Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
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
Canfield Medical Supply, Inc. a company’s whose
common stock was quoted on the OTCQB entered into an Agreement and Plan of Merger with SBG Acquisition Inc. (“Merger Sub”),
a Nevada Corporation wholly-owned by Canfield, and Splash Beverage Group, II 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 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 June 11, 2021, SBG’s common stock and warrant to purchase common stock began trading on the
NYSE American under the symbols “SBEV” and SBEV WT,” respectively
On November 8, 2021, SBG reincorporated into the State
of Nevada and became a Nevada corporation.
Our principal offices are located at 1314 E. Las Olas Blvd, Suite 221,
Fort Lauderdale, Florida 33301. Our main telephone number is (954) 745-5815. Our website address is www.splashbeveragegroup.com. We have
not incorporated by reference into this Annual Report on Form 10-K the information that can be assessed through our website and you should
not consider it to be part of this Annual Report on Form 10-K.
Results of Operations for the Year Ended December
31, 2022, compared to Year Ended December 31, 2021.
Revenue
Revenues for the year ended December 31, 2022 were
$18.1m compared to revenues of $11.3m for the year ended December 31, 2021. The $6.8m increase in sales was mainly due to the increase
in our ecommerce division distribution platform, Qplash of $6.4m.
Cost of Goods Sold
Cost of goods sold for year ended December 31, 2022
were $12.1m compared to cost of goods sold for the year ended December 31, 2021 of $8.3m. The $4.7m increase in cost of goods sold was
due to our increased sales and inflation.
Operating Expenses
Operating expenses for the year ended December 31,
2022 were $27.3m compared to $33m for the year ended December 31, 2021. Non cash operating expenses related to share issuance was $7.4m
as of December 31, 2022 compared $18.4m in December 31, 2021. The cash expense increase of $5.3m is mainly driven by an increase in sales
and marketing cost of $2.0m to drive sales and promote the brands, delivery fees of $2.0m and an increase in Amazon selling fees of $0.6m
associated with higher sales of Qplash division.
25
Other Income/(Expense)
Other expense for the year ended December 31, 2022
were $245,429 compared to $262,450 for the year ended December 31, 2021. These cost are mainly interest expense.
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.
In addition, the Company has an active registration statement on Form S-3 to facilitate raising additional funds.
As of December 31, 2022, we had total cash of $4,431,745,
as compared with $4,181,383 at December 31, 2021. The increase was primarily due to issuances of notes payable and stock subscription
agreements offset by expenses relating to the operating the business.
Net cash used for continuing operating activities
during the year ended December 31, 2022, was $14,061,116 as compared to the net cash used by continuing operating activities for the year
ended December 31, 2021, of $14,697,179. The primary reason for the change in net cash used due to an increase of $0.4m in operating loss
operating losses of the business, offset by a decrease of $1.2m in working capital Net cash used for discontinued operating activities
during the year ended December 31, 2022, was $32,774 as compared to $515,952 for the year ended December 31, 2021 due to discontinuing
the business on June 30, 2022.
Net cash used for investing activities during the
year ended December 31, 2022, was $102,698 as compared to the net cash used for investing activities during the year ended December 31,
2021, of $0. The net cash used in the year 2022 was for a capital expenditure for out of home used for advertising and building improvements.
Net cash provided by financing activities during the
year ended December 31, 2022, was $14,446,951 compared to $19,014,524 provided from financing activities for the year ended December 31,
2021. During the year ended December 31, 2022, we received $11,428,591 from the issuance of common stock compared to $19,630,565 during
the year ending December 31, 2021. We received $4,045,420 and $928,000 proceeds from the issuance of debt in years ending December 31,
2022 and 2021 respectively. In the year ending December 31, 2022 $390,500 shareholder advance was repaid and in year ending December 31,
2021 $390,500 cash advance from shareholder was received. Principal repayment of debt $636,560 and $1,673,296 were made in years ending
December 31, 2022 and 2021 respectively. In year ending December 31, 2021 a cash advance repayment of $261,245 was made.
