Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Regarding Forward-Looking
Statements
The information in this discussion may
contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations. Any statements that are not of historical fact may
be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some
cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” or “continue”, the negative of the terms or other comparable terminology.
Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking
statements. In evaluating these statements, you should consider various factors, including the risks included from time to time
in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may
cause our actual results to differ materially from any forward-looking statements. We disclaim any obligation to publicly update
these statements or disclose any difference between actual results and those reflected in these statements.
24
Unless the context otherwise requires,
references in this Form 10-K to “we,” “us,” “our,” or the “Company” refer to Splash
Beverage Group, Inc.
The following discussion and analysis
should be read in conjunction with the Audited Consolidated Financial Statements and Notes to Audited Consolidated Financial Statements
filed herewith.
Business Overview
Splash Beverage Group (“SBG”),
f/k/a Canfield Medical Supply, Inc. (the “CMS”), was incorporated in the State of Ohio on September 3, 1992, and changed
domicile to Colorado on April 18, 2012. CMS is 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, CMS entered into
an Agreement and Plan of Merger (the “Merger Agreement”) with SBG Acquisition Inc. (“Merger Sub”), a Nevada
Corporation wholly-owned by CMS, and Splash Beverage Group, Inc. a Nevada corporation (“Splash”) pursuant to which
Merger Sub merged with and into Splash (the “Merger”) with Splash as the surviving company and a wholly-owned subsidiary
of CMS. The Merger was consummated on March 31, 2020.
As the owners and management of Splash
have 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.
Splash specializes in the manufacturing,
distribution, and sales & marketing of various beverages across multiple channels. Splash operates in both the non-alcoholic
and alcoholic beverage segments. Additionally, Splash operates its own vertically integrated B-to-B and B-to-C e-commerce distribution
platform called Qplash, further expanding its distribution abilities and visibility.
In July 2020, we filed a Certificate of
Amendment of Articles of Incorporation to change our name to Splash Beverage Group Inc. On July 31, 2020, we received approval
from FINRA regarding our name change.
On December 24, 2020, we entered into
an Asset Purchase Agreement (the “Purchase Agreement”) with Copa di Vino Corporation an Oregon company for a purchase
price of $5,980,000.
Results of Operations for the Year
Ended December 31, 2020 compared to Year Ended December 31, 2019.
Revenue
Revenues for the year ended December 31,
2020 were $2,975,939 compared to revenues of $20,387 for the year ended December 31, 2019. The $2,955,552 increase in sales was
due to Salt Tequila $240,786, Qplash – our vertically integrated B2B and B2C e-commerce distribution platform which sells
their products on Amazon and Shopify $1,957,797 Canfield’s medical device business $675,213 and Copa di Vino business $101,544.
Cost of goods sold for year ended December 31, 2020 were $2,521,816 compared to cost of goods sold for the year ended December
31, 2019 of $245,500. The $2,006,816 increase in cost of goods sold for the year ended December 31, 2020 was primarily due to our
increased sales, and as our sales increased, our cost of sales for those sales correspondingly increased.
25
Operating Expenses
Operating expenses for the year ended December
31, 2020 were $18,025,359 compared to $4,261,946 for the year ended December 31, 2019. The $23,212,265 increase in our operating
expenses was primarily a result of recording expenses relating to warrants and share-based compensation for shares issued in exchange
for services. The net loss for the year ended December 31, 2020 was $28,674,556 as compared to a net loss of $ $5,135,731 for the
year ended December 31, 2019. The increase in net loss is due to our increase in operating expenses slightly offset by our increase
in revenues.
Other Income/(Expense)
Other expense for the year ended December 31, 2020 were $1,926,467
compared to $648,672 for the year ended December 31, 2019. The $1,276,795 increase in our interest expenses was primarily a result
of recording a finance charge of $1,236,254 associated with warrants issued to one of our note holders.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company
to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis.
Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts
payable and capital expenditures.
As of December 31, 2020, we had total cash
and cash equivalents of $380,000, as compared with $42,639 at December 31, 2019. The increase was primarily due to issuances of
notes payable and subscription agreements offset by expenses relating to the operating the business.
