La Rosa Holdings Corp

Notes to the Consolidated Financial Statements

Note 1 — Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

La Rosa Holdings Corp. (the “Company”), incorporated in Nevada on June 14, 2021, is a holding company for five agent-centric, technology-integrated, cloud-based, multi-service real estate segments. The Company generates revenue primarily by providing person-to-person residential and commercial real estate brokerage services to the public. In addition, the Company cross sells ancillary technology-based products and services to sales agents and the sales agents associated with the Company’s franchisees. The business is organized based on the services provided internally to agents and to the public, which are residential and commercial real estate brokerages, franchising services, real estate brokerage education and coaching, and property management services.

Initial Public Offering

On October 12, 2023, the Company completed an initial public offering (the “IPO”) in which it issued and sold 1,000,000 shares of Common Stock, par value $0.0001, at a public offering price of $5.00 per share. The Company received net proceeds of $4,360,000 after deducting underwriter discounts, commissions, and expenses. The Company also incurred other offering expenses of $2,544,459 and issued 1,393,618 common shares to service providers related to the IPO. These expenses were recorded against the proceeds received from the IPO.

Liquidity – Going Concern and Management’s Plans

On December 31, 2023, the Company had a cash balance of $959,604 and positive working capital of $1,173,596.

On February 20, 2024, the Company entered into securities purchase agreements with an accredited investor for the issuance of a 13% senior secured promissory note with a principal amount of $1,052,632 and a purchase price of $1,000,000 after an original issue discount of $52,632. The note is convertible into shares of the Company’s Common Stock at the option of the lender. In addition, on April 1, 2024, the Company entered into securities purchase agreements with the same accredited investor for the issuance of a 13% senior secured promissory note with a principal amount of $1,316,000 and a purchase price of $1,250,200 after an original issue discount of $65,800. The note is convertible into shares of the Company’s Common Stock at the option of the lender. The two promissory notes begin amortizing five months after the date of each loan, with full maturity occurring twelve months after the date of each loan. See Note 15 — Subsequent Events for additional information.

The Company is subject to the risks and challenges associated with companies at a similar stage of development. These include dependence on key individuals, successful development and marketing of its offerings, and competition with larger companies with greater financial, technical, and marketing resources. Furthermore, during the period required to achieve substantially higher revenue in order to become profitable, the Company will require additional funds that might not be readily available or might not be on terms that are acceptable to the Company. Until such time that the Company fully implements its growth strategy, it expects to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead and costs of being a public company. As such, the Company anticipates that its existing working capital, including cash on hand, and cash generated from operations will not be sufficient to meet projected operating expenses for the foreseeable future through at least twelve months from the issuance of the consolidated financial statements. The Company will be required to raise additional capital to service the two promissory notes, to repay the principal balance of each of the notes, and to fund ongoing operations.

The Company has incurred recurring net losses, and the Company’s operations have not provided net positive cash flows. In view of these matters, there is substantial doubt about the Company’s ability to continue as a going concern. The Company plans on continuing to expand via acquisition, which will help achieve future profitability, and the Company has plans to raise capital from outside investors, as it has done in the past, to fund operating losses and to provide capital for further business acquisitions. There can be no assurance the Company can successfully raise the capital needed.

Basis of Presentation and Consolidation

The Company prepares the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern and realization of assets and satisfaction of liabilities in the normal course of business and do not include any adjustments that might result from the outcome of any uncertainties related to the Company’s going concern assessment. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial statements include the financial statements of the Company, all entities that are wholly-owned by the Company, and all entities in which the Company has a controlling financial interest. All intercompany transactions and balances have been eliminated. Business combinations consummated during a reporting period are reflected in the Company’s results effective from the date of acquisition through the end of the reporting period.

A noncontrolling interest in a consolidated subsidiary represents the portion of the equity in a subsidiary not attributable, directly or indirectly, to the Company. Noncontrolling interests are presented as a separate component of equity in the consolidated balance sheets and the presentation of net income is modified to present earnings attributed to controlling and noncontrolling interests.

On March 21, 2022, the Company effected a 1-for-10 reverse stock split and on April 17, 2023, the Company effected a 2-for-1 forward stock split of the Company’s Common Stock issued and outstanding (including adjustments for fractional shares). As a result, all share information in the accompanying consolidated financial statements has been adjusted as if the reverse stock split and the forward stock split happened on the earliest date presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures in the accompanying notes. The Company’s significant estimates relate to revenue recognition, business combinations, asset impairments, the fair value of derivatives, stock-based compensation, and income taxes.

These estimates are based on management’s best estimates and judgment. Actual results may differ from these estimates. Estimates, judgments, and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions, judgments, and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Cash and Restricted Cash

Cash includes cash in banks, cash on hand, and sweep deposits.

Restricted cash consists of cash held by the Company for certain security deposits and rent collected by the Company as part of its property management business, which will be due to owners or tenants in the future. The Company recognizes a corresponding deposit liability until the funds are released. The Company reduces a deposit liability when the associated restricted cash is transferred from escrow.

Accounts Receivable and Allowance for Credit Losses

The Company’s trade accounts receivable consist of balances due from agents, tenants, franchisees, and commissions for closings and are presented on the consolidated balance sheet net of the allowance for credit losses. The allowance is determined by a number of factors, including age of the receivable, current economic conditions, historical losses, and management’s assessment of the financial condition of the debtor. Receivables are written off once they are deemed uncollectible, which may arise when the debtor is deemed unable to pay the amounts owed to the Company. The allowance for credit losses was $83,456, including $35,360 from the six acquisitions acquired in the fourth quarter of 2023, and $29,039 as of December 31, 2023 and 2022, respectively. Estimates of uncollectible accounts receivable are recorded to general and administrative expense.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. The Company maintains certain bank accounts in excess of FDIC insured limits of $250,000.

Leases

Under Financial Accounting Standards Board (“FASB”) ASC Topic 842,Leases, (“ASC 842”), the Company determines whether an arrangement is or contains a lease at contract inception. Right-of-use assets and lease liabilities, which are disclosed on the consolidated balance sheets, are recognized at the commencement date of the lease based on the present value of the lease payments over the lease term using the Company’s incremental borrowing rate on the lease commencement date. Lease expense is recognized on a straight-line basis over the term of the lease. Short-term leases, defined as leases with an initial term of twelve months or less, are not recorded on the consolidated balance sheets.

Property and Equipment, Net

Property and equipment, net is stated at cost less accumulated depreciation and accumulated impairment, if any. Cost of maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:

Long-lived Assets Including Acquired Intangible Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (or asset group) may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the asset is not recoverable, its carrying amount would be adjusted down to its fair value. There have not been any impairments of long-lived assets for the years ended December 31, 2023 and 2022.

Intangible assets are stated at cost less accumulated amortization and accumulated impairment, if any. Amortization is calculated on a straight-line basis over the estimated useful lives of the definite-lived intangible assets, as follows:

Business Combinations

The Company has completed a number of acquisitions in 2023 and will acquire additional businesses in the future. The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of acquisition. The Company allocates the purchase price, which is the sum of the consideration provided and may consist of cash, equity, or a combination of the two, in a business combination to the identifiable assets and liabilities of the acquired business at their acquisition date fair values. The excess of the purchase price over the amount allocated to the identifiable assets and liabilities, if any, is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates, and selection of comparable companies.

To date, the assets acquired and liabilities assumed in the Company’s business combinations have primarily consisted of goodwill and finite-lived intangible assets, consisting primarily of franchise agreements, agent relationships, real estate listings, non-compete agreements, and right-of-use assets. The estimated fair values and useful lives of identifiable intangible assets are based on many factors, including estimates and assumptions of future operating performance and cash flows of the acquired business, the nature of the business acquired, and the specific characteristics of the identified intangible assets. The estimates and assumptions used to determine the fair values and useful lives of identified intangible assets could change due to numerous factors, including market conditions, technological developments, economic conditions and competition. In connection with the determination of fair values, the Company engages independent appraisal firms to assist with the valuation of intangible assets acquired and certain assumed obligations.

