Splash(SBEV) - 2023 Q1 - Quarterly Report

PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements and accompanying notes for the company Condensed Consolidated Balance Sheets Total assets and stockholders' equity decreased, driven primarily by a reduction in cash and inventory | Metric | March 31, 2023 | December 31, 2022 | | :----------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $2,145,797 | $4,431,745 | | Accounts receivable, net | $2,190,681 | $1,812,110 | | Inventory | $3,144,793 | $3,721,307 | | Total current assets | $8,897,670 | $10,657,574 | | Total assets | $15,348,895 | $17,304,703 | | Total current liabilities | $4,899,980 | $4,965,584 | | Total liabilities | $7,755,441 | $7,982,569 | | Total stockholders' equity | $7,593,454 | $9,322,134 | Condensed Consolidated Statements of Operations and Comprehensive Loss Net revenues grew significantly, and despite higher costs, the company's net loss narrowed year-over-year | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net revenues | $5,822,727 | $3,926,573 | | Cost of goods sold | $(4,061,228) | $(2,635,310) | | Gross profit | $1,761,499 | $1,291,263 | | Total operating expenses | $5,216,420 | $6,975,215 | | Net loss | $(3,729,299) | $(5,994,408) | | Basic and dilutive loss per share | $(0.10) | $(0.16) | - Net revenues increased by $1,896,154 (48.3%) for the three months ended March 31, 2023, compared to the same period in 2022[16][111] - Net loss decreased by $2,265,109 (37.8%) for the three months ended March 31, 2023, due to higher sales and lower operating expenses[16][113] Condensed Consolidated Statement of Changes in Shareholders' Equity Stockholders' equity declined due to a net loss, partially offset by an increase in additional paid-in capital | Metric | March 31, 2023 | December 31, 2022 | | :----------------------------- | :------------- | :---------------- | | Common Shares Outstanding | 41,085,520 | 41,085,520 | | Additional paid-in capital | $123,634,774 | $121,632,546 | | Accumulated deficit | $(116,060,325) | $(112,331,026) | | Total stockholders' equity | $7,593,454 | $9,322,134 | - Additional paid-in capital increased by $2,002,228, including from a convertible promissory note and share-based compensation[18] - The accumulated deficit increased by $3,729,299 due to the net loss for the quarter[18] Condensed Consolidated Statements of Cash Flows Cash from operations was negative, while financing activities provided a net inflow, resulting in a net decrease in cash | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(4,103,827) | $(4,675,886) | | Net cash used in investing activities | $(10,571) | $0 | | Net cash provided by financing activities | $1,830,059 | $8,765,600 | | Net change in cash and cash equivalents | $(2,285,948) | $4,314,289 | | Cash and cash equivalents, end of period | $2,145,797 | $8,495,672 | - Net cash used in operating activities decreased by $572,059, primarily due to changes in working capital[21][117] - Financing activities in Q1 2023 included $2,000,000 from a convertible note and $200,000 from a shareholder advance[21][119] Notes to the Condensed Consolidated Financial Statements This section details the company's accounting policies, financial instruments, and going concern status Note 1 – Business Organization and Nature of Operations The company acquires and develops beverage brands, utilizing a comprehensive US distribution system and e-commerce - Splash Beverage Group's core business involves identifying, acquiring, and building early-stage or under-valued beverage brands[24] - The company's distribution system is comprehensive in the US and is expanding to select international markets[24] - Qplash, a division of Splash, provides e-commerce access for B2B and B2C customers for direct beverage delivery[24] Note 2 – Summary of Significant Accounting Policies This note outlines key accounting policies and highlights substantial doubt about the company's ability to continue as a going concern - The financial statements are prepared in accordance with U.S. GAAP and SEC interim reporting requirements[25] - The company's investment in Salt Tequila USA, LLC is carried at cost less impairment[28] - Revenue is recognized upon delivery of products to the customer, net of returns and allowances[45] - The company has incurred significant losses, with a net loss of $3.7 million and an accumulated deficit of $116.1 million as of March 31, 2023, raising substantial doubt about its ability to continue as a going concern[67][70] Note 3 – Notes Payable, Related Party Notes Payable, Convertible Bridge Loans Payable, Revenue Financing Arrangements and Bridge Loan Payable Total notes payable increased significantly due to a new convertible note issued in February 2023 | Metric | March 31, 2023 | December 31, 2022 | | :----------------------------- | :------------- | :---------------- | | Total notes payable | $7,144,900 | $5,514,841 | | Less notes discount | $(3,437,072) | $(1,898,265) | | Less current portion | $(1,275,540) | $(1,080,257) | | Long-term notes payable | $2,432,288 | $2,536,319 | - In February 2023, the company entered into a $2,000,000 twelve-month convertible loan[74] - Interest expense on notes payable was $167,121 for the three months ended March 31, 2023, up from $81,700 in the prior year period[74] Note 4 – Licensing Agreement and Royalty Payable The company holds licensing agreements for the 'TapouT' brand and manufacturing process patents - The company pays a 6% royalty on net sales for the 'TapouT' brand, with minimum monthly payments of $55,000 in 2023[77] - Guaranteed