Net cash used for continuing operating
activities during the year ended December 31, 2020 was $21,316,556 as compared to the net cash used by continuing operating activities
for the year ended December 31, 2019 of $2,658,328. The primary reasons for the change in net cash used was due to losses sustained
and increases for stock-based compensation, offset by other non-cash expenses. Net cash used for discontinued operating activities
during the year ended December 31, 2020, was $9,794.
Net cash used for continuing investing
activities during the year ended December 31, 2020 was $768,624 as compared to the net cash used by continuing investing activities
for the year ended December 31, 2019 of $12,552. The net cash used in the year 2020 was primarily due to the $250,000 payment made
to SALT Tequila USA and $500,000 of cash paid relating to the Copa di Vino acquisition offset by $72,422 of cash obtained in the
acquisition of Canfield Medical Supply, Inc. Net cash used for discontinued investing activities was $11,628.
Net cash provided by financing activities
during the year ended December 31, 2020 was $22,494,984 compared to $1,775,479 provided from financing activities for the year
ended December 31, 2019. During the year ended December 31, 2020, we received $20,182,503 from investors and related parties and
we issued $2,439,472 of debt used for the Copa di Vino acquisition offset by $46.3k is repayments to shareholder advances and $80.7K.
of the right of use liability.
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
26
Item 8. Financial
Statements and Supplementary Data.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders
Splash
Beverage Group, Inc.
Fort
Lauderdale, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Splash Beverage Group, Inc. (f/k/a Canfield medical supply, Inc.) (the “Company”) at December 31,
2020 and 2019, and the related consolidated statements operations, deficiency in stockholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial
statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company
at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period
ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements,
the Company has sustained recurring losses from operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
F-1
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical
Audit Matters
The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Intangible
Assets Impairment Assessments
As
described in Notes 2 and 8 to the consolidated financial statements, the Company has goodwill of $5.7 million at December 31,
2020. In most cases, no directly observable market inputs are available to measure the fair value to determine if the asset is
impaired. Therefore, an estimate is derived indirectly and is based on net present value techniques utilizing post-tax cash flows
and discount rates. The estimates that management used in calculating the net present values depend on assumptions specific to
the nature of the management service activities with regard to the amount and timing of projected future cash flows; long-term
professional service forecasts; actions of competitors (competing services), future tax and discount rates.
The
principal considerations for our determination that performing procedures relating to the intangible assets impairment assessment
is a critical audit matter are the significant judgment by management when developing the net present value of the intangible
assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating
management’s significant assumptions related to the amount and timing of projected future cash flows and the discount rate.
In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing
the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing management’s process for developing the fair value
estimate; evaluating the appropriateness of the net present value techniques; testing the completeness and accuracy of underlying
data used in the model; and evaluating the significant assumptions used by management, including the amount and timing of projected
future cash flows and the discount rate. Evaluating management’s assumptions related to the amount and timing of projected
future cash flows and the discount rate involved evaluating whether the assumptions used by management were reasonable considering
the current and past performance of the intangible assets, the consistency with external market and industry data, and whether
these assumptions were consistent with evidence obtained in other areas of the audit.
/s/
Daszkal Bolton LLP
Daszkal
Bolton LLP
We
have served as the Company’s auditor since 2020
Fort
Lauderdale, Florida
March
5, 2021
F-2
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Consolidated Balance Sheets
December 31, 2020 and December 31, 2019
Assets
Current assets:
Assets from discontinued operations 316,572 -
Non-current assets:
Investment in Salt Tequila USA, LLC 250,000 -
Liabilities and Deficiency in Stockholders' Equity
Liabilities:
Current liabilities
Bridge loan payable, net - 2,200,000
Revenue financing arrangements - 45,467
Shareholder advances - 46,250
Accrued interest payable - related parties - 546,362
Liabilities from discontinued operations 591,642
Long-term Liabilities:
