Image Source: Splash Beverage Group
 

Investment thesis

• Extremely experienced management team benefiting from numerous industry relations which enabled a dizzying pace of new substantial distribution deals with national and even international chains.
• A portfolio approach to brands, incubate them on their e-commerce platform Qplash, leverage them over their distribution networks and then spin them off. Rinse repeat. 
• The Qplash platform itself will be a growth engine, especially when regulations covering inter-state sales will be relaxed. 
• The company has a portfolio of four innovative brands which have compelling growth potential and additional benefits. 
• The financials don’t look pretty at this stage, but it’s very early days and financials will significantly improve as the company scales, new distribution deals ramp, and measures to contain cost kick in.

Splash Beverage is an innovative, capital-light beverage brand portfolio company that leverages its core capabilities over the following fashionable and/or innovative brands:

• TapouT Performance Drink, a high-end established performance drink that comes with relations with sports stars that are marketing assets.
• Copa di Vino Wine: quality wine by the glass, a new concept in the US.
• SALT Naturally Flavored Tequila is the first flavored tequila on the market that is likely to surf on the rapid growth of other flavored spirits.
• Pulpoloco Sangria, the most recent acquisition comes with favorable economics and innovative biodegradable cans that can be leveraged elsewhere.

The company either has majority stakes in these brands or owns them outright. Production is outsourced, except for Copa di Vino, which is produced in their Oregon facility. 

The main core capability of the company is the experience of management in managing brands, and solving problems for single-brand companies, from the 10-K:

Most new single beverage brands have limited access to distribution and thus find it extremely difficult to obtain meaningful retail shelf presence. Our management team has over 120 years of combined experience in the beverage industry, including decades of successful brand introductions by our management team (Gallo, Red Bull, Bacardi, Diageo, Sparkling Ice, Jones Soda, FUZE Beverage, NOS Energy, SoBe Beverages, Muscle Milk, Marley Beverages)

Indeed, CEO Robert Nistico, whom i had the opportunity to speak with directly in preparing this article, is a veteran of the industry. He brought Marley Beverages from startup to a $47M in annual revenues and was the 5th employee at Red Bull North America, where he was Senior VP of Marketing at a time when sales rose from zero to over $1.6B. 

Plenty of experience in the management team. But it’s not only their experience that is very useful, with acquiring that experience came building relationships. 

These relationships now turn out to be extremely useful in bringing in new distribution deals with chains. 

It’s therefore no surprise that they have been approached by 20+ brands but they are quite selective, according to the following criteria (10-K):

• Some level of preexisting brand awareness
• A regional presence that can be expanded
• Licensing an existing brand name (TapouT for example)
• Add to an underdeveloped and/or growing category capitalizing on consumer trends
• Innovation to an existing attractive category (such as flavored tequila)

Apart from management experience, another important source of synergy is distribution channels. Management believes that these are shifting, most notably the emergence of a DTC (direct to consumer) model that leverages the internet.

Hence they build an e-commerce platform Qplash, which sells beverages and groceries through its own website and third-party sites like Amazon.com (AMZN), Shop.com (SHOP), and Walmart.com (WMT)

The market

 

Brands

See their respective websites:

• Copa di Vino
• Pulpoloco Sangria,
• SALT Naturally Flavored Tequila
• TapouT Performance Drinks

SALT Tequila

SALT Tequila is the first flavored tequila and comes in three flavors, citrus, berry and chocolate. Other flavored alcohol drinks (flavored rum, whiskey, vodka, etc.) have met with considerable success which SALT expects to emulate. 

In the last 10 years, Tequila volume has grown by 72% and the growth of flavored spirits has been 10x that of unflavored ones. 

SALT is a joint-venture between Splash and SALT USA with Splash responsible for production, distribution and marketing. Splash has a host of distribution deals in place and the product sells in Mexico and some other countries in Latin America. 

Splash has a 22.5% ownership stake in Salt Tequila USA which can be increased to 37.5% via three additional 5% tranches at $250K each. 

TapouT

TapouT is a number of isotonic sports recovery drinks only consisting of GRAS (Generally Regarded As Safe, an FDA designation) ingredients (contrary to other sports drinks). 

