Splash Beverage Group, Inc. Q3 FY2024 Earnings Call

Greetings. Welcome to the Splash Beverage Group Third Quarter Conference Call. At this time, all participants are in a listen-only mode. Please note this conference is being recorded. I would now like to turn the conference over to your host, Robert Nistico, CEO of Splash Beverage Group. You may begin.

Good afternoon, everyone. This is Robert Nistico, CEO of Splash Beverage Group. I also have Julius Ivancsits, our CFO; and Bill Meissner, our President and Chief Marketing Officer. We appreciate everyone taking the time this morning for joining us on our quarterly earnings call for the period ending September 30, 2024. Before we get started, I want to reiterate why I started Splash and the investment thesis behind the business. Splash Beverage Group is focused on identifying, acquiring, and building early stage or undervalued beverage brands with strong growth potential in both the US and international markets. Additionally, the company operates its division Qplash, which markets well-known beverage brands to both business-to-business and business-to-consumer customers, leveraging e-commerce for direct delivery. The company has had its challenges, but the value proposition of creating this organization is solid and we have built a foundation to generate attractive returns for all our shareholders. Let me pivot now to the topics that will be covered during the call. On our agenda today, we will talk about Q3 2024 results, distribution and brand strategy, capital structure and financing update, mergers and acquisition update, and of course a Q&A session where we look forward and hope that we have a lot of good hard questions. Let's begin with tailwinds and headwinds since the last update. With regard to tailwinds, we've expanded our distribution network in numerous territories. We are in the process of restarting Qplash, Splash’s online resale business, which began at the end of August. Q3 2024 Splash gross margins were 30%, up from 23% in Q2 2024 and 11% in Q1 2024. Strategic sourcing programs are starting to have an impact, which is great. Lower SG&A spending for the period was down $500,000 from Q2 2024. We've raised approximately $8 million since August 2024 with the approval of our Board of Directors and auditors, supported by our shareholders. Headwinds include liquidity, which has been an ongoing challenge for well over a year since 2023. This has really been our main issue. Regarding the ABG TapouT lawsuit, we've been getting questions on this. Since we decided not to continue with TapouT, we're currently in a legal struggle with them, but we believe we will come through this in a very positive fashion. The timing of funding inflows has led to delays in liquidity, impacting inventory and sales. It's difficult on liquidity when you can't control the timing of the inflow of cash. I'll now turn it over to our CFO, Julius, who will provide an update on financial performance in the quarter.

Thank you, Robert. As Robert previously mentioned, the headwind on liquidity and the timing of inflows impacted our Q3 performance. Q3 ‘24 net sales were $381,000, down slightly from Q2 ‘24, which was a little over $1 million. Sales declines were driven by limited inventory due to the liquidity challenges that we previously mentioned. It is important to note the business did restart its resale business, Qplash, in August and continues to ramp up. This is key for our liquidity given it has short cash conversion cycles and high gross margins. Q3 gross margins increased by $244,000 from Q2 to $981,000 in Q3. The margin improvement was driven by lower wine costs at Copa DI Vino and the Qplash business, which had gross margins of 59%. Compared to Q1 ‘24, gross margin percentages have almost tripled from 11% to 30%. Q3 OpEx was down $1 million from the prior quarter, driven by expense controls, elimination of the TapouT license fee, and lower share-based compensation. EBITDA for the period was a loss of $1.7 million versus a loss of $2.2 million in Q2 ‘24, driven by higher gross margins and lower SG&A spending. The $1.7 million loss in the period is a $2 million improvement compared to Q3 ‘23. Net loss for Q3 was $4.6 million, which is a $700,000 improvement from the prior quarter and $1 million lower than Q3 ‘23. Liquidity and working capital, as previously noted, were tight for the period. However, Splash ended up with a cash balance of $457,000 in the bank compared to a very nominal amount at the end of Q2 ‘24. Collections were solid for the period, and inventory was flat compared to the prior quarter as well. I would like to turn this over to Bill Meissner, our President and CMO, to discuss commercial trends in the business, including distribution links and brand strategy.

