The accompanying
notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
The accompanying notes are an integral part of these
condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS
Business
Organization
Long
Island Iced Tea Corp, a Delaware corporation (“LIIT”), was formed on December 23, 2014. LIIT was formed in order to
allow for the completion of mergers between Cullen Agricultural Holding Corp. (“Cullen”) and Long Island Brand Beverages
LLC (“LIBB”). On December 31, 2014, LIIT entered into a merger agreement, as amended as of April 23, 2015, with Cullen,
a public company, Cullen Merger Sub, Inc. (“Cullen Merger Sub”), LIBB Acquisition Sub, LLC (“LIBB Merger Sub”),
LIBB and the founders of LIBB (“Founders”). Pursuant to the merger agreement, (a) Cullen Merger Sub was merged with
and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary of LIIT and (b) LIBB Merger Sub was merged with
and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of LIIT (the “Mergers”). As a result of
the Mergers which were consummated on May 27, 2015, LIIT consisted of its wholly owned subsidiaries, LIBB (its operating subsidiary)
and Cullen and Cullen’s wholly owned subsidiaries (collectively the “Company”).
Under
the merger agreement, upon consummation of the Mergers, the former holders of the LIBB membership interests (the “LIBB members”)
received 2,633,334 shares of common stock of LIIT (or approximately 63%).
For
accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former
LIBB members held a large percentage of LIIT’s shares and exercised significant influence over the operating and financial
policies of the consolidated entity and Cullen was a public shell company at the time of the transaction. Pursuant to Accounting
Standards Codification (“ASC”) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company
into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business
combination. As a result, the condensed consolidated balance sheets, statements of operations, and statements of cash flows of
LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical condensed consolidated financial
statements of LIBB are now reflected as those of the Company.
Overview
The
Company is a holding company operating through its wholly-owned subsidiary, LIBB. The Company is engaged in the production and
distribution of premium Non-Alcoholic ready-to-drink (“NARTD”) iced tea in the beverage industry. The Company is currently
organized under its flagship brand, Long Island Iced Tea, a premium NARTD tea made from a proprietary recipe and with quality
components. The Company’s mission is to provide consumers with premium iced tea offered at an affordable price.
The
Company aspires to be a market leader in the development of iced tea beverages that are convenient and appealing to consumers.
There are two major target markets for Long Island Iced Tea: “consumers on the go” and “health conscious consumers.”
“Consumers on the go” are families, employees, students and other consumers who lead a busy lifestyle. With increasingly
hectic and demanding schedules, there is a need for products that are accessible and readily available. “Health conscious
consumers” are individuals who are becoming more interested and better educated on what is included in their diets, causing
them to shift away from the less healthy options, such as carbonated soft drinks, towards alternative beverages such as iced tea.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS (CONTINUED)
Overview,
continued
The
Company produces a 100% brewed tea, using black tea leaves, purified water and natural cane sugar or sucralose. Flavors change
from time to time, and have included lemon, peach, raspberry, guava, mango, diet lemon, diet peach, sweet tea, green tea and honey,
sweet tea and half tea and half lemonade. The Company also offers lower calorie iced tea in twelve (12) ounce bottles. The lower
calorie flavor options include mango, raspberry and peach. The Company also sells its iced tea in gallon bottles with flavor options
including lemon, peach, green tea and honey, sweet tea and mango. The company also sells a private label version of its iced tea
products. In addition, in order to service certain vending contracts, the Company sells snacks and other beverage products on
a limited basis.
The
Company distributes an aloe vera derived juice beverage (“ALO Juice”). During the three months ended March 31, 2017,
the Company’s ALO Juice product accounted for approximately 36% of its condensed consolidated net sales.
On
March 14, 2017, the Company announced that it is expanding its brand to include lemonade. Lemonade will be offered in nine flavors
and will be offered at retail in both single and 12-packs of 18oz bottles.
The
Company sells its products to regional retail chains and to a mix of independent mid-to-large range distributors who in turn sell
to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels, principally in
the New York, New Jersey, Connecticut and Pennsylvania markets, with expanding distribution in Florida, Virginia, Massachusetts,
New Hampshire, Nevada, Rhode Island and parts of the Midwest. As of March 31, 2017, the Company’s products are available
in 27 states and in Canada and Latin America.
Asset
Purchase Agreement
On
December 8, 2016, the Company entered into an asset purchase agreement with The Wilnah International, LLC (“Wilnah”).
Pursuant to the agreement, the Company will acquire the intellectual property (“IP”) (trade names, formulas, recipes)
for ALO Juice. Upon the closing, the Company will issue to Wilnah 5,000 shares of its common stock. The closing of the transaction
is expected to occur in the second quarter of 2017. Separately, the Company has entered into an employment agreement with Julio
X. Ponce, majority interest member of Wilnah, to expand the Company’s sales of ALO Juice products within the Southeast U.S.
and Latin American regions.
Liquidity
and Management’s Plan
The
Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network
of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of
debt and equity, and through utilizing trade credit with its vendors.
