La Rosa Holdings Corp

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

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Regulation S-X and do not include all the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The Company has made estimates and judgements affecting the amounts reported in the Company’s condensed consolidated financial statements and the accompanying notes. The actual results experienced by the Company may differ materially from the Company’s estimates. The condensed consolidated financial information is unaudited and reflects all normal adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented, 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 unaudited condensed financial statements do not necessarily purport to represent realizable or settlement values.

The unaudited condensed 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 the reporting period are reflected in the Company’s results effective from the date of acquisition through the end of the reporting period.

Results of the three- and six-month periods ended June 30, 2024 are not necessarily indicative of the results to be expected for the full year ending December 31, 2024. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the Company as of and for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K. The condensed consolidated balance sheet as of December 31, 2023 was derived from the Company’s audited financial statements referred to above.

Liquidity – Going Concern and Management’s Plans

On June 30, 2024, the Company had a cash balance of $1.6 million and negative working capital of $1.4 million.

On July 16, 2024, the Company entered into a securities purchase agreement with an accredited investor for the issuance of a 13% senior secured promissory note with a principal amount of $468,000 and a purchase price of $444,600 after an original issue discount of $23,400. The note is convertible into shares of the Company’s common stock at the option of the lender. The promissory note begins amortizing five months after the date of the loan, with full maturity occurring twelve months after the date of each loan. See Note 11 — 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 its 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.

Reclassifications

Certain items in the prior period’s condensed consolidated financial statements have been reclassified to conform to the current year presentation reflected in the financial statements. Specifically, stock-based compensation was separated from general and administrative expenses on the condensed consolidated statements of operations.

Recently Adopted Accounting Standards

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. The Company adopted the standard beginning in fiscal year 2024. The adoption did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

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 — Business Combinations

The Company has completed a number of acquisitions in the first half of 2024 and will acquire additional businesses in the future. The results of businesses acquired in a business combination are included in the Company’s condensed 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, 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.

During the first half of 2024, the Company acquired majority ownership of the following franchisees of the Company: La Rosa Realty Georgia LLC (“Georgia”) and La Rosa Realty California (“California”), La Rosa Realty Lakeland LLC (“Lakeland”), La Rosa Realty Success LLC (“Success”) and 100% ownership of La Rosa Realty Winter Garden LLC (“Winter Garden”). All five 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 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 five acquisitions. The values assigned to certain acquired assets and liabilities are preliminary as the Company is continuing to evaluate the fair value of the assets and liabilities and may be adjusted as further information becomes available during the allocation period of up to 12 months from the acquisition date.

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 identifiable assets acquired and the estimated useful life of each class is presented in the table below for the five acquisitions:

The amounts of revenue, cost of revenue, gross profit, and loss from operations before income taxes of the five acquisitions included in the Company’s condensed consolidated statement of operations from the date of the acquisition for the three- and six-month periods ended June 30, 2024 is as follows:

The following unaudited pro forma financial information presents the combined operating results of the Company, Winter Garden, Georgia, California, Lakeland and Success 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 six-month periods ended June 30, 2024 and 2023:

Note 3 — Assets

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 condensed 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 of uncollectible accounts receivable is recorded to general and administrative expense.

Intangible Assets

Intangible assets consist of franchise agreements, agent relationships, real estate listings, and non-compete agreements, and are initially recorded at fair value. Long-lived intangible assets are amortized over their estimated useful lives in a method reflecting the pattern in which the economic benefits are consumed or amortized on a straight-line basis if such pattern cannot be reliably determined. The Company continues to assess potential triggering events related to the value of its intangible assets and concluded that there wereno indicators of impairment during the six months ended June 30, 2024.

The components of purchased intangible assets were as follows:

For the three and six months ended June 30, 2024, amortization expense was $254 thousand and $438 thousand, respectively. There wasno amortization expense in the three- and six-month periods ended June 30, 2023. Based on the intangible assets recorded at June 30, 2024, and assuming no subsequent additions or impairment of the underlying assets, the remaining estimated amortization expense is expected to be as follows:

Note 4 — Liabilities

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 classified certain liabilities based on the following fair value hierarchy:

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 condensed consolidated financial statements approximate fair value due to their short-term maturities.