Transaction costs associated with business combinations are expensed as incurred.

Goodwill

Goodwill is the excess of cost over the fair value of net assets acquired. Goodwill is not amortized but tested for impairment annually or more frequently if certain circumstances indicate a possible impairment may exist. The Company recognized goodwill for the first time in the fourth quarter of 2023. The Company will perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. The qualitative assessment includes, but is not limited to, market and macroeconomic conditions, cost factors, cash flows, changes in key management personnel, and the Company’s share price. The result of this assessment determines whether it is necessary to perform a quantitative goodwill impairment test. The Company determined that there was no impairment in goodwill as of December 31, 2023.

Revenue Recognition

The Company applies the provision of FASB ASC 606,Revenue from Contracts with Customers (“ASC 606”). The Company measures revenue within the scope of ASC 606 by applying the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. At contract inception, the Company assesses the goods or services promised within each contract that falls under the scope of ASC 606, determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied. The application of these five steps necessitates the development of assumptions that require judgment.

The Company records revenue based upon the consideration specified in the client arrangement, and revenue is recognized when the performance obligations in the client arrangement are satisfied. A performance obligation is a contractual promise to transfer a distinct good or service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

Real Estate Brokerage Services (Residential and Commercial)

The Company serves as a licensed broker in the areas in which it operates for the purpose of processing residential real estate transactions. Revenue from real estate brokerage services (residential) mainly consists of commissions generated from real estate brokerage services. The Company is contractually obligated to provide for the fulfillment of transfers of real estate between buyers and sellers. The Company provides these services itself and controls the services of its agents necessary to legally transfer the real estate. Consequently, the Company is defined as the principal in the transaction. The Company, as principal, satisfies its obligation upon the closing of a real estate transaction. The Company has concluded that agents are not employees of the Company, rather deemed to be independent contractors. Upon satisfaction of its obligation, the Company recognizes revenue in the gross amount of consideration it is entitled to receive. The transaction price is calculated by applying the Company’s portion of the agreed-upon commission rate to the property’s selling price. The Company may provide services to the buyer, seller, or both parties to a transaction. In instances in which the Company represents both the buyer and the seller in a transaction, it recognizes the full commission on the transaction. Commissions revenue contains a single performance obligation that is satisfied upon the closing of a real estate transaction, at which point the entire transaction price is earned. The Company’s customers remit payment for the Company’s services to the title company or attorney closing the sale of property at the time of closing. The Company is not entitled to any commission until the performance obligation is satisfied and is not owed any commission for unsuccessful transactions, even if services have been provided. In addition to commission, revenue from real estate brokerage services (residential) consists of annual and monthly dues charged to the agents for providing systems, accounting, marketing tools and compliance services. The annual and monthly dues are recognized each month as services are provided.

Franchising Services

The Company’s franchise agreements offer the following benefits to the franchisee: common use and promotion of La Rosa Realty trademark; distinctive sales and promotional materials; access to technology and training; and recommended procedures for operation of La Rosa Realty franchises. The Company concluded that these benefits are highly related and part of one performance obligation for each franchise agreement, a license of symbolic intellectual property that is billed through a variety of fees including (i) initial franchise fees, (ii) annual dues and (iii) royalty fees. Initial franchise fees consist of a fixed fee payable upon signing the franchise agreement. Annual dues are calculated at a fixed fee per agent (prorated for any partial year) payable annually before the 10th day of January or within 10 days after each agent commences their association with the franchise. Royalty fees are calculated as the greater of a (a) fixed percentage of gross commission income for the period which is made up of all commissions, transaction fees, property management fees, and monthly fees earned by the Franchisee and the Franchisee’s independent sales associates, agents, representatives, contractors, employees, partners, directors, officers, owners, or affiliates, regardless of whether or not such individuals or affiliates are entitled to retain all or part of such gross commission income, or (b) a fixed monthly fee.

Coaching Services

The Company provides mandatory training and guidance to newly licensed agents for their first four sales transactions. For each of the four transactions the newly licensed agents completes, La Rosa Coaching earns 13% of the commission and the brokerage who sponsors the agent, which may be La Rosa Realty, earns 10% of the commission. Coaches also provide optional special education services throughout the year to agents.

Property Management

The Company provides property management services on a contractual basis for owners who lease their residential properties. These services include managing daily operations of the property, tenant background screening, overseeing the tenant application process, and accounting services. The Company is compensated for its services through a flat monthly management fee. At the option of the owner, the Company can also facilitate and account for repair and remodeling costs for properties under management. These costs are not included in the transaction price as the customer is the party paying and receiving these services. Property management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is recognized at the end of each period for the fees associated with the services performed.

The amount of revenue recognized is presented gross for any services provided by the Company, as it is under the Company’s control. This is evidenced by the Company’s obligations for its performance and its ability to direct and redirect the work, as well as negotiate the value of such services.

See Note 12 — Segments for additional information on revenue from contracts with customers.

Cost of Revenue

Cost of revenue consists primarily of agent commissions less fees paid by the agents owed to the Company, disbursements to property owners under property management, and the cost of interchange and other fees for credit card processing services.

Advertising

Advertising costs are expensed as incurred. Advertising expenses for the years ended December 31, 2023 and 2022 was $89,501 and $89,565, respectively, and included in sales and marketing expenses in the consolidated statements of operations.

Debt Discounts and Debt Issuance Costs

Debt discounts and costs incurred in connection with obtaining new debt financing are deferred and amortized over the life of the related financing. Debt discounts and deferred costs are recognized as a direct reduction in the carrying amount of the debt instrument on the consolidated balance sheets and are recognized on the consolidated statements of operations to amortization of financing fees over the term of the related debt using the effective interest method. For the years ended December 31, 2023 and 2022, the Company recorded amortization of debt discounts and debt issuance costs of $1,016,644 and $349,913, respectively. Upon abandonment of a pending financing transaction, the related deferred financing costs are charged to expense.

Deferred Offering Costs

The Company capitalized certain legal, accounting, and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity as a reduction of additional paid-in capital. Should the planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the consolidated statement of operations. Deferred offering costs were $1,760,447 as of December 31, 2022. On October 12, 2023 the Company completed its IPO and incurred offering expenses of $2,544,459, which were recorded against the proceeds received from the IPO.

Income Taxes

The Company accounts for income taxes under the liability method, and deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided if it is determined that it is more likely than not that the deferred tax asset will not be realized. The Company records interest (and penalties where applicable), net of any applicable related income tax benefit, on potential income tax contingencies as a component of the income tax provision.

The Company evaluates and accounts for uncertain tax positions using a two-step approach. Recognition (step one) occurs when the Company concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustainable upon examination. Measurement (step two) determines the amount of benefit that is greater than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Derecognition of a tax position that was previously recognized would occur when the Company subsequently determines that a tax position no longer meets the more likely-than-not threshold of being sustained.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2023 and 2022. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

The United States is the Company’s only tax jurisdiction.

Stock Based Compensation

The Company issues stock-based awards to employees, directors, and non-employees that are generally in the form of stock options, restricted shares, or restricted stock units (“RSUs”). Compensation cost for equity awards is measured at their grant-date fair value, and in the case of restricted shares and RSUs, fair value is determined based on the price of the Company’s underlying Common Stock. The grant date fair value of stock options is estimated using the Black-Scholes option pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the stock options.

The expense for awards is recognized over the requisite service period (generally the vesting period of the award). The Company has elected to treat awards with only service conditions and with graded vesting as one award. Consequently, the total compensation expense is recognized straight-line over the entire vesting period, so long as the compensation cost recognized at any date at least equals the portion of the grant date fair value of the award that is vested at that date. The Company recognizes forfeitures as they occur.

