SPLASH BEVERAGE GROUP, INC. - Quarter Report: 2022 September (Form 10-Q)

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _________

Commission File No. 001-40471

SPLASH BEVERAGE GROUP, INC.

(Exact name of registrant as specified in its charter)

(954) 745-5815
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No

 As of November 14, 2022, there were 40,101,116 shares of Common Stock issued and outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these financial statements.

The accompanying notes are an integral part of these condensed consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Splash Beverage Group, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 1 – Business Organization and Nature of Operations

Splash seeks to identify, acquire, and build early stage or under-valued beverage brands that have strong growth potential within its distribution system. Splash’s distribution system is comprehensive in the US and is now expanding to select attractive international markets. The Splash brand portfolio is growing and diverse, covering multiple categories that are exhibiting strong growth in both the non-alcohol and alcohol sectors. Through its wholly owned subsidiary Qplash, Splash’s distribution reach includes e-commerce access to both B2B and B2C customers. Q-plash markets well known beverage brands to customers throughout the US that prefer delivery direct to their office, facilities and or homes.

On February 2021, Management initiated a plan to divest its Canfied Medical Supply, Inc. (“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.

On June 30, 2022, the Company entered into a Business Transfer and Indemnity Agreement (“Agreement”). Pursuant to the Agreement, the Company transferred and assigned the assets and liabilities from the CMS business. Pursuant to the Agreement the Company was paid $31,000 and recorded a gain of $148,747 for the nine months ended September 30, 2022.

In coordination with uplisting 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 on a retrospective basis to reflect the split.

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

These condensed consolidated financial statements include the accounts of Splash Beverage Group and its wholly owned subsidiaries, Splash International Holdings LLC, Splash Beverage Group Holding LLC, Splash Beverage Group II, Inc., Copa di Vino Wine Group, Inc. (“CdV”) and Splash Mexico SA de CV. CMS is reflected as discontinued operations until its disposal on June 30, 2022. All intercompany balances have been eliminated in consolidation.

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP).

The accompanying condensed consolidated financial statements have been prepared by us without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the three and nine months ended September 30, 2022 and 2021 have been made.

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the period ended September 30, 2022 are not necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of condensed 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 September 30, 2022 or December 31, 2021.

Our cash in bank deposit amounts, at times, may exceed federally insured limits of $250,000. At September 30, 2022 we had $2,210,567 in excess of the federally insured limits. Our bank deposit amounts in Mexico of $1,940 are uninsured. At December 31, 2021 we had $3,643,474 over the federally insured limits. Our cash in uninsured foreign bank accounts was $10,749 at December 31, 2021.

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are carried at their estimated recoverable 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 September 30, 2022 and December 31, 2021, our accounts receivable amounts are reflected net of allowances of $13,827 and $45,203, respectively.

Inventory

Inventory is stated at the lower of cost or net realizable value and accounted for using the weighted average cost method. The inventory balances at September 30, 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 $67,170 and $223,223 at September 30, 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 3-39 years. Company management reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. Furniture and computer equipment of $60,626 was no longer in use and written off as of September 30, 2022.

Depreciation expense totaled $27,762 and $44,465 for the three months ended September 30, 2022 and September 30, 2021, respectively. Depreciation expense totaled $101,991 and $80,048 for the nine months ended September 30, 2022 and September 30, 2021, respectively. Property and equipment as of September 30, 2022 and December 31, 2021 consisted of the following:

Excise Taxes

The Company pays alcohol excise taxes based on product sales to both the Oregon Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau (TTB). The Company is liable for the taxes upon the removal of product from the Company’s warehouse on a per gallon basis. The federal tax rate is affected by a small winery tax credit provision which decreases based upon the number of gallons of wine production in a year rather than the quantity sold.

Splash Beverage Group, Inc. 

Notes to the Condensed 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 condensed consolidated financial statements approximate fair values at September 30, 2022 and December 31, 2021, consistent with recent negotiations of notes payable and due to the short duration of maturities and market rates of interest.