The Company determined that the first warrants on the two Convertible Note transactions qualified as derivative liabilities and were recorded at fair value on the date of issuance and are re-measured at fair value each reporting period with the change reported in earnings. See Note 5 — Borrowings for additional information on the Convertible Note transactions.

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 three-month periods ended June 30, 2024 and 2023:

The following table provides a summary of changes in fair value associated with the Level 3 liabilities for the six-month periods ended June 30, 2024 and 2023:

The fair value of the derivative liability was computed using the Black Scholes model both when issued and on the balance sheet date. To determine the fair value, the Company incorporated transaction details such as the price of the Company’s common stock, contractual terms, maturity, and risk-free rates, as well as assumptions about future financings, volatility, probability of contingencies, and holder behavior. The fair value of the derivative liabilities on the issuance dates and the balance sheet date and the assumptions used in the Black-Scholes model are set forth in the table below.

Contract Liabilities and Performance Obligations

Contract liabilities consist of unsatisfied performance obligations related to annual dues received at the start of the calendar year. As of June 30, 2024, the Company has approximately $121 thousand of remaining performance obligations, all of which will be recognized into revenue by the end of the calendar year. The Company has elected to exclude disclosures regarding remaining performance obligations that have an original expected duration of one year or less.

Note 5 — 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 June 30, 2024 and December 31, 2023, no amount was drawn under the facility. The line of credit is collateralized by Company assets.

Economic Injury Disaster Loans

During the fourth quarter of 2023, the Company acquired two franchisees that had outstanding Economic Injury Disaster Loans (the “EIDL Loans”) in the aggregate of $263,000. During the first quarter of 2024, the Company acquired a franchise that had an outstanding EIDL Loan in the aggregate of $34,100. 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 2050 and bear interest at a rate of 3.75% per annum.

Total EIDL Loans are comprised of the following:

Future maturities of term debt as of June 30, 2024, were as follows:

Convertible Notes

On February 20, 2024, the Company entered into a 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 with a maturity date twelve months from the issue date. 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 second warrant to purchase 95,000 shares of the Company’s common stock with an exercise price of $2.25. The second warrant will only become exercisable if the note is not fully paid on or before the maturity date, at which point the warrant is exercisable until the five-year anniversary of the vesting date. The second 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 85% of the lowest volume weighted average price (VWAP) of the shares prior to five days of the conversion. 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. (“Alexander Capital”), a 5-year warrant to purchase 21,053 shares of the Company’s common stock at an exercise price of $1.50 per share.

On April 1, 2024, the Company entered into a securities purchase agreement with an accredited investor for the issuance of a senior secured promissory note with an aggregate principal amount of $1,316,000 with a maturity date twelve months from the issue date. 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 second warrant to purchase 152,300 shares of the Company’s common stock with an exercise price of $2.25. The second warrant will only become exercisable if the note is not fully paid on or before the maturity date, at which point the warrant is exercisable until the five-year anniversary of the vesting date. The second 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 85% of the lowest VWAP of the shares prior to five days of the conversion. 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.

The Company evaluated the terms of the securities purchase agreements and determined that the commitment shares and the first warrants are freestanding instruments. The Company determined the commitment shares are classified as equity, which are initially recorded at fair value with no subsequent remeasurement. The Company determined that the first warrants are classified as a derivative liability, which were initially recorded at fair value with changes in fair value recorded in earnings. The second warrants and certain terms within the debt notes are contingent upon certain possible events that are within the Company’s control. The Company determined that the contingencies are not probable and, as such, are not recorded as contingent liabilities.

The Company incurred issuance costs that were directly attributable to issuing the debt instruments in the amount of $346,248, which includes placement fees of $202,518 paid to Alexander Capital. Of the debt issuance costs, $326,879 was paid in cash and the remainder is the value of a warrant issued to Alexander Capital. The Company determined that the warrant issued to Alexander Capital is classified as equity. The issuance costs were not specifically related to any instrument within the transactions and, as such, were allocated in the same proportion as the proceeds were allocated to each of the debt transactions, the committed shares, and the warrants.

