As
filed with the Securities and Exchange Commission on November 22, 2017
Registration
No. 333-_________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
LONG
ISLAND ICED TEA CORP.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
|
2080
|
|
47-2624098
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(Primary
Standard Industrial
Classification
Code Number)
|
|
(I.R.S.
Employer
Identification
Number)
|
12-1
Dubon Court
Farmingdale,
NY 11735
(855)
542-2832
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Philip
Thomas
Chief
Executive Officer
Long
Island Iced Tea Corp.
12-1
Dubon Court
Farmingdale,
NY 11735
(855)
542-2832
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies
of communications, including communications sent to agent for service, should be sent to
:
David
Alan Miller, Esq.
Jeffrey
M. Gallant, Esq.
Graubard
Miller
The
Chrysler Building
405
Lexington Avenue
New
York, New York 10174
Telephone:
(212) 818-8800
Fax:
(212) 818-8881
|
M.
Ali Panjwani, Esq.
Pryor
Cashman LLP
7
Times Square
New
York, New York 10036
Telephone:
(212) 421-4100
Fax:
(212) 326-0806
|
Approximate
date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If
any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. [ ]
If
this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration statement for the
same offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
(Do
not check if a smaller reporting company)
|
Emerging
growth company [X]
|
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[X]
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
(2)
|
|
Proposed
Maximum Aggregate Offering Price
(1)
|
|
|
Amount
of Registration Fee
|
|
Common
stock, par value $0.0001 per share
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Class
A Warrants to purchase Common Stock
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Common
Stock underlying the Class A Warrant
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Underwriter’s
Warrant to purchase Common Stock
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Common
Stock underlying Underwriter’s Warrant to purchase Common Stock
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Total
|
|
$
|
10,000,000
|
|
|
$
|
1,245.00
|
|
(1)
|
This
amount represents the proposed maximum offering price of the securities registered hereunder
that may be sold by the registrant. Estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended
(the “Securities Act”).
|
(2)
|
Pursuant
to Rule 416 under the Securities Act, the shares of common stock registered hereby also
include an indeterminate number of additional shares of common stock as may from time
to time become issuable by reason of stock splits, stock dividends, recapitalizations
or other similar transactions.
|
(3)
|
Estimated
solely for the purposes of calculating the registration fee pursuant to Rule 457(o)
of the Securities Act.
|
The
registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until
registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective
in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective
on such date as the commission, acting pursuant to said section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is
not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED NOVEMBER 22, 2017
PRELIMINARY
PROSPECTUS
[●]
Shares of Common Stock and
[●] [Class A] Warrants to Purchase [●]Shares of Common Stock
Long
Island Iced Tea Corp.
We
are offering [●] of our shares of common stock and our [Class A] warrants to purchase [●] shares of our common stock.
One share of common stock is being sold together with one [Class A] warrant, with each [Class A] warrant being immediately exercisable
for one share of our common stock at an exercise price of $ per share (or [●] % of the price of
each share of common stock sold in this offering) and expiring [5] years after the issuance date.
Our
shares of common stock are listed on the Nasdaq Capital Market under the symbol “LTEA”. On [●], 2017, the last
reported sale price of our shares of common stock was $[●] per share. We have applied to list the [Class A] warrants offered
hereby on the Nasdaq Capital Market under the symbol “LTEAW.”
Investing
in our securities involves a high degree of risk. See “Risk Factors” beginning on page 8 of this prospectus
for a discussion of information that should be considered in connection with an investment in our securities.
|
|
|
Per
Share of Common
Stock
and Warrant
|
|
|
|
Total
|
|
Public
offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting
discount and commissions
(1)
|
|
$
|
|
|
|
$
|
|
|
Proceeds
to the Company, before expenses
|
|
$
|
|
|
|
$
|
|
|
(1)
|
We
have agreed to issue a warrant, or the Representative’s Warrant, to the representative of the underwriters, or the Representative.
We have additionally agreed to reimburse the underwriters for expenses incurred by them in an amount not to exceed $90,000.
We refer you to “Underwriting” beginning on page 64 of this prospectus for additional information regarding
total compensation and other items of value payable to the underwriters.
|
We
have granted the underwriters an option for a period of up to 45 days to purchase up to [●] additional shares of common
stock and/or [●] additional [Class A] warrants.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
underwriters expect to deliver the shares of common stock and [Class A] warrants to purchasers in the offering on or about
, 2017.
Maxim
Group LLC
The
date of this prospectus is , 2017.
TABLE
OF CONTENTS
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone
to provide you with different information or to make representations other than those contained in this prospectus. If anyone
provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not,
making an offer to sell these securities in any jurisdiction where the offer is not permitted.
We
obtained certain statistical data, market data and other industry data and forecasts used or incorporated by reference into this
prospectus from publicly available information. While we believe that the statistical data, industry data, forecasts and market
research are reliable, we have not independently verified the data, and we do not make any representation as to the accuracy of
the information.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include, but are not limited to, statements regarding our or our management’s
expectations, hopes, beliefs, intentions or strategies regarding the future and other statements that are other than statements
of historical fact. In addition, any statements that refer to projections, forecasts or other characterizations of future events
or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“might,” “plan,” “possible,” “potential,” “predict,” “project,”
“should,” “would” and similar expressions may identify forward-looking statements, but the absence of
these words does not mean that a statement is not forward-looking.
The
forward-looking statements in this prospectus are based upon various assumptions, many of which are based, in turn, upon further
assumptions, including without limitation, management’s examination of historical operating trends, data contained in our
records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because
these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict
and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.
As a result, you are cautioned not to rely on any forward-looking statements.