Related party notes payable - noncurrent 666,667 -
Notes payable - noncurrent 1,240,044 -
Liability to issue shares in APA 1,980,000 -
Deficiency in stockholders' equity:
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
Splash Beverage
Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Consolidated Statements of Operations
For the Year Ended December 31, 2020
and 2019
Operating expenses:
Other income/(expense):
Interest income 8 132
Provision for income taxes - -
Net income from discontinued operations, net of tax (9,446,853 ) -
Net loss per share (basic diluted)
Continuing operations (0.35 ) (0.13 )
Discontinued operations (0.17 ) -
Net loss per share $ (0.52 ) $ (0.13 )
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Consolidated Statement of Deficiency
in Stockholders’ Equity
For the year ended
December 31, 2020 and 2019
Total
Common Stock Treasury Stock Additional Paid-In Accumulated Stockholders' Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
Issuance of series B convertible preferred stock - - 0 - - - -
Warrants issued in connection with debt modification - - 0 - 15,667 - 15,667
Issuance of common stock for convertible debt - - - - 145,579 - 145,579
Incremental beneficial conversion for preferred A - - - - 240,770 (240,770 ) -
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
Splash Beverage
Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Consolidated Statement Cash Flows
For the Year Ended December 31, 2020
and 2019
Adjustments to reconcile net loss to net cash used in operating activities:
Gain from debt extinguishment - (16,391 )
Liability to issue shares in APA 1,980,000 -
Non-cash acquisition costs 3,578,212 -
Changes in working capital items:
Prepaid expenses and other current assets (251,752 ) (1,233 )
Accounts payable and accrued expenses (64,364 ) (127,167 )
Net cash used in operating activities – discontinued operations (9,794 ) -
Cash Flows from Investing Activities:
Investment in Salt Tequila USA, LLC (250,000 ) -
Cash used for Copa acquisition (500,000 ) -
Net cash acquired in Canfield merger 72,442 -
Net cash used in investing activities – discontinued operations (11,628 ) -
Cash Flows from Financing Activities:
Cash advance from shareholder - 153,582
Repayment of cash advance (46,250 ) -
Principal repayment of debt - (31,641 )
Net cash provided by financing activities – discontinued operations - -
Cash and Cash Equivalents, beginning of year 42,639 938,040
Cash and Cash Equivalents, end of year $ 431,020 $ 42,639
Supplemental Disclosure of Cash Flow Information:
Cash paid for Interest $ - $ 23,851
Supplemental Disclosure of Non-Cash Investing and Financing Activities
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
Splash Beverage
Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 1 – Business Organization and Nature of Operations
Splash Beverage Group (“SBG”),
f/k/a Canfield Medical Supply, Inc. (the “CMS”), was incorporated in the State of Ohio on September 3, 1992, and changed
domicile to Colorado on April 18, 2012. CMS is 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, CMS entered into
an Agreement and Plan of Merger (the “Merger Agreement”) with SBG Acquisition Inc. (“Merger Sub”), a Nevada
Corporation wholly-owned by CMS, and Splash Beverage Group, Inc. a Nevada corporation (“Splash”) pursuant to which
Merger Sub merged with and into Splash (the “Merger”) with Splash as the surviving company and a wholly-owned subsidiary
of CMS. The Merger was consummated on March 31, 2020.
As the owners and management of Splash
have 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.
As part of the recapitalization, previously
issued shares of SBG preferred stock have been reflected as shares of common stock that were received in the Merger. These common
shares have been retrospectively presented as outstanding for all periods.
Splash specializes in the manufacturing,
distribution, and sales & marketing of various beverages across multiple channels. Splash operates in both the non-alcoholic
and alcoholic beverage segments. Additionally, Splash operates its own vertically integrated B-to-B and B-to-C E-commerce distribution
platform called Qplash, further expanding its distribution abilities and visibility.
On July 2, 2020, CMS received a Certificate
of Good Standing from the State of Colorado. This certificate allowed us to change our name from Canfield Medical Supply, Inc.
to Splash Beverage Group, Inc. a Colorado company. On July 31, 2020, we received approval from FINRA to change the Company’s
name from Canfield Medical Supply, Inc. to Splash Beverage Group, Inc. Our new ticker symbol is SBEV.
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.
F-7
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 2 – Summary of Significant
Accounting Policies
Basis of Presentation and Consolidation
These consolidated financial statements
include the accounts of Splash Beverage Group and its wholly owned subsidiaries, Holdings and Splash Mex, in addition to the accounts
of the CMS from March 31, 2020, and Copa from December 1, 2020 the merger/acquisition effective date. All intercompany balances
have been eliminated in consolidation.
Our accounting and reporting policies
conform to accounting principles generally accepted in the United States of America (GAAP).