See Note 9 — Equity Incentive Plan for additional information.

Recently Adopted Accounting Standards

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, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new standard was effective for the Company for fiscal years beginning after December 15, 2022. The Company adopted the standard beginning in fiscal year 2023. The adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06 that, among other updates, simplifies the guidance in ASC 815-40,Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2023 and early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company adopted the standard beginning in fiscal year 2023. The adoption did not have a material impact on the Company’s consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,addressing areas identified by the FASB as part of its post-implementation review of its previously issued credit losses standard (ASU 2016-13) that introduced the current expected credit losses (CECL) model. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhances disclosure requirements for certain loan refinancings and restructurings made with borrowers experiencing financial difficulty. This update requires an entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. As the Company has already adopted ASU 2016-13, the new guidance was adopted on January 1, 2023. The adoption of ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820):Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This update also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 is effective for the Company in the fiscal year beginning after December 15, 2023, and interim periods within the fiscal year. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact that the adoption of this new accounting standard will have on its consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements:Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative, which incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“Codification”). The amendments are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. ASU 2023-06 will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes. The Company is currently evaluating the impact that the adoption of this new standard will have on its consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07,Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, to improve reportable segment disclosure requirements through enhanced disclosures about significant segment expenses. The ASU is effective for annual reporting periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the ASU to determine its impact on the Company’s segment disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures amending existing income tax disclosure guidance, primarily requiring more detailed disclosure for income taxes paid and the effective tax rate reconciliation. The ASU is effective for annual reporting periods beginning after December 15, 2024, with early adoption permitted and can be applied on either a prospective or retroactive basis. The Company is currently evaluating the ASU to determine its impact on the Company’s income tax disclosures.

Note 2 — Fair Value Measurements

Fair value is the price that would be received for an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company follows ASC 820,Fair Value Measurement, for financial assets and liabilities measured at fair value on a recurring basis. The Company uses the fair value hierarchy to categorize the financial instruments measured at fair value based on the available inputs to the valuation and the degree to which they are observable or not observable in the market.

The three levels of the fair value hierarchy are as follows:

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The Company has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions or estimation methodologies could have a significant effect on the estimated fair value amounts.

The carrying amounts of financial instruments, including cash, accounts receivable, accounts payable, and accrued expenses reflected in the consolidated financial statements approximate fair value due to their short-term maturities.

The Company determined that during the years ended December 31, 2023 and 2022 certain instruments qualified as derivative liabilities and are recorded at fair value on the date of issuance and re-measured at fair value each reporting period with the change reported in earnings. The fair value of these instruments was computed using the Black Scholes model, incorporating transaction details such as the assumed price of the Company’s Common Stock at an initial public offering, contractual terms, maturity and risk-free rates, as well as assumptions about future financings, volatility, and holder behavior.

A summary of the Company’s liabilities measured at fair value on a recurring basis is as follows:

The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the years ended December 31, 2023 and 2022:

Note 3 — Business Combinations

On October 12, 2023, the Company completed its IPO. Following the IPO, the Company acquired majority ownership of the following franchisees of the Company: Nona Legacy Powered By La Rosa Realty, Inc. (formerly, La Rosa Realty Lake Nona Inc.) (“Lake Nona”), Horeb Kissimmee Realty, LLC (“Kissimmee”), La Rosa Realty Premier, LLC (“Premier”), and La Rosa Realty Orlando, LLC (“Orlando”), and 100% ownership of the following franchisees of the Company: La Rosa CW Properties, LLC (“CW Properties”) and La Rosa Realty North Florida LLC (“North Florida”). All six franchises engage mostly in the residential real estate brokerage services to the public primarily through sales agents and also provide coaching and support services to agents on a fee basis.

The acquisitions were accounted for using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date.

The following table summarizes the purchase consideration and the purchase price allocation to the estimated fair values of the identifiable assets acquired and liabilities assumed for the six acquisitions:

The purchase consideration of North Florida was comprised of both equity and cash. In accordance with the terms of the purchase agreement, the cash consideration of $300,000 is to be paid over an eight-month period beginning January 2024, with two thirds of the balance to be paid in August 2024. The full cash consideration has been accrued as of December 31, 2023. The cash commitment does not include any contingencies.

Goodwill generated from the acquisition is primarily attributable to expected synergies from future growth and strategic advantages provided through expansion and is not expected to be deductible for income tax purposes.

The classes of intangible assets acquired and the estimated useful life of each class is presented in the table below for the six acquisitions:

The amounts of revenue, cost of revenue, gross profit, and loss from operations before income taxes of the six acquisitions included in the Company’s Consolidated Statement of Operations from the date of the acquisition for the year ended December 31, 2023 is as follows:

The following unaudited pro forma financial information presents the combined operating results of the Company, Lake Nona, Kissimmee, and the four acquisitions as if each acquisition had occurred as of January 1, 2023. The unaudited pro forma financial information includes the accounting effects of the business combinations, including adjustments to the amortization of intangible assets. The unaudited pro forma information does not necessarily reflect the actual results that would have been achieved, nor is it necessarily indicative of the Company’s future consolidated results.

The unaudited pro forma financial information is presented in the table below for the year ended December 31, 2023:

Note 4 — Goodwill and Intangible Assets

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The Company recognized goodwill for the first time in the fourth quarter of 2023; as such, the Company will begin goodwill testing in 2024. The gross carrying amount of goodwill as of December 31, 2023 was $5,702,612.

The components of purchased intangible assets were as follows:

The Company recorded $73,134 of amortization of the intangible assets during the year ended December 31, 2023. Based on the intangible assets recorded at December 31, 2023, and assuming no subsequent additions to or impairment of the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:

Note 5 — Leases

The Company has operating leases for office space in several states. Lease terms are negotiated on an individual basis. Generally, the leases have initial terms ranging fromone tofive years. Renewal options are typically not recognized as part of the right of use assets and lease liabilities as it is not reasonably certain at the lease commencement date that the Company will exercise these options to extend the leases.

The Company elected certain practical expedients under ASC 842 which allows the Company to combine lease and non-lease components of lease payments in determining right-of-use assets and related lease liabilities. The Company also elected the short-term lease exception. Leases with an initial term of twelve-months or less that do not include an option to purchase the underlying asset are not recorded on the consolidated balance sheets and are expensed on a straight-line basis over the lease term.

The Company leases its corporate office from an entity controlled by the Company’s CEO. The rent expense for the year ending December 31, 2023 was $134,505. During 2022, no rent expense was charged to the Company. There is no written agreement, and the rent is determined on a month-to-month basis. There are no future minimum rental payments, and the lease may be cancelled at any time by either party. On July 1, 2023, the Company began leasing office space for its subsidiary, La Rosa Realty, from an entity owned by Joseph La Rosa, the Company’s CEO, and Michael La Rosa, the Company’s member of the Board. There is a written lease, which includes minimum monthly rent of $4,593, with a term ending in June 2025.

Lease costs for the years ended December 31, 2023 and 2022 was $311,722 and $169,163, respectively, and included in general and administrative expenses in the consolidated statements of operations.

Supplemental cash flow information related to leases is as follows:

During the year ended December 31, 2023, the Company acquired six franchisees, of which four had remaining lease terms beyond twelve months, resulting in an increase of $644,498 in right-of-use assets and an increase in lease liabilities of $661,165.

Supplemental balance sheet information related to leases is as follows:

The Company’s leases do not provide a readily determinable implicit discount rate. The Company estimates its incremental borrowing rate as the discount rate based on the information available at lease commencement. The weighted average discount rate is 4.76%.

Future maturities on lease liabilities as of December 31, 2023, are as follows:

There were no leases with residual value guarantees.

