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.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking.
These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. These
statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,”
“anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions
or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this
Annual Report, and other factors that we may not know.
Business Overview
Canfield Medical Supply, Inc. (“CMS”)
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 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.
23
Results of Operations for the Year Ended December
31, 2023, compared to Year Ended December 31, 2022.
Revenue
Revenues for the year ended December 31, 2023 were
$18.9 million compared to revenues of $18.1 million for the year ended December 31, 2022. The increase in sales was mainly due to an
increase in our E-commerce segment of $0.4 million and an increase in our Splash Beverage Group segment of $0.3 million.
Cost of Goods Sold
Cost of goods sold for the year ended December 31,
2023 were $13.3 million compared to cost of goods sold for the year ended December 31, 2022 of $12.2 million. The $1.1 million increase
in cost of goods sold was due to our increased sales and inflation.
Operating Expenses
Operating expenses for the year ended December 31,
2023 were $20.9 million compared to $27.3 million for the year ended December 31, 2022. Non cash-operating expenses related to share
issuance was $1.2 million as of December 31, 2023 compared to $7.4 million in December 31, 2022. The remaining operating expense decrease
of $0.2 million was due to decreases in sales and marketing expense and other general and administrative expenses of $1.0 million, which
were offset by an increase of $0.8 million in salary and wages.
Other Income/(Expense)
Other expense for the year ended December 31, 2023
were $5.7 million compared to $0.2 million for the year ended December 31, 2022. The other expense increase of $5.5 million is mainly
driven by an increase in amortization of debt discount of $3.8 million and a $1.9 million increase in 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, 2023, we had total cash of $379,978,
as compared with $4,431,745 at December 31, 2022. The decrease was primarily due to expenses relating to operating the business.
Net cash used for continuing operating activities
during the year ended December 31, 2023, was $10.2 million as compared to the net cash used by continuing operating activities for the
year ended December 31, 2022, of $14.0 million. The primary reason for the change in net cash used was due to an increase of $3.8 million
in amortization of debt and a decrease of $0.6 million in losses of the business, offset by a decrease of $16.5 million in working capital.
Net cash used for discontinued operating activities during the year ended December 31, 2023, was $0 as compared to $0.03 million for
the year ended December 31, 2022.
Net cash used for investing activities during the
year ended December 31, 2023, was $0.01 as compared to the net cash used for investing activities during the year ended December 31,
2022, of $0.1 million. The net cash used in the year 2023 was for a capital expenditure for building improvements.
Net cash provided by financing activities during
the year ended December 31, 2023, was $6.1 million compared to $14.4 million provided from financing activities for the year ended December
31, 2022. During the year ended December 31, 2023, we received $0 from the issuance of common stock compared to $11.4 million during
the year ending December 31, 2022. We received $6.6 million and $4.0 million proceeds from the issuance of debt in years ending December
31, 2023 and 2022, respectively. In the year ending December 31, 2023, $0.2 million was received from a shareholder advance and a $0.4
million shareholder advance was repaid in the year ending December 31, 2022. Principal repayment of debt of $1.0 million and $0.6 million
were made in years ending December 31, 2023 and 2022 respectively. In the year ending December 31, 2023 a cash advance from related party
of $0.4 million was received.
24
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 issuance 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.
Critical Accounting Estimates
The preparation of our consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, as well as the disclosure of contingent assets
and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results could differ from those estimates.
Revenue
The Company faces significant judgment
in revenue recognition due to the complexities of the beverage industry’s competitive landscape and diverse distribution channels.
Determining the timing of revenue recognition involves assessing factors such as control transfer, returns, allowances, trade promotions,
and distributor sell-through data. Historical analysis, market trends assessment, and contractual term evaluations inform revenue recognition
judgments. However, inherent uncertainties persist, underscoring the critical nature of revenue recognition as it significantly impacts
financial statements and performance evaluation.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is established
based on historical experience, current economic conditions, and specific customer collection issues. Management evaluates the collectability
of accounts receivable on an ongoing basis and adjusts the allowance as necessary. Changes in economic conditions or customer creditworthiness
could result in adjustments to the allowance for doubtful accounts, impacting our reported financial results.