In order to have sufficient cash to fund our operations,
we will need to raise additional equity or debt capital. There can be no assurance that additional funds will be available when needed
from any source or, if available, will be available on terms that are acceptable to us. We will be required to pursue sources of additional
capital through various means, including debt or equity financings. Future financings through equity investments are likely to be dilutive
to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for new investors.
Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and
the issuances of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur
substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing
and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities
we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed
financing may be impaired by such factors as the capital markets and our history of losses, which could impact the availability or cost
of future financings. If the amount of capital we are able to raise from financing activities together with our revenues from operations,
is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to curtail
or cease operations.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
Not applicable for smaller reporting companies.
26
Item 8. Financial Statements and Supplementary
Data.
Financial Statements Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 229) F-2
Consolidated Balance Sheets December 31, 2022 and December 31, 2021 F-4
Notes to the Consolidated Financial Statements F-8
F-1
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. at December 31, 2022 and 2021, and the related consolidated statements operations,
stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States
of America.
Basis for Opinion
These 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 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.
Our audits included performing
procedures to assess the risks of material misstatement of the 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
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 financial statements. We believe that our audits provide a reasonable basis for
our opinion.
F-2
Critical Audit Matters
The critical audit matter communicated
below is a matter 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 a critical audit matter 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 matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which they relate.
Intangible Assets Impairment
Assessments
As described in Notes 2 and
4 to the consolidated financial statements, the Company has intangible assets of approximately $4.9 million at December 31, 2022. 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 valuation techniques utilizing undiscounted and discounted after-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 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 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 31, 2023
229
F-3
Splash Beverage Group, Inc.
Consolidated Balance Sheets
Assets
Current assets:
Assets from discontinued operations — 473,461
Non-current assets:
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities
Related party notes payable — 653,081
Liability to issue shares 91,800 —
Liabilities from discontinued operations — 389,086
Long-term Liabilities:
Stockholders’ equity:
Accumulated Other Comprehensive Income (20,472 ) —
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
Splash Beverage Group, Inc.
Consolidated Statements of Operations
Operating expenses:
Other income/(expense):
Gain from debt extinguishment — 176,082
Provision for income taxes — —
Net (loss) income from discontinued operations, net of tax (199,154 ) 294,550
Gain on discontinued operations 148,747 —
Net income (loss) from discontinued operations, net of tax (50,407 ) 294,550
Other Comprehensive loss
Foreign Currency Translation loss (20,472 ) —
Loss per share - continuing operations
Basic and Diluted (0.58 ) (1.01 )
Weighted average number of common shares outstanding - continuing operations
Income (loss) per share - discontinued operations
Weighted average number of common shares outstanding - discontinued operations
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
Splash Beverage Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Shares Amount Capital Income Deficit (Deficit)
Issuance of warrants on convertible instruments — — 1,898,265 — — 1,898,265
Accumulated Comprehensive Income - Translation — — — (20,472 ) (20,472 )
The accompanying notes are an integral part of these
consolidated financial statements
F-6
Splash Beverage Group, Inc.
Consolidated Statements Cash Flows
Adjustments to reconcile net loss to net cash used in operating activities:
Gain from debt extinguishment — 176,082
Gain from sale of discontinued operation 84,375 —
Changes in working capital items:
Prepaid expenses and other current assets (43,294 ) (384,784 )
Cash Flows from Investing Activities:
Capital Expenditures (102,698 ) —
Net cash used in investing activities -– continuing operations (102,698 ) —
Net cash used in investing activities - discontinued operations — —
Cash Flows from Financing Activities:
Repayment of cash advance — (261,245 )
Net cash provided by financing activities - discontinued operations — —
Supplemental Disclosure of Cash Flow Information:
Cash paid for Taxes — —
Supplemental Disclosure of Non-Cash Investing and Financing Activities
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 1 – Business Organization and Nature of Operations
Splash Beverage Group (“SBG” or “Splash”),
formally 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, 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 process, 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 the Company filed a Certificate of Amendment
of Articles of Incorporation of CMS with the Secretary of State of the State of Colorado, pursuant to which the Company changed its name
from CMS. to Splash Beverage Group, Inc. On July 31, 2020, we received approval from FINRA to change the Company’s name from CMS
to Splash Beverage Group, Inc. Our new ticker symbol is SBEV.