Note 6 — Borrowings

Line of Credit

The Company has a line of credit with Regions Bank that allows for advances up to $150,000 with interest at the Prime Rate plus 4.75% with a floor of 4.75% and no maturity date. On December 31, 2023, the interest rate was 13.25% and no amount was drawn under the facility. On December 31, 2022, the outstanding balance on the line of credit was $86,163. The line of credit is collateralized by Company assets.

Term Debt

Total term debt is comprised of the following:

Future maturities of term debt as of December 31, 2023, were as follows:

Note Payable

On August 22, 2022, the Company issued to an unaffiliated private investor an unsecured subordinated promissory note that was used for general corporate purposes in the principal amount of $250,000 with a coupon rate of 15% per annum. This note had an original maturity of the earlier of the consummation of the closing of an IPO by the Company or on November 23, 2022. After November 2022, the maturity was extended seven times, with all terms remained unchanged, except beginning January 1, 2023, the Company no longer made monthly interest payments and the principal balance along with all accrued but unpaid interest would be due on note maturity. The last amendment had a final maturity of the earlier of the consummation of the closing of an IPO by the Company or on October 31, 2023. The Company repaid the note principal and all unpaid accrued interest at the closing of the Company’s IPO on October 12, 2023. In addition, the Company issued 5,000 unregistered, restricted shares of Common Stock valued at $25,000 based on the per unit price of the Company’s IPO to the private investor.

OID Note

On November 14, 2022, the Company and Emmis Capital II, LLC, an affiliate of one of the Company’s consultants (“Emmis Capital”), entered into a securities purchase agreement and senior secured promissory note (“OID Note”) in the principal amount of $277,778 that was used for general corporate purposes. The OID Note had an original issue discount of 10%, a coupon rate of 10% per annum, a default interest rate of 24% per annum, and a $5,000 per month per occurrence delinquency penalty. The note holder had the right at any time, at the holder’s option, to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest into shares of the Company’s Common Stock at a price equal to the offering price of the IPO multiplied by 0.75, with certain provisions. The Company also issued warrants to the lenders that are exercisable for 50,000 shares of the Company’s Common Stock and (i) have a term of 60 months; (ii) have full ratchet anti-dilution protection provisions; (iii) are exercisable for a number of shares of the Company’s Common Stock equal to the number of shares that would be issued upon full conversion of this Note; and (iv) have an exercise price equal to the lower of: (A) $5.00 per share, or (B) the price per share of any subsequent offering undertaken by the Company. The Company also granted to the lenders: (i) upon the repayment of the loan,30,000 shares of the Company’s Common Stock (based on an assumed offering price of $5.00 per share, (ii) the right to participate in any future financings, (iii) additional “piggy back” registration rights, (iv) the right to rollover the principal and interest due to acquire Company securities in any future public or private offering, (v) extensive and non-customary default provisions in the note, and (vi) certain other affirmative and negative covenants. The loan had a maturity of the earlier of (i) six months from the date of issue or (ii) upon the completion of the Company’s IPO. The Company and Emmis Capital agreed to extend the maturity date of the loan to the earlier of the date when the Common Stock is listed on Nasdaq, or July 31, 2023. The parties agreed that in the event of listing of the Common Stock on Nasdaq prior to July 31, 2023, on the effective date of the registration statement, the Company would issue to Emmis Capital shares of Common Stock valued at the IPO price, in lieu of a cash, of the $5,000 delinquency penalty payable from May 14, 2023 to July 31, 2023. In the event the listing was not completed by July 31, 2023, then the delinquency fee would be paid in cash. In addition, Emmis Capital agreed to waive any and all events of default existing under the securities purchase agreement and the OID Note as of June 21, 2023, including but not limited to its right to receive default interest and to receive any additional fees, penalties and charges. On August 28, 2023, the Company repaid the OID Note with a principal balance of $277,778, accrued interest of $21,842, and a delinquency penalty of $17,258. In addition, in accordance with the terms of the OID Note, the Company issued 30,000 shares of Common Stock to Emmis Capital.

Economic Injury Disaster Loans

On June 1, 2020, the Company received net proceeds from Economic Injury Disaster Loans (the “EIDL Loans”) from the Small Business Administration (“SBA”) in the aggregate amount of $365,300. After processing fees, the net proceeds were $365,100 under the terms. The EIDL Loans, which are in the form of promissory notes, mature in May 2050 and bear interest at a rate of 3.75% per annum. Payments are to be made monthly, and each payment is applied first to the interest accrued to the date of receipt of each payment and any remaining payment is applied to principal. The loan terms provide for a collateral interest for the SBA and limits the use of proceeds to working capital to alleviate the effects of COVID-19 on the Company’s economic condition.

During the fourth quarter of 2023, the Company acquired two franchisees that had outstanding EIDL Loans in the aggregate of $263,000. The Company acquired the EIDL Loans, and the EIDL loans have terms similar to the Company’s existing EIDL loans. The EIDL Loans mature in June 2050 and July 2050 and bear interest at a rate of 3.75% per annum.

Convertible Notes

Total convertible notes comprised of the following:

In two private placements conducted from July 2021 through October 2022, the Company entered into convertible note purchase agreements pursuant to which the Company issued unsecured convertible promissory notes (“Convertible Notes”). The Company issued convertible notes in the aggregate principal amount of $616,000 that was used for general corporate purposes. Interest accrued on the principal amount of 16 of the convertible notes at 2.5% per annum with a default rate of 3% per annum. Interest accrued on the principal amount of seven of the Convertible Notes at 18% per annum, with a default interest rate of 20% per annum. The convertible notes had a maturity date of the earlier of the date that the Company’s Common Stock became listed for trading on a national securities exchange or one year from the date of issue of each such note. Prior to the maturity date, the convertible notes would convert the outstanding principal and accrued interest automatically into shares of the Company’s Common Stock on the date of the closing of an IPO at a price per share equal to the IPO price multiplied by 0.80. The conversion feature was deemed to be a derivative liability; as such, the Company recorded a debt discount of $203,782, which represented the fair value of the derivative liabilities at the commitment dates. In addition, the Company incurred $25,000 of professional fees directly related to the issuances of the convertible notes which was recorded as debt issuance costs. The convertible notes had original maturities at various times during 2022 and 2023, which all were extended into 2023. In December 2022, the Company repaid one convertible note with a principal amount of $10,000 plus accrued interest.

During 2023, the Company exchanged, in a private placement under Sections 3(a)(9) and 4(a)(2) of the Securities Act, 18 of the above convertible promissory notes, representing an aggregate amount of principal and accrued interest of $598,836, for 591 shares of the Company’s series A preferred stock at an exchange rate of $1,000 per share.

On the closing of the Company’s IPO on October 12, 2023, the Company repaid the principal and accrued interest of three of the remaining convertible notes totaling $94,433, and the remaining convertible note with a principal balance plus accrued interest of $26,265 was converted into 6,566 shares of the Company’s unregistered, restricted Common Stock based on the IPO price of $5.00.

The Company accrued interest totaling $21,285 and $91,821 during the year ending December 31, 2023 and 2022, respectively.

Cash Advance Agreement

On July 3, 2023, the Company entered into a standard merchant cash advance agreement (the “Cash Advance”) with Cedar Advance LLC (“Cedar”) for the purchase and sale of future receipts pursuant to which the Company sold in the aggregate $764,150 in future receipts of the Company for $500,650. Future receipts include cash, check, credit or debit card, electronic transfer, or other form of monetary payment. Until the purchase price has been repaid, the Company agreed to pay Cedar $27,188 per week. In addition, the Company granted Cedar a security interest in all of the Company’s accounts, including deposit accounts and accounts receivable and proceeds. The Company recorded a debt discount in the amount of $237,150 based upon the difference between the amount of future receipts sold and the actual proceeds received by the Company and debt issuance costs of $26,350. The debt discount and debt issuance costs are reflected as a reduction on the outstanding liability and are being amortized as non-cash interest expense using the effective interest method over the term of the agreement. During the year ended December 31, 2023, non-cash interest expense of $256,080 was recorded from the amortization of the debt discount and the debt issuance costs. As of December 31, 2023, the remaining gross balance of the Cash Advance was $84,463 and a net carrying value of $77,042, which was fully repaid in January 2024.