In
addition to these important factors and matters discussed elsewhere herein, important factors that, in our view, could cause actual
results to differ materially from those discussed in the forward-looking statements include among other things:
|
●
|
We
operate in highly competitive markets.
|
|
|
|
|
●
|
We
may not effectively respond to changing consumer preferences, trends, health concerns and other factors.
|
|
|
|
|
●
|
Costs
for our raw materials may increase substantially.
|
|
|
|
|
●
|
Fluctuations
in our results of operations from quarter to quarter could have a disproportionate effect
on our overall financial condition and results of operations.
|
|
|
|
|
●
|
We
depend on two distributors and a small number of large retailers for a significant portion of our sales.
|
|
|
|
|
●
|
Our
intellectual property rights could be infringed or we could infringe the intellectual
property rights of others, and adverse events regarding licensed intellectual property,
including termination of distribution rights, could harm our business.
|
|
|
|
|
●
|
We
have experienced cash losses from operations and our ability to grow and compete in the
future will be adversely affected if adequate capital is not available to us.
|
|
|
|
|
●
|
Our
gallon product line has minimal gross margins and may divert sales from our higher margin existing product lines.
|
|
|
|
|
●
|
We
have a limited operating history.
|
|
●
|
Further
growth in our ‘better-for-you’ brand portfolio may in part come from merger, acquisition, distribution or licensing
agreements that require greater management capability to effectively manage and may have greater inherent risk.
|
These
factors could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements.
Other unknown or unpredictable factors also could harm our results or developments. Consequently, there can be no assurance that
actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements.
We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. If one or more forward-looking statements are updated, no inference should be
drawn that additional updates will be made with respect to those or other forward-looking statements.
PROSPECTUS
SUMMARY
This
summary highlights certain information that appears elsewhere in this prospectus or in documents incorporated by reference herein,
and this summary is qualified in its entirety by that more detailed information. This summary may not contain all of the information
that may be important to you. We urge you to carefully read this entire prospectus, including our financial statements and the
related notes and the information in the section of this prospectus entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” As an investor or prospective investor, you should also review carefully
the sections entitled “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in
this prospectus.
Unless
the context otherwise requires, as used in this prospectus, the terms “LIIT,” the “Company” and “we,”
“us” and “our” are to Long Island Iced Tea Corp., a Delaware corporation, and its subsidiaries, Long Island
Brand Beverages LLC, or “LIBB,” and Cullen Agricultural Holding Corp., or “Cullen.” Unless otherwise specifically
stated, the information presented in the prospectus assumes no exercise of the [Class A] warrants or Representative’s Warrant
and that the underwriters have not exercised their option to purchase additional shares of common stock and [Class A] warrants.
Overview
We
are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of
premium Non-Alcoholic Ready-to-Drink (“NARTD”) beverages. We are currently organized around our flagship tea product
under the brand Long Island Iced Tea
®
. The Long Island Iced Tea name for a cocktail originated in Long Island in
the 1970’s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and
bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe
and with quality components.
We
sell our 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,
Rhode Island and parts of the Midwest. As of September 30, 2017, our products are available in 20 states and in the Caribbean,
Canada and Latin America.
On
March 14, 2017, we announced the extension of our brand with the launch of The Original Long Island Brand™ Lemonade. This
lemonade is a NARTD functional beverage made from a proprietary recipe with quality components.
Since
February 2016, we have been engaged in the aloe juice business, under the brand ALO Juice. ALO Juice is a NARTD functional beverage
made from juice derived from the aloe plant known as aloe vera. ALO Juice sources its aloe plants from harvests in Thailand. The
plants are exported from there to South Korea where they are processed in a unique whole leaf manner to ensure the nutritional
and health benefits are maintained from the plant all the way through to the bottling process.
Our
mission is to provide consumers with “better-for-you” premium beverages offered at an affordable price.
We
aspire to be a market leader in the development of beverages that are convenient and appealing to consumers. There are two major
target markets for our beverages: 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 options perceived as less healthy such
as carbonated soft drinks (“CSDs”) towards alternative beverages such as iced tea.
Competitive
Strengths
We
believe that a differentiated brand will be a key competitive strength in the NARTD category. Key points of differentiation for
Long Island Iced Tea® and Long Island Brand™ Lemonade include:
●
|
A
highly experienced beverage management team, supported by a strong Board of Directors and strategic advisors;
|
●
|
Ownership
of the “Long Island Iced Tea” trademark in the United States in the non-alcoholic beverage segment, which carries
immediate brand recognition;
|
|
|
●
|
A
distribution partnership in the New York region with Big Geyser Inc. (“Big Geyser”), the largest independent non-alcoholic
beverage distributor in metro New York that has in excess of 25,000 doors;
|
|
|
●
|
Strong
and growing distribution in the Northeast (company’s origin), with expanding distribution in the Midwest and South;
|
|
|
●
|
Offered
at an affordable price;
|
|
|
●
|
A
widely recognized US brand name, reinforced with “Made in America” positioning, highly relevant to the three largest
global RTD tea markets – USA, China and Japan;
|
|
|
●
|
The
use of non-GMO ingredients; and
|
|
|
●
|
A
product that meets shifting consumer demands, our flagship brands being corn free, hormone/antibiotic free, gluten free, natural
and having no artificial color or flavor.
|
The
NARTD tea market is a crowded space and, as a result, we believe in pricing our products competitively. We highlight to consumers
our use of premium ingredients and our affordable price. The suggested retail price for an 18oz. bottle of Long Island Iced Tea®
is $1.00 to $1.50 and the suggested retail price of The Original Long Island Brand™ Lemonade is $1.25 to $1.79 per 18oz.
bottle. ALO Juice® has a suggested retail price of $1.49 to $1.79 for the 500 ml bottle and $2.39 to $2.79 for the 1.5 liter
bottle. Management has set pricing levels to reflect current pricing dynamics in the industry. There has been downward pressure
on prices, which management believes is caused by the entrance of major multinational beverage corporations into the alternative
beverage category. This is starting to lead towards industry consolidation, in what is currently considered a somewhat fragmented
marketplace.
Business
Strategy
We
are seeking to organically grow our NARTD tea and related product sales by capitalizing on an iconic name with unique brand awareness
to create familiar and easily recognizable beverages.
We
intend to increase our market share in our existing geographic markets and expand into additional geographic markets in the U.S.
We have established distribution in a number of small international markets and are exploring distribution in additional international
markets on a highly selective and limited basis, which may include royalty and licensing agreements. As discussed below in “
Our
Customers
,” we generally focus our sales efforts on approaching beverage distributors and taking advantage of their
unique positioning in the retail industry. However, a portion of our sales efforts are also dedicated to direct sales to retailers,
because some wholesale chains request direct shipments from the product supplier. In addition, we are exploring several new sales
channels. We currently are conducting a small scale business trial in which we sell our beverage product alongside other snacks
in vending machines. We also sell our twelve-ounce lower calorie products in schools, in some cases through sales to purchasing
cooperatives that represent multiple school districts, but also via the vending machine business trial.
