10-K
1
e2408_10-k.htm
FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2020
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to
_________
Commission File Number 000-55114
SPLASH BEVERAGE GROUP, INC.
(Exact name of registrant as specified
in its charter)
1314 E Las Olas Blvd. Suite 221
Fort
Lauderdale, FL 33301
(Address of principal executive offices)
(Zip code)
(954) 745-5815
(Registrant’s telephone number,
including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class Trading Symbol Name of each exchange on which registered
N/A N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant
(i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by checkmark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐
No
Indicate by checkmark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company,” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the Registrant’s
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last
business day of the Registrant’s most recently completed second fiscal quarter was $24,013,945.
On March 8, 2021, there were 76,093,546
shares of Common Stock issued and outstanding.
SPLASH BEVERAGE GROUP, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 2020
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 23
PART II
Item 6. Selected Financial Data 24
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 26
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 27
Item 9B. Other Information 27
PART III
Item 10. Directors, Executive Officers and Corporate Governance 28
Item 11. Executive Compensation 31
Item 14. Principal Accounting Fees and Services 32
PART IV
Item 15. Exhibits and Financial Statement Schedules 32
Signatures 33
i
PART I
Item 1. Business.
Overview
Canfield
Medical Supply, Inc. (“CMS”) was incorporated in the State of Ohio on September 3, 1992, and changed domicile to Colorado
on April 18, 2012. CMS was in the business of home health services, primarily the selling of durable medical equipment and medical
supplies to the public, nursing homes, hospitals and other end users.
On
December 31, 2019, Canfield entered into an Agreement and Plan of Merger (the “Merger Agreement”) with
SBG Acquisition Inc. (“Merger Sub”), a Nevada Corporation wholly-owned by Canfield, and Splash Beverage
Group, Inc. a Nevada corporation (“Splash” or “SBG“) pursuant to which Merger
Sub merged with and into Splash (the “Merger”) with Splash as the surviving company and a wholly-owned
subsidiary of Canfield. The Merger was consummated on March 31, 2020.
As
the owners and management of Splash had voting and operating control of CMS following the Merger, the Merger transaction was accounted
for as a reverse acquisition (that is with Splash as the acquiring entity), followed by a recapitalization.
On July 31, 2020,
CMS changed its name to Splash Beverage Group, Inc. (“SBG”).
On December 24, 2020,
SBG consummated an Asset Purchase Agreement(the “APA”) with Copa di Vino Corporation (“CdV”), to purchase
certain assets and assume certain liabilities that comprise the Copa di Vino business for a total purchase price of $5,980,000,
payable in the combination of $2,000,000 in cash (“Cash Consideration”), $2,000,000 convertible promissory note (the
“Convertible Note”) to Seller and a variable number of shares of the Company’s common stock based on a attainment
of revenue hurdles. CdV is one of the leading producers of premium wine by the glass in the United States with its primary offices
and facilities in The Dalles, Oregon.
The Company’s
common stock is quoted on the OTCQB under the symbol SBEV.
1
Company Overview and History
Splash was incorporated
in the State of Nevada under the name TapouT Beverages, Inc. for the purpose of acquiring the rights under a license agreement
with TapouT, LLC (Authentic Brands Group and now the WWE) for the right to use the TapouT brand in connection with manufacturing
and selling certain beverages. Robert Nistico was hired as CEO and the name was changed to Splash Beverage Group, Inc. (SBG)
to reflect the revised business plan of being a manufacturer and distributor of several brands of beverages including both
non-alcoholic and spirits brands.
Robert Nistico has
over 28 years of experience in all levels of the three-tier distribution system used in the beverage industry. Prior to joining
the Company, he led the Marley Beverage Company from startup to over $47 million in annual revenues and ultimately profitability
in three and one-half years. Before that he was the 5th employee at Red Bull North America, Inc. and served as General Manager,
VP of Field Marketing and Sr. Vice President & General Manager during his 11 years there. He was instrumental in building
the Red Bull brand in North and Central America and the Caribbean from $0 revenue to $1.6 billion in annual revenues. Nistico
began his career with the Gallo Winery, quickly ascending within that system between winery and senior positions in distribution
with Premier Beverage and RNDC Texas.