The convertible notes are comprised of the following:

The debt discount is reflected as a reduction on the outstanding liability and is being amortized as non-cash interest expense using the effective interest method over the term of the agreements. The Company accrued interest on the notes totaling $75,967 and recorded amortization of the debt discount totaling $48,582 during the three-month period ending June 30, 2024. The Company accrued interest on the notes totaling $90,922 and recorded amortization of the debt discount totaling $249,882 during the six-month period ending June 30, 2024.

Cash Advance Agreements

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. 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 were reflected as a reduction on the outstanding liability and were being amortized as non-cash interest expense using the effective interest method over the term of the agreement. The Cash Advance was fully repaid in January 2024. During the six months ended June 30, 2024, non-cash interest expense of $7,420 was recorded from the amortization of the debt discount.

On May 20, 2024, the Company entered into another standard merchant cash advance agreement (the “2024 Cash Advance”) with Cedar for the purchase and sale of future receipts pursuant to which the Company sold in the aggregate $761,250 in future receipts of the Company for $500,000. 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 $23,000 per week. In addition, the Company granted Cedar a security interest in all the Company’s accounts, including deposit accounts and accounts receivable and proceeds. The Company recorded a debt discount in the amount of $236,250 based upon the difference between the amount of future receipts sold and the actual proceeds received by the Company and debt issuance costs of $25,000. The debt discount and debt issuance costs were 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 three and six months ended June 30, 2024, non-cash interest expense of $62,801 was recorded from the amortization of the debt discount. As of June 30, 2024, the remaining gross balance of the Cash Advance was $646,250, with a remaining unamortized discount of $198,449, for a net balance of $447,801, which will be fully repaid by January 2025.

Note 6 — Commitments and Contingencies

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. 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. In addition, some of the entities acquired in the fourth quarter of 2023 and the first quarter of 2024 lease their offices from their former owners, who now hold a minority interest in those entities.

Lease costs for the three-month periods ended June 30, 2024 and 2023 were $212,955 and $101,975, respectively, and lease costs for the six-month periods ended June 30, 2024 and 2023 were $420,870 and $133,440, respectively. Lease costs are included in general and administrative expenses in the condensed consolidated statements of operations.

Supplemental cash flow information related to leases is as follows:

During the first half of 2024, the Company acquired five franchisees, four of which had remaining lease terms beyond twelve months, resulting in an increase of $333,509 in right-of-use assets and lease liabilities.

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 9.14%.

Future maturities on lease liabilities as of June 30, 2024, are as follows:

There were no leases with residual value guarantees.

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 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. A mediation has been scheduled for September 6, 2024.

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.

On July 19, 2024, LPT Realty, LLC commenced a civil action in the Ninth Judicial Circuit in Orange County, Florida against La Rosa Holdings Corp; Joseph La Rosa a/k/a Joe La Rosa; La Rosa Realty Lake Nona, Inc. n/k/a Nona Legacy Powered By La Rosa Realty, Inc.; & La Rosa Realty, LLC, seeking damages, reasonable royalty of all real estate transactions conducted by all the La Rosa defendants and injunctive relief for misappropriation of trade secrets as to all the defendants. The court ordered a mediation to take place within 45 days. The defendants filed a response to the complaint in the form of a motion to strike as sham, which is still pending.

On July 22, 2024, the Company’s subsidiary, Nona Legacy Powered by La Rosa Realty, Inc. commenced a civil action in the Ninth Judicial Circuit in Orange County, Florida against Olga Norkis Fernandez Valdez a/k/a Norkis Fernandez and LPT Realty, LLC. The plaintiff seeks monetary damages caused by Norkis Fernandez due to the breach of contract and breach of fiduciary duty by Ms. Fernandez as well as injunctive relief against Ms. Fernandez. The plaintiff also seeks damages against LPT Realty, LLC for tortious interference with a contractual relationship. The defendants were served their response is due in the end of August.

The Company believes that the above claims against the Company 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 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.

