8-K: Splash Beverage Group Eyes Medterra CBD Merger

Splash Beverage Group, Inc. has entered a letter of intent for a potential business combination with Medterra CBD, LLC, valuing Medterra at $37.6 million.

Summary

• Splash Beverage Group, Inc. (SBEV) signed a letter of intent (LOI) for a potential merger with Medterra CBD, LLC, a leading manufacturer and multi-brand operator of federally compliant cannabinoid wellness products.
• The proposed merger values Medterra at an enterprise value of $37.6 million.
• The transaction involves issuing approximately 75,200,000 shares of SBEV common stock, assuming repayment of Medterra's outstanding debt.
• At closing, Medterra investors will receive up to 19.99% of SBEV's outstanding common stock, with the remainder issued as Series X and Series X-1 convertible preferred stock.
• The convertible preferred shares will convert at $0.50 per share, with Series X offering downside protection if the common stock price falls below $0.50, subject to a floor price of 20% of the NYSE American Minimum Price.
• SBEV is required to raise capital to pay off Medterra's approximately $10.4 million debt.
• The merger is contingent on due diligence, a definitive agreement, shareholder approval, audited financial statements for Medterra, and other customary closing conditions.
• SBEV will redeem up to $5 million of the Series X and X-1 preferred stock from up to 50% of net proceeds from future securities offerings.
• Medterra is required to have a minimum working capital of $4,000,000 at closing.
• Certain Medterra officers and directors are expected to join SBEV's management and board post-merger.
• SBEV will file a Proxy Statement for shareholder approval of the change of control, with a $250,000 liquidated damages clause if approval is not sought within specified timelines.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a strategically positive but highly conditional development. The potential for market expansion is good, but the significant capital raise requirement and numerous closing conditions introduce considerable uncertainty and risk.

Positives

• Potential expansion into the cannabinoid wellness market through a merger with a "leading manufacturer and multi-brand operator."
• The proposed merger provides a clear valuation for Medterra at $37.6 million.
• The structure includes convertible preferred stock (Series X) with downside protection for Medterra investors, potentially aligning interests.
• The cancellation of Medterra's lender warrants in exchange for Series X-1 preferred stock simplifies Medterra's capital structure.

Negatives

• SBEV is required to raise approximately $10.4 million in capital to pay off Medterra's debt, which could be dilutive or challenging to secure.
• The merger is subject to numerous conditions, including due diligence, definitive agreements, shareholder approval, and audited financials, indicating significant uncertainty.
• The issuance of a large number of shares (75,200,000) and convertible preferred stock could lead to substantial dilution for existing SBEV shareholders.
• The common stock issued at closing to Medterra investors cannot vote on the change of control, potentially limiting their immediate influence on a critical decision.
• SBEV faces a $250,000 liquidated damages penalty if it fails to obtain shareholder approval within specified timelines, adding financial risk.

Risks

• Failure to complete due diligence satisfactorily.
• Inability to negotiate and execute a definitive Merger Agreement.
• Failure to obtain shareholder approval for the change of control.
• Inability to raise the required capital of approximately $10.4 million to pay off Medterra's debt.
• Medterra's audited financial statements may not meet expectations or reveal unforeseen issues.
• Potential dilution for existing shareholders due to the issuance of common and convertible preferred stock.
• Market price of SBEV common stock falling below the $0.50 conversion price, triggering downside protection for Series X shares and potentially further dilution.
• Regulatory hurdles or changes in the legal landscape for cannabinoid wellness products.
• Integration risks post-merger, including cultural differences, operational challenges, and achieving anticipated synergies.

Future Outlook

The filing outlines a clear path towards a potential business combination with Medterra CBD, LLC, contingent on several key milestones including due diligence, definitive agreement execution, capital raise for debt repayment, and shareholder approval. Post-merger, there is an expectation of integrating Medterra's management and board members into Splash Beverage Group. The company anticipates filing a Proxy Statement with the SEC to obtain the necessary shareholder approval for the change of control.

Management Comments

• "Splash Beverage Group, Inc. entered into a letter of intent with Medterra CBD, LLC, a leading manufacturer and multi-brand operator of federally compliant cannabinoid wellness products."
• "The proposed terms for the Merger represent an enterprise value of Medterra of $37.6 million or the issuance of approximately 75,200,000 shares of common stock, which assumes repayment of its outstanding debt."
• "The intent of this net-working capital approach is to ensure that Medterra is delivered with a normalized level of net-working capital."

Industry Context

StockSavvy.ai notes that this potential merger positions Splash Beverage Group to expand beyond traditional beverages into the rapidly growing cannabinoid wellness market. This move aligns with a broader industry trend of convergence between the food/beverage sector and the cannabis/CBD space, as companies seek new growth avenues and diversified product portfolios. Competitors in the beverage industry are increasingly exploring functional beverages and alternative ingredients, making this a strategic, albeit potentially risky, diversification play for SBEV.

Comparison to Industry Standards

• StockSavvy.ai observes that the valuation of Medterra at $37.6 million, while specific to this LOI, would need to be benchmarked against recent M&A activities in the CBD and wellness sector. For instance, Canopy Growth's acquisition of Acreage Holdings or Tilray's merger with Aphria involved significantly larger valuations, but also larger, more established cannabis operations.
• The requirement for SBEV to raise $10.4 million to cover Medterra's debt is a substantial financial undertaking, comparable to the capital requirements seen in many smaller-to-mid-cap M&A deals where the acquirer takes on or refinances target debt.
• The issuance of convertible preferred stock with downside protection is a common mechanism in M&A to bridge valuation gaps or provide security to target shareholders, similar to structures seen in private equity deals or venture capital investments in growth-stage companies.

Management Changes

Corporate Governance

Stakeholder Impact

• Shareholders (SBEV): Potential for significant dilution from the issuance of 75.2 million shares and convertible preferred stock. Opportunity for growth and diversification into the cannabinoid wellness market. Risk of capital raise failure or merger not closing.
• Shareholders (Medterra): Will receive SBEV common and convertible preferred stock, potentially gaining liquidity and exposure to a publicly traded company.
• Medterra's Lender: Warrants will be cancelled in exchange for Series X-1 preferred stock, altering their investment structure.
• Employees (Medterra): Potential for integration into a larger public company, with certain officers and directors expected to join SBEV.
• Customers (Both): Potential for expanded product offerings and market reach.

Next Steps

• Conduct thorough due diligence on Medterra CBD, LLC.
• Negotiate and execute a definitive Merger Agreement and other applicable agreements.
• Obtain audited financial statements of Medterra.
• Raise capital of approximately $10.4 million to pay off Medterra's debt.
• Seek shareholder approval for the merger and change of control.
• Prepare and file a Proxy Statement with the SEC for shareholder approval.
• Appoint certain officers and directors of Medterra as officers and directors of Splash Beverage Group following the Merger, subject to NYSE American Rules.

Key Dates

Recommendation

The announcement of a letter of intent for a strategic merger with Medterra CBD presents a significant growth opportunity for Splash Beverage Group by diversifying into the cannabinoid wellness market. However, the transaction is highly conditional, requiring substantial capital raise ($10.4 million for debt repayment) and shareholder approval, which introduces considerable uncertainty and potential dilution. Given the early stage of the agreement and the hurdles ahead, a 'hold' recommendation is appropriate until more definitive terms are established and the likelihood of successful completion becomes clearer.

Keywords

Splash Beverage Group, Medterra CBD, Merger, Cannabinoid Wellness, Beverage Industry, SEC Filing, 8-K, Business Combination, Convertible Preferred Stock, Capital Raise, Shareholder Approval, SBEV, CBD Products