In
March 2017, we entered into a long-term strategic distribution agreement with Big Geyser, a large independent non-alcoholic beverage
distributor in metro New York, pursuant to which Big Geyser became the exclusive distributor of our iced tea bottle products.
The agreement 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 has the potential to significantly increase our distribution footprint
and allow us to streamline our business and brings additional focus to building our brand. We are committed to building this relationship,
including the recruitment of Robert Stefanizzi and a team of experienced industry professionals focused on expanding our products
into Big Geyser’s distribution network.
We
continually seek to better develop emerging markets, as well as expand our overall geographic footprint. We have entered into
new business arrangements involving international specialists contracted to (i) identify new market opportunities and (ii) assist
in the overall management of our international expansion efforts. During 2017, we announced the appointment of a New Zealand based
distributor and an Australian based distributor, as well as an Australian based co-packer with capability to produce products
for Australasia and Asia. We have also focused on the development of markets in South America, and have announced expansion into
Costa Rica, Columbia, Honduras, Ecuador and other Latin American countries. We have worked alongside existing distributor partnerships
in Puerto Rico, Canada and South Korea to further expand distribution points throughout their respective markets.
Our
strategy for ALO Juice includes increasing brand support through our existing sales and marketing team, ultimately accelerating
points of distribution throughout current (and future) distributor and retail partnerships alongside our flagship iced tea and
lemonade products.
We
are currently securing ownership of the “Long Island Iced Tea” trademark in selective international jurisdictions
via the Madrid protocol. Domestically, we are building our brand primarily by establishing comprehensive marketing plans that
include but are not limited to trade marketing, customer appreciation programs, social media, pricing promotions and demos via
brand ambassadors.
In
the past twelve months, we have secured two material brand building, awareness and trial mechanics through the sponsorships of
1) Nassau Veterans Memorial Coliseum and 2) Barclays Center. These properties reinforce brand ownership in our key New York markets
and promote trial and adoption across key demographics.
We
also use co-op advertising (advertisements by retailers that include the specific mention of manufacturers, who, in turn, repay
the retailers for all or part of the cost of the advertisement) and special promotions, together with its retail partners, so
as to complement other marketing efforts towards brand awareness.
We
also seek to expand our product line. From time to time, we explore and test market potential of new NARTD products that may,
in the future, contribute to our operating performance. We expect that the introduction of The Original Long Island Brand™
Lemonade and growth of ALO Juice will be able to attract a new market segment of beverage drinkers.
Industry
Opportunity
Iced
Tea
Globally,
NARTD tea products are ranked as the 4th largest beverage category, behind carbonated soft drinks, water and dairy. The non-alcohol
iced tea global category size is estimated at $55 billion and growing at a 6.6% compound annual growth rate (“CAGR”).
(Source: Euromonitor International, “Versatility of RTD Tea Generates Bright Spot in Global Soft Drinks”, May 2014.
We
have executed a select number of international distribution opportunities – recruiting an International beverage consultant
- with a mandate to initially effect distribution and co-pack agreements in Australia and New Zealand. We have also established
a footprint in South America with distribution agreements in
Costa Rica, Columbia, Honduras
and Ecuador
, with other relationships pending.
The
U.S. non-alcoholic liquid refreshment beverage market consists of a number of different products, and CSDs are the top selling
beverage category. However, consumers are increasingly coming to view CSDs (typically caffeinated as well as high in sugar and
preservatives) with disfavor. In volume, the CSD category declined 0.6% in 2016, 1.5% in 2015, 1.6% in 2014, 2.3% in 2013 and
1.5% in 2012. (Sources: Euromonitor International, “Carbonates in the US”, February 2017).
CSDs
have historically dominated the non-alcoholic liquid refreshment beverage market and been primarily controlled by two industry
giants, Coca-Cola and PepsiCo. However, a number of beverages began to emerge in the 1990s as alternatives to CSDs as part of
a societal shift towards beverages that are perceived to be healthier. The alternative beverage category of the market has resulted
in the birth of multiple new product segments that include sports drinks, energy drinks and NARTD teas.
According
to a 2017 Euromonitor International industry report, the U.S. NARTD tea segment was expected to have $7.1 billion of revenue in
2016, a 7.9% increase from the prior year and an 8.3% annualized growth rate over the last 5 years (2011 – 2016) (Source:
Euromonitor International , “RTD Tea in the US”, February 2017). The industry report also forecasted an annual revenue
growth rate of 5.3% over the coming five years, with revenues reaching $9.2 billion in 2021.
In
2014, consumers showed special interest in healthier versions of NARTD teas, preferring unsweetened teas.
RTD
Tea Industry Revenue by Type (2017)
Black
Tea
|
|
|
58.9
|
%
|
Green
and White Tea
|
|
|
24.7
|
%
|
Herbal
Tea
|
|
|
16.4
|
%
|
(Source:
IBISWorld Industry Report OD4297, “RTD Tea Production in the US”, October 2017).
Lemonade
According
to IBISWorld, lemonade comprises 8.2% of the $12.0 billion U.S. juice market in 2016. About 6.7 billion liters of juice were
consumed in 2015, of which Lemonade sales totaled 451 million liters. (Source: IBISWorld Industry Report 31211c, “Juice
Production in the US”, January 2017) According to a Technavio report, the Global lemonade drinks market is expected to grow
at a CAGR of over 6% from 2017-2021. (Source: Technavio Market Research Report, “Global Lemonade Drinks Market 2017-2021”,
July 2017)
ALO
Juice
The
global aloe vera-based drinks market is an expanding category, expected to grow at a CAGR of close to 10% during the forecast
period for 2016 through 2020, according to a Technavio report dated November 2016. The Americas is expected to grow at an 11.24%
CAGR over the same period. (Source: Technavio Market Research Report, “Aloe Vera-Based Drinks Market”, November 2016)
Other
Brands
With
the growing and sustainable distribution base, we now have the opportunity to develop domestic US and international brand portfolios
via merger and acquisition opportunities, together with distribution and licensing opportunities. The building blocks we put in
place over the last twelve months across the East Coast, including our partnership with Big Geyser, provides us with the infrastructure
and management capabilities to pursue these extended goals.