On December 24, 2020, SBG consummated an Asset Purchase
Agreement (the “Copa 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.
On February 2021, Management initiated a plan to divest its CMS business.
As a result, the assets and operations of CMS have been retrospectively reflected as discontinued operations. On November 12, 2021 the
Company changed its state of Domicile from Colorado to Nevada.
In coordination with up listing to the NYSE on
June 11, 2021 the Company consummated a 1.0 for 3.0 reverse stock split. All common stock shares stated herein have been adjusted to reflect
the split.
F-8
Splash Beverage Group, 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 and its wholly owned subsidiaries, Holdings and Splash Mex, CMS (as discontinued operations), and CdV. All intercompany
balances have been eliminated in consolidation.
Our investment in Salt Tequila USA, LLC is accounted
for at cost, as the company does not have the ability to exercise significant influence.
Our accounting and reporting policies conform to accounting
principles generally accepted in the United States of America (GAAP).
Certain reclassifications have been made to the prior
period financial statements to conform to the current period classifications. These reclassifications had no impact on net loss.
Use of Estimates
The preparation of 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, 2022 or December 31, 2021.
Our cash in bank deposit accounts, at times, may
exceed federally insured limits of $250,000.
At December 31, 2022 we had approximately $3.8m over
the federally insured limits. Our cash in uninsured foreign bank accounts was $1,941at
December 31, 2022.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivables 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, 2022 and December 31, 2021, our accounts receivable amounts are reflected net of allowances
of $13,683 and $45,203, respectively.
F-9
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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, 2022 and December 31, 2021 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 $66,146 and $223,223 at December 31, 2022 and December 31, 2021, respectively.
Property and Equipment
We record property and equipment at cost when purchased.
Depreciation is recorded for property, equipment, and software using the straight-line method over the estimated economic useful lives
of assets, which range from 3-20 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 $182,886 and $156,766
for the years ended December 31, 2022 and 2021 respectively. Property and equipment consisted of the following:
Schedule of Property and equipment
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 also pays taxes to the State of Florida – Division of Alcoholic Beverages and Tobacco. 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.
Employee Retention Credit (“ERC”)
The CARES Act provides an employee retention credit
(“CARES Employee Retention credit”), which is a refundable tax credit against certain employment taxes of up to $5,000 per
employee for eligible employers. The tax credit is equal to 50% of qualified wages paid to employees during a quarter, capped at $10,000
of qualified wages per employee through December 31, 2020. Additional relief provisions were passed by the United States government, which
extend and slightly expand the qualified wage caps on these credits through December 31, 2021. Based on these additional provisions, the
tax credit is now equal to 70% of qualified wages paid to employees during a quarter, and the limit on qualified wages per employee has
been increased to $10,000 of qualified wages per quarter. The Company qualified for the tax credit under the CARES Act. Copa Di Vino received
$211,300 which represents refunds for the quarters ended March, June and September 2021 Form 941 Employer Quarterly Federal Tax Returns.
F-10
Splash Beverage Group, 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, 2022 and December 31, 2021, consistent with recent negotiations
of notes payable and due to the short duration of maturities.
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, and
warehousing expense after manufacture are accounted for in Other General and Administrative cost.
F-11
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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. The
cost of transportation from production site to other 3rd party warehouses or customer is included in Other General and Administrative
cost.
Other General and Administrative Expenses
Other General and Administrative expenses includes
Amazon selling fees, royalty cost for selling TapouT, cost of transportation from production site to other 3rd party warehouses
or customers, Insurance cost, consulting cost, legal and audit fees, Investor Relations expenses, travel & entertainment expenses,
occupancy cost and other cost.
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.
We measure stock-based awards at the grant-date fair
value for employees, directors and consultants and recognizes compensation expense on a straight-line basis over the vesting period of
the award. Determining the appropriate fair value of stock-based awards requires the input of subjective assumptions, including the fair
value of our common stock, and for stock options and warrants, the expected life of the option and warrant, and expected stock price volatility
and exercise price. We used the Black-Scholes option pricing model to value its stock-based awards. The assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense
could be materially different for future awards. The expected life of stock options/warrants were estimated using the “simplified
method,” which calculates the expected term as the midpoint between the weighted average time to vesting and the contractual maturity,
we have limited historical information to develop reasonable expectations about future exercise patterns. The simplified method is based
on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, we use comparable public companies
as a basis for its expected volatility to calculate the fair value of award. The risk-free interest rate is based on U.S. Treasury notes
with a term approximating the expected life of the award. The estimation of the number of awards that will ultimately vest requires judgment,
and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts are recognized as
an adjustment in the period in which estimates are revised.