Mr. Nistico has assembled
a team of experienced beverage industry professionals with the goal of replicating the business model of companies like Diageo
of owning some brands and managing others where there are synergies among a distribution standpoint. SBG however, has an additional
strategic advantage of “brand incubation” with its own ecommerce platform.
SBG has license rights
to the TapouT brand for the United States and several other countries and we have joint venture with SALT Flavored Tequila. Mr.
Nistico and SBG understand the proven strategy of infusing beverage brands with strong pop culture and lifestyle elements which
drives trial, belief and most importantly repeat purchase.
Our Strategy
Our strategy is to
combine the traditional approach of manufacturing, distributing, and marketing of beverages, but with brands that have a reasonable
level of pre-existing brand awareness (market presence) or have attributes that we believe to be purely innovative. These are
SBG’s core values. We believe this allows SBG to break through the clutter of numerous brand introductions and dilute risk.
This philosophy is applied regardless as to whether the brand is to be 100% owned or a joint venture.
For acquisition or
joint venture consideration, we prefer to work with brands that already have one or more of the following in place:
● Some level of preexisting brand awareness
● Regional presence that can be expanded
● Licensing an existing brand name (TapouT for example)
● Add to an underdeveloped and growing category
● Innovation to an existing attractive category (Flavored Tequila)
We believe offering
brand founders access to our shared services model, provides us with two paths to success: one, developing our wholly owned core
brands and two the ability to tap into high growth early stage brands ready to scale. By managing joint venture brands, we can
significantly reduce their development expense while simultaneously increasing efficiencies for all brands in the SBG portfolio.
Most new single beverage
brands have limited access to distribution and thus find it extremely difficult to obtain meaningful retail shelf presence. With
decades of successful brand introductions (Gallo, Red Bull, Bacardi, DIAGEO, Sparkling Ice, Jones Soda, FUZE Beverage, NOS Energy,
SoBe Beverages, Muscle Milk, Marley Beverages) our ability to break through the distribution and retail bottlenecks makes us an
attractive joint venture partner to many new brand owners.
Our business ventures
are typically structured with a revenue split, a marketing spend commitment from the brand founder and an earned equity position
that constitutes control. Most are happy to award an equity position in their brand in exchange for distribution, sales and marketing
management within the distribution network which eliminates their need to invest in infrastructure. Our partners only need to
manage a small base of corporate operations.
2
We benefit by avoiding
the development costs for new products. This model spreads our risk over several brands, contributes to our economies of scale,
and it improves our relationship with distribution because we can provide them with a broader line of proven beverage products.
Since our inception
we have seen very good deal flow having been offered over 20 brands. SBG is only engaging with brands that fit comfortably within
the above guidelines and are in some way complementary to each other categorically or from a distribution standpoint.
We also believe the
distribution landscape in the beverage category is changing rapidly and see that tech-enabled business models are thriving. Direct
to consumer, office or home solutions are projected to continue to gain traction in the future. A core strategy for SBG is to
build onto the early success we’re seeing with the Qplash online platform.
Products
We produce, distribute
and market two beverages brands, “TapouT Performance”, a hydration & recovery isotonic sport drink and SALT Naturally
Flavored Tequila, a 100% agave 80 proof line of flavored tequilas. The following is a description of these products.
SALT Flavored Tequila
We produce, distribute,
and market the following flavors under the brand name SALT Naturally Flavored Tequila:
● Citrus flavor
● Berry flavor
● Chocolate flavor
SALT Tequila is the
first line of 100% agave 80-proof flavored tequilas. Tequila, vodka, rum, and now even brown spirits have experienced significant
growth when flavors were introduced, and we expect significant growth as the tequila category is already growing at double digits.
SALT is currently
being launched and distributed by RNDC, Youngs Market and Major Brands to Walmart and Total Wine to date in 6 U.S. states and
is for sale in Mexico. Several South American countries will also launch SALT during spring 2021.
3
SALT is a business
venture between SBG and SALT USA, LLC. All aspects of manufacturing, logistics, distribution and marketing are the responsibility
of SBG.