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 2 – Summary of Significant Accounting Policies, continued

Revenue Recognition

We recognize revenue under ASC 606, Revenue from Contracts with Customers (Topic 606). This guidance sets forth a five-step model which depicts the recognition of revenue in an amount that reflects what we expect to receive in exchange for the transfer of goods or services to customers.

We recognize revenue when our performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control of our products is transferred upon delivery to the customer. Revenue is measured as the amount of consideration that we expect to receive in exchange for transferring goods and is presented net of provisions for customer returns and allowances. The amount of consideration we receive and revenue we recognize varies with changes in customer incentives we offer to our customers and their customers. Sales taxes and other similar taxes are excluded from revenue.

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.

Distribution expenses to transport our finished goods, where applicable, and warehousing expense are accounted for within cost of goods.

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 award’s vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock-based awards. We early adopted ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which aligns accounting treatment for such awards to non-employees with the existing guidance on employee share-based compensation in ASC 718.

Income Taxes

We use the liability method of accounting for income taxes as set forth in ASC 740, ”Income Taxes”. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. We record a valuation allowance when it is more likely than not that the deferred tax assets will not 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 September 30, 2022 and December 31, 2021.

Splash Beverage Group, Inc. 

Notes to the Condensed 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 stock 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.

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 and marketing expense of $746,965 and $249,100 for the three-months ended September 30, 2022 and 2021, respectively. We recorded advertising and marketing expense of $1,918,420 and $465,705 for the nine months ended September 30, 2022 and 2021, respectively.

Goodwill and Intangibles Assets

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.

Intangible assets consist of customer lists, brands and license agreements acquired in the acquisition of CdV. The Company amortizes intangible assets with finite lives on a straight-line basis over their estimated useful lives of 15 years.

Splash Beverage Group, Inc. 

Notes to the Condensed 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.

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.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current year presentation.

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 3 – Notes Payable and Related Party Notes Payable

Notes payable are generally nonrecourse and secured by all Company owned assets.

Interest expense on notes payable was $65,007 and $82,871 for the three months ended September 30, 2022 and 2021, respectively.

Interest expense on notes payable was $217,123 and $340,653 for the nine months ended September 30, 2022 and 2021 respectively. Accrued interest was $183,553 at September 30, 2022. 

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 3– Notes Payable and Related Party Notes Payable

Interest expense on related party notes payable was $0 and $5,995 for the three months ended September 30, 2022 and 2021, respectively. Interest expense on related party notes payable was $5,407 and $21,833 for the nine months ended September 30, 2022 and 2021, respectively. Accrued interest was $0 as of September 30, 2022.

Splash Beverage Group, Inc.

Notes to the Condensed Consolidated Financial Statements

Note 4 – 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 energy drinks, energy shots, water, teas and sports drinks for beverages sold in the United States of America, its territories, possessions, U.S. military bases and Mexico. Under the terms of the agreement, we are required to pay a 6% royalty on net sales, as defined. We are required to make minimum royalty monthly payments of $54,450 in 2022 and $49,500 in 2021.

There were no unpaid royalties at September 30, 2022. Royalty payments including the minimum totaling $490,050 and $445,500 were made for the nine months ended September 30, 2022 and 2021, respectively, these costs are 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 CdV 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 our manufacturing process. In exchange for notes payable, 1/4 Vin granted us 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 5– Stockholders’ Equity

Common Stock

During the three-months ended September 30, 2022, the Company issued 2,000,000 shares of common stock as part of the public offering and 380,959 shares in settlement of litigation.

During the nine-months ended September 30, 2022, the Company issued 4,300,000 shares of common stock as part of the public offerings, 1,050,000 shares in exchange for services, 380,959 shares in settlement of litigation, 223,596 shares on convertible instruments, and 100,000 shares for cash.

