Splash Beverage Group, Inc. Q2 FY2024 Earnings Call

Greetings and welcome to the Splash Beverage Group Second Quarter Conference Call. I will now hand the call over to Robert Nistico, Chairman and CEO of Splash Beverage Group. You may start.

Thank you very much. Hi, everybody. Thank you for joining us. This is Robert Nistico, CEO of Splash Beverage Group. Also with us today, we have Julius Ivancsits, our CFO; and of course, Bill Meissner, our President and Chief Marketing Officer, on the call as well, and each will be speaking with respect to their individual responsibilities. Honestly, many of you haven't had much exposure to Julius because he's only been with us for about four months now, but we're thrilled to have him. He's been a tremendous addition to the team. And Bill, of course, has been with us for a number of years, and he is truly one of the best presidents and marketing people I've ever worked with. So you'll have a chance to hear from them and ask questions as we get into this. Today, we'll be discussing the company's financial performance, key developments providing insights into what the result means for the future, with 'future' being the key word. We have a formal dialogue to follow here, but we're going to try and keep it as informal as possible. And then, of course, we'll open the web portal up for questions when we're done. Six basic topics today briefly on Q2 and H1 results. We all know what they are, so we're really more interested in how we're moving forward now, which we're very excited about. Distribution and brand strategy is super important as we move forward into the second half of the year and into next year. Capital structure and financing update, really a key subject as we're moving into the back half of the year again. Of course, financial outlook for the next 18 months. We also want to talk about mergers and acquisitions. That's a key part of our narrative. And of course, we'll have a Q&A session. Alright, just a really brief, super high-level overview on the quarter. We reported revenue of $1.05 million, which is very light compared to 1.5 million in the first quarter and, of course, $5 million last quarter. The sales decline was attributed 100% to limited liquidity; it prevented us from procuring inventory for Qplash and frankly supporting the chain authorizations we've received recently. So we're going to address all this in great detail shortly. The net loss came in at $5.3 million, basically $0.11 per share, compared with 13% in Q2 last year, 2023. So that's kind of our look in the rearview mirror. We're going to talk a lot about financing and liquidity as we move forward. So now I'm going to turn it over to Julius for a more detailed review of the financial performance, and Julius, it’s all yours.

Okay. Thank you, Robert. I just want to dive a little bit deeper into the financials. For revenue, as Robert mentioned, revenue was just over $1 million for the quarter, and that was down compared to the nominal sales at Qplash. It's important to note that our sales performance wasn't only affected at Qplash due to liquidity, but also on our Copa di Vino brand due to the lack of liquidity that prevented us from procuring enough wine to fulfill all of our orders and carry a $250,000 backlog from June into July. So the demand was strong for the brand, and Bill will dive deeper into that. On the gross margin side, the margins actually improved from the prior quarter. We made about $244,000 in gross profit compared to $164,000 in the prior quarter. We expanded our gross margins by 12%, from 11% in Q1 to 23% in Q3, attributable to lower raw material costs versus the prior period. Given our liquidity challenges, we really focused on managing our SG&A spending, which was $2.6 million in the quarter, 9% lower than in Q1 and 52% lower than Q2 last year. Given the limited liquidity, the business was diligent on managing our spending across the board, from travel and entertainment to sales and marketing and then backfilling individuals who left through natural attrition. A couple more points here: EBITDA for the period was a loss of $2.6 million, which was actually an improvement of $300,000 from Q2 and half of what the loss was in Q2 2023. Regarding stock-based compensation in Q2 versus Q1, net loss was actually flat at $4 million from the prior quarter and a $600,000 improvement from a year earlier. Lastly, liquidity was tight for the period, and we had nominal cash at the end of the quarter. But if you back it up a bit, collections were solid for the period as we actively managed that. Additionally, inventory levels were down $100,000 from the prior quarter as anything we procured was effectively immediately consumed. Even with our light liquidity situation, current liabilities were unchanged from Q1 to Q2. We managed everything as effectively as we could given the liquidity challenges we faced. I'll turn it over to Bill, who can discuss some of the commercial trends, distribution wins, brand strategies, and product development updates.