TapouT Isotonic Sports Drinks
SBG will produce,
market, sell and distribute the following sports beverages under the brand name TapouT in the coming two years:
● TapouT Performance: Flavors completed
Flavor Cherry Lemonade Orange Citrus Kick
Zero Sugar / 10 Calories In Production In Production 2021
● TapouT Elite: In development for 2022
● TapouT Energy: Under consideration also for 2022
TapouT Performance
is a unique advanced performance functional beverage that has recuperative and cell regeneration capabilities that increase hydration
and cellular recovery. It is formulated with all GRAS (FDA Designation “Generally Regarded As Safe) ingredients versus controversial
ingredients used in many competitive products. It can be taken before, during or after activity to enhance activation, hydration,
and recovery. TapouT Performance is all natural and is perfectly balanced with a proprietary blend of 5 electrolytes, amino acids
and a proprietary specialized ingredient blend of minerals and nutrients.
TapouT, formally associated
with the UFC and mixed martial arts (MMA) has been producing branded clothing and light equipment for over 23 years and has a
very high level of aided and unaided brand awareness.
4
Now associated with
the WWE, Authentic Brands Group, LLC (“ABG TapouT”), the original owner of the TapouT brand IP, represents the biggest
WWE stars, produces reality TV shows, Pod Casts, and other media and TapouT is the official training partner of the WWE.
TapouT License Agreement
We have the rights
under a License Agreement to North, Central and South America, US military bases, Australia, South Africa and the EU. The beverages
covered by the License Agreement include sports drinks, energy drinks, energy shots, water, protein, teas, etc.
We pay a 6% royalty
of net sales or a guaranteed minimum royalty of $540,000 whichever is greater. This agreement goes through December 31, 2022.
We have the right
to use the TapouT brand to market, advertise and promote for sale our TapouT beverages, and TapouT agrees to provide us with certain
materials which we can use in connection with our advertising and promotion. We are required to spend 2% of our net sales on marketing
expenditures such as expenses attributable to trade shows, catalogs and websites, point-of-sale advertising featuring TapouT products
and other retail advertising. TapouT has certain relationships with certain celebrity and athletic talent and, if requested, it
agrees to use its reasonable efforts to request the celebrities and/or athletes to be present at autograph signings, tradeshows
and other similar events.
Manufacturing and Distribution
SBG is responsible
for the manufacturing of the TapouT Performance Beverage and SALT Naturally Flavored Tequila.
Although we are responsible
for manufacturing TapouT and SALT, we do not directly manufacture these products, but instead we outsource such manufacturing
to third party bottlers and contract packers.
5
We purchase concentrates,
flavors, dietary ingredients, cans, bottles, caps, labels, and other ingredients for our beverage products from our suppliers,
which are delivered to our various third-party bottlers and co-packers. In some cases, certain common supplies may be purchased
by our various third-party bottlers and co-packers. Depending on the product, the third-party bottlers or packers add filtered
water and/or other ingredients (including dietary ingredients) for the manufacture and packaging of the finished products into
our approved containers in accordance with our formulas.
The Copa di Vino and
Pulpoloco brands are manufactured at our manufacturing facility in The Dalles, Oregon.
Co-Packing Arrangements
Our TapouT products
are manufactured by various third-party bottlers and co-packers situated throughout the United States under separate arrangements
with each party. Our co-packaging arrangements are generally on a month-to-month basis or are terminable upon request and do not
typically obligate us to produce any minimum quantities of products within specified periods.
In some instances,
subject to agreement, certain equipment may be purchased by us and installed at the facilities of our co-packers to enable them
to produce certain of our products. In general, such equipment remains our property and is returned to us upon termination of
the packing arrangements with such co-packers, unless we are reimbursed by the co-packer via a per-case credit over a predetermined
number of cases that are produced at the facilities concerned.
We are generally responsible
for arranging for the purchase and delivery to our third-party bottlers and co-packers the containers in which our beverage products
are packaged.
We pack some of our
products in multiple locations to enable us to produce finished goods closer to the markets where they are sold, with the objective
of reducing freight costs as well as transportation-related product damages. As distribution volumes increase, we will continue
to source additional packing arrangements closer to such markets to further reduce logistics costs. Our ability to estimate demand
for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly
in new markets. If we materially underestimate demand for our products and/or are unable to secure sufficient ingredients or raw
materials including, but not limited to aluminum cans, PET plastic bottles, labels, flavors, juice concentrates, dietary ingredients,
and other ingredients, and/or procure adequate packing arrangements and/or obtain adequate or timely shipment of our products,
we might not be able to satisfy demand on a short-term basis.