Total cash advance agreement comprised of the following:

Note 7 — Warrants

Warrants are issued to consultants as compensation or as part of certain capital raises which entitle the holder to purchase shares of the Company’s Common Stock at a fixed price. The strike price of warrants granted in 2022 were set when the Company completed the IPO pricing agreement with the Company’s underwriters on October 9, 2023, which was $5.00.

At December 31, 2023, warrants outstanding that have vested and are expected to vest are as follows:

Additional information with respect to warrant activity:

During 2022 the Company issued warrants to lenders of the Company, including the Company’s CEO, to purchase 100,000 shares of Common Stock. The warrants were immediately vested and have a term offive years from the grant date with an exercise price of $5.00. The warrants are freestanding instruments in a bundled transaction with debt offerings and are accounted for separately. The Company determined that the warrants are classified as equity, and the proceeds of the debt offerings were allocated based on the relative fair values of the debt instruments and the warrants.

During 2023 the Company issued warrants to purchase 50,000 shares of Common Stock to the Company’s underwriter as compensation for providing services to complete the Company’s IPO. The warrants vest on April 2, 2024 and have a term offive years from the grant date with an exercise price of $5.50. The warrants are freestanding instruments in a bundled transaction with the IPO and are accounted for separately. The Company determined that the warrants are classified as equity.

As of December 31, 2023, there was no unrecognized expense related to warrants. As of December 31, 2022, unrecognized amortization of financing fees related to warrants granted totaled $149,995, all of which was recognized in 2023.

The valuation methodology used to determine the fair value of the warrants was the Black-Scholes option-pricing model. The Black-Scholes model requires the use of a number of assumptions including volatility of the stock price, the average risk-free interest rate, and the weighted average expected life of the warrant.

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of the award. The Company’s estimated volatility is an average of the historical volatility of peer entities over the shorter of i) the period equal to the expected life of the award or ii) the period over which the peer company was publicly traded. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the award at the grant date.

The weighted average fair value of warrants granted and the assumptions used in the Black-Scholes model are set forth in the table below.

Note 8 — Stockholders’ Equity

The Company is authorized to issue two classes of stock consisting of 250,000,000 shares of Common Stock, $0.0001 par value per share, and 50,000,000 shares of preferred stock, $0.0001 par value per share. On July 22, 2021, the Company issued 6,000,000 shares of Common Stock and 2,000 shares of Series X Super Voting Preferred Stock to Mr. La Rosa as compensation for services and the founding of the Company.

Common Stock

On March 18, 2022, the Company effected a 1-for-10 reverse stock split of its Common Stock issued and outstanding. On April 17, 2023, the Company effected a 2-for-1 forward stock split of its Common Stock issued and outstanding (including adjustments for fractional shares). As a result, all share information in the accompanying financial statements has been adjusted as if the reverse stock split and forward stock split happened on the earliest date presented. The par value of the Common Stock was not impacted by either of the splits.

At December 31, 2023 and 2022 there were 13,406,480 and 6,000,000 shares of Common Stock issued and outstanding, respectively. Holders of common stock are entitled to one vote per share. Holders of Common Stock are not entitled to receive dividends unless declared by the Board of Directors.

Initial Public Offering

On October 12, 2023 the Company completed its IPO and sold 1,000,000 shares of its Common Stock at a price to the public of $5.00 per share, resulting in gross proceeds of $5,000,000. The Company received net proceeds of $4,360,000 after underwriter discounts, commissions, and expenses. The Company also incurred other offering expenses of $2,544,459 and issued 1,393,618 common shares to service providers related to the IPO. These expenses were recorded against the proceeds received from the IPO.

The Company used the proceeds to repay existing debt and accrued interest of approximately $375,000, related party debt of approximately $150,000, existing accounts payable of $1,000,000, and $550,000 toward the purchase of two franchised La Rosa offices. See Note 3 — Business Combinations for additional information.

Common Stock Issuances for IPO Services

On May 12, 2021, the Company entered into a capital market advisory agreement with a consultant. During 2022, the parties amended the agreement, and in addition to other compensation, the amended agreement required the Company to issue 400,000 shares, as adjusted for the stock splits, when the Company’s Common Stock starts trading on a senior exchange. The Company issued the shares on October 9, 2023 valued at the IPO price of $5.00 a share.

On January 10, 2022, the Company entered into an investment banking agreement with a consultant. In addition to other compensation, the agreement required the issuance of Common Stock of the Company equal to 4.0% of the Company. Such shares were to be held in book entry at the transfer agent and were not eligible to be sold until the Company trades on a senior exchange. The consultant was granted anti-dilution protection such that they retained 4.0% of the Company’s fully diluted shares outstanding after the senior exchange listing. The Company evaluated the agreement and determined that the performance condition was satisfied on July 31, 2023. As such, the Company issued 250,168 shares of Common Stock on July 31, 2023, valued at the then expected IPO price of $5.00 a share. Upon the completion of the Company’s IPO on October 12, 2023, the Company issued 228,656 shares of Common Stock, valued at the IPO price of $5.00 a share, representing the remaining shares to be issued to the consultant.

Upon the closing of the Company’s IPO, the Company issued 514,794 shares of Common Stock valued at the IPO price of $5.00 a share to certain third-party service providers in accordance with the respective contractual agreements who directly worked on the IPO process. A portion of the value of the shares extinguished $157,856 of existing accounts payable.

Additional Common Stock Issuances

On August 28, 2023, the Company repaid an OID Note and, in accordance with the terms of the original note, the Company issued 30,000 shares of Common Stock to the lender, valued at the expected IPO price of $5.00 a share.

On October 12, 2023, the Company completed its IPO and, in accordance with the debt agreement the Company executed in December 2022 with the Company’s CEO, the Company issued 60,000 shares of unregistered, restricted Common Stock to the Company’s CEO with a value of $5.00 per share.

On October 12, 2023, upon the repayment of a note payable to one of the Company’s lenders, the Company issued 5,000 shares of unregistered, restricted Common Stock with a value of $5.00 per share in accordance with the debt agreement.

In September 2023, the Company executed a consulting agreement with a service provider to supply certain investor relations services post-IPO. As part of the agreement, the Company issued 125,000 shares of the Company’s unregistered, restricted Common Stock, which were issued on October 13, 2023 and valued at $3.00 per share.

In December 2023, the Company executed a consulting agreement with a service provider to supply certain investor relations services. As part of the agreement, the Company issued 100,000 shares of the Company’s unregistered, restricted Common Stock, which were issued on December 18, 2023 and valued at $1.98 per share.

In the fourth quarter of 2023, the Company acquired controlling interests in four of its franchisees and full control of two of its franchisees. As part of the purchase consideration of all six of the acquisitions, the Company issued 2,750,114 of the Company’s unregistered, restricted Common Stock. Each of the selling members entered into lock-up/leak out agreements with the Company. Pursuant to these agreements, the selling members are restricted from selling more than one-twelfth of the shares they received per calendar month during the one-year period commencing after the six-month holding period under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to applicable securities laws. See Note 3 — Business Combinations for additional information regarding the acquisitions.

Debt Conversion to Common Stock

Upon the first day of trading of the Company’s Common Stock on the Nasdaq stock exchange on October 10, 2023, one remaining convertible note with a principal balance plus accrued interest of $26,265 was converted into 6,566 shares of the Company’s unregistered, restricted Common Stock based on the IPO price of $5.00.