Thanks, Julius. Indeed, while inventory shortages hindered our commercial results for the quarter, we had numerous successes to build sales momentum into the balance of 2024 and '25. One key point is that demand for our products was measured by orders coming into the system, which were 20.1% higher than Q2 2023. The inventory funding challenges were simply the reason the orders didn't get out, but order demand was significantly greater year-over-year and continues to grow in size and intensity. Pulpoloco was expanded to all Sea World Parks & Entertainment venues across California, Florida, Pennsylvania, Virginia, and Texas. Copa di Vino and Pulpoloco received authorization from Chevron's ExtraMile convenience stores across 650 stores in 6 states. Copa di Vino and Pulpoloco also received expansion into 300 Murphy Oil USA stores across 7 states. Copa di Vino received authorization from ampm convenience stores, up to 1,100 stores across several states, making it one of the larger chains in the United States. We executed a successful launch of Copa di Vino's new four-pack in a test at 28 Walmart stores in Tampa, Florida, which we're very excited about and performing well. It's our hope to be expanded into Walmart as we progress in that test. We launched a test in Walgreens in 59 stores in the greater Las Vegas area, which is also performing well, and we expect to continue to grow with Walgreens following the test. We expanded coverage for all brands into Colorado with Legacy Distribution. The bulk of the category is really in straight Blanco tequilas, and we have become the go-to flavor tequila brand, positioning us tightly in that market. From a momentum perspective, this was a very successful quarter that will bolster our results for the second half of the year despite the headwinds we faced regarding liquidity and inventory. Our sales team remains focused on our ever-growing national distribution network, and high-quality distributors and retailers remain enthusiastic for our brands and the innovation to come. I'll now turn it back to Robert, who will provide an update on our capital structure.

Thanks, Bill. That’s great information. Good work, everyone. The key takeaway is that despite facing serious liquidity challenges, this team did not become stagnant. We made significant progress with almost no funds. While we are organizing our financing strategies, we have achieved a lot to prepare for the incoming funds, which started coming in as of yesterday. This positions us to take advantage of that momentum and begin increasing revenue as we approach December and next year. The number of authorizations is impressive, and the efforts of the sales and marketing team deserve recognition. We want to acknowledge their hard work with limited resources. It’s important to clarify how we ended up in this situation. Companies sometimes encounter cash flow problems. We had a signed deal and proof of funds from a European group, but unfortunately, that deal did not materialize for reasons beyond our control. Thankfully, we are not dependent on a single option, so we had backups. However, another group from Florida also failed to secure their funding. We worked hard to find capital through investment banks, which can be costly in terms of dilution. The positive news is that we have retired one of those debts, initially $2.4 million, and that burden is now lifted. We needed those funds, and sometimes you have to make do with what is available. I’m pleased to announce that we have an agreement with a group from Rochester, New York, made up of high-net-worth individuals managed by Capitol Securities and Rochester Wealth Management. We have a formal agreement for a private placement with them. This morning, we shared some early results of that effort. We have secured the first tranche, which is about half of the needed funds, and we will need to file an 8-K shortly. Money is continuing to come in. We plan to proceed in two tranches, with a possibility of a third, although I won’t confirm that yet. The second tranche has signed documents for about two-thirds of the total. We are confident and pleased that funds are coming in, and with the efforts of the sales and marketing team, we will be able to utilize that capital effectively. Additionally, Julius has been working diligently on an Asset-Based Lending facility, which will give us extra liquidity as soon as the funds arrive. The last few quarters have been tough. Personally, I invested additional funds into the business because I believe in our vision. We have also received support from some of our long-time investors. We financed through accounts receivable and other avenues. We’re past that now and it's time to move forward. Now, I’ll turn it over to Julius to discuss the outlook for the remainder of 2024 and into 2025.