Our production arrangements
are generally of short duration or are terminable upon our request. For some of our products, there may be limited co-packing
facilities in our domestic market with adequate capacity and/or suitable equipment to package our products. We believe a short
disruption or delay in production would not significantly affect our revenues; however, as alternative co-packing facilities in
our domestic market with adequate long-term capacity may not be available for such products, either at commercially reasonable
rates and/or within a reasonably short time period, if at all, a lengthy disruption or delay in production of any of such products
could significantly affect our revenues.
We continue to actively
seek alternative and/or additional advantageously located co-packing facilities with adequate capacity and capability for the
production of our various products to minimize transportation costs and transportation-related damages as well as to create redundancies
to mitigate the risk of a disruption in production and/or importation.
Distribution
In the United States
we operate within what is referred to as the “Three Tier Distribution System” where manufacturers do not typically
sell directly to retailers, but instead contract for local and regional distribution with independent distributors. These distributors
typically have geographic rights to distribute major beverage brands such as Budweiser, Pepsi, and Red Bull and call on every
store in a given area such as major cities or regions. However, due to increasing costs over the last 20 years for these distributors
to call on every store (sometimes referred to in the industry as “DSD” or direct store delivery), there has been a
great deal of consolidation which has limited the options for new brands to gain distribution and retail shelf presence. Our management
team believes that their history of success and experience working within this channel will allow SBG to be successful in building
a strong network of these distributors.
In addition to working
with these independent distributors, we also have distribution arrangements with national retail accounts to distribute some of
our products directly through their warehouse operations.
6
E-commerce
“Qplash”
is the consumer-packaged goods retail division of Splash Beverage Group and our first entry point into the growing e-commerce
channel. The division sells beverages & groceries online through qplash.com, and third-party storefronts such as Amazon.com
and Walmart.com. Inside of the division, there are two primary customer groups, B-to-B retail businesses, which in turn offer
the products to their customers, and B-to-C, selling direct to end users.
Qplash sells to retailers
through www.qplash.com. These retailers, generally in the high-end apparel space, are working to enhance their customers in store
shopping experience. They offer high end beverages to for customers to enjoy while shopping or to take on the go. This program
allows businesses to control inventory, order with payment terms, and the convenience of delivery directly to each store.
To the end user, we
ship orders from our warehouses direct to their home or office. We offer competitive pricing, an easy & convenient transactional
process, and a wide selection of products. Consumers can order from qplash.com, from our storefront on Amazon, or other third-party
platforms. Amazon is a valuable revenue source as it allows us to access their loyal customer base and a high conversion rate
as they are comfortable navigating and checking out.
Currently we offer
over 350 listings and ship from Ontario, California. Later this year, we plan to activate additional warehouse partnerships, thus
reducing shipping costs and the transit times while gaining access to several thousand additional items. Our objective is to offer
1,500 items by the spring of 2021.
Additionally, this
vertically integrated platform affords SBG a unique opportunity to incubate, accelerate and ultimately migrate brands to traditional
distribution.
Canfield Medical Supply, Inc.
Canfield Medical Supply,
Inc. is a provider of home medical equipment, supplies and services (which relate to the equipment sales) in Ohio’s Mahoning
Valley, Western Pennsylvania and Northern West Virginia, with an emphasis on providing for patients with mobility-related limitations
who have had strokes, hip or knee replacements, and other surgeries after they are discharged from a hospital or rehab center.
7
Copa di Vino Wine Group, Inc. Products:
Copa Di Vino is the
leading producer of premium wine by the glass in the United States. Founder and owner, James Martin discovered the concept on
a bullet train adventure through the south of France. A year later he brought the technology to his hometown of The Dalles, Oregon
located in the majestic Columbia River Gorge. His passion for wine led to Copa Di Vino – wine in a glass – a ready
to drink wine glass that could go anywhere without the need for a bottle, corkscrew or glass. Just open and enjoy! Wine is no
longer trapped in the bottle!
We currently have
seven varietals of wine: Pinot Grigio, Riesling, Merlot, Chardonnay, White Zinfandel, Moscato, and Cabernet Sauvignon.
