tax positions and has determined that it does not have any uncertain tax positions. The Company will recognize interest and penalties related to any uncertain tax positions through its income tax expense.

The Company is subject to taxation in the U.S. and various state jurisdictions. The Company is not presently subject to any income tax audit in any taxing jurisdiction, though all tax years from 2021 on remain open to examination.

10. COMMITMENTS AND CONTINGENCIES

Lease

In February 2023, the Company entered into a lease agreement for office space in Miami, Florida. The agreement matures in February 2025 and requires monthly payments of $850. The Company adopted ASC 842 on January 1, 2022 and recognized a right of use asset and liability of $19,007 using a discount rate of 8.0%.

As of December 31, 2023, the outstanding right of use liability was $9,858, including a current portion of $7,324 and a non-current liability of $2,534.

As of December 31, 2023, there are future annual minimum payments totaling $10,200 through January 2024.

Funding Commitment Agreement

On November 1, 2023, the Company entered into a Funding Commitment Agreement with KBROS, the Product Handler pursuant to the Product Handling Agreement as defined in Note 4. Pursuant to this agreement, the Company commits to provide annual funding to the Product Handler from time to time in the minimum amount of $2,500,000 to enable the Product Handler to purchase inventory from Company-approved vendors (“Vendors”). 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.

Contingencies

The Company may be subject to pending legal proceedings and regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but the Company does not anticipate that the final outcome, if any, arising out of any such matters will have a material adverse effect on its business, financial condition or results of operations.

11. SUBSEQUENT EVENTS

In January 2024, the Company purchased a total of 190,628 shares of the Company’s common stock at an average price of $2.90 per share.

In February 2024, the Board of Directors declared a 50% stock dividend for distribution to all of the Company’s shareholders of record at the close of business on February 12, 2024. On March 1, 2024,1,609,817 shares were issued per the dividend. As a result of the stock dividend, a 3:2 stock split was effected. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the stock split.

The Company filed on February 13, 2024 a Certificate of Amendment to the Articles of Incorporation of the Company with the Secretary of State of the State of Nevada increasing its authorized shares to 350,000,000 shares of common stock.