Thank you, Julius. While the revenue was slightly down from Q2 2024, we continued to lay the foundation for growth in 2025 and beyond. Despite significant shipping challenges driven by liquidity, backlog orders plus shipped orders for Q3 were up 3.3% versus Q3 a year ago on Copa and 12.2% on Pulpoloco. Actual shipped orders were up on Pulpoloco by 7.5% versus Q3 a year ago. In past shareholder communications, we have emphasized the importance of distribution for success in our category and continue to expand our distribution network. Copa DI Vino and Pulpoloco had key distribution expansion in the Pacific Northwest, giving the brands full state coverage in Washington with both King Beverage and Olympic Eagle, AB wholesalers. We expanded our northeast distribution coverage in Massachusetts with Atlas Distributing, and we expanded our southwest distribution coverage in Texas. Our new distributor partner there, Reed Beverage, gives Splash full coverage in all of West Texas, including Amarillo, Lubbock, and El Paso. On the retail front, Circle K has authorized Copa DI Vino for all franchise stores. The four SKUs that were authorized are Red Blend, Cabernet, Sauvignon Blanc, and Chardonnay. Circle K is one of the leading convenience store chains, with more than 800 franchise locations in the US. The Pennsylvania Liquor Control Board, through our broker Breakthru Beverage, has authorized our exciting new tequila brand Chispo. Our team has been relentless, even with the challenges. As liquidity normalizes, these achievements will set a higher floor for sustainable success moving forward. I will now turn it back over to Robert, who will provide an update on our capital structure.

Thank you for the update, Bill. I want to publicly thank Bill and the commercial team for its dedication over the last year in a tough liquidity environment. Before I provide an update on the capital raise over the last quarter or so, I also want to thank our legacy investors who continue to support the vision of Splash Beverage. The confidence in the business and leadership team is very much appreciated. Okay, now on to the capital structure. On October 16th of this year, 2024, we released a press release regarding the completion of the first tranche of the capital raise for our strategic acquisition. Since August of 2024, the company has secured commitments of roughly $8 million in fundraising to expand its markets and presence and support working capital. The capital raise was achieved through private placement of convertible notes along with equity in the pending acquisition. The capital will provide Splash Beverage Group essential working capital for its legacy business while enabling us to pursue complementary acquisitions anticipated to enhance the company's product offerings and operational efficiencies. This is very important. We continue to actively recruit investors to ensure we have the necessary liquidity to support our growth. While the response from family offices and individuals has been fantastic, the timing of when we receive the funds has been a challenge. To finalize our retail-level fundraising, we're actively working with two additional institutions to raise significant amounts of capital with targets between $7 million and $12 million. We do need to keep the names of those parties confidential currently. However, we are formally engaged with two institutions who are looking to make significant investments into Splash Beverage. We are in the middle of the due diligence process with both organizations and look forward to having signed documents for financing before the holidays with one of the two providers, if not both, who best align with our long-term vision and create a capital structure to generate appropriate returns for our investor base. Once we complete the raise from both our retail and institutional investors, it will allow us to move forward with the definitive agreement with the energy drink company, which fits perfectly into our portfolio. We anticipate this deal closing in early January. However, with the pending holiday season and the necessary financial audit, it could be slightly longer. Nevertheless, both organizations are highly committed to transacting the deal. Let me turn it back over to Julius with an update on Project White Hot, Splash's strategic plan before we continue to discuss mergers and acquisitions.