As
of March 31, 2017, the Company had cash of $118,474 and short term investments of $1,602,655. As of March 31, 2017, the Company
had working capital of $3,197,482. The Company incurred net losses of $3,454,522 and $1,417,070 for the three months ended March
31, 2017 and 2016, respectively. As of March 31, 2017, the Company’s stockholders’ equity was $4,132,689.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS (CONTINUED)
Liquidity
and Management’s Plan, continued
Pursuant
to a Credit and Security Agreement (the “Credit Agreement”), the Company has a revolving credit facility in an amount
up to $3,500,000, subject to approval by the lender (See Note 5).
On
January 27, 2017, the Company sold 376,340 shares of the Company’s common stock in a public offering at an average price
of $4.02 per share. Of the shares sold, 300,000 were sold to the public at an offering price of $4.00 while the remaining 76,340
shares were sold to officers and directors of the Company at a price of $4.10 per share. The sale of common stock generated gross
proceeds of $1,513,000 and net proceeds of $1,429,740 after deducting commissions and other offering expenses.
The
Company believes that as a result of the commitment for financing from certain members of management and a stockholder
and its working capital as of March 31, 2017, its cash resources will be sufficient to fund the Company’s net cash requirements
through May 15, 2018. However, in order to execute the Company’s long-term growth strategy, the Company may need to raise
additional funds through private equity offerings, debt financings, or other means. On May 12, 2017, the Company received
a commitment letter from certain members of management and a stockholder committing to fund any cash deficit required to
sustain the operations of the Company through May 15, 2018. There are no assurances that the Company will be able to raise
such funds on terms that would be acceptable to the Company.
In
consideration for a prior commitment for financing the Company through March 31, 2018 from a stockholder, on March 29, 2017, the
Company’s Board of Directors issued to this stockholder a warrant to purchase 165,000 shares of the Company’s common
stock at an exercise price of $4.18 per share. This warrant has a term of one year and was fully vested upon issuance. The option
had a grant date fair value of $172,526, which was fully charged to general and administrative expense during the three months
ended March 31, 2017. The fair value of the warrant was determined utilizing the Black-Scholes option pricing model, based upon
a common stock price of $4.00 per share, dividend yield of 0%, expected volatility of 70%, risk free interest rate of 1.00%, and
an expected life in years of 1.00.
In
consideration for the May 12, 2017 commitment for financing the Company through May 15, 2018 from a stockholder, on May 12, 2017,
the Company’s Board of Directors issued to this stockholder a warrant to purchase 20,000 shares of the Company’s common
stock at an exercise price of $4.90 per share. This warrant has a term of one year and was fully vested upon issuance.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2017. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 2016 and related notes thereto included in the Company’s
Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 30, 2017.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
effect on the previously reported net loss.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those
which result from using such estimates. Management utilizes various other estimates, including but not limited to, assessing the
collectability of accounts receivable, accrual of rebates to customers, the valuation of securities, the valuation of inventory,
determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants
issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates
are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
Revenue
Recognition
Revenue
is stated net of sales discounts and rebates paid to customers (See Customer Marketing Programs and Sales Incentives, below).
Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determinable; (2) evidence of
a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance
required; and (4) amounts are collectible under normal payment terms.
These
conditions typically occur when the products are delivered to or picked up by the Company’s customers. For sales where certain
revenue recognition criteria have not been met at the date of delivery, the Company defers recognition of such revenue and accounts
receivable until such recognition criteria are met.
Customer
Marketing Programs and Sales Incentives
The
Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among
these programs are arrangements under which allowances can be earned by customers for various discounts to the end retailers or
for participating in specific marketing programs. The Company believes that its participation in these programs is essential to
ensuring volume and revenue growth in a competitive marketplace. During the three months ended March 31, 2017, an adjustment to
these allowances resulted in an increase of $9,144 in net sales. During the three months ended March 31, 2016, these allowances
resulted in a reduction in net sales of $45,165.
Shipping
and Handling Costs
Shipping
and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are
included in selling and marketing expenses within the condensed consolidated statements of operations and totaled $25,290 and
$40,152, for the three months ended March 31, 2017 and 2016, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
The
Company expenses advertising costs as incurred. Advertising costs are included in selling and marketing expenses within the condensed
consolidated statements of operations and totaled $51,642 and $9,631 for the three months ended March 31, 2017 and 2016, respectively.
Research
and Development
Costs
related to new product initiatives incurred during the three months ended March 31, 2017 and 2016 were $176,862 and $400, respectively,
and were included in selling and marketing expenses. Other research and development costs were $829 and $46,667 for the three
months ended March 31, 2017 and 2016, respectively and were included in general and administrative expenses. The expenses incurred
during the three months ended March 31, 2016 were incurred pursuant to a product development agreement which will require the
Company to pay $40,000 in cash and $40,000 in common stock upon the completion of the arrangement. As of March 31, 2017, $50,000
was included in accrued expenses in the condensed consolidated balance sheet related to the 2016 arrangement.
Short-term
Investment
The
Company accounts for securities in accordance with accounting standards for investments in debt and equity securities. Accounting
standards require investments in debt and equity securities to be classified as either “held to maturity”, “trading”,
or “available-for-sale.”