The accompanying consolidated financial
statements have been prepared by us. In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and cash flows for the year ended December 31, 2020
and 2019 have been made.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents and Concentration
of Cash Balance
We consider all highly liquid securities
with an original maturity of three months or less to be cash equivalents. We had no cash equivalents at December 31, 2020 and
2019.
Our cash in bank deposit accounts, at times,
may exceed federally insured limits of $250,000. At December 31, 2020 we had bank accounts over the federally insured limits by
approximately $29,300. Our bank deposit accounts in Mexico ($2,400) are uninsured.
F-8
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 2 – Summary of Significant
Accounting Policies, continued
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable are carried at their
estimated collectible amounts and are periodically evaluated for collectability based on past credit history with clients and other
factors. We establish provisions for losses on accounts receivable on the basis of loss experience, known and inherent risk in
the account balance, and current economic conditions. At December 31, 2020 and 2019, our accounts receivable amounts are
reflected net of allowances of $0 and $11,430, respectively.
Inventory
Inventory is stated at the lower of cost
or net realizable value, accounted for using the weighted average cost method. The inventory balances at December 31, 2020 and
2019 consisted of raw materials, work-in-process, and finished goods held for distribution. The cost elements of inventory consist
of purchase of products, transportation, and warehousing. We establish provisions for excess or inventory near expiration are based
on management’s estimates of forecast turnover of inventories on hand and under contract. A significant change in the timing
or level of demand for certain products as compared to forecast amounts may result in recording additional provisions for excess
or expired inventory in the future. Provisions for excess inventory are included in cost of goods sold and have historically been
adequate to provide for losses on inventory. We manage inventory levels and purchase commitments in an effort to maximize
utilization of inventory on hand and under commitments. The amount of our reserve was $366,109 and $150,974 at December 31, 2020
and 2019, respectively.
Excise taxes
The Company pays alcohol excise taxes
based on product sales to both the Oregon Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol and Tobacco
Tax and Trade Bureau (TTB). The Company is liable for the taxes upon the removal of product from the Company’s warehouse
on a per gallon basis. The federal tax rate is affected by a small winery tax credit provision which decreases based upon the
number of gallons of wine production in a year rather than the quantity sold.
Property and Equipment
We record property and equipment at cost
when purchased. Depreciation is recorded for property, equipment, leasehold improvements, and software using the straight-line
method over the estimated economic useful lives of assets, which range from 3-39 years. Company management reviews the recoverability
of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying
amount of a long-lived asset might not be recoverable.
Depreciation expense totaled $55,616 and
$19,781 for the year ended December 31, 2020 and 2019, respectively. Property and equipment as of December 31, 2020 and 2019 consisted
of the following:
Licensing Agreements
The initial amount of the TapouT agreement
as entered into by one of the founders prior to the Company’s assumption in 2013 was $4,000,000 to be paid over several
years pursuant to a guaranteed minimum royalty agreement. Royalty costs incurred under the agreements, guaranteed minimum royalty
amounts, are expensed as incurred.
We have not made any payments to Salt
Tequila USA, LLC under the licensing agreement due to the immaterial level of our sales to date from the brand.
In connection with the Copa APA, we acquired
the license to certain patents from 1/4 Vin SARL (“1/4 Vin”) 1/4 Vin has the right to license certain patents and
patent applications relating to inventions, systems, and methods used in the Company’s manufacturing process. In exchange
for notes payable, 1/4 Vin granted the Company a nonexclusive, royalty-bearing, non-assignable, nontransferable, terminable license
which would continue until the subject equipment is no longer in service or the patents expire. Amortization will be approximately
$31,000 annually until the license agreement is fully amortized. The asset is being amortized over a 10 year useful life.
F-9
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 2 – Summary of Significant
Accounting Policies, continued
Fair Value of Financial Instruments
Financial Accounting Standards (“FASB”)
guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable
or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market
assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value
hierarchy are as follows:
The liabilities and indebtedness presented
on the consolidated financial statements approximate fair values at December 31, 2020 and 2019, consistent with recent
negotiations of notes payable and due to the short duration of maturities.
Convertible Instruments
U.S. GAAP requires
the bifurcation of certain conversion rights contained in convertible indebtedness and account for them as free standing derivative
financial instruments according to certain criteria. This criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract
is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value
reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument
would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional
as that term is described under applicable U.S. GAAP.