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, 2022 and December 31, 2021. See not 13.
F-12
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
Net income (loss) per share
The net income (loss) per share is computed by dividing
the net income (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.
Weighted average number of shares outstanding excludes
anti-dilutive common stock equivalents, including warrants to purchase shares of common stock and warrants granted by our Board but have
not been exercised totaling 14,343,896.
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 $732,618
and $728,045 for the years ended December 30, 2022 and 2021, respectively.
Goodwill and other intangibles
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.
F-13
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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.
Foreign
Currency Gain/Losses
Foreign Currency Gain/Losses — foreign subsidiaries’
functional currency is the local currency of operations and the net assets of foreign operations are translated into U.S. dollars using
current exchange rates. Gain or losses from these translation adjustments are included in the consolidated statement of operations and
other comprehensive (loss) income as foreign currency translation gains or losses. Translation gains and losses that arise from the translation
of net assets from functional currency to the reporting currency, as well as exchange gains and losses on intercompany balances, are included
in Other Comprehensive Losses. The Company incurred foreign currency translation net loss during the year ended December 31, 2022 of $20,472.
Recent Accounting Pronouncements
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 – Liquidity, Capital Resources
and Going Concern Considerations
During 2022, the Company received approximately $12.8million and $4.0million from the proceeds from the issuance common stock and debt, respectively. These events served to mitigate the
conditions that previously raised substantial doubt about
the Company’s ability to continue as a going concern.
The Company’s
consolidated financial statements have been prepared on the basis of US GAAP for a going concern, on the premise that Company’s
ability to meet its obligations as they come due in the normal course of business. The Company sustained a net loss of approximately $21.7
million and negative cash flows from operating activities of approximately $14.1 million for the year ended December 31, 2022. To
date the Company has generated cash flows from issuances of equity and indebtedness.
Management believes
that its current available resources will be sufficient to fund the Company’s planned expenditures over the next 12 months. However,
management recognizes that it may be required to obtain additional resources via issuances of indebtedness or equity to successfully execute
its business plans. No assurances can be given that management will be successful in raising additional capital, if needed, or on acceptable
terms. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should the Company determine it shall be unable to continue as a going concern.
F-14
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 4 – Notes Payable, Related Party
Notes Payable, and Revenue Financing Arrangements
Notes payable are generally nonrecourse and secured
by all Company owned assets.
Schedule of Notes payable
Notes Payable
Long-term notes payable $ 2,536,319 $ —
Interest expense on notes payable was $217,123 and $376,572 for the years
ended December 31, 2022 and 2021, respectively. Accrued interest was $141,591 and $171,452 at December 31, 2022 and December 31, 2021,
respectively.
Notes discount of $1,898,265 for the year ending December 31, 2022 is related
to the discounted warrants on the December notes. The year ending December 31, 2021 did not have discounted warrants.
F-15
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 4 – Notes Payable, Related Party
Notes Payable, and Revenue Financing Arrangements, continued
Schedule of Notes payable
Related Parties Notes Payable
Less current portion — (653,081 )
Long-term notes payable $ — $ —
Interest expense on related party notes payable was
$5,407 and $26,409 for the years ended December 31, 2022 and 2021, respectively.
F-16
Splash Beverage Group, Inc.
Notes to the
Consolidated Financial Statements
Note 5 – Licensing Agreement and Royalty
Payable
We have a licensing agreement with ABG TapouT, LLC (“TapouT”),
providing us with licensing rights to the brand “TapouT” on (i) energy drinks, (ii) energy bars, (iii) coconut water, (iv)
electrolyte gum/chews, (v) energy shakes, (vi) powdered drink mix, (viii) water (including enhanced water), (vii) energy shots, (viii)
teas, and (ix) sports drinks sold in the North America (including US Territories and Military Bases), United Kingdom, Brazil, South Africa,
Australia, Scandinavia, Peru, Colombia, Chile and Guatemala.. Under the terms of the agreement, we are required to pay a 6% royalty on
net sales, as defined. In 2022 and 2021, we are required to make monthly payments of $54,450 and $49,500, respectively.