The brand TapouT is formally associated with the UFC and it produces UFC branded merchandise that increases its visibility. It has 23 years of brand awareness. Splash has a license agreement until 2028 which stipulates a 6% royalty of net sales (or a yearly payment of $653K, whichever is higher).

Splash is spending 12% of sales in marketing, TapouT provides collateral in the from of relations with sports stars.

Copa di Vino  

In December 2020, Splash bought certain assets and assumed certain liabilities from CdV (Copa di Vino) for $5.98M payable in the combination of $2M in cash, a $2M convertible promissory note to CdV and a variable number of shares of the Company’s stock based on certain revenue hurdles.

There is some potential trouble, from the Q2/22 10-Q:

On June 10, 2022, Copa Di Vino Corporation (“Copa”) filed a lawsuit against the Company in Broward County, Florida. The complaint alleges that the Company still owes part of the final payment under the December 24, 2020 Asset Purchase Agreement (“APA”) between Copa and the Company. Specifically, Copa maintains that 380,959 shares are owed. The parties are actively discussing amicable resolution on a framework both sides appear to be agreeable to. The Company will vigorously defend the case if a settlement is not reached. Litigation is uncertain, however, and no particular result can be assured. 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.

Pulpoloco

Splash bought a controlling 80% interest in Pulpoloco Sangria at the end of June 2022 although we have no news yet on the closure of the deal nor its terms. 

Splash was already the exclusive importer of the drink since 2020, overseeing a dramatic growth with a distribution deal with a third of 7-11 shops. Now they also benefit from overseas sales. 

An additional factor is the unique 8-layer eco-friendly packing CartoCan, made from sustainable wood fiber, providing the Sangria with a 14 month shelf life. Splash has the exclusive rights to the CartoCan.

These CartoCans not only increase the value of Pulpoloco’s products but opens opportunities for additional packaging business. Management told us that they are going to expand the cartons through placing three machines in the US and Latin America. 

The CartoCan also provides a cost advantage as they cost roughly 8 cents to make versus at least 28 cents for aluminum cans. 

The sangria comes in three varieties: Crisp White, Soft Rosé, and Smooth Red, from the linked PR:

Owning the manufacturing process entirely, which includes the exclusive rights of the innovative eco-friendly packaging, not only expands those rights, but will provide us with the opportunity to ship in greater bulk and to markets with faster growth potential.  We believe this will help us add scale and drive additional revenue growth while potentially improving margins.

Pulpoloco was recently selected for 7-Eleven’s Brands with Heart event.

Management believes all four of these brands have strong potential, from the August 2022 Letter to shareholders:

We see unique opportunities for each of our brands, each one reflecting positive consumer trends in their respective segments. TapouT is tapping into a growing market for isotonic beverages that offer a healthier list of ingredients. Flavored tequila is showing growth in the spirits category and in the single serve wine segment, Copa Di Vino is proving to be a breakout product with consumers. And of course, the opportunity afforded by bio-degradable paper cans has the potential to be a complete game changer. So, we feel we’re in all the right categories at all the right times.

 

Distribution

Distribution should be a main source of leverage and the company has certainly not rested on its laurels, with a spade of recent distribution deals, more than 20 according to the August 2022 Letter to shareholders. Here are some:

• Kalil Bottling (TapouT)
• 7-11 (Pulpoloco) 
• Circle-K
• China-based ASC (American Software Capital)
• AB-One 
• Walmart Arkansas (TapouT)
• Dodgers Stadium (Copa de Vino)
• AMPM (BP) convenience stores

The AB-One deal is especially significant, from the linked PR:

will expand the availability of Splash Beverage’s TapouT performance drink, Copa di Vino wine by the glass, and Pulpoloco sangria throughout its entire network. The AB One distribution network will cover large new markets for the Splash brands incremental to those independent Anheuser Busch wholesalers previously gained in the Copa di Vino acquisition in December of 2020.  AB One’s distribution organization covers key US markets like New York, Boston and Los Angeles.  