The
Company holds investments in marketable securities, consisting of U.S. government securities and mutual funds. The Company’s
available-for-sale securities are carried at estimated fair value with any unrealized gains and losses, net of taxes, included
in accumulated other comprehensive (loss) income in stockholders’ equity when applicable. During the three months ended
March 31, 2017 and 2016, the unrealized gain was $12,197 and $0, respectively. Unrealized losses are charged against interest
and other income/(expense), net, when a decline in fair value is determined to be other-than-temporary. The Company has not recorded
any such impairment charge in the periods presented. The Company determines realized gains or losses on sale of marketable securities
on a specific identification method, and records such gains or losses as interest and other income/(expense), net.
The
following table sets forth the available-for-sale securities:
|
|
As of
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
US Government Securities
|
|
$
|
-
|
|
|
$
|
195,374
|
|
Fixed income Mutual Funds
|
|
|
1,602,655
|
|
|
|
2,194,147
|
|
|
|
$
|
1,602,655
|
|
|
$
|
2,389,521
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term
Investment, (continued)
Short-term
investments included the following securities with gross unrealized gains/losses included in other comprehensive loss:
|
|
As of March 31, 2017
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Loss
|
|
|
Fair Value
|
|
U. S. government securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fixed income Mutual funds
|
|
|
1,620,704
|
|
|
|
(18,049
|
)
|
|
|
1,602,655
|
|
Total
|
|
$
|
1,620,704
|
|
|
$
|
(18,049
|
)
|
|
$
|
1,602,655
|
|
|
|
As of December 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Fair Value
|
|
U. S. government securities
|
|
$
|
195,570
|
|
|
$
|
(196
|
)
|
|
$
|
195,374
|
|
Fixed income Mutual funds
|
|
|
2,224,197
|
|
|
|
(30,050
|
)
|
|
|
2,194,147
|
|
Total
|
|
$
|
2,419,767
|
|
|
$
|
(30,246
|
)
|
|
$
|
2,389,521
|
|
The
following table classifies the US Government Securities by maturity:
|
|
As of
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Within one year
|
|
$
|
-
|
|
|
$
|
94,967
|
|
Within one to five years
|
|
|
-
|
|
|
|
100,407
|
|
|
|
$
|
-
|
|
|
$
|
195,374
|
|
Accounts
Receivable
The
Company sells products to distributors and in certain cases directly to retailers, and extends credit, generally without requiring
collateral, based on its evaluation of the customer’s financial condition. While the Company has a concentration of credit
risk in the retail sector, it believes this risk is mitigated due to the diverse nature of the customers it serves, including,
but not limited to, its type, geographic location, size, and beverage channel. Potential losses on the Company’s receivables
are dependent on each individual customer’s financial condition and sales adjustments granted after the balance sheet date.
The Company carries its trade accounts receivable at net realizable value. Accounts receivable have terms of ranging from 30 to
75 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential
losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its
history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the
Company’s efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management
expects to collect.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable, continued
Accounts
receivable, net, is as follows:
|
|
As of
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accounts receivable, gross
|
|
$
|
2,144,878
|
|
|
$
|
1,859,474
|
|
Allowance for doubtful accounts
|
|
|
(490,299
|
)
|
|
|
(232,416
|
)
|
Accounts receivable, net
|
|
$
|
1,654,579
|
|
|
$
|
1,627,058
|
|
Concentrations
of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with
financial institutions, short-term investments and accounts receivable. At times, the Company’s cash in banks is in excess
of the FDIC insurance limit. The Company has not experienced any loss as a result of these cash deposits. These cash balances
are maintained with two banks. As of March 31, 2017, the Company was exposed to concentrations of credit risk through short-term
investments held with two financial institutions. One customer accounted for 47% and 46% of the Company’s trade receivables
as of March 31, 2017 and December 31, 2016, respectively. The Company does not generally require collateral or other security
to support customer receivables.
On
March 14, 2017, a distributor that represented 47% of the Company’s trade receivables as of March 31, 2017 issued to the
Company a note in the amount of $467,444 due on June 12, 2017. Such note provides credit enhancement and bears interest commencing
on the 45
th
day from the date of execution based on the Wall Street Journal’s prime rate at (4% per annum at
March 31, 2017) for a period of 45 days and then adjusted to 15% per annum, thereafter. The obligations of the distributor under
the note are personally guaranteed by its former part owner, who, on January 1, 2017, became the Company’s employee.
The
Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
Inventories
The
Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory
consists of bottled iced tea and ALO Juice. As of March 31, 2017 and December 31, 2016, included in inventory was finished goods
inventory with a cost of approximately $206,000 and $320,000, respectively, that was delivered to a distributor, and is held in
inventory until certain revenue recognition criteria are met.
The
Company values its inventories at the lower of cost or market, net of reserves. Cost is determined using the first-in, first-out
(FIFO) method. As of March 31, 2017 and December 31, 2016, the Company recorded reserves of $59,113 and $45,078, respectively,
to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the
dates presented:
|
|
As of
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
627,970
|
|
|
$
|
905,642
|
|
Raw materials and supplies
|
|
|
446,507
|
|
|
|
282,299
|
|
Total inventories
|
|
$
|
1,074,477
|
|
|
$
|
1,187,941
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property
and Equipment
Property
and equipment is recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance
and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Depreciation is
recorded using the straight-line method over the respective estimated useful lives of the
Company’s assets.