There were no
unpaid royalties at December 31, 2022 and 2021. We paid the guaranteed minimum royalty payments of $653,400
and $594,000
for the years ended December 31, 2022 and 2021, which is included in general and administrative expenses.
In connection with the Copa APA, we acquired the license
to certain patents from 1/4 Vin SARL (“1/4 Vin”) On February 16, 2018, the Copa di Vino entered into three separate license
agreements with 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 is approximately $31,000 annually until the license agreement is fully amortized. The asset
is being amortized over a 10-year useful life.
Note 6 – Stockholders’ Equity
Common Stock
During the twelve-months ended December 31, 2022,
we issued 4,596,129 shares of common stock as part of the public offerings, 1,834,404 shares in exchange for services, 380,959 shares
in connection with the purchase of Copa di Vino, 377,796 shares on conversion of convertible instruments, and 300,000 shares for cash.
F-17
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 6 – Stockholders’
Equity, continued
Private Placement Memorandum (PPM)
In January 2021, the Board of Directors approved a
private placement offering of 1,212,121 shares of the common stock of the Company, a purchase price of $3.30 per share for aggregate gross
proceeds of $4,000,000 (“PPM”). As part of the PPM, each purchaser received a warrant to purchase one share for every
two shares purchased. In February 2021, we completed our PPM by issuing a total of 1,212,355 of shares and 606,179 warrants receiving
gross proceeds of approximately $4,000,000.
In July 2022, we issued 100,000shares of common stock of the Company, at a purchase price of $1.10per share. In December 2022, we issued 200,000shares of common stock of the Company, at a purchase price of $1.00per share this placement included 100%
warrant coverage.
In December 2022, we issued Convertible Notes for
4,000,000 shares at $1.00 per share with warrants to purchase 4,000,000 shares of common stock at $0.25 per share.
Stock Plans
A summary of the Company’s stock option plan
and changes during the year ended is as follows:
Schedule of stock option plan
On August 2020, the Board adopted the 2020 Stock
Incentive Plan (the “2020 Plan”), which provides for the grant of Options, Restricted Stock Awards, Stock Appreciation Rights,
Performance Units and Performance Bonuses to consultants and eligible recipients.
F-18
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
The following is a summary of the Company’s
stock option activity:
Schedule of stock option activity
Balance - beginning of the year 1,065,000 $ 2.60 — —
Exercises — — — —
In September 2021 we granted 1,065,000 options to
purchase common stock of the Company to employees, consultants, and directors. These options vest over two years.
In May 2022, we granted 146,000 options to purchase
common stock to employees and consultants, these options vest between one and four years.
The Company determined the grant date fair value of
the options granted using the Black Scholes Method using the following assumptions:
Schedule of stock option assumption
Risk-free interest rates 0.84 % 2.99 %
Expected life 5 years 10 years
Expected dividends — —
During the year ended December 31, 2022, 397,748options vested with a weighted average grant date fair value of $2.55 Stock compensation expense for the years ended December 31,
2022 and 2021 was $1,146,965and $3,971,926, respectively.
F-19
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
At December 31, 2022, there was 418,254
options unvested with an average grant date fair value of $2.54and
$379,144of
unrecognized compensation costs related to stock options which will be recognized over the weighted average remaining years of
0.84.
The following is a summary of the Company’s Warrant activity
Schedule of warrant activity
Exercises — — — —
Cancelled — — — —
In January 2021 we issued 606,179 warrants to purchase
common stock of the Company in connection with the January 2021 private placement offering of 1,212,121 shares of common stock.
In May 2021 we granted 333,333 warrants to purchase
common stock of the Company to a director. These warrants vest over two years.
We issued 3,750,000 warrants to purchase common stock
of the Company in connection with the June 2021 underwritten public offering of 3,750,000 shares of common stock, in addition to 150,000
warrants to purchase common stock of the Company to the representative underwriter.