Warrants issued to two investors who loaned money to the Company, Emmis Capital II, LLC and the Company’s CEO, Joseph La Rosa, on November 14, 2022 and December 2, 2022, respectively, included full ratchet antidilutive protections. The original warrants each covered 50,000 shares at a strike price of $5.00. The February 20, 2024 debt raise transaction required the Company to issue a warrant to Alexander Capital with a strike price of $1.50 (the fair market value of the Company’s common stock at the time of issuance). In accordance with the full ratchet antidilutive terms, the warrants were adjusted to reflect the strike price of the warrant issued to Alexander Capital and the number of shares covered by each of the warrants increased to 166,667. The difference in the fair value between each warrant immediately before and after the trigger was, in aggregate, $230,667, which is considered a deemed dividend that increased the basic net loss per share for common stockholders for the six months ended June 30, 2024.

At June 30, 2024, warrants outstanding that have vested and are expected to vest are as follows:

Additional information with respect to warrant activity:

On February 20, 2024, the Company entered into a securities purchase agreement with an accredited investor for the issuance of a senior secured promissory note. As part of the transaction, the Company issued two warrants, the first gives the investor the option 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. The second warrant gives the investor the option to purchase 95,000 shares of the Company’s common stock with an exercise price of $2.25. The second warrant will only become exercisable if the note is not fully paid on or before the maturity date, at which point the warrant is exercisable until the five-year anniversary of the vesting date. The second warrant will be cancelled and extinguished if the note is fully paid on or before the note maturity date.

On April 1, 2024, the Company entered into a securities purchase agreement with an accredited investor for the issuance of a senior secured promissory note. As part of the transaction, the Company issued two warrants, the first gives the investor the option 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. The second warrant gives the investor the option to purchase 152,300 shares of the Company’s common stock with an exercise price of $2.25. The second warrant will only become exercisable if the note is not fully paid on or before the maturity date, at which point the warrant is exercisable until the five-year anniversary of the vesting date. The second warrant will be cancelled and extinguished if the note is fully paid on or before the note maturity date.

Under an agreement between the Company and the Company’s underwriter, Alexander Capital, the Company issued a warrant to Alexander Capital as a result of the issuance of the promissory note on February 20, 2024. The holder of the warrant has the right to purchase 21,053 shares of the Company’s common stock with an exercise price of $1.50, exercisable until the five-year anniversary of the grant date.

As of June 30, 2024 and December 31, 2023, there was no unrecognized expense related to warrants.

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 in the first half of 2024 and the assumptions used in the Black-Scholes model are set forth in the table below.

Note 8 — Stockholders’ Equity

Common Stock Issuances

On February 20, 2024 and April 1, 2024, the Company entered into securities purchase agreements with the same accredited investor for the issuance of senior secured promissory notes. As part of these transactions, the Company issued 67,000 shares and 50,000 shares, respectively, of the Company’s common stock as commitment fees. The value of the shares was allocated to the debt discount.

In February 2024, the Company executed a service agreement with a service provider for efforts to initiate the Company’s brokerage business in Texas. The Company issued 5,000 shares of the Company’s unregistered, restricted common stock to the service provider, which were issued on February 22, 2024 and valued at $1.32 per share resulting in $6,589 of stock-based compensation expense.

In September 2023, the Company executed a consulting agreement with a service provider to supply certain investor relations services post-IPO. The Company extended the agreement in March 2024 and issued 225,000 shares of the Company’s unregistered, restricted common stock, which were issued on March 13, 2024 and valued at $1.76 per share resulting in $396,000 of stock-based compensation expense.

In May 2024, the Company executed three consulting agreements with service providers to supply certain investor relations services post-IPO. As part of these agreements, the Company issued an aggregate of 260,000 shares of the Company’s unregistered, restricted common stock, which were issued on May 17, 2024 and valued at $1.20 per share resulting in $312,000 of stock-based compensation expense.

During the first half of 2024, the Company purchased five of the Company’s franchises. The purchase price for all of these entities were settled by the issuance of an aggregate of 1,117,737 unregistered, restricted shares of the Company’s common stock. See Note 2 — Business Combinations for additional information.