Thank you, Robert. Just to recap, Project White Hot serves as Splash's guiding principles for our strategic decision making, and the project has five strategic pillars: one, sustainable and profitable growth; two, operational excellence; three, e-commerce; four, bolt-on acquisitions; and five, capital structure. Project White Hot is expected to move the company to positive cash flow from operations and positive EBITDA on a run rate basis by Q3 ‘25, excluding any M&A. Since we last talked, we've been successful on several fronts, even with the headwinds of limited liquidity, and the results can be seen in our Q3 earnings with our uptick in gross margins. Looking at the pillars and just the recent successes, for sustainable and profitable growth, we've expanded our distributor network as Bill has previously discussed. Regarding e-commerce, Qplash, we restarted our resale business in August after very limited activities since January ‘24. On the operational excellence front, we've had success in strategic wine sourcing. We're hitting milestones to execute our plan for a third-party logistics provider out of Texas, and we've also identified alternative suppliers for key raw materials, either at a lower cost or to have dual sourcing options. From a bolt-on acquisition standpoint, we do have the LOI for the energy drink company and continue to move forward with Western Son. We continue to work our M&A pipeline and have discussions with a very early stage ready-to-drink spirits company as well. From a capital structure perspective, we have commitments for roughly $8 million in capital, and we continue to work with institutions to lower our cost of capital and provide working capital for our existing business and acquisition-related financing. This concludes the strategic initiative update. I will turn it over to Robert for an update on mergers and acquisitions.

Thank you, Julius. I appreciate the update. The key message here, folks, is we're not sitting around waiting for liquidity. We're doing everything we can to fine-tune the organization and prepare us for when the final funding does arrive in the near future. Thank you for the update. Before I provide an update on Western Son and other M&A, I'd like to provide some insight on recent transactions in the energy drink space over the last four weeks. It's quite exciting. KDP, known as Keurig Dr Pepper, announced their acquisition of the energy drink maker Ghost for more than $1 billion, and Molson Coors has taken a majority stake in ZOA, which I believe was the Rock’s startup. Both announcements confirm a strong belief in the better-for-you energy drink space, which outperforms the broader energy drink category, while both are still growing. This gets us extremely excited about our pending acquisition in this market segment. Our pending acquisition is under a letter of intent, but I can't disclose a name at this time. However, it is the right product with great partners at a fair valuation, which will allow us to capture our fair share, or as I like to say, our unfair share of the energy drink segment. With highly attractive margins and a competitive overhead structure, this dovetails nicely with Qplash, our resale business, and will provide growth exceeding 30% via our distribution network. Apologies for the excitement in my voice, but you can tell we're very enthusiastic about this opportunity. The gating item to move to definitive agreements is to finish securing the financing for the transaction, and we've secured a good portion from retail investors. The institutions will help us get over the top. As everyone is aware, we publicly announced a letter of intent for Western Son. Western Son is an amazing vodka that was recently ranked as the number one tasting vodka by Newsweek magazine. We're working on raising funds, with 50% of the funds secured, and will provide periodic updates to their ownership group. Thank you, everyone, for your attention. In summary, our issues have been 100% related to liquidity. We're in the process of solving that quickly. We're quite excited about it. We'll now open up the call to questions. Stand by as questions are coming in as we speak. Looks like the bulk of our questions are regarding liquidity and acquisitions. I'm going to make a couple of general statements before I answer specific questions, and I'll also have Julius and Bill help us here. Regarding liquidity, again, I mentioned two to three times, our issues have been 100% about liquidity. One of the questions here is concern over missing timelines on acquisitions and raising funding. Fair question. There's no one more impatient than I am. But you know, with liquidity challenges it affects all types of timelines, and as Julius described, we have spent a lot of time working on margins and different production options to ensure we're positioned beautifully to close. We are extremely close. We mentioned we have two additional, what I like to call backups, that will ultimately be our partners. One that we especially like is a private equity group that can help us with future acquisitions and deal flow. We're very excited to work with that team. I’ll stop there, because at this point, we elected not to release names. So liquidity has been it. Regarding our current raise, yes, we've brought on a certain amount, as you've seen in the 8-Ks, and I think we brought on another $1 million and change since then, so we're getting very close on that. We do have signed documents for the balance. Somebody asked just recently, they thought it was $12 million. It has never been $12 million; it was $8 million to $10 million. As I mentioned earlier, we have commitments up to $8 million, so we’re just shy of that. We do have signed documents and expect that to happen literally anytime. With the holidays, things tend to slow down, but keep an eye on the 8-Ks and press releases; everything is moving forward. There was a question on Pulpoloco, our sangria that we've imported in the paper can technology. Nothing has changed there. It’s a fabulous brand. We are now scanning it, and 7-Eleven is slowly loading those accounts across the country. The key factor for completing this is, again, liquidity. We must convey a small percentage of capital raised to complete that transaction. Nothing has changed; it's just taking time because of liquidity. Bill, there's a question on Western Son. Could you please answer where we are on that transaction and when you anticipate closing on that brand?