The
estimated useful lives typically are 3 years for cold-drink containers, such as reusable fridges, wood racks, vending machines,
barrels, and coolers, and are depreciated using the straight-line method over the estimated useful life of each group of equipment,
as determined using the group-life method. Under this method, the Company does not recognize gains or losses on the disposal of
individual units of equipment when the disposal occurs in the normal course of business. The Company capitalizes the costs of
refurbishing its cold-drink containers and depreciates those costs over the estimated period until the next scheduled refurbishment
or until the equipment is retired. The estimated useful lives are typically 3 to 5 years for office furniture and equipment and
are depreciated on a straight-line basis. The estimated useful lives for trucks and automobiles are typically 3 to 5 years and
are depreciated on a straight line basis. For the three months ended March 31, 2017 and 2016, depreciation expense was $41,369
and $38,694, respectively.
Intangible
Assets
Intangible
assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested
for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include
website development costs of $1,250 and $2,500 as of March 31, 2017 and December 31, 2016, respectively. The estimated useful
life of the capitalized costs of the Company’s website is 3 years and is depreciated on a straight line basis. As of March
31, 2017, the cost of the website development was $15,000 and the accumulated amortization was $13,750. As of December 31, 2016,
the cost of the website development was $15,000 and the accumulated amortization was $12,500. For the three months ended March
31, 2017 and 2016, amortization expense was $1,250 and $1,251, respectively. Expected future amortization of website development
costs is $1,250 for the nine months ended December 31, 2017.
Income
Taxes
The
Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between
the financial statement, and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit
based on expected profitability by tax jurisdiction.
In
its interim financial statements, the Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income
Taxes”, whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for
the interim periods. That rate differs from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s
net operating loss carryforward as a result of the historical losses of the Company.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes, continued
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liabilities. In management’s opinion, adequate provisions for income taxes have been made for all years.
If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
The Company accounts for uncertain tax positions in accordance with ASC 740 —“Income Taxes”. No uncertain tax
provisions have been identified. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components
of the income tax provision in the accompanying condensed consolidated statements of operations. Our primary tax jurisdictions
are our federal, various state, and local taxes.
Generally,
Federal, State and Local authorities may examine the Company’s tax returns for three years from the date of filing.
In
accordance with ASC 740, the Company evaluates whether a valuation allowance should be established against the net deferred tax
assets based upon the consideration of all available evidence and using a “more likely than not” standard. Significant
weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the
recent history of cumulative losses and current operating performance. In conducting the analysis, the Company utilizes an approach,
which considers the current year loss, including an assessment of the degree to which any losses are driven by items that are
unusual in nature and incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions
and any other factors arising during the period, which may impact its future operating results.
Loss
per share
Basic
net loss per common share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted
earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon the exercise
of stock options, warrants and the conversion. The computation of diluted earnings per share excludes those with an exercise price
in excess of the average market price of the Company’s common shares during the periods presented. The computation of diluted
earnings per share excludes outstanding options, warrants and other dilutive instruments in periods where the inclusion of such
instruments would be antidilutive, as provided below:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common stock
|
|
|
862,964
|
|
|
|
425,411
|
|
Warrants to purchase common stock
|
|
|
635,570
|
|
|
|
470,570
|
|
Total potentially dilutive securities
|
|
|
1,498,534
|
|
|
|
895,981
|
|
Fair
Value of Financial Instruments
The
carrying amounts of cash, short term investments, accounts receivable, accrued expenses, automobile and equipment loans and the
UBS Credit Line (See Note 4 below) approximate fair value due to the short-term nature of these instruments. In addition, for
notes payable, the Company believes that interest rates approximate prevailing rates.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments, continued
ASC
820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3 measurements).
Fair
value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined
based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is
used to prioritize the inputs in measuring fair value as follows:
Level
1 Quoted prices in active markets for identical assets or liabilities.
Level
2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level
3 Significant unobservable inputs that cannot be corroborated by market data.
Fair
values for short-term money market investments are determined from quoted prices in active markets for these money market funds,
and are considered to be Level 1.
The
carrying value of financial instruments in the Company’s condensed consolidated financial statements are as follows:
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
|
|
Quoted Prices for
Similar Assets or
Liabilities in
Active Markets
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Short-term investments at March 31, 2017
|
|
$
|
1,602,655
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments at December 31, 2016
|
|
$
|
2,389,521
|
|
|
$
|
-
|
|
|
$
|
-
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements
In
January 2016, the FASB, issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments-Overall (Subtopic
825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. generally
accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance
primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and are to be adopted by means of
a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective.
Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair
value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating
the impact the adoption of this standard will have on its condensed consolidated financial statements.
In
February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencement
date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis; and a right-of use asset, which is an asset that represents the lessee’s right
to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term
of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is
permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply
a full retrospective transition approach. The Company is currently evaluating the impact the adoption of this standard will have
on its condensed consolidated financial statements.