minimum royalty payments of $165,000 were paid for the three months ended March 31, 2023[78] - A license for manufacturing process patents is amortized at approximately $31,000 annually until 2027[79] Note 5 – Stockholders' Equity This note details changes in stockholders' equity, including a private placement and stock option grants - In February 2023, the Board approved a private placement offering of 2,000,000 common shares at $1.00 per share, generating $2,000,000 in gross proceeds[80] - The 2020 Stock Incentive Plan increased available shares by 2,054,276 at January 1, 2023, through its 'evergreen' feature[83] - 65,000 stock options were granted to new employees during the quarter with a fair value of $149,999[84][85] - The company has an obligation to issue 1,500,000 restricted shares related to a convertible note and 100,000 shares for services[86][88] Note 6 – Related Parties The company has related party payables for services provided by the CEO, who also guarantees a note payable - Related party payables arise from services provided by the CEO or company expenses paid by the CEO[90] - A note payable with a balance of $876,836 at March 31, 2023, is guaranteed by a related party (the CEO)[91] Note 7 – Investment in Salt Tequila USA, LLC The company holds a 22.5% ownership interest in SALT Tequila USA, LLC and has a distribution agreement - The company has a 22.5% ownership interest in SALT Tequila USA, LLC, carried at cost less impairment[92] - A marketing and distribution agreement exists with SALT for the manufacturing of the company's Tequila product line[92] - The company has the right to increase its ownership in SALT to 37.5%[92] Note 8 – Leases The company has operating lease agreements for real estate and office space with mainly fixed payments - Operating lease expense was $93,328 for the three months ended March 31, 2023[96] | Undiscounted Future Minimum Lease Payments | Operating Lease | | :----------------------------------------- | :-------------- | | 2023 (Nine months remaining) | $214,202 | | 2024 | $252,000 | | 2025 | $252,000 | | Total | $718,202 | | Total operating lease liability | $673,907 | | Current portion of operating lease liability | $250,734 | | Operating lease liability, non-current | $423,173 | - The remaining term on leases ranges from 1 to 33 months, with an incremental borrowing rate of 5.0%[97] Note 9 – Segment Reporting The company operates in two segments, with the e-commerce segment generating higher revenue and contribution - The company has two reportable operating segments: Splash Beverage Group and E-Commerce[100] | Metric | March 31, 2023 | March 31, 2022 | | :------------------------------------ | :------------- | :------------- | | Revenue, net: | | | | Splash Beverage Group | $1,898,968 | $1,478,158 | | E-Commerce | $3,923,759 | $2,448,415 | | Total revenues, net | $5,822,727 | $3,926,573 | | Contribution after Marketing: | | | | Splash Beverage Group | $(286,929) | $(459,775) | | E-Commerce | $1,311,602 | $1,030,059 | | Total contribution after marketing | $1,024,673 | $570,283 | | Total assets: | | | | Splash Beverage Group | $12,801,083 | $14,723,553 | | E-Commerce | $2,547,812 | $2,581,150 | | Total assets | $15,348,895 | $17,304,703 | Note 10 – Commitment and Contingencies Management does not expect current legal proceedings to have a material adverse effect on the business - The company is a party to asserted claims and subject to regulatory actions in the ordinary course of business[104] - Management does not anticipate a material adverse effect on its business from these proceedings[104] Note 11 – Subsequent Events After the quarter, the company issued common stock, granted options, and received funds from a private placement - On May 2, 2023, the company issued 1,500,000 shares of common stock related to a convertible promissory note[105] - The company granted 500,000 options to Board Directors in April and May under the 2020 plan[105] - In May 2023, the company received approximately $0.8 million from a private placement of convertible notes, part of an $8.0 million agreement[106] ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses the company's financial performance, highlighting revenue growth, a reduced net loss, and liquidity challenges Business Overview The company acquires and develops beverage brands, leveraging its US distribution network and e-commerce division - Splash Beverage Group identifies, acquires, and builds early-stage or under-valued beverage brands with strong growth potential[109] - The company's distribution system is comprehensive in the US and is expanding to select international markets[109] - Qplash, the company's division, offers B2B and B2C e-commerce access for direct beverage delivery[109] Results of Operations for the Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022 The company's revenue increased substantially, leading to improved gross profit and a significantly reduced net loss Revenue Revenues grew 48.3%, driven by strong performance in both beverage sales and the Qplash e-commerce platform | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change ($) | Change (%) | | :------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Revenues | $5,822,727 | $3,926,573 | $1,896,154 | 48.3% | - Beverage sales increased by $420,810, with TapouT and Copa di Vino being the largest contributors[111] - Qplash e-commerce revenues increased by $1,475,344 (60%), driven by expanded territory and new products[111] Cost of Goods Sold Cost of goods sold increased due to higher sales volumes and a shift