Pulpoloco is a sangria
which is encased in a 100% biodegradable can made from paper.
Item 1A. Risk
Factors.
You should carefully consider the risks
described below as well as other information provided to you in this document, including information in the section of this document
entitled “Information Regarding Forward Looking Statements.” If any of the following risks actually occur, the Company’s
business, financial condition or results of operations could be materially adversely affected, the value of the Company’s
Common Stock could decline, and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
An occurrence of an uncontrollable
event such as the COVID-19 pandemic may negatively affect our operations and our ability to raise capital.
The occurrence of
an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social
distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and
professional advisors. This event may also limit our ability to raise capital which as noted above could trigger certain rescission
rights which could result in the Company’s incurring additional debt and preferred holders who may take preference over
other common holders. These factors, in turn, may not only impact our operations, financial condition and demand for our products
but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our
filing obligations with the Commission.
If we are unable to continue as
a going concern, our securities will have little or no value.
Although our audited
financial statements for the year ended December 31, 2020 were prepared under the assumption that we would continue our operations
as a going concern, the report of our independent registered public accounting firm that accompanies our financial statements for
the year ended December 31, 2020 contains a going concern qualification in which such firm expressed substantial doubt about
our ability to continue as a going concern, based on the financial statements at that time. Specifically, we have sustained recurring
losses and we have had a working capital and stockholders’ equity deficits. These prior losses and expected future losses
have had, and will continue to have, an adverse effect on our financial condition. In addition, continued operations and our ability
to continue as a going concern may be dependent on our ability to obtain additional financing in the near future and thereafter,
and there are no assurances that such financing will be available to us at all or will be available in sufficient amounts or on
reasonable terms. Our financial statements do not include any adjustments that may result from the outcome of this uncertainty.
If we are unable to generate additional funds in the future through sales of our products, financings or from other sources or
transactions, we will exhaust our resources and will be unable to continue operations. If we cannot continue as a going concern,
our shareholders would likely lose most or all of their investment in us.
8
We have experienced recurring losses
from operations and negative cash flows from operating activities and anticipate that we will continue to incur significant
operating losses in the future.
We have experienced
recurring losses from operations and negative cash flows from operating activities. We expect to continue to incur significant
expenses related to our ongoing operations and generate operating losses for the foreseeable future. The size of our losses will
depend, in part, on the rate of future expenditures and our ability to generate revenues. We incurred a net loss of $28.7 million for
the year ended December 31, 2020. Our accumulated deficit increased to $61.6 million as of December 31, 2020 compared
to the prior year’s deficit of $35.6 million.
We may encounter unforeseen
expenses, difficulties, complications, delays, and other unknown factors that may adversely affect our financial condition. Our
prior losses and expected future losses have had, and will continue to have, an adverse effect on our financial condition. If
our products do not achieve sufficient market acceptance and our revenues do not increase significantly, we may never become profitable.
Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure
to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand
our business, diversify our product offerings or continue our operations. A decline in the value of our company could cause you
to lose all or part of your investment.
9
If we are not able to successfully
execute on our future operating plans, our financial condition and results of operation may be materially adversely affected,
and we may not be able to continue as a going concern.
It is important that
we meet our sales goals and increase sales going forward as our operating plan already reflects prior significant cost containment
measures and may make it difficult to achieve top-line growth if further significant reductions become necessary. If we do not
meet our sales goals, our available cash and working capital will decrease and our financial condition will be negatively impacted.
Demand
for our products may be adversely affected by changes in consumer preferences or any inability on our part to innovate, market
or distribute our products effectively, and any significant reduction in demand could adversely affect our business, financial
condition or results of operations.
Our beverage portfolio
is comprised of a number of unique brands with reputations and consumer imagery that have been built over time. Our investments
in marketing as well as our strong commitment to product quality are intended to have a favorable impact on brand image and consumer
preferences. Unfavorable publicity, or allegations of quality issues, even if false or unfounded, could tarnish our reputation
and brand image and may cause consumers to choose other products. In addition, if we do not adequately anticipate and react to
changing demographics, consumer and economic trends, health concerns and product preferences, our financial results could be adversely
affected.
Volatility in the price or availability
of the inputs we depend on, including raw materials, packaging, energy and labor, could adversely impact our financial results.