Series X Super Voting Preferred Stock

On July 29, 2021, the Company filed an Amended and Restated Articles of Incorporation with the Secretary of State of Nevada authorizing 50,000,000 shares of “blank check” preferred stock. The Company designated 2,000 shares of the authorized preferred stock as Series X Super Voting Preferred Stock and issued 100% of the Super X Super Voting Preferred Stock to the Company’s CEO. Each share of the Series X Super Voting Preferred Stock entitles its holder to 10,000 votes per share and votes with the Company’s Common Stock as a single class on all matters to be voted or consented upon by the stockholders. The Series X Super Voting Preferred Stock is not convertible into Common Stock or any other securities of the Company. The holders of the Series X Super Voting Preferred Stock are not entitled to any dividend rights or any liquidation preference and have no subscription, redemption or conversion privileges.

Series A Preferred Stock

On February 13, 2023, the Company designated 11,000 shares of the authorized preferred stock as series A preferred stock. The holders of the series A preferred stock do not have voting rights, redemption rights, dividend rights, anti-dilution rights, nor liquidation rights. Each share of the series A preferred stock will automatically convert into shares of the Company’s Common Stock upon the earlier of the closing date of the Company’s IPO or upon a change in control of the Company. Upon the Company’s IPO, the value of each share is converted to common stock at a 30% discount of the IPO price. The discount is accounted for as a deemed dividend that increases the basic net loss per share for common stockholders.

During 2023, the Company issued 1,523 shares of its series A preferred stock to 77 investors in a private placement pursuant to Regulation D under the Securities Act, raising $1,523,000. The Company also exchanged convertible debt with an outstanding balance of $598,836, including accrued interest of $87,836, for 591 shares of series A preferred stock. On March 27, 2023, the Company exchanged a portion of its related party debt with an outstanding gross balance of $1,324,631, excluding debt discount of $469,785, and including accrued interest of $28,101, for 1,321 shares of series A preferred stock. On December 31, 2022, a loan of $556,268 from Celebration Office Condos LLC, a company owned by the Company’s CEO, was forgiven for one share of series A preferred stock which was issued in March 2023.

Upon the first day of trading of the Company’s Common Stock on the Nasdaq stock exchange on October 10, 2023, the 3,436 shares of Series A Preferred Stock outstanding automatically converted into 981,676 shares of the Company’s Common Stock based on the IPO price of $5.00. The 30% discount from the IPO price resulted in an aggregate discount of $1,472,514, which was accounted for as a deemed dividend that increased the basic net loss per share for common stockholders.

Note 9 — Equity Incentive Plan

On January 10, 2022, the Company adopted the La Rosa Holdings Corp. 2022 Equity Incentive Plan (the “2022 Plan”) pursuant to which a maximum of 5,000,000 shares of Common Stock of the Company were authorized to be issued pursuant to the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted stock units (RSUs), performance units and performance shares. Persons eligible to receive awards under the 2022 Plan include employees, consultants, and directors of the Company. The plan is administered by the Compensation Committee of the Board of Directors. On October 20, 2023, the Company filed a Form S-8 to register the securities in the 2022 Plan. As of December 31, 2023, there are 2,653,369 shares available for issuance.

Stock Option Awards

Stock options are awards issued to employees and directors that entitle the holder to purchase Common Stock of the Company at a fixed price. Options issued prior to the Company’s IPO on October 12, 2023 have a strike price equal to the IPO price of $5.00 per share.

On November 1, 2023, the Company issued stock options to its non-management Board of Directors in lieu of paying the directors their cash board fees they had accrued since the initiation of their term through September 30, 2023, which totaled $375,052. The options cover 412,125 shares of the Company’s Common Stock at a strike price of $1.28, the closing price of the Company’s Common Stock on the previous business day from the grant date. The options immediately vested upon grant and have a ten-year term. The Company extinguished the accrued liability recorded at September 30, 2023.

On December 7, 2023, the Company issued a non-qualified stock option to the Company’s CEO in accordance with the CEO’s employment agreement. The option covers 900,000 shares of the Company’s Common Stock at a strike price of $2.09, the closing price of the Company’s Common Stock on the previous business day from the grant date. The option immediately vested upon grant and has a ten-year term.

The Company recorded share-based compensation related to options of $1,816,188 and $230,644 for the year ended December 31, 2023 and 2022, respectively. The Company did not realize any tax benefits associated with share-based compensation for the years ended December 31, 2023 and 2022, as the Company recorded a valuation allowance on all deferred tax assets.

At December 31, 2023, options outstanding that have vested and are expected to vest are as follows:

Additional information with respect to stock option activity:

The weighted average fair value and the assumptions used in calculating the stock options granted during fiscal year 2023 and 2022 were based on estimates at the date of grant as follows:

As of December 31, 2023, there was no unrecognized compensation expense related to stock option awards. As of December 31, 2022, unrecognized compensation expense related to stock option awards totaled $46,136, all of which was recognized in 2023.

Restricted Stock Units (RSUs)

During July 2022, the Company made agreements with 89 real estate agents and employees, who provide services to the Company, that they would be issued RSUs under the 2022 Plan covering $1,959,860 of value, when the Company’s Common Stock began trading on the Nasdaq stock exchange. The Company’s stock started trading on October 10, 2023, and the RSUs vested immediately upon issuance, which covered 391,972 common shares. To cover employees’ payroll withholding tax liability, the Company netted 35,466 shares of Common Stock from the employee awards for a total issuance of 356,506 shares.

A restricted stock unit covering 4,000 shares of Common Stock issued to the Company’s Chief Technology Officer (CTO) vested on February 1, 2023. In addition, the CTO will receive a future grant of 4,000 restricted stock units on February 1, 2024, which will be issued under the 2022 Plan. The Company records stock-based compensation expense for the new grant ratably over theone-year vesting period. The Company also valued the new award using the assumed IPO price of $5.00 a share. For the year ended December 31, 2023, the Company recorded $38,247 of share-based compensation expense for the CTO’s RSUs, and as of December 31, 2023, unrecognized compensation expense related to the award was $1,753, which will be recognized in 2024. The Company didnot realize any tax benefits associated with share-based compensation for the year ended December 31, 2023, as the Company recorded a valuation allowance on all deferred tax assets.

Issuance of Common Shares to Consultants

In the fourth quarter of 2023, the Company executed six consulting agreements with third-party service providers to supply certain services to the Company. The Company issued 594,000 shares of the Company’s Common Stock under the Company’s 2022 Equity Incentive Plan between October 26, 2023 and November 2, 2023, with a weighted-average value of $1.20 per share.

Note 10 — Earnings Per Share

Basic loss per share of common stock attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share of common stock attributable to common stockholders is computed by giving effect to all potential shares of common stock, including those related to the Company’s outstanding warrants and the 2022 Plan, to the extent dilutive. For all periods presented, these potential shares were excluded from the calculation of diluted loss per share because their inclusion would be anti-dilutive. As a result, diluted loss per common share is the same as basic loss per common share for all periods presented. The Company’s mandatory convertible Series A Preferred Stock included a 30% discount from the IPO price. As a result, the aggregate discount of $1,472,514 was accounted for as a deemed dividend that increased the basic net loss per share for common stockholders.

The following table sets forth common stock equivalents that have been excluded from the computation of dilutive weighted average shares outstanding as their inclusion would have been antidilutive:

Note 11 — Income Taxes

The benefit from income taxes was as follows:

A reconciliation of the provision for income taxes with the amounts computed by applying the Federal income tax rate to income from operations before the provision for income taxes is as follows for the years ended December 31, 2023 and 2022:

The components of deferred tax assets (liabilities) were as follows:

A reconciliation of the beginning and ending amount of deferred income tax valuation allowance were as follows:

As of December 31, 2023, the Company has federal net operating loss carryforwards of approximately $5.1 million and state net operating loss carryforwards of approximately $5.3 million which can be carried forward indefinitely. Deferred tax assets for net operating loss carryforwards are fully offset by a valuation allowance.