Private Placement Memorandum (PPM)

In January 2021, the Board of Directors approved a Private Placement Memorandum (PPM) offering of 1,212,121 shares of the common stock of the Company, $0.001 value per share at a purchase price of $3.30 per share for aggregate gross proceeds of $4,000,000. As part of the PPM, each purchaser received a warrant to purchase one share for every two shares purchased. In February 2021, the Company issued a total of 1,212,355 shares and 606,178 warrants and received the gross proceeds of approximately $4,000,000.

Splash Beverage Group, Inc. 

Notes to the Consolidated Financial Statements

Note 6 – Related Parties

There is a $75,000 balance due to a related party as of September 30, 2022 and $653,081 was outstanding as of December 31, 2021. 

Note 7 – Investment in Salt Tequila USA, LLC

We have a marketing and distribution agreement with SALT Tequila USA, LLC (“SALT”) for the manufacturing of our Tequila product line in Mexico.

We have a 22.5% percentage ownership interest in SALT and have the right to increase our ownership to 37.5%. This investment is accounted for at cost, due to our inability to exercise significant influence over the assets and operations.

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 8 – Operating Lease Obligations

Effective July 2018, we entered into a lease agreement for the right to use and occupy office space. The lease term commenced July 1, 2018 and is scheduled to expire after 36 months, on June 30, 2021. In July 2021, we executed a two-year renewal at the same monthly amount. A three-year lease was signed in September 2022.

Effective November 2019, we entered into a new lease with Interport Logistics, LLC. The lease term commenced on November 11, 2019 and is scheduled to expire on November 11, 2022, at which point it became month-to-month.

Effective May 2019, we entered into a new lease in Mexico. The lease commenced May 1, 2019 and was renewed on April 1, 2022 for one year.

Effective January 2021, we entered into a lease agreement for the right to use and occupy office space. The lease term commenced January 18, 2021 and was extended for 1 18 months to July 31, 2023.

Effective January 2021, we entered into a lease agreement for the right to use and occupy office and manufacturing space. The lease term commenced January 1, 2021 and is scheduled to expire after 60 months, on December 31, 2025.

The following table presents the discounted present value of minimum lease payments for our office and warehouses to the amounts reported as financial lease liabilities on the condensed consolidated balance sheet at September 30, 2022:

The table below presents information for lease costs related to our operating leases at September 30, 2022

The table below presents lease-related terms and discount rates at September 30, 2022

Splash Beverage Group, Inc. 

Notes to the Condensed Consolidated Financial Statements

Note 9 – Segment Reporting

The Company evaluates segment reporting in accordance with the FASB Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Executive Officer and Chief Financial Officer.

The CdV business is included in our Splash Beverage Group segment.

Note 10 – Liability to Issue Shares

The Company has obligations to issue shares of its common stock at September 30, 2022 arising from the following transactions:

Note 11 – Commitment and Contingencies

We are a party to asserted claims and are subject to regulatory actions in the ordinary course of business. The results of such proceedings cannot be predicted with certainty, but we do not anticipate that the outcome, if any, arising out of any such matter will have a material adverse effect on its business, financial condition or results of operations.

Note 12– Subsequent Events

Subsequent to September 30, 2022 the Company’s Board approved the issuance of 225,000 shares associated with a 3 year contract and 18,519 shares for services. The Company issued 296,129 shares upon exercise of the underwriters’ over-allotment that generated gross amount of $459,000. We have extended a licensing agreement with ABG TapouT, LLC (“TapouT”) through 2028.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

The information in this discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements that are not of historical fact may be deemed to be forward-looking statements. These forward-looking statements involve substantial risks and uncertainties. In some cases you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue”, the negative of the terms or other comparable terminology. Actual events or results may differ materially from the anticipated results or other expectations expressed in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks included from time to time in other reports or registration statements filed with the United States Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statements. We disclaim any obligation to publicly update these statements or disclose any difference between actual results and those reflected in these statements.

Unless the context otherwise requires, references in this Form 10-Q to “we,” “us,” “our,” or the “Company” refer to Splash Beverage Group and its subsidiaries.