Recent
Developments
January
2017 Offering
In
January 2017, we consummated a public offering (the “January 2017 Offering”) of an aggregate of 376,340 shares of
our common stock, through Alexander Capital, L.P., as placement agent, pursuant to the terms of a selling agent agreement, dated
January 25, 2017, with the placement agent and subscription agreements with each of the investors in the offering. Of the aggregate
number of shares sold, 300,000 shares were sold to the public at a price of $4.00 per share and 76,340 of the shares were sold
to our officers and directors at a price of $4.10 per share, the most recent closing bid price of the common stock at the time
the officers and directors executed their subscription agreements. The offering generated gross proceeds of $1,513,000 and net
proceeds of $1,429,740, after payment of the placement agent fees and other offering expenses.
The
offering was made pursuant to our existing shelf registration statement on Form S-3 (File No. 333-213874), which was filed with
the Securities and Exchange Commission (“SEC”) on September 30, 2016 and declared effective by the SEC on October
14, 2016 (the “Shelf Registration”), and is described in more detail in a prospectus supplement dated January 27,
2017 and the accompanying base prospectus dated October 14, 2016 (the “Base Prospectus”).
June
2017 Offering
In
June 2017, we consummated a public offering (the “June 2017 Offering”) of an aggregate of 256,848 shares of our common
stock, through Alexander Capital, L.P., as placement agent, pursuant to subscription agreements with each of the investors in
the offering. Of the aggregate number of shares sold, 231,850 shares were sold to the public at a price of $5.00 per share and
24,998 of the shares were sold to our officers and directors at a price of $5.60 per share, the most recent closing bid price
of the common stock at the time the officers and directors executed their subscription agreements. The offering generated gross
proceeds of $1,299,250 and net proceeds of $1,259,415, after payment of the placement agent fees and other offering expenses.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated June 14,
2017 and the accompanying Base Prospectus.
July
2017 Offering
In
July 2017, we consummated a public offering (the “July 2017 Offering”) of an aggregate of 448,160 shares of our common
stock, through Alexander Capital, L.P., as placement agent, pursuant to subscription agreements with each of the investors in
the offering. The shares were sold at a price of $5.00 per share. Of the shares sold, 200,000 were sold to lead investors who,
as a result of purchasing more than $500,000 in shares, each received (i) an additional number of shares of common stock equal
to 7% of the total number of shares of common stock purchased by such lead investors in this offering (or an aggregate of 14,000
shares) and (ii) three-year warrants up to that number of shares of common stock equal to 20% of the total number of shares purchased
by such lead investors in this offering (or warrants to purchase an aggregate of 40,000 shares). These warrants have an exercise
price of $5.50 and were fully vested upon issuance. The sale of common stock generated gross proceeds of $2,240,800 and net proceeds
of $2,134,487 after deducting commissions and other offering expenses.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated July 6,
2017 and the accompanying Base Prospectus.
October
2017 Offering
In
October 2017, we consummated a public offering (the “October 2017 Offering”) of an aggregate of 607,500 shares of
our common stock. The shares were sold at a price of $2.05 per share. The sale of common stock generated gross proceeds of $1,245,375
and estimated net proceeds of $1,235,375 after deducting expenses. Each investor in the offering also received a warrant to purchase
50% of the number of shares for which such investor subscribed in the offering (or a total aggregate number of shares underlying
such warrants equal to 303,750 shares). The warrants have an exercise price of $2.40 per share, subject to adjustment, and expire
one year from the closing of the offering.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated September
27, 2017 and the accompanying Base Prospectus.
Lemonade
On
March 14, 2017, we announced the expansion of our brand to include lemonade. The Original Long Island Brand™ Lemonade range
consists of nine real-fruit flavors, and is offered at retail in 18oz. bottles. This premium lemonade is intended to be differentiated
from other lemonade beverages in the US market. It is made with 100% raw cane sugar and non-GMO ingredients that incorporate the
“better-for-you” attributes that are prominent within our iced tea brand, and will complement Long Island Iced Tea®.
This product became available in select markets during the second quarter of 2017. It is our objective to grow market share and
offer this product alongside our iced tea products.
Big
Geyser Strategic Distribution Partnership
On
March 14, 2017, we entered into a long-term strategic distribution agreement, in certain regions, with Big Geyser, a large independent
non-alcoholic beverage distributor in metro New York, pursuant to which Big Geyser became the exclusive distributor of our iced
tea bottle products in the region. 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 our distribution footprint and allow us to streamline our business
and brings additional focus to building our brand. As part of the distribution agreement, we have issued warrants to Big Geyser
in the second and third quarter of 2017 which vest upon the achievement of certain performance targets.
ALO
Juice
On
September 18, 2017, we entered into an exclusive perpetual licensing agreement (“Licensing Agreement”) with The Wilnah
International, LLC (“Wilnah”) ALO Juice brand owners, providing us with worldwide rights to produce, distribute and
sell the ALO Juice brand. As compensation to Wilnah for these rights, we paid an initial fee of $150,000, which was applied against
the Seba Distribution LLC (“Seba”) accounts receivable upon the closing and have agreed to pay to Wilnah a 7.0% royalty
on our gross sales of ALO Juice sales delivered to our customers after the closing of this agreement. The majority owner of Wilnah
is the former owner of Seba and the guarantor of its obligations. We believe that ALO Juice complements our “better for
you” beverage strategy, and as such, we intend to further leverage and grow the ALO Juice brand and distribution.
Corporate
Information
We
were incorporated on December 23, 2014 in the State of Delaware. Our principal executive offices are located at 12-1 Dubon Court,
Farmingdale, New York 11735. Our telephone number is (855) 542-2832. Our website address is www.longislandicedtea.com. The information
contained on, or accessible from, our corporate website is not part of this prospectus and you should not consider information
contained on our website to be a part of this prospectus or in deciding whether to purchase our common stock and [Class A] warrants.