We have taken current and potential future expirations into consideration when evaluating the need for valuation allowances against these deferred tax assets. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of federal tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which our deferred tax assets are deductible, we believe it is more likely than not that we will not realize the benefits of these deductible differences. We have recorded a valuation allowance for deferred tax assets of $1,577,303 and $688,442 as of December 31, 2023 and 2022, respectively.

The Company applies the FASB’s provisions for uncertain tax positions. The Company utilizes the two-step process to determine the amount of recognized tax benefit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties associated with uncertain tax positions as a component of income tax expense.

As of December 31, 2023, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.

Note 12 — Segments

The Company’s business is organized into five material reportable segments which aggregate 100% of revenue:

The reporting segments follow the same accounting policies used in the preparation of the Company’s consolidated financial statements. The following represents the information for the Company’s reportable segments for the years ended December 31, 2023 and 2022, respectively.

The following table disaggregates the Company’s revenue based on the type of sale or service and the timing of satisfaction of performance obligations for the years ended December 31:

Note 13 — Commitments and Contingencies

The Company has entered into indemnification agreements with the Company’s officers and directors for certain events or occurrences. The Company maintains a directors and officers insurance policy to provide coverage in the event of a claim against an officer or director.

Nasdaq Listing Rule

On November 24, 2023, the Company received written notification from the staff (the “Staff”) of Nasdaq indicating that, the Company no longer meets Nasdaq Listing Rule 5550(b)(2) (the “Rule”) requiring the Company to maintain a minimum market value of listed securities (“MVLS”) of $35 million. The notice was based on a review of the Company’s MVLS for the past 30 consecutive business days. Nasdaq’s listing rules provide the Company with a compliance period of 180 calendar days, or until May 22, 2024, in which to regain compliance. If at any time during this compliance period the Company’s MVLS closes at $35 million or more for a minimum of ten consecutive business days, Nasdaq will provide written confirmation of compliance and the matter will be closed.

Legal Proceedings

From time to time the Company is involved in litigation, claims, and other proceedings arising in the ordinary course of business. Such litigation and other proceedings may include, but are not limited to, actions relating to employment law and misclassification, intellectual property, commercial or contractual claims, brokerage or real estate disputes, or other consumer protection statutes, ordinary-course brokerage disputes like the failure to disclose property defects, commission disputes, and vicarious liability based upon conduct of individuals or entities outside of the Company’s control, including agents and third-party contractor agents. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur.

On February 13, 2023, Mr. Mark Gracy, who served as the Company’s Chief Operating Officer from November 18, 2021 to November 15, 2022, filed a civil lawsuit in the Circuit Court of Osceola County, Florida, seeking a jury trial and claiming that the Company breached his employment agreement by reducing his salary and failing to pay him his full severance payments and is looking for payment of his alleged severance of $249,000. On April 11, 2023, the Company filed a motion to dismiss Mr. Gracy’s complaint, which is still pending.

On July 14, 2023, a writ of garnishment was issued naming La Rosa Realty, LLC, a subsidiary of the Company, as a purported garnishee for an alleged, but not actual, employee or contractor, Marc Cameron, in the Seventh Judicial Circuit Court of St. Johns’ County, Florida. On October 31, 2023, the Plaintiff voluntarily dismissed the action.

On September 5, 2023, Mr. Anthony Freites, who was an alleged independent contractor of La Rosa Realty, LLC from January 13, 2013 until June of 2021, filed an amended complaint in the Circuit Court of Osceola County, Florida, seeking a jury trial and claiming that the Company breached his contract and is looking for payment of commissions on alleged closed real estate sales as an independent contractor in the amount unspecified but allegedly including actual damages, compensatory damages, attorney’s fees, costs, and prejudgment interest. On October 12, 2023, the Company filed a motion to dismiss Mr. Freites’ complaint, which is still pending.

On January 3, 2024, Ms. Sarah Palmer filed a putative national class action complaint against La Rosa Realty, LLC in the United States District Court, Middle District of Florida, Orlando Division. Ms. Palmer alleges that she received two (2) brief pre-recorded calls one week apart to her cell phone from La Rosa Realty, LLC presenting her an employment opportunity as a real estate agent. Ms. Palmer seeks an undisclosed amount of monetary damages from La Rosa Realty, LLC for the alleged would-be injurious, isolated and opportunistic employment gestures to her through a purported nationwide class action. Ms. Palmer claims that the defendant violated her privacy, annoyed and harassed her, constituted a nuisance, and occupied her telephone line. On March 12, 2024 La Rosa Realty, LLC filed a motion to dismiss the case with prejudice, which is still pending.

The Company believes that the above claims are without merit, and it will vigorously defend against such claims. Moreover, these claims, in the aggregate, would not have a material adverse effect on the Company’s financial condition, business, or results of operations, should the Company’s defense not be successful in whole or in part. Except as stated herein, there is no other action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers, threatened against or affecting our Company or our officers or directors in their capacities as such.

Note 14 — Related Party Transactions

The Company leases its corporate office from an entity controlled by the Company’s CEO. The rent expense for the year ending December 31, 2023 was $134,505. During 2022, no rent expense was charged to the Company. There is no written agreement, and the rent is determined on a month-to-month basis. There areno future minimum rental payments, and the lease may be cancelled at any time by either party.

On July 1, 2023, the Company began leasing office space for its subsidiary, La Rosa Realty, from an entity owned by Joseph La Rosa, the Company’s CEO, and Michael La Rosa, the Company’s member of the Board. There is a written lease, which includes minimum monthly rent of $4,593, with a term ending in June 2025.

On May 4, 2023, the mother of the Company’s CEO purchased 200 shares of the Company’s series A preferred stock for $200,000. Upon the Company’s IPO, the shares were converted into 57,142 shares of the Company’s Common Stock.

Due from related party

La Rosa Realty, LLC has provided interest-free, due on demand advances to La Rosa Insurance LLC, a company controlled by the Company’s CEO. The outstanding balance was $41,558 as of December 31, 2022. As a newly publicly traded company, the Company must comply with the Sarbanes-Oxley Act of 2002 and specifically Section 402, which amended the Securities Exchange Act of 1934 to prohibit companies from making most personal loans to their directors and executive officers. During the fourth quarter of 2023, upon the Company completing its IPO, the Compensation Committee reviewed the advance, which had a balance of $45,413, and determined that the existing related party receivable would be charged as part of the Company’s CEO’s annual bonus as specified in his employment agreement.

Due to related party (due on demand advances)

Prior to 2023, the Company’s CEO provided interest free, due on demand, advances to the Company for general operations. The outstanding balance of these obligations was $75,591 as of December 31, 2022.

Prior to 2023, a relative of the Company’s CEO provided an interest free, due on demand, advance to the Company. The outstanding balance was $48,000 as of December 31, 2022.

Prior to 2023, an entity owned by the Company’s CEO provided an interest free, due on demand, advance to the Company. The outstanding balance was $40,654 as of December 31, 2022.

The Company repaid all of the advances totaling $149,245 at the closing of the Company’s IPO on October 12, 2023.

Due to related party (term loans)

From February 2022 through October 3, 2022, the Company issued to the Company’s CEO six unsecured subordinated promissory notes in the aggregate principal amount of $765,000. The notes accrued interest at rates ranging from 1.4% per annum to 3.43% per annum, each with athree year term with monthly payments toward principal and interest beginning after the Company’s IPO.

On July 15, 2021, the Company issued to a private investor, Mr. Carlos J. Bonilla, an attorney with the law firm of ELP Global PLLC that represents the Company, an unsecured subordinated promissory note (the “ELP Note”) in the principal amount of $40,000 that was used for general corporate purposes. Interest accrued on the principal amount at 18% per annum. On December 1, 2022, the Company’s CEO, Joseph La Rosa, entered into an agreement with Mr. Bonilla pursuant to which Mr. La Rosa sold to Mr. Bonilla 600,000 shares of his common stock in exchange for the assignment by Mr. Bonilla of the ELP Note plus accrued interest and the payment by Mr. Bonilla to Mr. La Rosa of cash in the amount of $449,500. As a result of the assignment of the ELP Note to Mr. La Rosa, the principal balance of $40,000 was reclassified to “Due to related party” on the consolidated balance sheets.