Our financial results
could be adversely impacted by changes in the cost or availability of raw materials and packaging. Continued growth would require
us to hire, retain and develop a highly skilled workforce and talented management team. Any unplanned turnover or our failure
to develop an adequate succession plan for current positions could erode our competitiveness. In addition, our financial results
could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased
employee benefit costs.
Changes in government regulation
or failure to comply with existing regulations could adversely affect our business, financial condition and results of operations.
Our business and properties
are subject to various federal, state and local laws and regulations, including those governing the production, packaging, quality,
labeling and distribution of beverage products. In addition, various governmental agencies have enacted or are considering additional
taxes on soft drinks and other sweetened beverages. Changes in existing laws or regulations could require material expenses and
negatively affect our financial results through lower sales or higher costs.
We compete in an industry that is
brand-conscious, so brand name recognition and acceptance of our products are critical to our success.
Our business is dependent
upon awareness and market acceptance of our products and brands by our target market, trendy, young consumers looking for a distinctive
tonality in their beverage choices. In addition, our business depends on acceptance by our independent distributors and retailers
of our brands as beverage brands that have the potential to provide incremental sales growth. If we are not successful in the
revitalization and growth of our brand and product offerings, we may not achieve and maintain satisfactory levels of acceptance
by independent distributors and retail consumers. In addition, we may not be able to effectively execute our marketing strategies
in light of the various closures and event cancellations caused by the COVID-19 outbreak. Any failure of our brand to maintain
or increase acceptance or market penetration would likely have a material adverse effect on our revenues and financial results.
10
Our brands and brand images are
keys to our business and any inability to maintain a positive brand image could have a material adverse effect on our results
of operations.
Our success depends
on our ability to maintain brand image for our existing products and effectively build up brand image for new products and brand
extensions. We cannot predict whether our advertising, marketing and promotional programs will have the desired impact on our
products’ branding and on consumer preferences. In addition, negative public relations and product quality issues, whether
real or imagined, could tarnish our reputation and image of the affected brands and could cause consumers to choose other products.
Our brand image can also be adversely affected by unfavorable reports, studies and articles, litigation, or regulatory or other
governmental action, whether involving our products or those of our competitors.
Competition from traditional and
large, well-financed non-alcoholic and alcoholic beverage manufacturers may adversely affect our distribution relationships and
may hinder development of our existing markets, as well as prevent us from expanding our markets.
The beverage industry
is highly competitive. We compete with other beverage companies not only for consumer acceptance but also for shelf space in retail
outlets and for marketing focus by our distributors, all of whom also distribute other beverage brands. Our products compete with
all non-alcoholic beverages and alcoholic, most of which are marketed by companies with substantially greater financial resources
than ours. Some of these competitors are placing severe pressure on independent distributors not to carry competitive brands such
as ours. We also compete with regional beverage producers and “private label” hydration suppliers.
Increased competitor
consolidations, market-place competition, particularly among branded beverage products, and competitive product and pricing pressures
could impact our earnings, market share and volume growth. If, due to such pressure or other competitive threats, we are unable
to sufficiently maintain or develop our distribution channels, we may be unable to achieve our current revenue and financial targets.
Competition, particularly from companies with greater financial and marketing resources than ours, could have a material adverse
effect on our existing markets, as well as on our ability to expand the market for our products.
We compete in an industry characterized
by rapid changes in consumer preferences and public perception, so our ability to continue developing new products to satisfy
our consumers’ changing preferences will determine our long-term success.
Failure to introduce
new brands, products or product extensions into the marketplace as current ones mature and to meet our consumers’ changing
preferences could prevent us from gaining market share and achieving long-term profitability. Product lifecycles can vary and
consumers’ preferences and loyalties change over time. Although we try to anticipate these shifts and innovate new products
to introduce to our consumers, we may not succeed. Customer preferences also are affected by factors other than taste, such as
health and nutrition considerations and obesity concerns, shifting consumer needs, changes in consumer lifestyles, increased consumer
information and competitive product and pricing pressures. Sales of our products may be adversely affected by the negative publicity
associated with these issues. In addition, there may be a decreased demand for our product as a result of the COVID-19 outbreak. If
we do not adequately anticipate or adjust to respond to these and other changes in customer preferences, we may not be able to
maintain and grow our brand image and our sales may be adversely affected.