THE
OFFERING
Shares
of Common Stock presently outstanding
|
|
________
shares
(1)
|
|
|
|
Securities
offered by us
|
|
[●]
shares of common stock together with [Class A] warrants to purchase [●] of our shares of common stock at the exercise
price of $ per share (or [●]% of the price for each share sold in the offering). The [Class A] warrants will be immediately
exercisable and will expire [5] years after the issuance date. An aggregate of [●] shares of common stock together with
[Class A] warrants to purchase [●] of shares of common stock are being offered assuming the underwriters exercise their
option to purchase additional shares and [Class A] warrants in full but assuming no exercise of the [Class A] warrants themselves
or the Representative’s Warrant.
|
|
|
|
Common
stock to be outstanding immediately after this offering
|
|
[●]
shares of common stock ([●] shares of common stock, if the underwriters exercise their option to purchase additional
shares and [Class A] warrants in full but assuming no exercise of the [Class A] warrants themselves or the Representative’s
Warrant).
(1)
|
|
|
|
Underwriters’
Option to Purchase Additional Shares and
Warrants
|
|
The
Underwriting Agreement provides that we will grant to the underwriters an option, exercisable
within 45 days after the closing of this offering, to purchase up to an additional 15%
of the total number of shares of common stock and [Class A] warrants to be offered by
us pursuant to this offering. The option may be exercised in whole or in part during
the 45 day option period.
|
|
|
|
Use
of proceeds
|
|
We
estimate that we will receive net proceeds of approximately $[●], and approximately $[●] million if the underwriters
exercise their option to purchase additional shares and [Class A] warrants in full but assuming no exercise of the [Class
A] warrants themselves or the Representative’s Warrant, after deducting underwriting discounts and commissions and estimated
expenses payable by us.
|
|
|
|
Risk
factors
|
|
Investing
in our securities involves a high degree of risk. See “Risk Factors” below on page 8 to read about the
risks you should consider before investing in our securities.
|
|
|
|
Listing
|
|
Our
shares of common stock are listed on the Nasdaq Capital Market under the symbol “LTEA”. We have applied to list
the [Class A] warrants offered hereby on the Nasdaq Capital Market under the symbol “LTEAW.”
|
|
|
|
Lock-Up
Agreements
|
|
Subject
to certain exceptions, we, all of our executive officers and directors, and certain affiliates have entered into lock-up agreements
with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of
the Representative offer, sell, contract to sell or otherwise dispose of or hedge our shares of common stock or securities
convertible into or exchangeable for our shares of common stock. These restrictions will be in effect for a period of six
(6) months after the date of this prospectus.
|
(1)
|
Based
on 9,755,607 shares of common stock outstanding as of November 14, 2017. Excludes 2,196,558 shares of common stock subject
to our currently outstanding options and warrants, with exercise prices ranging from $3.75 to $6.875 per share, and the [Class
A] warrants that may be issued in this offering.
|
SUMMARY
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
information set forth below should be read in conjunction with “Capitalization,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements
and related notes included elsewhere in this prospectus.
The
summary consolidated data as of September 30, 2017 has been derived from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. The summary consolidated financial data for the nine months ended September 31, 2017 and
2016, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
The summary consolidated financial data as of December 31, 2016 and 2015 and for the years then ended have been derived from our
audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of
December 31, 2014, 2013 and 2012 and for the years then ended is derived from audited financial statements of LIBB, as our predecessor,
which are not included in this prospectus.
|
|
For
the Nine Months Ended
September 30,
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
3,901,145
|
|
|
$
|
3,412,961
|
|
|
$
|
4,558,030
|
|
|
$
|
1,899,230
|
|
|
$
|
1,744,440
|
|
|
$
|
886,061
|
|
|
$
|
1,003,502
|
|
Gross
profit
|
|
|
237,741
|
|
|
|
159,683
|
|
|
|
318,713
|
|
|
|
343,090
|
|
|
|
240,294
|
|
|
|
152,325
|
|
|
|
72,956
|
|
Operating
loss
|
|
|
(11,239,936
|
)
|
|
|
(5,829,953
|
)
|
|
|
(7,789,073
|
)
|
|
|
(3,052,229
|
)
|
|
|
(3,041,083
|
)
|
|
|
(264,120
|
)
|
|
|
(128,824
|
)
|
Total
other expense
|
|
|
(352,559
|
)
|
|
|
(2,560,311
|
)
|
|
|
(2,658,516
|
)
|
|
|
(128,040
|
)
|
|
|
(110,298
|
)
|
|
|
(53,812
|
)
|
|
|
(44,108
|
)
|
Net
loss
|
|
$
|
(11,592,495
|
)
|
|
$
|
(8,390,264
|
)
|
|
$
|
(10,447,589
|
)
|
|
$
|
(3,180,269
|
)
|
|
$
|
(3,151,381
|
)
|
|
$
|
(317,932
|
)
|
|
$
|
(172,932
|
)
|
Net
loss per share
|
|
$
|
(1.36
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(1.77
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
Weighted
average shares outstanding - basic and diluted
|
|
|
8,529,399
|
|
|
|
5,407,036
|
|
|
|
5,889,428
|
|
|
|
3,744,931
|
|
|
|
2,633,334
|
|
|
|
2,633,334
|
|
|
|
2,633,334
|
|
|
|
As
of
September 30,
|
|
|
As
of
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
3,947,545
|
|
|
$
|
6,648,745
|
|
|
$
|
1,458,663
|
|
|
$
|
1,143,481
|
|
|
$
|
966,558
|
|
|
$
|
423,199
|
|
Total
assets
|
|
|
4,830,399
|
|
|
|
7,784,284
|
|
|
|
3,752,597
|
|
|
|
1,429,808
|
|
|
|
1,032,425
|
|
|
|
482,482
|
|
Total
current liabilities
|
|
|
3,594,950
|
|
|
|
3,129,859
|
|
|
|
1,116,477
|
|
|
|
955,778
|
|
|
|
1,485,110
|
|
|
|
506,939
|
|
Total
liabilities
|
|
|
4,208,248
|
|
|
|
3,215,741
|
|
|
|
2,356,037
|
|
|
|
2,610,306
|
|
|
|
1,485,110
|
|
|
|
506,939
|
|
Total
stockholders’ equity (deficit)
|
|
|
622,151
|
|
|
|
4,568,543
|
|
|
|
1,396,560
|
|
|
|
(1,180,498
|
)
|
|
|
(452,685
|
)
|
|
|
(24,457
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,830,399
|
|
|
$
|
7,784,284
|
|
|
$
|
3,752,597
|
|
|
$
|
1,429,808
|
|
|
$
|
1,032,425
|
|
|
$
|
482,482
|
|
RISK
FACTORS
An
investment in our securities involves a high degree of risk. Before deciding to invest in our securities, you should carefully
consider the risks described below. These risks and uncertainties are not the only risks and uncertainties that we face. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
If any of these risks actually occurs, our business, financial condition and results of operations could be materially adversely
affected. In that case, you may lose all or part of your investment in the securities.