Stock Option Awards

For the three-month period ended June 30, 2024, the Company recorded stock-based compensation for employee options of $162 thousand. There was no stock-based compensation for options for the three-month period ending June 30, 2023. For the six-month periods ended June 30, 2024 and 2023, the Company recorded stock-based compensation for employees awards of $2.950 million and $46 thousand, respectively. The Company did not realize any tax benefits associated with share-based compensation for the three- and six-month periods ended June 30, 2024 and 2023, as the Company recorded a valuation allowance on all deferred tax assets.

At June 30, 2024, 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 of stock options granted in the first half of 2024 and the assumptions used in the Black-Scholes model are set forth in the table below.

As of June 30, 2024, unrecognized compensation expense related to stock option awards totaled $74,729. As of December 31, 2023, there wasno unrecognized compensation expense related to stock option awards.

Restricted Stock Units

On February 1, 2024, a Restricted Stock Unit (“RSU”) covering 4,000 shares granted to the Company’s Chief Technology Officer (“CTO”) vested. The Company withheld 1,187 shares to cover payroll tax withholding and issued 2,813 shares to the executive. The Company also granted a new RSU to the CTO on February 1, 2024, which will vest on the first anniversary of the grant.

For the three-month periods ending June 30, 2024 and 2023, the Company recorded $2,871 and $4,987, respectively, of share-based compensation expense related to the RSUs. For the six-month periods ending June 30, 2024 and 2023, the Company recorded $5,514 and $28,165, respectively, of share-based compensation expense related to the RSUs. As of June 30, 2024, unrecognized compensation expense related to the awards was $43,488. The Company did not realize any tax benefits associated with share-based compensation for the three- and six-month periods ended June 30, 2024 and 2023, as the Company recorded a valuation allowance on all deferred tax assets.

Note 9 — 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, options and RSUs, 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. Two outstanding warrants covering the Company’s common stock included full ratchet antidilutive features. The features were triggered during the first quarter of fiscal year 2024, reducing the strike price for both warrants from $5.00 to $1.50 and the number of shares increased from 50,000 to 166,667. The difference in the fair value between each warrant immediately before and after the trigger, in aggregate, was $230,667, which is considered 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 10 — 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 condensed consolidated financial statements. The following represents the information for the Company’s reportable segments for the three and six months ended June 30, 2024 and 2023, 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 three and six months ended June 30, 2024 and 2023, respectively.

Note 11 — Subsequent Events

Debt Issuance

On July 16, 2024, the Company entered into a securities purchase agreement with the same accredited investor for the capital raise on February 20, 2024 and April 1, 2024, for the issuance of a senior secured promissory note with an aggregate principal amount of $468,000 with a maturity date twelve months from the issue date. The note has an original issue discount of 5% and a coupon rate of 13% per annum. In addition, the Company issued 29,800 shares of the Company’s common stock as a commitment fee, a warrant to purchase 53,700 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 second warrant to purchase 54,200 shares of the Company’s common stock with an exercise price of $2.25. The second warrant will only become exercisable if the note is not fully paid on or before the maturity date, at which point the warrant is exercisable until the five-year anniversary of the vesting date. The second 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 85% of the lowest VWAP of the shares prior to five days of the conversion. 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.

Debt Conversion to Common Stock

During July 2024, the accredited investor holding the February 20, 2024 senior secured promissory note decided to convert all accrued and unpaid interest and a portion of the principal into common stock. The Company issued 98,893 shares of common stock, which reduced accrued interest and principal of $59,986 and $52,265, respectively.

Equity Issuance

On August 7, 2024, the Company entered into a securities purchase agreement with an institutional accredited investor, Brown Stone Capital Ltd., a corporation organized under the laws of England and Wales, pursuant to which the Company agreed to issue and sell to the Buyer, upon the terms and conditions set forth in the securities purchase agreement, up to 3,051,336 shares of the Company’s common stock and pre-funded warrants to purchase shares of common stock at a price equal to $0.59 per share. The first closing took place on August 12, 2024, and the Company issued 761,689 shares of common stock and a pre-funded warrant to purchase 509,498 shares of common stock. The Company received net proceeds of $725,000 after deducting offering expenses.