Legislative or regulatory changes
that affect our products, including new taxes, could reduce demand for products or increase our costs.
Taxes imposed on the
sale of certain of our products by federal, state and local governments in the United States, or other countries in which we operate
could cause consumers to shift away from purchasing our beverages. Several municipalities in the United States have implemented
or are considering implementing taxes on the sale of certain “sugared” beverages, including non-diet soft drinks,
fruit drinks, teas and flavored waters to help fund various initiatives. These taxes could materially affect our business and
financial results.
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Our reliance on distributors, retailers
and brokers could affect our ability to efficiently and profitably distribute and market our products, maintain our existing markets
and expand our business into other geographic markets.
Our ability to maintain
and expand our existing markets for our products, and to establish markets in new geographic distribution areas, is dependent
on our ability to establish and maintain successful relationships with reliable distributors, retailers and brokers strategically
positioned to serve those areas. Most of our distributors, retailers and brokers sell and distribute competing products, including
non-alcoholic and alcoholic beverages, and our products may represent a small portion of their businesses. The success of this
network will depend on the performance of the distributors, retailers and brokers of this network. There is a risk that the mentioned
entities may not adequately perform their functions within the network by, without limitation, failing to distribute to sufficient
retailers or positioning our products in localities that may not be receptive to our product. Our ability to incentivize and motivate
distributors to manage and sell our products is affected by competition from other beverage companies who have greater resources
than we do. To the extent that our distributors, retailers and brokers are distracted from selling our products or do not employ
sufficient efforts in managing and selling our products, including re-stocking the retail shelves with our products, our sales
and results of operations could be adversely affected. Furthermore, such third-parties’ financial position or market share
may deteriorate, which could adversely affect our distribution, marketing and sales activities.
Our ability to maintain
and expand our distribution network and attract additional distributors, retailers and brokers will depend on a number of factors,
some of which are outside our control. Some of these factors include:
We may not be able
to successfully manage all or any of these factors in any of our current or prospective geographic areas of distribution. Our
inability to achieve success with regards to any of these factors in a geographic distribution area will have a material adverse
effect on our relationships in that particular geographic area, thus limiting our ability to maintain or expand our market, which
will likely adversely affect our revenues and financial results.
It is difficult to predict the timing
and amount of our sales because our distributors are not required to place minimum orders with us.
Our independent distributors
and national accounts are not required to place minimum monthly or annual orders for our products. In order to reduce their inventory
costs, independent distributors typically order products from us on a “just in time” basis in quantities and at such
times based on the demand for the products in a particular distribution area. Accordingly, we cannot predict the timing or quantity
of purchases by any of our independent distributors or whether any of our distributors will continue to purchase products from
us in the same frequencies and volumes as they may have done in the past. Additionally, our larger distributors and national partners
may make orders that are larger than we have historically been required to fill. Shortages in inventory levels, supply
of raw materials or other key supplies could negatively affect us.
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If we do not adequately manage our inventory levels,
our operating results could be adversely affected.
We need to maintain
adequate inventory levels to be able to deliver products to distributors on a timely basis. Our inventory supply depends on our
ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly
for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or are unable to
maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If we overestimate
distributor or retailer demand for our products, we may end up with too much inventory, resulting in higher storage costs, increased
trade spend and the risk of inventory spoilage. If we fail to manage our inventory to meet demand, we could damage our relationships
with our distributors and retailers and could delay or lose sales opportunities, which would unfavorably impact our future sales
and adversely affect our operating results. In addition, if the inventory of our products held by our distributors and retailers
is too high, they will not place orders for additional products, which would also unfavorably impact our sales and adversely affect
our operating results.
If we fail to maintain relationships
with our independent contract manufacturers, our business could be harmed.
We do not manufacture
our products but instead outsource the manufacturing process to third-party bottlers and independent contract manufacturers (co-packers).