From an operating perspective, both teams are ready to go from a due diligence perspective. Everything has been completed. At this point, we're trying to finalize the raise. We've made great progress dividing it between debt and equity. On the equity side, we've made excellent progress and are essentially there. We need to marry both elements at the same time, so we're circling back on the debt front and trying to get that completed. It will go quickly once that's done, but with the holidays, it could leak into Q1. Assuming we make good progress by year-end, the Western Son team will likely continue to work with us on an extension. But that is just speculation; however, I believe they would.

Okay, thanks, Bill. Just to clarify, it's a blend of equity and debt, and it's a chicken-and-the-egg situation. The debt providers don't want to commit until the equity providers have committed and vice versa. Nevertheless, we’re basically there on the debt side. This is important news, so now, regarding the equity side, the debt providers are beginning to dig in again. But Bill is right; we have challenges with the holidays slowing things down. The unnamed acquisition in the energy drink space has likely not happened this year. Our target has always been December 15th since we'd like to capture that revenue in our annual report. However, that would be a nice to have, not a need to have. We remain completely engaged and are positively intent on moving forward with them. Once we close out the rest of our capital raised, we will trigger the audits and then proceed. Remember, we don’t have to be fully audited; the SEC allows 71 days to produce consolidated financials, so we will close as quickly as we can. It’s a fantastic acquisition for us, and it represents a significant amount of top line and gross revenue. The top line number is above $30 million, which is significantly transformative for the company. We’re quite excited about it. There is one more question on liquidity: How much money has been raised since our last press release? I believe it’s roughly $1 million; Julius, do you have that exact number?

I don't have the exact dates of the press releases, but we're just a little over $8 million in commitments from various stakeholders.

Thank you. I have a question about the note in technical default. When will that be paid back? Our intention is to pay that back as we raise additional equity for the organization with these current capital raises. There will be plenty of cash to do that. We'll see how that goes in the next week or so. There are a couple more questions coming in; we're waiting for them to load. I understand everybody's impatient. This has been a difficult year for us. Micro and small caps have faced immense challenges in raising money, and a poor share price hasn't helped either. I must say, we appreciate our shareholders for their continued support. I've received questions regarding Western Son; thank you for the information on timing. What are the terms? We can't disclose that yet, but it involves a blend of debt and equity, as Bill Meissner mentioned. Why won't you release the name of the energy drink target? There are different types of confidentiality: inside information, public information, and corporate confidentiality. Remember, our model for Splash is a shared service model. Therefore, we need to be sensitive to those people involved and refrain from disclosing that name at this point. Julius, Bill, are you seeing any questions I missed?

No.

No.

All right. With that, I want to thank everybody for joining us. This concludes our quarterly conference call for Q3 results. We appreciate everyone's long-term support. Our legacy investors have been absolutely fantastic. We remain extremely excited about the future. We believe we've just about resolved difficult liquidity issues over the past year. Thank you again for your support, and I hope everyone has a fantastic Thanksgiving and happy holidays. We appreciate your support one last time, and I wish you all a great week. Thank you very much. This concludes our Q3 quarterly results conference call.

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