The following discussion and analysis should be read in conjunction with the Condensed Financial Statements (unaudited) and Notes to Condensed Financial Statements (unaudited) filed herewith.

Business Overview

Splash seeks to identify, acquire, and build early stage or under-valued beverage brands that have strong growth potential within its distribution system. Splash’s distribution system is comprehensive in the US and is now expanding to select attractive international markets. The Splash brand portfolio is growing and diverse, covering multiple categories that are exhibiting strong growth in both the non-alcohol and alcohol sectors. Through its wholly owned subsidiary Qplash, Splash’s distribution reach includes e-commerce access to both B2B and B2C customers. Q-plash markets well known beverage brands to customers throughout the US that prefer delivery direct to their office, facilities and or homes.

Splash was originally incorporated in the State of Nevada under the name TapouT Beverages, Inc. for the purpose of acquiring the rights under a license agreement with TapouT, LLC (Authentic Brands Group) for the right to use the TapouT brand in connection with manufacturing and selling certain beverages.

On March 31, 2020, a wholly-owned subsidiary of a public entity called Canfield Medical Supply, Inc. (“CMS”) merged with and into Splash and Splash became a wholly-owned subsidiary of CMS. At the time of the merger CMS’s state of incorporation was Colorado.  At the time of the merger CMS’s common stock was quoted on the OTCQB.

On July 31, 2020, we changed our name from Canfield Medical Supply, Inc. to Splash Beverage Group, Inc.

On June 11, 2021, our common stock and warrants to purchase common stock began trading on the NYSE American under the symbols “SBEV” and SBEV WS,” respectively

On November 8, 2021, we changed our state of incorporation from Colorado to Nevada.

On June 30, 2022, Management completed its plan to divest its CMS’s business.

In coordination with uplisting to the NYSE American on June 11, 2021 the Company consummated a 1.0 for 3.0 reverse stock split.

Results of Operations for the Three and Nine Months Ended September 30, 2022 compared to Three and Nine Months Ended September 30, 2021.

Net Revenue

Net revenues for the three and nine months ended September 30, 2022 were higher compared to revenues for the three and nine months ended September 30, 2021 due to an increase from our vertically integrated B2B and B2C e-commerce distribution platform called Qplash (Qplash sells goods on both Amazon and Shopify), a number of retail chain authorizations has led to increased distribution on the beverage portfolio and a price increase on CdV.

Cost of Goods Sold

Cost of goods sold for the three and nine months ended September 30, 2022 were higher compared to cost of goods sold for the three and nine months ended September 30, 2021. The increase in cost of goods sold is primarily due to higher sales at Qplash, incremental volumes in the beverage portfolio and higher supply chain costs on both ingredients and freight.

Operating Expenses

Operating expenses for the three months ended September 30, 2022 were lower compared to the three months ended September 30, 2021 due to a decrease in share based compensation partially offset by increases in marketing expenses. Operating expenses for the nine months ended September 30, 2022 were higher compared to the nine months ended September 30, 2021 driven by an increase in sales and marketing cost partially offset by lower non-cash compensation for services cost. 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 three years.

Interest Expense

Interest expenses for the three and nine months ended September 30, 2022 were lower compared to the three and nine months ended September 30, 2021 due to the paydown of notes payable.

Net Loss

The net loss for the three months ended September 30, 2022 was lower compared to the three months ended September 30, 2021. The decrease in the net loss is due to our lower operating expenses and an increase in revenues. The net loss for the nine months ended September 30, 2022 was lower compared to the nine months ended September 30, 2021. The decrease in the net loss is due to our increase in e-commerce revenue and lower operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

As of September 30, 2022, we had total cash and cash equivalents of $2,601,270 as compared with $4,181,383 at December 31, 2021.

Net cash used for operating activities during the nine months ended September 30, 2022 was $10,626,135 as compared to the net cash used by operating activities for the nine months ended September 30, 2021 of $11,615,297. The primary reasons for the change in net cash used is due to losses sustained, increases in inventory and costs incurred in connection with the company’s shelf registration statement on Form S-3.