On
March 30, 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock
Compensation (Topic 718)”. This update requires that all excess tax benefits and tax deficiencies arising from share-based
payment awards should be recognized as income tax expense or benefit on the income statement. The amendment also states that excess
tax benefits should be classified along with other income tax cash flows as an operating activity. In addition, an entity can
make an entity-wide accounting policy election to either estimate the number of awards expected to vest or account for forfeitures
as they occur. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The
Company adopted this standard effective December 31, 2016. The adoption did not have a material effect on the Company’s
condensed consolidated financial statements.
In
April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606)”,
“Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following
two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related
principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December
15, 2017, with early application permitted. The Company is continuing to evaluate the expected impact of this new revenue guidance.
The Company is currently preparing its assessment of the full financial impact of the new revenue recognition guidance, including
the method of adoption, and intends to adopt the guidance when it becomes effective for the Company on January 1, 2018.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements, continued
In
May 2016, the FASB issued Accounting Standards Update ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”,
“Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12
is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update
are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company
is continuing to evaluate the expected impact of this new revenue guidance. The Company is currently preparing its assessment
of the full financial impact of the new revenue recognition guidance, including the method of adoption, and intends to adopt the
guidance when it becomes effective for the Company on January 1, 2018.
In
August 2016, the FASB issued Accounting Standards Update ASU No. 2016-15 “Statement of Cash Flows (Topic 230)”, “Classification
of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The amendments for this update provide guidance
on the eight specific cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent
consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the
settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests
in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The provisions
of this update are effective for annual and interim periods beginning after December 15, 2016, with early application permitted.
The Company adopted this standard effective December 31, 2016. The adoption did not have a material effect on the Company’s
condensed consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Clarifying the Definition of a Business” (“ASU
2017-01”), which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. ASU 2017-01 requires entities to use a screen test to determine when an integrated set
of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against
the framework. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those
years. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial
statements.
Management’s
Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the review, other than described in Note 1 –Business Organization, Liquidity, and Management’s Plans, Note
8 - Commitments and Contingencies and Note 11 – Subsequent Events, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
3 – EQUIPMENT LOAN
On
November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp. (“Magnum”), an entity
managed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, and certain of his family
members. In exchange for the exclusive right to stock vending machines owned by Magnum, the Company agreed to reimburse Magnum
for the cost of products to stock the machines and the costs that Magnum incurred to acquire the machines including machines which
were purchased with an equipment loan. The total principal amount of the payments underlying the agreement upon inception was
$117,917. The reimbursements will be made in 35 monthly payments of principal and interest in the amount of $3,819 with an interest
rate of 10%. Upon completion of these payments in October 2018, Magnum will transfer ownership of the vending machines to the
Company. In addition, in exchange for the right to stock certain other vending machines that the Company has the right to use,
the Company agreed to purchase the products required to be displayed in those vending machines from Magnum, at a price equal to
Magnum’s cost for such products (See Note 10). The Company may terminate the agreement and all obligations to make future
payments on ten days’ written notice to Magnum. As of March 31, 2017 and December 31, 2016, the outstanding balance on the
equipment loan was $68,251 and $76,474, respectively.
NOTE
4 – UBS CREDIT LINE
On
October 27, 2016, the Company entered into a credit line with UBS (The “UBS Credit Line”). The UBS Credit Line has
a borrowing capacity determined by the level of the collateral pledged and bears interest at a floating rate, depending on the
time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of March
31, 2017, the interest rate on the UBS Credit Line was 3.483 %. The UBS Credit Line, when drawn, is collateralized by certain
of the Company’s short-term investments. As of March 31, 2017 and December 31, 2016, the outstanding balance on the line
of credit was $0 and $1,280,275, respectively. As of March 31, 2017 and December 31, 2016, the Company’s borrowing capacity
under the UBS Credit line was $521,587 and $19,725, respectively.
NOTE
5 – LINE OF CREDIT – RELATED PARTIES
Brentwood
LIIT Corp.
On
November 23, 2015, LIIT and LIBB entered into a Credit and Security Agreement (the “Credit Agreement”), by and among
LIBB, as the borrower, LIIT and LIIT (NZ) Ltd. (the “Lender”). The Lender is controlled by a related party, Eric Watson,
who beneficially owned approximately 17.4% of the Company as of March 31, 2017. The Credit Agreement provides for a revolving
credit facility in an amount of up to $3,500,000, subject to approval by the lender. The Available Amount may be increased, in
increments of $500,000, up to the Facility Amount, and LIBB may obtain further advances, subject to the approval of the Lender.
NOTE
6 – STOCKHOLDERS’ EQUITY
2017
Issuances
On
January 3, 2017, the Company issued 1,790 shares to a product broker. The shares had a fair value of $7,500.
On
January 17, 2017, the Company issued 41,965 shares of common stock to directors of the Company. The shares were issued in satisfaction
of accrued director fees and had a fair value of $175,000.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 – STOCKHOLDERS’ EQUITY (CONTINUED)
2017
Issuances, continued
On
January 30, 2017, the Company issued 61,208 shares of the Company’s common stock to consultants of the Company in satisfaction
of accrued obligations. The shares were valued based upon the value of such services. The fair value was $213,550. As of March
31, 2017, $104,690 is included within prepaid expenses and other current assets in the condensed consolidated balance sheets.