Okay. Thank you, Robert. I want to pivot to what has occurred and just really look ahead at a promising future for Splash. The projections I'm referring to exclude any acquisitions and are based upon the financing we received yesterday and will receive in the next couple of weeks. From a revenue guidance standpoint, management expects revenue to be in the range of $9 million to $10 million for the full year of 2024 and $38 million to $42 million for 2025. This will be driven by organic growth in our Copa di Vino and Pulpoloco brands, along with the restart of our Qplash e-commerce platform. While we will discuss M&A later, any acquisitions made would be accretive to these figures. On gross margins, I expect them to land in the high 20s for the full year of 2024, moving up about 10 percentage points to the high 30s in 2025, driven by operational efficiencies and procurement savings. Regarding EBITDA, I project a loss of around $9 million for 2024. However, based on our current strategy, I expect that we will achieve positive EBITDA by late Q2 2025 or early Q3 2025. These financial projections will be supported by our strategic initiatives. This is the first time we've gone public with our Project White Hat. We have five strategic pillars: the first focused on sustainable and profitable growth; the second on operational excellence; the third on our e-commerce platform Qplash; the fourth on bolt-on acquisitions; and finally, our capital structure. Project White Hat aims to lead the company towards positive cash flow from operations and positive EBITDA, without relying on any acquisitions. Cost reductions and expected organic growth will help us achieve this. It is essential for Splash Beverage Group to strengthen its capital position and restructure its operations to ensure a path towards achieving positive cash flow. Project White Hat provides a strategic plan to focus on optimizing our operating footprint to support our growth cycle and prepare for potential M&A. To elaborate on the strategic pillars, Splash has successfully expanded its distribution and product offerings, much of which Bill pointed out, which will create momentum for the rest of this year into the next. As we overcome liquidity challenges, we can invest strategically in our tequila lines and enhance our advertising and promotion spending on Copa di Vino and Pulpoloco brands. I've previously noted the expected gross margin expansion, which should exceed significant cost savings through contract manufacturing, strategic raw material procurement, and freight savings programs. These initiatives, combined with increased sales, will allow us to reach our procurement savings targets and gross margin expansion. With our balance sheet being recapitalized, we will have the liquidity needed to procure inventory for our e-commerce platform. Year-to-date sales in 2024 for Qplash have been nominal, but we plan to relaunch it soon, expecting sales in the low to mid-20s million range in 2025. Finally, on the topic of bolt-on acquisitions, I want to remind everyone that Splash was founded on the concept of a diversified portfolio of beverage brands. Our strategic pillar for acquisitions aims to execute our M&A strategy. Robert will elaborate on this later. In summary, this is our outlook on Project White Hat, and I will now turn it back over to Robert for an M&A update.

Julius, could you please go a little deeper into how Qplash will work? Because it sounds like a significant jump in numbers, and I want to ensure people understand why that's realistic.

Yes, sure. So essentially, you're selling through Amazon as a reseller. It's a really fantastic business model where you're effectively buying inventory and selling it on a cost-plus basis. For those who may not know, we only have four individuals supporting that business, meaning our overhead is very low, and the turnaround time on orders is quite fast. In the past, we used to do around $4 million to $4.5 million a quarter in Qplash when liquidity wasn’t an issue. So this isn't a very large stretch to get back to that performance. We will need a couple of months to reach that point, but it's a well-developed business model that has proven effective previously. The beauty of this model is the cash conversion cycle is excellent; you procure inventory and receive payment in about 5 to 10 business days.

Yes. Okay, great. It's a fantastic platform for us. Essentially, it's virtually cash flow neutral, if not positive, by the middle of next year. Thanks for that. Now, regarding the M&A update, we've been working on Western Son Vodka for some time. It's been a productive exercise because it's a strong group of people, and we will work exceptionally well together once we finalize the acquisition. Our intention is to close this deal hopefully by the end of the year, but it may roll into early January. We structured the raise like this: it's a blend of long-term debt and equity, around $75 million total. Three-quarters of that, about $50 million, is long-term debt, with the remaining $25 million being from an equity partner. We must be cautious as we cannot disclose many names publicly yet, but we have hard estimates. Recently, a new player, who is worth about $3 billion, has shown interest from both the debt and equity sides. This is promising news. It's still early, but I will keep you updated as it progresses. The M&A piece is crucial, and I also want to talk a little about our philosophy. The Splash platform was always designed to be an acquisition and exit strategy. We never intended it to be an incubation platform. We have another potential acquisition in the pipeline, but I won't reveal details today as we are not yet ready to announce it. It’s a great example of a regional brand that has proven itself; they have a solid footing in a specific geography which we can accelerate using our distribution expertise. Right before our liquidity challenges, we were positioned perfectly; regrettably, we had to pause for a couple of quarters. Now, as we move forward, this proposed acquisition is a prime example of our forward momentum. We can leverage geographical targeting and make strategic marketing investments that fit the brand's needs based on factors such as geography and season. Our distribution capability, which sets us apart, will act as our competitive advantage, and we are genuinely excited about the future of M&A as we move ahead. We’re not attempting to become the next DIAGEO; we aim to be the most efficient and profitable version of ourselves, ultimately enhancing shareholder value. With that said, I'm eager about the potential of Western Son and possibly this other unnamed opportunity. Let's open the floor to questions.

Thank you for your attention. We are looking forward to discussing the potential of Western Son and another opportunity we have in mind. Now, I would like to invite any questions you may have.

Alright, it seems we have our first question. It's for Julius. Can you please explain further about the operational excellence you mentioned, particularly how we achieve profitability with this current raise by the middle of next year?