Inventory Valuation
We value inventory at the lower of cost or net realizable
value. Estimating the net realizable value of inventory involves significant judgment, particularly when market conditions change rapidly
or when excess or obsolete inventory exists. Management regularly assesses inventory quantities on hand, future demand forecasts, and
market conditions to determine whether write-downs to inventory are necessary.
Fair Value Measurements
We measure certain financial assets and liabilities
at fair value on a recurring basis. Fair value measurements involve significant judgment and estimation, particularly when observable
inputs are limited or not available. Management utilizes valuation techniques such as discounted cash flow models, market comparables,
and third-party appraisals to determine fair values.
Item 7A. Quantitative and
Qualitative Disclosures about Market Risk.
Not applicable for smaller reporting companies.
25
Item 8. Financial Statements
and Supplementary Data.
Financial Statements Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 229) F-2
Report of Independent Registered Public Accounting Firm (PCAOB ID: 468) F-3
Consolidated Balance Sheets December 31, 2023 and December 31, 2022 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 sheet of Splash Beverage
Group, Inc. (the “Company”) at December 31, 2022, and the related consolidated statements operations, changes in stockholders’
equity and cash flows for the year 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 the results of its operations and its cash flows for the year 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 audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the
December 31, 2022 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 Note 2 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 cashflows; 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
Fort Lauderdale, Florida
March 31, 2023
We served as the Company’s auditor from 2020 to March 2023.
F-2
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
sheet of Splash Beverage Group, Inc. at December 31, 2023, and the related consolidated statements of operations, changes in stockholders’
equity and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of
the Company at December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity
with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated
financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit and a working capital
deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters
are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
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
audit. 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters 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. We determined that there are no critical audit matters.
Rose, Snyder & Jacobs
LLP
We have served as the Company’s
auditor since 2023
Encino, CA
March 29, 2024
F-3
Splash Beverage Group, Inc.
Consolidated Balance Sheets
Assets
Current assets:
Non-current assets:
Liabilities and Stockholders’ Equity
Liabilities:
Current liabilities
Related party notes payable 380,000 —
Liability to issue shares — 91,800
Long-term Liabilities:
Right of use liability, net of current portion 296,128 480,666
Stockholders’ equity:
Accumulated Other Comprehensive Income (16,583 ) (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):
Other Income/expense (30,328 ) —
Amortization of debt discount (3,832,628 ) —
Provision for income taxes — —
Net (loss) income from discontinued operations, net of tax — (199,154 )
Gain on discontinued operations — 148,747
Net income (loss) from discontinued operations, net of tax — (50,407 )
Other comprehensive loss
Foreign currency translation gain (loss) 3,889 (20,472 )
Loss per share - continuing operations
Basic and Diluted (0.49 ) (0.58 )
Weighted average number of common shares outstanding - continuing operations
Income (loss) per share - discontinued operations
Basic and Diluted (0.00 ) (0.00 )
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 )
Accumulated Comprehensive Income - Translation — — — 3,889 — 3,889
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:
Amortization of debt discount 3,832,628 —
Gain from sale of discontinued operation — 84,375
Changes in working capital items:
Prepaid expenses and other current assets 238,241 (43,294 )
Net cash used in operating activities - discontinued operations — (32,774 )
Cash Flows from Investing Activities:
Net cash used in investing activities - discontinued operations — —
Cash Flows from Financing Activities:
Proceeds from issuance of Common stock — 11,428,591
Related party cash advance 380,000 —
Net cash provided by financing activities - discontinued operations — —
Net cash effect of exchange rate changes on cash 3,889 (20,472 )
Supplemental Disclosure of Cash Flow Information:
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.
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.
F-8
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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, 2023 or December 31, 2022.
Our cash in bank deposit accounts, at times, may
exceed federally insured limits of $250,000. At December 31, 2023, the Company’s cash on deposit with financial institutions, at
times, had not exceed federally insured limits of $250,000. The Company had approximately $3.8 million over the federally insured limits
in 2022. Our cash in uninsured foreign bank accounts was $0 and $1,941 at December 31, 2023 and December 31, 2022, respectively.