On December 2, 2022, the Company issued to the Company’s CEO a Convertible OID Promissory Note in the original principal amount of $491,530 for which he paid $449,500. The note had an annual original issue discount of 8.55% with a default interest rate of 24.0% and a $5,000 per month per occurrence delinquency penalty. The holder had the right at any time to convert all or any part of the outstanding and unpaid principal amount and accrued and unpaid interest of the note into shares of the Company’s Common Stock at a price equal to the offering price of the initial public offering multiplied by 0.75 with certain distribution, fundamental transaction and anti-dilution protections and cash penalties for failure to deliver the shares in a timely manner. The Company also issued to the Company’s CEO warrants exercisable for 50,000 shares of the Company’s Common Stock that: (i) have a term of 60 months; (ii) have full ratchet anti-dilution protection provisions; (iii) are exercisable for a number of shares of our Common Stock equal to the number of shares that would be issued upon full conversion of this note; and (iv) have an exercise price equal to the lower of: (A) $5.00 per share, or (B) the price per share of any subsequent offering undertaken by the Company. The Company also granted to the Company’s CEO (i) upon repayment of the loan,60,000 shares of the Company’s Common Stock, (ii) the right to participate in any future financings, (iii) the right to rollover the principal and interest due to acquire Company securities in any future public or private offering, (iv) extensive and non-customary default provisions in the note, and (v) certain other affirmative and negative covenants.

In March 2023, the Company exchanged, in a private placement under Sections 3(a)(9) and 4(a)(2) of the Securities Act, the six unsecured subordinated promissory notes, the ELP Note, and the Convertible OID Promissory Note representing an aggregate amount of principal and accrued interest of $1,324,631, for 1,321 shares of the Company’s series A preferred stock. Upon the Company’s IPO, the shares were converted into 377,428 shares of the Company’s Common Stock. See Note 8 – Stockholders’ Equity for additional information.

Note 15 — Subsequent Events

Franchise Acquisitions

On February 21, 2024, the Company completed an acquisition of 100% of the membership interests of La Rosa Realty Winter Garden LLC, a Florida limited liability company and a franchisee of the Company. The purchase price was $352,204, which was settled by the issuance of an aggregate of 268,858 unregistered shares of the Company’s Common Stock based on $1.31 per share, the closing price of the Company’s Common Stock for the previous trading day. Concurrently the selling members entered into lock-up/leak out agreements with the Company pursuant to which the selling members may not sell more than one-twelfth of their common shares per calendar month during the one year period commencing after the six-month holding period under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to applicable securities laws.

On March 7, 2024, the Company completed an acquisition of 51% of the membership interests of La Rosa Realty Georgia LLC, a Georgia limited liability company and a franchisee of the Company. The purchase price was $516,450, which was settled by the issuance of an aggregate of 276,178 unregistered shares of the Company’s Common Stock based on $1.87 per share, the closing price of the Company’s Common Stock for the previous trading day. Concurrently the selling members entered into lock-up/leak out agreements with the Company pursuant to which the selling members may not sell more than one-twelfth of their common shares per calendar month during the one year period commencing after the six-month holding period under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to applicable securities laws.

On March 15, 2024, the Company completed an acquisition of La Rosa Realty California and now holds a 51% stake in the entity. Previously, La Rosa Franchising held a 50% stake in the entity. The purchase price for the one additional percentage ownership was $2,414, which was settled by the issuance of an aggregate of 1,387 unregistered shares of the Company’s Common Stock based on $1.74 per share, the closing price of the Company’s Common Stock for the previous trading day. Concurrently the selling members entered into lock-up/leak out agreements with the Company pursuant to which the selling members may not sell more than one-twelfth of their common shares per calendar month during the one year period commencing after the six-month holding period under Rule 144 promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to applicable securities laws.

Debt Issuances

On February 20, 2024, the Company entered into securities purchase agreement with an accredited investor for the issuance of a senior secured promissory note with an aggregate principal amount of $1,052,632. The note has an original issue discount of 5% and a coupon rate of 13% per annum. In addition, the Company issued 67,000 shares of the Company’s Common Stock as a commitment fee, a warrant to purchase 120,000 shares of the Company’s Common Stock with an exercise price of $3.00, exercisable until the five-year anniversary of the closing date, and a warrant to purchase 95,000 shares of the Company’s Common Stock with an exercise price of $2.25, exercisable until the five-year anniversary of the closing date, which warrant will be cancelled and extinguished if the note is fully paid on or before the note maturity date. The Company also agreed to register the securities issued to the investor by filing a registration statement with the U.S. Securities and Exchange Commission within ninety (90) calendar days from the date of the agreement. The investor also has a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance, and discharge in full of all of the Company’s obligations under the note. The principal amount and interest under the note are convertible into shares of the Company’s Common Stock at a conversion price of $2.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $2.50 or the trading price of the shares. The securities purchase agreements contain customary representations and warranties and agreements and obligations of the parties. The proceeds of the note will be used for business development and general working capital purposes. In connection with this financing, the Company also issued to its placement agent, Alexander Capital L.P., a 5-year common stock purchase warrant to purchase 21,053 shares of Common Stock at the exercise price of $1.50 per share. The terms of this warrant are substantially similar to the terms of the warrants issued to the investors.

On April 1, 2024, the Company entered into securities purchase agreement with the same accredited investor for the capital raise on February 20, 2024 for the issuance of a senior secured promissory note with an aggregate principal amount of $1,316,000. The note has an original issue discount of 5% and a coupon rate of 13% per annum. In addition, the Company issued 50,000 shares of the Company’s Common Stock as a commitment fee, a warrant to purchase 150,000 shares of the Company’s Common Stock with an exercise price of $3.00, exercisable until the five-year anniversary of the closing date, and a warrant to purchase 152,300 shares of the Company’s Common Stock with an exercise price of $2.25, exercisable until the five-year anniversary of the closing date, which warrant will be cancelled and extinguished if the note is fully paid on or before the note maturity date. The Company also agreed to register the securities issued to the investor by filing a registration statement with the U.S. Securities and Exchange Commission within ninety (90) calendar days from the date of the agreement. The investor also has a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance, and discharge in full of all of the Company’s obligations under the note. The principal amount and interest under the note are convertible into shares of the Company’s Common Stock at a conversion price of $2.50 per share unless the Company fails to make an amortization payment when due, in which case the conversion price shall be the lower of $2.50 or the trading price of the shares. The securities purchase agreement contains customary representations and warranties and agreements and obligations of the parties. The proceeds of the note will be used for business development and general working capital purposes. The additional capital raise solidifies the Company’s ability to meet its obligations for at least the next twelve months.

Executive Equity Awards

On January 2, 2024, the Company issued a non-qualified stock option to the Company’s CEO in accordance with the CEO’s employment agreement. The option covers 800,000 shares of the Company’s Common Stock at a strike price of $1.50, the closing price of the Company’s Common Stock on the previous business day from the grant date. The option immediately vested upon grant and has aten-year term.

On February 1, 2024, the Company issued non-qualified stock options to the Company’s CEO, CFO, and COO in accordance with the respective employment agreements. The option covers 793,185 shares of the Company’s Common Stock at a strike price of $1.73, the closing price of the Company’s Common Stock on the previous business day from the grant date. The options immediately vested upon grant and have aten-year term.

On March 15, 2024, the Company issued non-qualified stock options to the Company’s CEO in accordance with the employment agreement. The option covers 600,000 shares of the Company’s Common Stock at a strike price of $1.74, the closing price of the Company’s Common Stock on the previous business day from the grant date. The options immediately vested upon grant and have aten-year term.