Image Source: Splash Beverage Group

An interesting company that recently caught my interest is Splash Beverage Group (NYSE: SBEV), with a market cap of just under $100 million. At present just one analyst covers the company, EF Hutton. After the company's Q2 earnings report in mid-August, Hutton reiterated a Buy rating and set a target of $5 for the stock (which is currently hovering around the $2 mark.) `

Splash has a unique business model, which for me is both an advantage and disadvantage - easier to stand out, but harder to explain. It's not specifically a beverage manufacturer, or a beverage distributor, but an "asset-light portfolio company,"  as Hutton calls it. Essentially, Splash has four portfolio companies at the moment - some owned outright, some licensed or partnered.  

Here's how CEO Robert Nistico describes it in his latest (Aug. 8) letter to shareholders: 

"Splash Beverage Group, an innovator in the beverage industry, owns a growing portfolio of alcoholic and non-alcoholic beverage brands including Copa di Vino wine by the glass, SALT flavored tequilas, Pulpoloco sangria, and TapouT performance hydration and recovery drink. Splash’s strategy is to rapidly develop early-stage brands already in its portfolio as well as acquire and then accelerate brands that have high visibility or are innovators in their categories. Led by a management team that has built and managed some of the top brands in the beverage industry and led sales from product launch into the billions, Splash is rapidly expanding its brand portfolio and global distribution."
 

Anyone who looks into Splash will quickly notice the extremely impressive industry experience of the management. Notably,

• CEO Nistico, with 30 years in the beverage industry, was an early employee of Red Bull North America; as GM for 10+ years he took the annual revenue from 0 to $1.6 Billion. 
• William Meissner, CMO and President of Sales, has taken multiple brands to over $100MM in sales, having been among other things CEO of SweetLeaf, CMO of Fuze (Coca-Cola - KO) and Brand Director of SoBe (Pepsico - PEP). 
• Ron Wall, who joined as CFO in May, Ron has held senior leadership roles in Finance at both William Grant & Sons (as CFO) and Diageo.

The reason that experience is so attractive, and such a key element, is that no matter how great an idea or how good a beverage product, if you can't get it on shelves, you're out of luck. If you're good enough to generate excitement, you still have to get it into the hands of consumers. That's a worry I don't think investors would need to have with SBEV. 

One of the things I like most about my job is that I get to do what most individual investors would love to do - when a company intrigues me, I get to reach out and talk to the CEO about it. I had a good conversation with CEO Nistico a few days ago. It certainly broadened my horizons as to understanding not only the up-front value of having so many experienced people but gave me insight into why those people have gotten onboard with a relatively new and small company.

"We're in such a good position to capitalize on industry growth, due to management depth of knowledge and connections in distribution and retail," he confirmed. Unlike a VC, Splash can attract smaller or lesser known innovative beverage companies not just with money, but with its ability to almost immediately and substantially ramp its sales up across the board. 

As Nistico told me, their portfolio criteria is that a company either already has "​pre-existing brand awareness or pure innovation." A premium product with decent markup can get the targeted distribution it needs; a lower-margin beverage concept can be rapidly given the broad distribution and brand awareness needed to be continuously profitable. 

One of the pitches for the company is that it "provides investors the opportunity to participate in the growth and excitement of a diversified portfolio of innovative and emerging beverage brands." And indeed some investors, when it comes to consumer goods, are more comfortable with brands they just plain like. If that's you, then you can look more deeply into the four main portfolio brands than I am going to touch on here. 

On the more premium end of the spectrum, I'm seeing two products with different strengths and needs. 

• TapouT is a niche sports and recovery drink that has an established history and appeal to athletes. Splash has some key management with experience in this area, including Aida Aragon, whose experience is in FMCG (fast-moving consumer goods) and was in sales and marketing for Muscle Milk, as well as being known as a competitive Fitness and FIgure athlete (where emphasis is on muscle definition, not muscle size). The Splash folks have been rolling out new distribution and retail agreements for TapouT practically monthly - just yesterday they announced the go-ahead to distribute in Target stores nationally.
• SALT Tequila had just finished its fine-tuning and test-marketing when the pandemic hit, so only really has its marketing and distribution gotten underway. Quality and flavor are the emphasis, with tastings and premium distribution expected to ramp up.

On the more mass-market side, there are also two examples.

• Copa di Vino, which Splash outright acquired at the end of 2020, has considerable brand awareness for having been featured on Shark Tank not once but twice in the past decade. With a winery in Oregon, it patented its single-serve wine packaging, which can be scalable to other categories. Probably most importantly, it came with its own distribution network of 82 Anheuser-Busch distributors to 13,000 stores.
• Pulpoloco Sangria, already a distribution partner, is becoming majority owned by Splash. The four flavors of its Sangria come in both bottles and single-service "paper cans,", the latter of which has particular synergy with the overall portfolio because the rights to the unique biodegradable 'CartoCan' are property of the company. 

As I said above, if you are particularly intrigued by any one of these you can research it further on splashbeverage.com. 

Really noteworthy, following on to the Copa di Vino deal with independent distributors ,Splash's depth of recognizable management was able to supplement the distribution network with a broader company-wide agreement with AB One, which is AB-InBev's (BUD) corporate distribution network. AB One serves approximately 50,000 accounts including retail stores, restaurants, bars, and venues across multiple states in the U.S. , in key markets such as New York, Boston and Los Angeles.   

And before I forget: there is also the relatively new Qplash BtoB and (soon) BtoC website that contributed to the most recent quarter's growth (+86% in the quarter, to $2.45 million). While right now, as I understand it, the platform is primarily an aid to wholesale distribution, the sexy part will be positioning it to capitalize on the growing direct-to-consumer trend taking place in the adult-beverage industry. 

For me, I'm more interested in SBEV's big picture. Because it's not really looking to be in the beverage-manufacturing business. It's looking to be in the brand-building, value-increasing, top-line growing sell-and-buy-another business. As Nistico told me, "We're not here to build a $20 million company, we're here to wire revenue with new brand acquisitions, new targets, a constant process."

If you like numbers, here are some from the latest 10K (Q2 2022, Aug. 15). Gross sales, $4.8 Million. Revenue increase 41% YOY. Cash on hand pretty much the same as at the end of Q1. (Note, however, that there was a capital raise via a shelf registration statement of over $8 Million in the interim, which seems to have been spent.)  Also, without knowing a lot about their entire payroll, it looks like the big names on top come at a cost, with a total payroll of over $1M and non-cash share-based compensation another $2.7M.

EF Hutton writes,

We believe that they are on the precipice of material acceleration in sales as wholesale wins begin to bear fruit. Our price target of $5, which is based on 4x 2023 ev/sales, remains unchanged.

Identifying key risks, they say that "the company has so far relied on capital raises to compensate for losses/expenses." So, investors may want to be aware of the potential for dilution. 

I always feel that you should only invest in any microcap if you have strong risk tolerance. Add to that a good gut feeling. Then do as much research as you can. 

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