SBEV - Splash Beverage: Q4 2022 Results Don't Make A Splash

2023-04-05 04:03:32 ET

Summary

• Revenue growth is slowing down as sales rose by 56.5% year on year in Q4 compared to 72.2% in Q3.
• The e-commerce business of Splash is growing at a high pace as the company keeps increasing its marketing spending but the offline business has been struggling.
• Net cash used in operating activities is over $1 million per month and I’m concerned that Splash will have to tap the equity market soon to fund its operations.
• However, short selling seems dangerous as the short borrow fee rate is 28% and call options are expensive.
• In my view, risk-averse investors should avoid this stock.

Introduction

I've written three articles on SA about U.S. non-alcoholic and alcoholic beverages company Splash Beverage Group (NYSE: SBEV ), the latest of which was in November when I said that the business model seemed flawed and that more stock dilution was likely to come before the end of 2022. Well, Splash released its 2022 annual report on March 31 and I think that the Q4 financial results were underwhelming. Revenue growth slowed down to 56.5% year on year while the net loss came in at $4.8 million. Cash and cash equivalents rose to $4.43 million as notes payable and accounts payable soared but I think there could be significant stock dilution soon as net cash used in operating activities for the quarter stood at $3.43 million. Let's review.

Overview of the Q4 2022 financial results

In case you haven't read any of my previous articles about Splash Beverage Group, here's a short description of the business. The company specializes in the purchase and development of beverage brands that have pre-existing brand awareness with positive consumer sentiment. Splash's idea is that the distribution landscape in the beverage category is changing rapidly and that tech-enabled business models will continue to grow. The company has a vertically integrated B2B and B2C e-commerce distribution platform named Qplash, which sells products on both Amazon ( AMZN ) and Shopify ( SHOP ). It focuses on buying local and regional brands with the aim of developing a direct line of sales to small retail stores. Qplash currently offers more than 1,500 listings and has warehouses that ship from the states of California and Pennsylvania.

Splash's portfolio includes four brands at the moment - TapouT (high-performance sports drinks), Salt Tequila (blanco agave tequila), Copa Di Vino (premium wine by the glass), and Pulpoloco (Spanish sangria). The company has an asset-light business model and manufacturing is usually outsourced to third party co-packers and distillers. This includes TapouT, and Salt Tequila at the moment. Copa Di Vino is bottled at the company's own facility in Oregon while Pulpoloco is imported from Spain as a finished product. Splash has about 40 full-time employees.

Turning our attention to the 2022 financial results, Qplash continued to be the main driver for revenue growth as e-commerce sales soared by 94.4% year on year to $13.33 million. However, revenue growth is slowing down as sales rose by 56.5% year on year in Q4 compared to 72.2% in Q3. In addition, revenues decreased by 1.6% quarter on quarter to $4.79 million. The main reason for the revenue decline was a slump of offline sales by 32.1% to just $0.78 million which I find surprising as Splash inked several distribution deals in the second half of 2022.

The main reasons behind the strong growth of e-commerce revenues in 2022 included an expanded territory coverage, new products and higher cart size when checking out. In addition, Splash boosted sales and marketing expenses by over 250% year on year to $2.81 million. Operating expenses declined by 17.2% in 2022 but the main reason for this was lower non-cash share-based compensation. The company lost more than one dollar for each dollar of revenues and the loss from continuing operations in Q4 2022 alone stood at $4.77 million. This represents an improvement from the $6.15 million operating loss in Q4 2021 thanks to the strong performance of the e-commerce business, but Splash is a very long way from becoming profitable.

Net cash used in operating activities for 2022 was $14.06 million and Q4 alone accounted for $3.43 million of that amount. I don't expect the cash flow situation to improve anytime soon.

Turning our attention to the balance sheet, cash and cash equivalents rose by $1.83 million quarter on quarter to $4.43 million at the end of December 2022 and they were slightly higher than a year before. The main reason behind the higher cash balance was a quarter on quarter increase in long term notes payable of $2.29 million while accounts payable soared by $1.3 million. In addition, Splash issued 296,129 shares for $0.46 million as underwriters exercised an over-allotment option under a public offering launched in late September.

I find the increase in long term notes payable concerning as the interest rate on the majority of them is 12%. And with net cash used in operating activities standing at just over $1 million per month, I think Splash is likely to launch another stock offering before the end of Q2 2023 to strengthen its balance sheet. This could result in significant stock dilution.

Looking at what to expect for 2023, I think that e-commerce revenues are likely to continue to expand at a rapid pace. According to Splash's 2022 annual report, Salt is expected to launch sales in several countries in Latin America this year (page 8 here ) while TapouT's new energy drink named TapouT Energy was slated for a March launch. In addition, I expect the company to add at least one more brand to its portfolio in 2023. However, I think that profitability will likely remain elusive as the margins are underwhelming and I remain bearish.

So, how do you play this? Well, short selling seems dangerous as data from Fintel shows that the short borrow fee rate stands at 28% as of the time of writing. In addition, there are just 60,000 shares available for short selling and call options seem expensive at the moment.

Looking at the risks for the bear case, I think that the major one is that the share prices of microcap companies can increase for spurious and unknown reasons. We've already seen this happen several times here over the past few years and the share price of Splash has soared by over 40% since my previous article despite slowing revenue growth and stock dilution risk.

Investor takeaway

The e-commerce business of Splash is growing at a high pace as the company keeps increasing its marketing spending. However, the overall revenue growth has been slowing down as the offline business is struggling despite an increasing number of distribution partnerships. In addition, net cash used in operating activities is over $1 million per month and I'm concerned that Splash will have to tap the equity market soon to fund its operations.

Overall, I continue to think that the business is unlikely to become profitable anytime soon. That being said, I think that short selling is dangerous as the short borrow fee rate is 28% and call options are expensive. In my view, risk-averse investors should avoid this stock.

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