Sure. The raise gives us liquidity to procure raw materials, which is crucial. One of our highest cost items is freight, and we are pursuing adding 3PLs to optimize our shipping routes. This will not only drive costs down but also reduce our cash conversion cycle. We are looking at ways to buy more efficiently, purchasing wine at a 10% to 20% discount. Currently, due to our tight liquidity, we've been forced to buy on a hand-to-mouth basis and miss out on volume discounts. We're evaluating all aspects of our operations, from packaging to labels, to identify areas for potential cost savings and efficiencies.

Here's a question for me; regarding Western Son, what's taken so long? Is the deal at risk? Yes, that's correct. The main issue has been securing the financing. Additionally, in the spirits industry, you must also consider COLA waivers and licensing. It isn't a quick process. That said, I believe we've finally found the proper blend of debt and equity, and we're seeing much better indications that we will finalize the deal shortly.

To address the risk factor, I can assure everyone that the Western Son team is very motivated. They want this deal just as much as we do. They believe in the brand's potential, and they see Splash as the perfect partner to help take it to the next level.

Let's address a few more questions; we've had a lot of information shared. Operator, please initiate the questions in queue.

Appreciate the update, Robert. You're throwing a lot of information at us. Is the holdup on Western Son driven mostly by financing? Is that fair?

Yes, that's absolutely correct. It’s also worth noting there are licensing and permitting considerations, which complicate matters a bit. But yes, we're now confident we've structured the right financing blend.

In the most recent investor deck, it looks like with the closing of Western Son, you will be moving some production to the Dallas area. Is that correct?

I’d say it this way: the Western Son campus is located in Pilot Point, which is North Texas. Some of our production and not all of it, but some of it can be relocated there, and the shipping lane savings will be significant. Just focusing on that, we could see about 30% savings on freight costs.

What potential cost savings or margin benefit would be realized from relocating some production or inventory there?

Yes, just alone from the freight savings, we're estimating about 30% reductions. That's significant, not just a point or two. Additionally, this will enhance our supply chain efficiencies.

You mentioned utilizing proceeds from this recent raise; what will be addressed with the funds?

We've been operating hand-to-mouth regarding cash flow and have fallen behind on some bills. Our vendors have been great, but this raise will enable us to systematically address those past dues over the next 8 to 10 weeks. On the inventory side, we’ll make investments in Qplash and bulk purchases to enhance our purchasing power.

Can you share the pricing information on this raise? Will that be included in the 8-K filed either this afternoon or tomorrow?

Yes, you'll see it in the 8-K, but I can share it’s reasonable and competitive. I believe stakeholders will be comfortable with it.

Can you give us some information on the ABL’s capacity?

We have a term sheet; it's your standard ABL, focusing on AR and inventory. The range I'll provide is between $3 million to $5 million.

Will more information be shared in the coming weeks once this raise is finalized?

Yes, correct. The process involves gradual buildup since we must buy inventory to finance it. It's worth pointing out that Robert was surprised at the terms, given our financial situation.

On the M&A front, are there any brands that may not be part of the portfolio in 6 to 12 months?

Yes, I'll go into this. Out of corporate necessity, we've been understated about TapouT. We had a licensing agreement for TapouT, which has proven to be more of an incubation project. While it has had some success, the level we need to achieve isn't sufficient to justify continued investment. The truth is, we will not be continuing with TapouT; our focus is on brands with more regional success. This decision was necessary, and I must clarify that it's a tough choice, but ultimately beneficial as we look to maximize our resources on our stronger brands.

Thanks for the insights on guidance. Can you clarify the revenue expectation for '25; was that $30 million to $34 million?

No, no, it's $38 million to $42 million.

Would you expect to be EBITDA positive for the year?

For the full year, I expect about a $2 million to $2.5 million loss, particularly in the first two quarters. There’s potential upside with some sales momentum, but I'm being conservative.

Will achieving positive EBITDA be consistent once you reach that point?

Yes, once we cross into positive territory in the second half of 2025, I expect our brands to build momentum, ensuring we maintain that profitability moving forward.

With the closure of Western Son, will you be relocating some production?

Some production will indeed move to North Texas, which will offer substantial freight savings.

Could you provide an update on Pulpoloco and the opportunities there?

We're excited about Pulpoloco—I mentioned our success with the 7-Eleven authorization, and we've been working on expanding its reach. We're confident in its potential growth. Thank you all for your insightful questions. We've shared a lot of information today. We are genuinely excited about the future. It’s crucial to remember that while the journey has been challenging, it has also proven our commitment. We're looking ahead with optimism and determination. Thank you for your continued support, and we look forward to keeping you informed on our progress.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.