Risks
Related to Our Business
We
operate in highly competitive markets, which could negatively affect our sales.
Our
industry is highly competitive. We compete with multinational corporations with significant financial resources, including Dr.
Pepper Snapple Group, Inc. and Arizona Beverage Company. These competitors can use their resources and scale to rapidly respond
to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional
activities. We also compete against a variety of smaller, regional and private label manufacturers. Smaller companies may be more
innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. Our inability
to compete effectively could result in a decline in our sales. We are subject to competition from companies, including from some
of our customers, that either currently manufacture or are developing products directly in competition with our products. These
generic or store-branded products may be a less expensive option for consumers than our products making it more difficult to sell
our product. As a result, we may have to reduce our prices or increase our spending on marketing, advertising and product innovation.
Any of these could negatively affect our business and financial performance.
We
may not effectively respond to changing consumer preferences, trends, health concerns and other factors. If we do not effectively
anticipate these trends, then quickly develop new products, our sales could suffer.
Consumers’
preferences can change due to a variety of factors, including aging of the population, social trends, negative publicity, economic
downturn or other factors. If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop
new products in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not
be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond
to these changes, either of which could negatively affect our business and financial performance.
Costs
for our raw materials may increase substantially, which could negatively affect our financial performance.
The
principal raw materials we use in our business are bottles, caps, labels, packaging materials, tea essence and tea base, sugar,
natural flavors and other sweeteners, juice, electricity, fuel and water. The cost of the raw materials can fluctuate substantially.
We may not be able to pass along any increases in such costs to our customers or consumers, which could negatively affect our
business and financial performance. We presently do not mitigate our exposure to volatility in the prices of raw materials through
the use of forward contracts, pricing agreements or other hedging arrangements.
Certain
raw materials we use are available only from a limited number of suppliers. In the event our suppliers are unable or unwilling
to meet our requirements, we could suffer shortages or substantial cost increases.
Most
of the raw materials we use are available from only a few suppliers. If these suppliers are unable or unwilling to meet our requirements,
we could suffer shortages or substantial cost increases. Changing suppliers can require long lead times. The failure of our suppliers
to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease,
crop failure, strikes, transportation interruption, government regulation, political instability and terrorism. A failure of supply
could also occur due to suppliers’ financial difficulties, including bankruptcy. Any significant interruption to supply
or cost increase could substantially harm our business and financial performance.
Substantial
disruption to production at our third party beverage co-packing facilities and our storage facilities could occur, which could
disrupt or delay our production or cause us to incur substantially higher costs.
Our
products are currently produced by three established co-packing companies. A disruption in our production at, or our relationships
with, our third party beverage co-packing facilities could have a material adverse effect on our business. In addition, a disruption
could occur at any of our storage facilities or those of our suppliers, co-packers or distributors. The disruption could occur
for many reasons, including fire, natural disasters, weather, manufacturing problems, disease, strikes, transportation interruption,
government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may
cost substantially more or may take a significant time to start production, each of which could negatively affect our business
and financial performance.
We
rely, in part, on our third party beverage co-packing facilities to maintain the quality of our products. The failure or inability
of this co-manufacturer to comply with the specifications and requirements of our products could result in product recall and
could adversely affect our reputation.
We
take great care in ensuring the quality and safety in the manufacture of our products. Our third-party co-manufacturer is required
to maintain the quality of our products and to comply with our product specifications and requirements for certain certifications.
Our third-party co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of
our product. However, our products could still otherwise become contaminated. A contamination could occur in our operations or
those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability
claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls.
Any of these failures or occurrences could negatively affect our business and financial performance.
We
may be subject to litigation. The cost of defending against such litigation and the negative publicity related to such litigation
may adversely affect our business, financial condition and results of operations.
From
time to time in the normal course of our business operations, we may become subject to litigation that may result in liability
or negatively affect our operating results. The cost to defend such litigation may be significant and may require a diversion
of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception
of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation
may adversely affect our business, financial condition and results of operations. For more information, see the item “Legal
Proceedings” in the Annual Report and Quarterly Reports.
Fluctuations
in our results of operations from quarter to quarter could have a disproportionate effect on our overall financial condition and
results of operations.
We
experience seasonal fluctuations in revenues and operating income. Historically, sales during the second and third fiscal quarters
have generally been the highest. Any factors that harm our second or third quarter operating results, including adverse weather
or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year.
Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our
business and financial performance.
In
order to prepare for our peak selling season, we must produce and keep in stock more inventory than we would carry at other times
of the year. Any unanticipated decrease in demand for our products during our peak selling season could require us to sell excess
inventory at a substantial markdown, which could reduce our net sales and gross profit.
A
deterioration of global economic conditions may adversely affect our industry, business and results of operations.
Disruptions
in the global credit and financial markets and in economic conditions generally may include diminished liquidity and credit availability,
a decline in consumer confidence, a decline in economic growth, an increased unemployment rate and uncertainty about economic
stability. Such disruptions may affect businesses such as ours in a number of ways, making it difficult to accurately forecast
and plan our future business activities. Any adverse global economic conditions and tightening of credit in financial markets
may lead consumers to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future
orders with us. In addition, financial difficulties experienced by our suppliers, manufacturers, distributors or customers could
result in product delays, increased accounts receivable defaults and inventory challenges. We are unable to predict the likely
duration and severity of disruptions in the credit and financial markets and adverse global economic conditions.
Our
sales growth is dependent upon maintaining our relationships with existing distributors and retailers and the loss of any one
such distributor or retailer could materially adversely affect our business and financial performance.
Certain
retailers that we service primarily through our distributors make up a significant percentage of our products’ retail volume,
including volume sold by our distributors. We also sell directly to certain retail accounts and to the distribution facilities
of such retailers. Some retailers also offer their own private label products that compete with some of our brands. For the nine
months ended September 30, 2017, two customers, Garden Foods and Big Geyser accounted for 21% and 12% of our net sales, respectively.
