LQR House Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The filing was signed November 16, 2023. LQR House develops alcohol brands and provides marketing services, with sales and marketing operations substantially tied to the CWS e-commerce platform.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $170,511 | $129,567 | $512,096 | $232,792 |
| Gross profit (loss) | $7,619 | $40,027 | $110,246 | $(373,767) |
| Gross margin | 4% | 31% | 22% | (161%) |
| Operating expenses | $5,377,847 | $491,251 | $9,359,039 | $1,325,717 |
| Net loss | $(5,541,228) | $(451,224) | $(9,419,793) | $(1,699,484) |
| Net loss per share, basic and diluted | $(0.47) | $(0.05) | $(0.98) | $(0.19) |
Q3 service revenue fell 22% year over year to $101,414; product revenue was $69,097, versus none in Q3 2022, following delivery of a SWOL Tequila batch to CWS. Nine-month service revenue rose to $395,212 from $232,792, and product revenue was $116,884. The company attributed the nine-month gross-profit improvement mainly to lower service costs, while Q3 gross margin declined as costs grew faster than revenue.
General and administrative expense reached $4.80 million in Q3 and $8.68 million for nine months. The company recorded $5.55 million of non-cash stock compensation for shares issued for services during the nine-month period, including $2.55 million in Q3. Sales and marketing expense was $574,026 in Q3 and $674,213 for nine months. Nine-month interest expense was $171,000.
Financial position, cash flow and capital
- At September 30, cash and cash equivalents were $1.864 million, total assets $5.386 million, current liabilities $664,000, total liabilities $666,414 and stockholders’ equity $4.719 million. Current assets included $1.296 million of prepaid expenses.
- Operating cash outflow for the first nine months was $4.569 million, compared with $1.035 million in 2022. Investing activities provided $137,426; financing activities provided $6.288 million. Ending cash increased by $1.856 million from year-end 2022.
- The company borrowed $950,000 at 18% interest in August and September; principal and $171,000 accrued interest were converted into 2,550,622 shares on September 27. No note payable remained on the September 30 balance sheet.
- The August 2023 IPO raised $5.75 million gross and approximately $4.5 million net. Subsequent public offerings closed in October and November, raising approximately $15.5 million gross and $15.0 million net combined. These offerings materially increased the share count: the filing reports 201,919,966 shares issued and 201,840,656 outstanding as of November 16, versus 16,356,056 issued and 16,276,746 outstanding at September 30.
Changes, outlook and notable matters
- The nine-month net loss increased substantially from 2022, principally reflecting higher operating expenses and share-based compensation. The company remains early-stage, reports limited revenue and has not achieved its planned operating level.
- Going concern: Management says cash may not be sufficient for at least one year to fund operating expenses and acquisition plans, despite the subsequent offerings. Continued operations depend on generating cash or obtaining further financing; the filing provides no assurance these efforts will succeed.
- Concentration and related parties: Marketing revenue depends on the CWS relationship and marketing license agreement with Ssquared Spirits, both with links to company insiders. The company also identified reliance on a small number of vendors. Related-party balances included $141,285 in receivables and $177,340 in advances at quarter-end.
- Post-quarter platform arrangements: In November, a wholly owned subsidiary acquired the CWS Platform domain and related rights from Ssquared for $10,000. The company also entered a 10-year management agreement with KBROS, providing for a $40,000 monthly fee plus revenue-based payments, subject to a $5 million annual cap on additional payments. The CEO owns 50% of Ssquared; a board special committee was formed to review certain transactions involving entities owned or controlled by him.
- The board authorized repurchases of up to 20% of the company’s common stock or $2.0 million. It bought back 79,310 shares for $93,464 during the quarter. The filing warns repurchases may affect share price, liquidity and funds available for other uses.
- Controls: Management reported disclosure controls and procedures were ineffective at the reasonable-assurance level, citing inadequate segregation of duties and a material weakness related to limited staffing. A later sentence in the filing describes the controls as effective, creating an internal inconsistency that investors should clarify.
- No earnings guidance or quantified forward revenue targets are provided. Management describes strategies including expanding SWOL, collaborative marketing and opportunistic acquisitions.
Important facts for investors to verify
- Cash runway and funding needs after the October and November offerings, considering management’s stated going-concern uncertainty and acquisition plans.
- Post-offering dilution, including the new shares and underwriter warrants, and the effect of the low-priced November issuance.
- Economics and governance of the CWS/Ssquared and KBROS arrangements, including related-party conflicts and the management fees.
- The scale and recurrence of stock-based compensation and other public-company expenses relative to revenue.
- Management’s intended remediation of the disclosed segregation-of-duties weakness and the contradictory controls statements.