For the nine months ended September 30, 2022, an SUV was purchased and financed with a loan. We did not use or receive cash relating to investing activities during the nine months ended September 30,2021

Net cash provided by financing activities during the nine months ended September 30, 2022 was $9,091,442 compared to $19,597,565 provided from financing activities for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we received $12,300,000 from investors from the Company Shelf Registration Statement on Form S-3, which was offset by repayments to debt holders of $1,285,861 and financing fees associated with the Shelf Registration Statement $1,738,896.

Inventory increased for the three months ended September in preparation to fulfil orders related to new retail chain authorizations.

CONTRACTUAL OBLIGATIONS

Minimum Royalty Payments:

We have a licensing agreement with ABG TapouT, LLC (“TapouT”). Under the licensing agreement, we have minimum royalty payments to TapouT for $653,400 in 2022.

Inventory Purchase Commitments:

None.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as that term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future material effect on our financial condition, revenue or expenses, results of operations, liquidity, and capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for Smaller Reporting Companies.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities and Exchange Commission Act of 1934 reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As further discussed below, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer concluded that, because of certain material weaknesses in our internal control over financial reporting, our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of September 30, 2022.

We hired a consultant to advise on technical issues related to U.S. generally accepted accounting principles as relates to the maintenance of our accounting books and records and the preparation of our consolidated financial statements. Although we are aware of the risks associated with not having dedicated accounting personnel, we are also at an early stage in the development of our business. We anticipate expanding our accounting functions with dedicated staff and improving our internal accounting procedures and separation of duties when we can absorb the costs of such expansion and improvement with additional capital resources. In the meantime, management will continue to observe and assess our internal accounting function and make necessary improvements whenever they may be required. If our remedial measures are insufficient to address the material weakness, or if additional material weaknesses or significant deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements, and we could be required to restate our financial results. In addition, if we are unable to successfully remediate this material weakness and if we are unable to produce accurate and timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable stock exchange listing requirements.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Our management assessed the effectiveness of the Company’s internal control over financial reporting at September 30, 2022, and this assessment identified some deficiencies in our internal control over financial reporting.

Remediation plan

The company has established two procedures to begin addressing the controls area. Each quarter Senior Managers respond to a questionnaire to identify areas that would impact the company’s financial statements to be reviewed against the reported financial statements. Also, quarterly financial packages are collected and reviewed with each subsidiary to analyze and ensure completeness of their financial statements.

Actions have been taken regarding the remediation plan, however there remain actions to complete:

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On June 10, 2022, Copa Di Vino Corporation (“Copa”) filed a lawsuit against the Company in Broward County, Florida. The complaint alleged that the Company still owed part of the final payment under the December 24, 2020 Asset Purchase Agreement (“APA”) between Copa and the Company. The Company settled the lawsuit with Copa Di Vino Corporation. This matter was settled in September 2022 without the admission of liability or wrongdoing on the part of Splash.  In exchange for full release from COPA, the Company agreed to issue 380,959 shares of the Company’s common stock. The Company entered into the settlement solely to avoid the costs and uncertainty of litigation.

ITEM 1A. RISK FACTORS

No new risk factors noted since our Annual Report on Form 10-K for the year ended December 31, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2022, we issued 550,000 shares of common stock in exchange for services, 2,300,000 shares pursuant to our public offering to increase working capital, and 223,596 shares were issued on convertible instruments. For the three-month-ended June 30, 2022 we issued 500,000 shares in exchange for service provided that were valued at a fair market value stock price based on the agreement date and 100,000 shares for cash. During the three-months ended September 30, 2022 we issued 2,000,000 shares pursuant to our public offering to support inventory increases. The Company also issued 380,959 shares in settlement of litigation. We recognized share-based compensation and warrant expense for the nine-months ended September 30, 2022 of $6,717,504 which is classified within non-cash compensation on our Condensed Consolidated Statements of Operations.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

No disclosure required.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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