When bifurcation
is required, the embedded conversion options are bifurcated from the convertible note, resulting in the recognition of discounts
to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between
the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price
embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated
date of redemption.
With respect
to convertible preferred stock, we record a dividend for the intrinsic value of conversion options embedded in preferred securities
based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and
the effective conversion price embedded in the preferred shares.
F-10
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 2 – Summary of Significant
Accounting Policies, continued
Revenue Recognition
We recognize revenue under ASC 606, Revenue
from Contracts with Customers (Topic 606). This guidance sets forth a five-step model which depicts the recognition of revenue
in an amount that reflects what we expect to receive in exchange for the transfer of goods or services to customers.
We recognize revenue when our performance
obligations under the terms of a contract with the customer are satisfied. Product sales occur once control of our products is
transferred upon delivery to the customer. Revenue is measured as the amount of consideration that we expect to receive in exchange
for transferring goods and is presented net of provisions for customer returns and allowances. The amount of consideration we
receive and revenue we recognize varies with changes in customer incentives we offer to our customers and their customers. Sales
taxes and other similar taxes are excluded from revenue.
Distribution expenses to transport our
products, where applicable, and warehousing expense after manufacture are accounted for within operating expenses.
Cost of Goods Sold
Cost of goods sold include the costs of
products, packaging, transportation, warehousing, and costs associated with valuation allowances for expired, damaged or impaired
inventory.
Stock-Based Compensation
We account for stock-based compensation
in accordance with ASC 718, “Compensation - Stock Compensation”. Under the fair value recognition
provisions, cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over
the requisite service period, which is generally the option vesting period. We use the Black-Scholes option pricing
model to determine the fair value of stock options. We early adopted ASU 2018-07, “Improvements to Nonemployee
Share-Based Payment Accounting”, which aligns accounting treatment for such awards to non-employees with the existing guidance
on employee share-based compensation in ASC 718.
Income Taxes
We use the liability method of accounting
for income taxes as set forth in ASC 740, “Income Taxes”. Under the liability method, deferred
taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities
using tax rates expected to be in effect during the years in which the basis differences reverse. We record a valuation
allowance when it is not more likely than not that the deferred tax assets will be realized.
Company management assesses its income
tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances
and information available at the reporting date. In accordance with ASC 740-10, for those tax positions where there
is a greater than 50% likelihood that a tax benefit will be sustained, our policy is to record the largest amount of tax benefit
that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant
information.
For those income tax positions where there
is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements.
Company management has determined that there are no material uncertain tax positions at December 31, 2020 and 2019.
Net loss per share
The net loss per share is computed by
dividing the net loss by the weighted average number of shares of common outstanding. Warrants, stock options, and common stock
issuable upon the conversion of the Company’s convertible debt or preferred stock (if any), are not included in the computation
if the effect would be anti-dilutive.
Numerator
Net loss from discontinued applicable to common shareholders $ (9,446,853 ) $ -
Denominator
Net income per share from discontinued operations (basic diluted) $ (0.17 ) $ -
F-11
Splash Beverage
Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 2 – Summary of Significant
Accounting Policies, continued
Weighted average number of shares outstanding
excludes anti-dilutive common stock equivalents, including warrants to purchase 3 million shares of common stock for nominal consideration.
Advertising
We conduct advertising for the promotion
of our products. In accordance with ASC 720-35, advertising costs are charged to operations when incurred. We recorded advertising
expense of $146,579 and $4,767 for the years ended December 31, 2020 and 2019, respectively.
Related Parties
We are indebted to certain members of
our Board of Directors at December 31, 2020 and 2019. Transactions between us and the Board members are summarized in Notes 4
and 8.
Goodwill
Goodwill represents the excess of acquisition
cost over the fair value of the net assets acquired and is not subject to amortization. The Company reviews goodwill annually
in the fourth quarter for impairment or when circumstances indicate carrying value may exceed the fair value. This evaluation
is performed at the reporting unit level. If a qualitative assessment indicates that it is more likely than not that the fair
value is less than carrying value, a quantitative analysis is completed using either the income or market approach, or a combination
of both. The income approach estimates fair value based on expected discounted future cash flows, while the market approach uses
comparable public companies and transactions to develop metrics to be applied to historical and expected future operating results.