For the year ended December 31, 2016, two customers, Seba Distribution LLC and Garden Foods accounted for 20% and 11% of our net
sales, respectively. For the year ended December 31, 2015, one customer, Wakefern Food Corp., accounted for 10% of net sales.
The loss of sales of any of our products in a major retailer could have a material adverse effect on our business and financial
performance.
Food
and beverage retailers in the U.S. have been consolidating which may reduce our ability to increase both our revenue and our gross
margins.
Consolidation
has resulted in large, sophisticated retailers with increased buying power. They are in a better position to resist our price
increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product
delivery programs. If we, and our bottlers and distributors, do not successfully provide appropriate marketing, product, packaging,
pricing and service to these retailers, our product availability, sales and margins could suffer.
We
do not have any contracts with our customers that require the purchase of a minimum amount of our products. The absence of such
contracts could result in periods during which we must continue to pay costs and service indebtedness with reduced sales.
Our
customers do not provide us with firm, long-term or short-term volume purchase commitments. As a result of the absence of such
contracts, we could have periods during which we have no or limited orders for our products, but we will continue to have to pay
our costs, including those to maintain our work force and service our indebtedness with reduced sales. We cannot assure you that
we will be able to timely find new customers to supplement periods where we experience no or limited purchase orders or that we
can recover fixed costs as a result of experiencing reduced purchase orders. Periods of no or limited purchase orders for our
products could have a material adverse effect on our net income and cause us to incur losses. Conversely, we may experience unanticipated
increased orders for our products from these customers that can create supply chain problems and may result in orders we may be
unable to meet. Unanticipated fluctuations in product requirements by our customers could result in fluctuations in our results
from quarter to quarter.
We
have developed a gallon product line in which our gross margins are minimal, and therefore may not generate sufficient revenues
or other benefits to justify its introduction. In addition, the gallon product line may divert sales from our higher margin 18oz.
product line, which would adversely affect our business.
In
May 2015, we developed a gallon product line featuring five of our existing flavors. Our gross margins on this product line are
minimal. Accordingly, this product line may not generate sufficient revenues or other benefits to justify its introduction. In
addition, to the extent distributors choose to carry the gallon product line instead of our higher margin 18oz. product line,
it may negatively affect our operating results, specifically our gross margin. Although we believe the gallon size has a different
function and manner of consumption, consumers may choose to purchase the gallon size instead of the 18oz. size, because the gallon
size offers a better per ounce value. This would result in an overall lower gross margin for our business.
We
do not have registered ownership of certain of our trade names and our intellectual property rights could be infringed or we could
infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination
of distribution rights, could harm our business.
We
possess intellectual property that is important to our business. This intellectual property includes our logo, trademarks for
“Long Island Iced Tea” and “The Original Long Island Brand,” various other trademarks, copyrights, patents,
ingredient formulas, business processes and other trade secrets. However, we do not currently have registered ownership of the
trademark “The Original Long Island Brand” and do not have registered ownership on the principal register of the trademark
“Long Island Iced Tea” as described below. We and third parties, including competitors, could come into conflict over
intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount
to protect our rights or defend ourselves against claims. We cannot be certain that the steps we take to protect our rights will
be sufficient or that others will not infringe or misappropriate our rights. Our business is also highly dependent upon our distribution
rights. If we are unable to protect our intellectual property rights, including the right to our trade name and logo, our brands,
products and business could be harmed and could have a material adverse effect on our business and financial performance.
On
April 19, 2016, the United States Patent and Trademark Officer, or the “USPTO,” registered our mark “Long Island
Iced Tea” (Registration No. 4,943,056) on the supplemental register. Registration on the supplemental register allows the
use of the “®” symbol, blocks later filed applications for confusingly similar marks, and allows us to sue infringers
in federal court, which has well-settled case law and standards. Notwithstanding the foregoing, the supplemental register does
not provide all the protection of a registration on the principal register. As with any other registered mark, we may be open
to claims of others contesting the trademark.
In
addition, we have filed trademark applications for “The Original Long Island Brand” as a standard character mark and
as a stylized mark, which applications are pending review by the USPTO. The applications are for use of the trademarks with iced
tea, tea based products, juices, water, beverages and other similar products. We also plan to file for stylized marks protecting
certain other tag lines and product designs. With respect to the pending trademark applications for “The Original Long Island
Brand” (standard character mark and stylized mark), the USPTO has made an initial determination that both marks are geographically
descriptive. This determination is refutable and the USPTO has afforded us the opportunity to produce evidence to establish that
the marks have become distinctive of the goods in commerce. There can be no assurance that the USPTO will approve these applications.
If
we incur substantial debt, it could adversely affect our liquidity and results of operations.
As
of September 30, 2017, we had $71,403 of total indebtedness, consisting of auto and vending loans. In addition, until November
23, 2018, we may obtain up to a maximum of $3,500,000 in advances under our Credit and Security Agreement, or the “Credit
Agreement,” dated as of November 23, 2015 and amended as of January 10, 2016 and April 8, 2016, by and among us, LIBB and
Brentwood LIIT (NZ) Ltd., as successor in interest to Brentwood LIIT Inc., or “Brentwood.” Our ability to obtain advances
under the Credit Agreement is subject to the terms and conditions of the Credit Agreement, including a requirement that we obtain
prior approval of Brentwood for each advance. While our existing level of debt is not substantial and we may pay interest that
accrues on any future loans under the Credit Agreement by capitalizing the interest and adding it to the principal balance of
such loans, we may incur significant indebtedness in the future, including through advances under the Credit Agreement, and we
may not be able to generate sufficient cash to service such debt as cash payments become due. If new debt and/or new credit sources
are added to our existing debt and credit sources, the related risks for us could intensify.