On
March 27, 2017, the Company’s Board of Directors approved the issuance of 5,000 and 25,000 shares of the Company’s
common stock to directors and consultants, respectively, in consideration of services provided. The fair value of these shares
was $112,853.
On
March 27, 2017, the Company’s Board of Directors approved the issuance of 111,457 shares of the Company’s common stock
to consultants of the Company in consideration of services provided. The fair value of these shares was $437,598.
NOTE
7 – STOCK BASED COMPENSATION
Stock
Options
On
May 27, 2015, the Company’s board of directors adopted the 2015 Long-Term Incentive Equity Plan (“2015 Stock Option
Plan”). The 2015 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock
and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. During January
2017, the 2015 Stock Option Plan was amended to increase the aggregate number of shares authorized for issuance by 283,333 shares
to 750,000 shares.
On
January 5, 2017, the Company issued to various officers, directors, and employees options to purchase an aggregate of 220,867
shares of the Company’s common stock. The options expire five years from the date of grant, have an exercise price of $5.00,
and vest quarterly over two years, beginning on April 5, 2017. The options have a fair value of $440,698.
On
January 30, 2017, pursuant to his consulting agreement, Mr. Davidson, the Company’s Executive Chairman, was granted an option
to purchase 71,686 shares of the Company’s common stock (See Note 8). The option expires four and a half years from the
date of grant, has an exercise price of $4.09, and vests in three equal installments on January 30, 2017, July 28, 2017, and July
28, 2018. The option has a fair value of $131,240.
On
March 10, 2017, in connection with his amended and restated employment agreement, Mr. Thomas, the Company’s Chief Executive
Officer (“CEO”), was granted an option to purchase 75,000 shares of the Company’s common stock. The option expires
five years from the date of grant and has an exercise price of $4.50 per share. The option will vest in three annual installments
beginning on the date of grant. The option has a fair value of $128,062.
On
March 27, 2017, as compensation, the Company issued to a director an option to purchase 70,000 shares of the Company’s common
stock. The option will expire five years from the date of grant, has an exercise price of $4.50 per share, and vests in three
annual installments beginning on the date of grant. The option has a fair value of $130,266.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK BASED COMPENSATION (CONTINUED)
Stock
Options, continued
The
Company determined the fair value of stock options granted based upon the assumptions as provided below.
|
|
For the Three Months Ended
March 31, 2017
|
|
Stock price
|
|
|
$ 3.88-$4.32
|
|
Exercise price
|
|
|
$ 4.09-$5.00
|
|
Dividend yield
|
|
|
0%
|
|
Expected volatility
|
|
|
72-75%
|
|
Risk-Free interest rate, per annum
|
|
|
1.43% – 1.57%
|
|
Expected life (in years)
|
|
|
2.58 - 3.06
|
|
The
following table summarizes the stock option activity of the Company:
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Average Remaining Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at January 1, 2017
|
|
|
425,411
|
|
|
$
|
4.93
|
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
437,553
|
|
|
|
4.69
|
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired, forfeited or cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
862,964
|
|
|
$
|
4.81
|
|
|
$
|
2.86
|
|
|
|
4.4
|
|
|
$
|
20,800
|
|
Exercisable at March 31, 2017
|
|
|
289,144
|
|
|
$
|
4.48
|
|
|
$
|
3.95
|
|
|
|
3.9
|
|
|
$
|
18,200
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair
value of the Company’s common stock.
As
of March 31, 2017, there was a total of $1,048,036 of unrecognized compensation expense related to unvested stock options.
This cost is expected to be recognized through 2019 over a weighted average period of 1.33 years.