During 2020, the company recorded an impairment charge associated with the CMS acquisition. See Note 17.
Long-lived assets
The Company evaluates long-lived assets
for impairment on an annual basis, when relocating or closing a facility, or when events or changes in circumstances may indicate
the carrying amount of the asset group, generally an individual warehouse, may not be fully recoverable. For asset groups held
and used, including warehouses to be relocated, the carrying value of the asset group is considered recoverable when the estimated
future undiscounted cash flows generated from the use and eventual disposition of the asset group exceed the respective carrying
value. In the event that the carrying value is not considered recoverable, an impairment loss is recognized for the asset group
to be held and used equal to the excess of the carrying value above the estimated fair value of the asset group. For asset groups
classified as held-for-sale (disposal group), the carrying value is compared to the disposal group’s fair value less costs
to sell. The Company estimates fair value by obtaining market appraisals from third party brokers or using other valuation techniques.
Recent Accounting Pronouncements
In June 2016, that FASB issued ASU
2016-13, “Financial Instruments – Credit Losses” (Topic 326). This ASU provides financial statement
users with more decision-useful information about the expected credit losses on financial instruments and other commitments
to extend credit held by a reporting entity at each reporting date.
Management is currently assessing the new
standard but does not believe that it would have a material effect.
Management does not believe that any other
recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements.
As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note 3 – Going Concern
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our business operations have not yet generated significant revenues, and we have sustained
net losses of approximately $28.7 million during the year ended December 31, 2020 and have an accumulated deficit of approximately
$61.6 million at December 31, 2020. In addition, we have current liabilities in excess of current assets of approximately $3.2
million at December 31, 2020. Further, we are in default on approximately $1.0 million of indebtedness, including accrued interest.
Our ability to continue as a going concern
in the foreseeable future is dependent upon our ability to generate revenues and obtain sufficient long-term financing to meet
current and future obligations and deploy such to produce profitable operating results. Management has evaluated these conditions
and plans to raise capital as needed and to generate revenues to satisfy our capital needs. No assurance can be given that we
will be successful in these efforts.
These factors, among others, raise substantial
doubt about our ability to continue as a going concern for a reasonable period of time. These consolidated financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should we be unable to continue as a going concern.
F-12
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 4 – Debt
Notes payable are generally nonrecourse
and secured by all Company owned assets.
Notes Payable
Interest expense on notes payable was $50,592
and $105,966 for the years ended December 31, 2020 and 2019, respectively. Accrued interest was $271,533 and $581,693 at 31, 2020
and December 31, 2019, respectively.
Concurrently with the consummation of
the Merger with CMS, notes payable of $525,000 and accrued interest were converted to shares of Splash common stock, which were
exchanged for Splash Beverage Group, Inc. [Formerly known as Canfield Medical Supply, Inc.] shares. Pursuant to the terms of the
conversion agreements, these investors have the right to rescind the common shares received and receive replacement notes payable
if we fail to raise $9 million in a secondary initial public offering by September 30, 2020 (subsequently extended to April 30,
2021). As a result, these shares are classified as mezzanine equity in our consolidated balance sheet. See Note 18.
F-13
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 4 –Debt, continued
Related Parties Notes Payable
Continued on next page
F-14
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 4 –Debt, continued
Related Parties Notes Payable, continued
Interest expense on related party notes
payable was $37,967 and $95,183 for the year ended December 31, 2020 and 2019, respectively. Accrued interest was $0 and $546,362
as of December 31, 2020 and December 31, 2019.
Concurrently with the consummation of the
Merger with CMS, notes payable of $1,505,100 and accrued interest were converted to shares of Splash common stock, which were exchanged
for Splash Beverage Group, Inc. [Formerly known as Canfield Medical Supply, Inc.] shares. Pursuant to the terms of the conversion
agreements, these investors have the right to rescind the common shares received and receive replacement notes payable if we fail
to raise $9 million in a secondary initial public offering by September 30, 2020 (subsequently extended to April 30, 2021). As
a result, these shares are classified as mezzanine equity in our consolidated balance sheet. See Note 18.
F-15
Splash Beverage Group, Inc.
[f/k/a Canfield Medical Supply, Inc.]
Notes to the Consolidated Financial
Statements
Note 4 –Debt, continued