in product mix toward lower-margin items | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change ($) | | :--------------- | :-------------------------------- | :-------------------------------- | :--------- | | Cost of goods sold | $4,061,228 | $2,635,310 | $1,425,918 | - The increase in cost of goods sold is primarily due to increased sales and a product mix shift in the e-commerce business[112] Operating Expenses Operating expenses decreased significantly due to lower non-cash expenses, resulting in a reduced net loss | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Change ($) | | :--------------- | :-------------------------------- | :-------------------------------- | :--------- | | Operating expenses | $5,216,420 | $6,975,215 | $(1,758,795) | | Net loss | $(3,729,299) | $(5,994,408) | $2,265,109 | - The decrease in operating expenses was primarily due to lower non-cash expenses[113] Net Other Income and Expense Interest expense increased, while the company recognized other income from an insurance settlement | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------- | :-------------------------------- | :-------------------------------- | | Interest expense | $167,121 | $85,879 | | Other income | $140,404 | $0 | | Amortization of debt discount | $247,661 | $0 | - Other income of $140,404 was related to an insurance settlement[114] LIQUIDITY, GOING CONCERN CONSIDERATIONS AND CAPITAL RESOURCES The company's cash position decreased, and historical losses raise substantial doubt about its ability to continue as a going concern | Metric | March 31, 2023 | December 31, 2022 | | :------------------------------------------ | :------------- | :---------------- | | Cash and cash equivalents | $2,145,797 | $4,431,745 | | Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash used for operating activities | $(4,103,827) | $(4,675,886) | | Net cash provided by financing activities | $1,830,059 | $8,765,000 | - The company has a history of significant losses, raising substantial doubt about its ability to continue as a going concern[121] - Additional equity or debt capital is needed to fund operations, which will likely be dilutive to existing stockholders[121] CONTRACTUAL OBLIGATIONS The company has obligations to issue shares and make minimum royalty payments for the remainder of 2023 - The company had an obligation to issue 1,500,000 shares related to a private placement, which was fulfilled in May 2023[122] - An obligation exists to issue 100,000 shares to a consultant for services provided[122] - Minimum royalty payments to ABG TapouT, LLC are $495,000 for the remaining nine months of 2023[123] Off-Balance Sheet Arrangements The company does not have any off-balance sheet arrangements likely to have a material effect on its financial condition - The company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on its financial condition or operations[124] ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a Smaller Reporting Company, these disclosures are not required - Disclosure about market risk is not required for Smaller Reporting Companies[126] ITEM 4: CONTROLS AND PROCEDURES Management concluded that disclosure controls were ineffective due to material weaknesses in internal controls Evaluation of Disclosure Controls and Procedures Disclosure controls were deemed ineffective due to a lack of segregation of duties and insufficient accounting personnel - Disclosure controls and procedures were not effective as of March 31, 2023[127] - Material weaknesses include a lack of segregation of duties and insufficient in-house accounting personnel for complex transactions[127] Changes in Internal Control Over Financial Reporting No material changes to internal controls occurred during the quarter, but the company plans to engage additional staff - No additional material changes in internal control over financial reporting occurred during the quarter[129] - The company plans to engage additional staff or an advisory firm to strengthen its control environment[128] PART II: OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The company reported no legal proceedings for the period - There are no legal proceedings to report[131] ITEM 1A: RISK FACTORS No new risk factors have been identified since the latest Annual Report on Form 10-K - No new risk factors have been noted since the Annual Report on Form 10-K for the year ended December 31, 2022[132] ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported no unregistered sales of equity securities for the period - There were no unregistered sales of equity securities and use of proceeds to report[133] ITEM 3: DEFAULTS UPON SENIOR SECURITIES The company reported no defaults upon senior securities for the period - There were no defaults upon senior securities to report[134] ITEM 4: MINE SAFETY DISCLOSURES No disclosure regarding mine safety is required for the company - No mine safety disclosure is required[135] ITEM 5: OTHER INFORMATION The company reported no other information for the period - There is no other information to report[136] ITEM 6: EXHIBITS This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications - Exhibits include certifications of the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[139] - XBRL Exhibits are also included[139] SIGNATURES The report is duly signed by the company's CEO and CFO as of June 5, 2023 - The report is signed by Robert Nistico, Chairman and CEO (Principal Executive Officer)[142] - The report is signed by Ronald Wall, CFO (Principal Accounting Officer and Principal Financial Officer)[142]