The
Company accounts for all stock based compensation as an expense in the financial statements and associated costs are measured
at the fair value of the award or the fair value of the service provided whichever is most readily determinable.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK BASED COMPENSATION (CONTINUED)
Stock
Warrants
The
following table summarizes the common stock warrant activity of the Company:
|
|
Number of shares
|
|
|
Weighted average exercise price
|
|
|
Weighted average contractual life (years)
|
|
Outstanding - January 1, 2017
|
|
|
470,570
|
|
|
$
|
5.95
|
|
|
|
-
|
|
Issued
|
|
|
165,000
|
|
|
$
|
4.18
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding March 31, 2017
|
|
|
635,570
|
|
|
$
|
5.49
|
|
|
|
1.7
|
|
Exercisable at March 31, 2017
|
|
|
635,570
|
|
|
$
|
5.49
|
|
|
|
1.7
|
|
The
following tables summarize total stock-based compensation costs recognized for the three months ended March 31, 2017 and 2016:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock options
|
|
$
|
375,904
|
|
|
$
|
151,354
|
|
Warrants
|
|
|
172,526
|
|
|
|
-
|
|
Common Stock
|
|
|
81,800
|
|
|
|
30,000
|
|
Total
|
|
$
|
630,230
|
|
|
$
|
181,354
|
|
The
total amount of stock-based compensation was reflected within the statements of operations and comprehensive loss as:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
General and administrative
|
|
$
|
421,817
|
|
|
$
|
135,740
|
|
Sales and marketing
|
|
|
208,413
|
|
|
|
45,614
|
|
Total
|
|
$
|
630,230
|
|
|
$
|
181,354
|
|
NOTE
8 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The
Company is involved in various claims and legal actions arising from time to time in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters in ordinary course of business will not have a material adverse effect
on the Company’s consolidated financial position, results of operations or cash flows. Legal costs related to these matters
are expensed as they are incurred.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal
Proceedings, continued
On
August 1, 2014, an action was filed by LIBB in the Supreme Court in the State of New York entitled Long Island Brand Beverages
LLC v. Revolution Marketing, LLC (“Revolution”) and Ascent Talent, Model Promotion Ltd. LIBB is seeking damages of
$10,000,000 for several claims including breach of contract and fraud occurring during 2014. Revolution has filed a counterclaim
for breach of contract and related causes of action, claiming damages in the sum of $310,880, and seeking punitive damages of
$5,000,000. Ascent has filed a pre-answer motion to dismiss LIBB’s complaint. LIBB filed papers in opposition and the motion
was submitted by March 9, 2015. In addition, Revolution has filed a motion to amend its answer to include cross-claims against
Ascent which were not asserted in its original answer of record. On February 5, 2016, the Court rendered a decision. The motion
to dismiss was denied with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate
motion filed by Revolution to amend its answer to include cross-claims against Ascent. The Company’s management and legal
counsel believes it is too early to determine the probable outcome of this matter.
Brokerage
Arrangements
The
Company maintains arrangements with sales brokers who help with bringing new distributors and retail outlets to the Company. These
sales brokers receive a commission for these services. For the three months ended March 31, 2017, commissions to these brokers
ranged from 2-5% of sales. In addition, the Company sells its products through alternative vending channels. Commissions resulting
from sales through these channels were 42% and 42% for the three months ended March 31, 2017 and 2016, respectively.
Employment
Agreements
On
December 9, 2016, the Company entered into an employment agreement with Julio X. Ponce to serve as Vice President of Southeast
and Latin American Sales of the Company. Until December 31, 2016, Mr. Ponce was an owner of one of the Company’s distributors.
Mr. Ponce’s primary duties shall be to advance the sales of ALO Juice. The term of employment agreement is from January
1, 2017 to December 31, 2017 and can be extended by written mutual agreement of the parties. Mr. Ponce will receive a base salary
of $90,000 and an incentive bonus of up to 62,500 shares of the Company’s common stock based on the introduction or procurement
of sales and/or distributors of the Company’s products outside of the Southeast United States and an additional performance
bonus of up to 905,769 shares of the Company’s common stock based on sales of the Company’s iced tea and ALO Juice
product by Mr. Ponce to approved customers reaching target thresholds in 2017. The target thresholds are between $2.5 million
and $5.5 million for ALO Juice and between $2.0 million and $4.0 million for the Company’s iced tea products. Notwithstanding
the foregoing, if such sales in 2018 do not reach at least 60% of their 2017 levels, the performance bonus will not be payable.
On
March 10, 2017, the Company entered into an amended and restated employment agreement with Mr. Thomas. The amended employment
agreement has a term that runs until December 31, 2019. Mr. Thomas will receive a base salary of $250,000, was paid $83,000 upon
the signing of the agreement, and is eligible for paid incentive bonuses from the Company. Pursuant to the agreement, Mr. Thomas
was also granted an option to purchase 75,000 shares of the Company’s common stock (See Note 7).
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements
On
June 6, 2016, the Company entered into an amendment to the consulting agreement with Julian Davidson which provides for him to
serve as the Company’s Executive Chairman. Either Mr. Davidson or the Company may terminate the consulting agreement with
30 days’ prior written notice. Pursuant to the consulting agreement, as in effect prior to its amendment and restatement
as described below, the Company (a) paid to Mr. Davidson $10,000 per month, and (b) granted to Mr. Davidson 1,667 shares of common
stock per month (an aggregate of 4,302 shares). The consulting agreement, as amended, contains provisions for protection of the
Company’s intellectual property and confidentiality and non-competition restrictions for Mr. Davidson (generally imposing
restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with,
competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s
customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such
entity).
On
August 18, 2016, the Company entered into a second amendment to the consulting agreement with Julian Davidson. The amendment modified
the condition that was required to be satisfied for certain changes in the compensation payable to Mr. Davidson under the consulting
agreement to take effect. After the amendment, upon the Company completing an equity raise with gross proceeds of at least $6,900,000,
the monthly cash fee to Mr. Davidson increases to $20,000 per month, the monthly stock grant to Mr. Davidson is eliminated and
Mr. Davidson receives a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock.
The amendment also modified the compensation that will be payable to Mr. Davidson under his agreement. Mr. Davidson is entitled
to receive an option to purchase 4% of the fully diluted common stock outstanding immediately after the Offering, or 286,744 shares
of the Company’s common stock. On August 18, 2016, the Company granted to Mr. Davidson an option to purchase 286,744 shares
of common stock.