Most of these distribution deals haven’t had time to scale yet so this will keep growth purring along for a while irrespective of new distribution deals. Speaking of which, they keep coming fast, like:

• Target for TapouT
• Lohr Distributing for all Splash brands

No need to explain that the Target (TGT) deal is especially significant, being a national chain with ubiquitous presence in all 50 states. Qplash

There are quite a number of advantages attached to their platform in terms of marketing opportunities, testing markets and generating higher margins:
 

At present, this is the channel that actually generates the most revenue, which is quite notable. But one has to keep in mind that most distribution deals are quite recent and they take time to ramp, with six national chains coming in the last several months.

Changing regulation might enable shipping across state borders, which would make the platform much more valuable still. The platform is a great incubator of brands, enabling them to grow up and then enter more traditional distribution. 

Finances

Revenues are rising pretty fast:

And most growth is actually coming from their ecommerce platform Qplash:
 

 

But one should not lose sight that the company is still producing significant losses, $5.8M in Q2, although non-cash items were $3.0M of that (mostly the $2.77M share based compensation and inventory build). And at least the loss is declining as it was $6.6M in Q2/21. Next year the brands will be splitted out. 

The company achieved 6 new distribution deals in the quarter and another 6 or so after the quarter closed so there is the groundwork for continued revenue growth. 

In fact, the distribution deals have come in such quantity and so rapidly that the company had to resort to the financial markets on September 23, 2022 in order to get finances to be able to build inventory and be able fulfill all orders an absolutely critical issue.

The company issued 2M shares at $1.55 for a gross total of $3.1M, with an option for another 300K shares for the underwriters. 

Margins

The low gross margin does look a problem at first sight, it declined to just 15% in Q2. 
 

However, the individual brands are producing much higher gross margins, except TapouT. Copa de Vino has gross margins in the mid 30s, Pulpoloco at 40% and Salt at 48% with a perspective to rise that to 55%, management has informed us. 

There are multiple initiatives ongoing to increase gross margins, which are artificially deflated by the inclusion of shipping and warehousing in COGS, something that is likely to change in the near future. 

Shipping cost are particularly high right now and are included in COGS so margins are better than they look at the moment

Operating cost have stabilized and are therefore declining as a percentage of revenue. Keep in mind these are GAAP figures, the non-GAAP (adjusted) ones are considerably lower (there was $3.8M in non-cash share based compensation in H1/22 and $12.8M in FY21, for instance, so adjusted OpEx is likely in the range of $18M-$20M): 
 

But it will be clear that the company has some way to go in order to break even, so our attention turns to cash.

Cash

Cash flows are quite negative, but there was improvement in Q2:
 

$1M of the $7.1M loss of cash in H1 was caused by working capital, mostly an increase in inventories. The company raked in $8M from selling shares in H1. Not surprisingly, there is considerable dilution:
 

In all, there is $1.67M in debt on the balance sheet, almost all of this is a revenue-based loan from Decathlon, an $1.57M revenue-based credit facility from Decathlon Alpha IV, to be paid back by future revenues of which $1.25M is left at a very steep 17% interest rate. 

At the end of Q2 the company had just $4.2M in cash left (although they topped that up with $3M and likely $4M+ with their last financing), with the payment for Pulpoloco still remaining (although that’s a six-figure amount). The company is in the process of arranging a line of credit.
 

Valuation

With 39.6M shares (including the recent financing) and 0.6M warrants outstanding the company has a market cap of $56M (at $1.4 per share). Revenues are expected to be in the order of $24M this year rising to $39M next year, which would give the shares a sales multiple well under 2x. 

Non-GAAP breakeven, with non-GAAP OpEx is $18M-$20M and gross margin at 20% is in the order of $90M-$100M. Cash break even is probably a little lower still (due to the share-based compensation in COGS), but not by much.

Conclusion

We think Splash Beverage offers a pretty exciting opportunity on the basis of their rapidly expanding distribution network and the potential of many of their latest distribution deals. 

We’re convinced that revenues will rise rapidly and if the company is able to increase gross margins and keep OpEx in check then the cash bleed can decline fairly quickly. 

We also think that their business model makes a lot of sense, incubate brands and sell them off when they mature. 

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Related Article:
Splash Beverage Making A Splash: Small Portfolio Company With Big Potential

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