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, 2023 and December 31, 2022, our accounts receivable amounts are reflected net of allowances
of $183,089 and $13,683, 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, 2023 and December 31, 2022 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 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 $290,524 and $66,146 at December 31, 2023 and December 31, 2022, 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.
F-9
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
Depreciation expense totaled $153,908 and $182,886
for the years ended December 31, 2023 and 2022 respectively. Property and equipment consisted of the following:
Schedule of property and equipment
Computer Software 5,979 —
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.
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, 2023 and December 31, 2022, 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.
F-10
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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.
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 include
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 recognize 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.
F-11
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
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, 2023 and December 31, 2022. See not 13.
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 that
have not been exercised totaling 74,007,680.
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 $1,721,547
and $732,618 for the years ended December 30, 2023 and 2022, 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.
The gross amounts and accumulated amortization of
the Company’s acquired identifiable intangible assets with finite useful lives, included in other intangible assets, net in the
accompanying consolidated balance sheets, were as follows:
Schedule of identifiable intangible assets
Gross Amount Accumulated Amortization Amortization Period
Finite: (in years)
F-12
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 2 – Summary of Significant Accounting
Policies, continued
At the time of acquisition, the Company estimates
the fair value of the acquired identifiable intangible assets based upon the facts and circumstances related to the particular intangible
asset. Inherent in such estimates are judgments and estimates of future revenue, profitability, cash flows and appropriate discount rates
for any present value calculations. The Company preliminarily estimates the value of the acquired identifiable intangible assets and
then finalizes the estimated fair values during the purchase allocation period, which does not extend beyond 12 months from the date
of acquisition. The Company’s amortization expense for acquired identifiable intangible assets with finite useful lives was $392,068
for fiscal years 2023 and 2022. Estimated amortization expense for acquired identifiable intangible assets for fiscal year 2024 and the
succeeding years is as follows:
Schedule of future intangible asset amortization expense useful lives
Future Intangible Asset Amortization Expense
Fiscal Year:
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 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 a foreign currency translation net gain during the year ended December 31, 2023 of $3,889 and a foreign
currency translation net loss during the year ended December 31, 2022 of $20,472.
Recent Accounting Pronouncements
Adoption of FASB ASU 2020-06
In August 2020, the Financial Accounting Standards
Board (FASB) issued ASU No. 2020-06, “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.”
ASU 2020-06 simplifies the accounting for convertible instruments and contracts by removing certain models that were previously required
to be applied. The amendments are effective for the fiscal years beginning after December 15, 2023, with early adoption permitted. The
Company is currently evaluating the impact this update will have on its consolidated financial Statements.
F-13
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 3 – Liquidity, Capital Resources
and Going Concern Considerations
During 2023, the Company received $6.6 million from
the issuance of debt. This event 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 the Company is able to meet its obligations as they
come due in the normal course of business. The Company sustained a net loss of approximately $21.0 million and negative cash flows from
operating activities of approximately $10.2 million for the year ended December 31, 2023. To date the Company has generated cash flows
from issuances of equity and indebtedness.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As of March 29, 2024, the Company has incurred significant losses from operations
and has experienced negative cash flows from operating activities. Additionally, the Company’s current liabilities exceed its current
assets, and it has a working capital deficit.
Management’s plans in regard to these matters
include actions to sustain the Company’s operations, such as seeking additional funding to meet its obligations and implement its
business plan. However, there is no assurance that the Company will be successful in implementing its plans or in raising additional
funds. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. If the Company is unable to continue as a going concern, adjustments would be
necessary to the carrying values of its assets and liabilities and the reported amounts of revenues and expenses could be materially
affected.
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
F-15
Splash Beverage Group, Inc.
Notes to the Consolidated Financial Statements
Note 4 – Notes Payable, Shareholder Notes Payable, and Revenue
Financing Arrangements, continued
Interest expense on notes payable was $1,836,377
and $246,090 for the years ended December 31, 2023 and 2022, respectively. Accrued interest was $1,714,646 and $141,591 at December 31,
2023 and December 31, 2022, respectively. The Company’s effective interest
rate was 60.17% for the year ended December 31, 2023.