We do not own the plants or the majority of the equipment required to manufacture and package our beverage products, and we do
not anticipate bringing the manufacturing process in-house in the future. Our ability to maintain effective relationships with
contract manufacturers and other third parties for the production and delivery of our beverage products in a particular geographic
distribution area is important to the success of our operations within each distribution area. We may not be able to maintain
our relationships with current contract manufacturers or establish satisfactory relationships with new or replacement contract
manufacturers, whether in existing or new geographic distribution areas. The failure to establish and maintain effective relationships
with contract manufacturers for a distribution area could increase our manufacturing costs and thereby materially reduce gross
profits from the sale of our products in that area. Poor relations with any of our contract manufacturers could adversely affect
the amount and timing of product delivered to our distributors for resale, which would in turn adversely affect our revenues and
financial condition. In addition, our agreements with our contract manufacturers are terminable at any time, and any such termination
could disrupt our ability to deliver products to our customers.
Increases in costs or shortages
of raw materials could harm our business and financial results.
The principal raw
materials we use include glass bottles, aluminum cans, labels and cardboard cartons, aluminum closures, flavorings, sucrose/inverted
pure cane sugar and sucralose. In addition, certain of our contract manufacturing arrangements allow such contract manufacturers
to increase their charges to us based on their own cost increases. These manufacturing and ingredient costs are subject to fluctuation.
Substantial increases in the prices of our ingredients, raw materials and packaging materials, to the extent that they cannot
be recouped through increases in the prices of finished beverage products, would increase our operating costs and could reduce
our profitability. If our supply of these raw materials is impaired or if prices increase significantly, it could affect the affordability
of our products and reduce sales.
If we are unable to
secure sufficient ingredients or raw materials including glass, sugar, and other key supplies, we might not be able to satisfy
demand on a short-term basis. Moreover, in the past there have been industry-wide shortages of certain concentrates, supplements
and sweeteners and these shortages could occur again from time to time in the future, which could interfere with and delay production
of our products and could have a material adverse effect on our business and financial results.
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In addition, suppliers
could fail to provide ingredients or raw materials on a timely basis, or fail to meet our performance expectations, for a number
of reasons, including, for example, disruption to the global supply chain as a result of the COVID-19 outbreak, which could cause
a serious disruption to our business, increase our costs, decrease our operating efficiencies and have a material adverse effect
on our business, results of operations and financial condition.
The volatility of energy and increased
regulations may have an adverse impact on our gross margin.
Over the past few
years, volatility in the global oil markets has resulted in variable fuel prices, which many shipping companies have passed on
to their customers by way of higher base pricing and increased fuel surcharges. If fuel prices increase, we expect
to experience higher shipping rates and fuel surcharges, as well as energy surcharges on our raw materials. It is hard
to predict what will happen in the fuel markets in 2021 and beyond. Due to the price sensitivity of our products, we may
not be able to pass such increases on to our customers.
Disruption within our supply chain,
contract manufacturing or distribution channels could have an adverse effect on our business, financial condition and results
of operations.
Our ability, through
our suppliers, business partners, contract manufacturers, independent distributors and retailers, to make, move and sell products
is critical to our success. Damage or disruption to our suppliers or to manufacturing or distribution capabilities due to weather,
natural disaster, fire or explosion, terrorism, pandemics such as influenza and the novel coronavirus (COVID-19), labor strikes
or other reasons, could impair the manufacture, distribution and sale of our products. Many of these events are outside of our
control. Failure to take adequate steps to protect against or mitigate the likelihood or potential impact of such events, or to
effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations.
We rely upon our ongoing relationships
with our key flavor suppliers. If we are unable to source our flavors on acceptable terms from our key suppliers, we could suffer
disruptions in our business.
We currently purchase
our flavor concentrate from various flavor concentrate suppliers, and continually develop other sources of flavor concentrate
for each of our products. Generally, flavor suppliers hold the proprietary rights to their flavor specific ingredients. Although
we have the exclusive rights to flavor concentrates developed with our current flavor concentrate suppliers, while we have the
rights to the ingredients for our products, we do not have the list of ingredients for our flavor extracts and concentrates. Consequently,
we may be unable to obtain these exact flavors or concentrates from alternative suppliers on short notice. If we have to replace
a flavor supplier, we could experience disruptions in our ability to deliver products to our customers, which could have a material
adverse effect on our results of operations.
If we are unable to attract and
retain key personnel, our efficiency and operations would be adversely affected; in addition, management turnover causes uncertainties
and could harm our business.
Our success depends
on our ability to attract and retain highly qualified employees in such areas as finance, sales, marketing and product development.