On
October 5, 2016, the Company entered into an amended and restated consulting agreement with Julian Davidson (“Davidson Amendment”),
effective as of September 29, 2016, which provides for him to continue to serve as the Company’s Executive Chairman.
On
March 1, 2017, the Company entered into a consulting agreement with an investor relations and communications firm. The agreement
commenced on March 1, 2017 for an initial term of two months. The agreement was renewed for the month of May 2017 and may
be renewed on a monthly basis by the Company. The agreement shall terminate in 180 days from the date of the agreement.
In consideration for services, the Company shall pay (a) $15,000 in cash on the signing of the contract and $15,000 on the 5
th
day of each month thereafter, (b) up to $135,000 in ancillary budget (at the Company’s discretion) due each month
for the balance of the contract, (c) issue 10,000 shares of common stock upon the execution of the agreement and issue a 10,000
shares of common stock on the 5
th
day of each month of the agreement until termination or renewal of this agreement,
and (d) the reimbursements of pre-approved travel or other expenses monthly.
Distribution
Agreements
On
March 14, 2017, the Company entered into a long-term strategic distribution agreement with Big Geyser, a large independent non-alcoholic
beverage distributor in metro New York. Big Geyser will be the exclusive distributor of the Company’s iced tea and lemonade
18oz bottle products. The agreement became effective on April 24, 2017 and covers retail locations in the New York City metro
region, including the five boroughs of New York City, Long Island, Westchester and Putnam County. This distribution coverage will
provide the potential to significantly increase the distribution footprint and allow the Company to streamline the business and
bring additional focus to building the Company’s brand. As part of the distribution agreement, the Company has also agreed
to issue warrants to Big Geyser in the second quarter as compensation for achieving certain
performance targets.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
On
June 6, 2014, the Company entered into a lease agreement. The lease commenced on July 1, 2014 and extends through June 30, 2017
and includes a two year extension option.
Rent
expense for the three months ended March 31, 2017 and 2016 was $11,458 and $10,074, respectively.
Future
minimum payments under the Company’s leases for the three months ended June 30, 2017 are $13,261.
In
addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the three months ended March
31, 2017 and 2016 was $9,421 and $20,610, respectively.
NOTE
9 – MAJOR CUSTOMERS AND VENDORS
For
the three months ended March 31, 2017 and 2016, two customers accounted for 35% and 10%, or 45% in the aggregate, and two customers
accounted for 16% and 12%, or 28% in the aggregate, of the Company’s net sales, respectively
For
the three months ended March 31, 2017 and 2016, two vendors accounted for 31% and 22%, or 53% in the aggregate, and four vendors
accounted for 19%, 18%, 18% and 16%, or 71% in the aggregate, of purchases, respectively.
NOTE
10 - RELATED PARTIES
The
Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, CEO, stockholder,
and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the three months ended March 31, 2017
and 2016, sales to this related party were $269 and $1,158, respectively. As of March 31, 2017 and December 31, 2016, there
was $269 and $0, respectively, due from this related party which was included in accounts receivable in the condensed consolidated
balance sheets. The Company also purchases product at cost, from this entity to supplement certain vending sales. For the three
months ended March 31, 2017 and 2016, the Company purchased $3,342 and $8,258, respectively, of product from this entity. As of
March 31, 2017 and December 31, 2016, the outstanding balance due to this entity included in accounts payable was $4,042 and $10,043,
respectively.
On
March 27, 2017, the Company issued an option to purchase 70,000 shares of the Company’s common stock to a member of the
Board of Directors in connection with services provided to the Company beyond the Board of Director duties of this Director. As
of March 31, 2017 and December 31, 2016 accounts payable and accrued expenses to a company wholly owned by this director’s
company were $9,375 and $4,032, respectively.
NOTE
11 – SUBSEQUENT EVENTS
Long-Term
Equity Incentive Plan
On
April 14, 2017, the Company’s board of directors adopted the 2017 Long-Term Incentive Equity Plan (“2017 Stock Option
Plan”). The 2017 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock
and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. The total number
of shares reserved under the 2017 Stock Option Plan is 850,000.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
11 – SUBSEQUENT EVENTS (CONTINUED)
Option
Issuance
On
April 14, 2017, the Company’s issued options to purchase 127,500 shares of the Company’s common stock under the 2015
Stock Option Plan and 187,647 shares of the Company’s common stock under the 2017 Stock Option Plan to various employees.
Employment Agreement
On April 18, 2017, the Company
entered into an employment agreement with Virginia Morris to serve as the Company’s Chief Sales & Marketing Officer.
Ms. Morris’s primary responsibilities will be driving the growth agenda for the Company’s entire portfolio of brands
and overseeing key sales and marketing functions including brand management, channel strategy development and execution, and product
innovation. Pursuant to the employment agreement, Ms. Morris was awarded an option to purchase 27,500 shares of the Company’s
common stock under the 2015 Stock Option Plan, and an additional option to purchase 42,500 shares of the Company’s common
stock under the 2017 Stock Option Plan. The options have an exercise price of $4.50 and vest annually in three equal installments
beginning on the date of grant. Ms. Morris was also awarded 25,000 shares of the Company’s common stock prior to the execution
of her employment agreement for services provided to the Company.