If
we incur substantial debt, it could have important consequences. In particular, it could:
|
●
|
require
us to dedicate a substantial portion of our cash flow from operations to payments on
our indebtedness, thereby reducing the availability of our cash flow to fund capital
expenditures and other general corporate purposes;
|
|
|
|
|
●
|
limit,
along with the restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds;
|
|
|
|
|
●
|
limit
our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
|
|
|
|
|
●
|
increase
our vulnerability to general adverse economic and industry conditions; and
|
|
|
|
|
●
|
place
us at a competitive disadvantage compared to our competitors that have less debt.
|
In
addition, if we are unable to make payments as they come due or comply with the restrictions and covenants in the Credit Agreement
or any other agreements governing our indebtedness, there could be a default under the terms of such agreements. In such event,
or if we are otherwise in default under the Credit Agreement or such other agreements, including pursuant to any cross-default
provisions of such agreements, the lenders could terminate their commitments to lend and/or accelerate the loans and declare all
amounts borrowed due and payable. Furthermore, our lenders under the Credit Agreement could foreclose on their security interests
in our assets, including the equity interests in our material subsidiaries. If any of those events occur, our assets might not
be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if
we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us. Additionally, we may not
be able to amend the Credit Agreement or obtain needed waivers on satisfactory terms or without incurring substantial costs. Failure
to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.
The
loss of the services of our key personnel could negatively affect our business, as could our inability to attract and retain qualified
management, sales and technical personnel as and when needed.
The
execution of our business strategy depends largely on the continued efforts of our executive management, including Julian Davidson
(our Executive Chairman) and Philip Thomas (co-founder of LIBB and our Chief Executive Officer). As we have a limited operating
history, we are highly dependent upon these individuals’ knowledge, experience and reputation within the industry. Any or
all of these individuals may in the future choose to discontinue their employment with us. If so, we may not be able to find adequate
replacements for them. Without their experience, expertise and reputation, our development efforts and future prospects would
be substantially impaired. We have employment agreements in place with these individuals that include non-competition provisions.
We
may not comply with applicable government laws and regulations, and they could change. Any violations could result in reputational
damage or substantial penalties, and any changes could result in increased compliance costs.
We
are subject to a variety of federal, state and local laws and regulations in the U.S., and other countries in which we do business.
These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation,
advertising and sale of our products. Violations of these laws or regulations could damage our reputation and/or result in regulatory
actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or
the introduction of higher standards or more stringent laws or regulations could result in increased compliance costs or capital
expenditures. For example, changes in recycling and bottle deposit laws or special taxes on soft drinks or ingredients could increase
our costs. Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling
laws, such as California’s “Prop 65,” which requires warnings on any product with substances that the state
lists as potentially causing cancer or birth defects, could become applicable to our products. Some local and regional governments
and school boards have enacted, or have proposed to enact, regulations restricting the sale of certain types of soft drinks in
schools. Any violations or changes of regulations could have a material adverse effect on our profitability, or disrupt the production
or distribution of our products, and negatively affect our business and financial performance.
Our
ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available
on terms favorable to us.
Historically,
our cash generated from operations has not been sufficient to meet our expenses. We have financed our operations principally through
the raising of equity capital, debt and through trade credit with our vendors. Our ability to continue our operations and to pay
our obligations when they become due is contingent upon obtaining additional financing. Management’s plans include raising
additional funds through equity offerings, debt financings, or other means.
We
believe that we will be able to raise sufficient additional capital to finance our planned operating activities. There are no
assurances that we will be able to raise such capital on terms acceptable to the Company or at all. If we are unable to obtain
sufficient amounts of additional capital, we may be required to reduce the scope of our planned market development activities,
and/or consider reductions in personnel costs or other operating costs. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern.
We
have a limited operating history and history of operating losses, and there is no guarantee that we will achieve profitability.
We
have a limited operating history and a history of operating losses. There is no guarantee that we will become a profitable business.
Further, our future operating results depend upon a number of factors, including our ability to manage our growth, retain our
customer base and to successfully identify and respond to emerging trends in our market areas.
Further
growth into our ‘better-for-you’ brand portfolio may, in part, result from merger, acquisition, distribution or licensing
agreements that require greater capability of management to effectively administer this growth and may have greater inherent risk.
We
are constantly looking to grow our business through potential mergers, acquisitions, distribution agreements or licensing agreements.
However, we may not be able to identify suitable candidates, obtain the capital necessary to pursue our strategy or have the agreements
be on satisfactory terms. We will likely experience significant competition in our effort to execute a strategy as a number of
competitors have also adopted a strategy of expanding and diversifying through acquisitions, mergers, distribution or licensing
agreements. As a result, we may be unable to continue to further our growth strategy or may be forced to pay more for the growth
than we would otherwise want to pay. When growth occurs, we may not be able to integrate or manage these businesses to produce
returns that justify the investment. Any difficulty in successfully integrating or managing the operations of such growth could
have a material adverse effect on our business, consolidated financial condition, results of operations or liquidity, and could
lead to a failure to realize any anticipated synergies. Our management also will be required to dedicate substantial time and
effort to the integration of any mergers, acquisitions, distribution or licensing agreements. These efforts could divert management’s
focus and resources from other strategic opportunities and operational matters.
Risks
Related to this Offering and an Investment in Our Common Stock and Warrants
We
do not intend to pay cash dividends on our common stock in the foreseeable future.
We
have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board
of directors. We do not anticipate paying dividends in the foreseeable future, but expect to retain earnings to finance the growth
of our business. Therefore, any return on investments will only occur if the market price of our common stock appreciates.
A
robust public market for our common stock may not develop or be sustained, which could affect your ability to sell our common
stock or depress the market price of our common stock.
Our
common stock is listed on NASDAQ, but we cannot assure you that our common stock will continue to trade on this market or another
national securities exchange. In addition, we are unable to predict whether an active trading market for our common stock will
develop or will be sustained.
Nasdaq
may delist our securities from quotation on its exchange which could limit investors’ ability to make transactions in our
securities and subject us to additional trading restrictions.
On
October 9, 2017, we received a notice from the Nasdaq Listing Qualifications Department stating that, for the last 30 consecutive
business days, the market value of our listed securities had been below the minimum of $35 million required for continued listing
on Nasdaq under Nasdaq Listing Rule 5550(b)(2). The notification letter stated that we were afforded 180 calendar days (until
April 9, 2018) to regain compliance. In order to regain compliance, the market value of our listed securities must remain at $35
million or more for a minimum of ten consecutive business days. The notification letter also stated that in the event we did not
regain compliance within the 180 day period, our securities may be subject to delisting.
If
Nasdaq delists our securities from trading on its exchange, we could face significant material adverse consequences, including:
|
●
|
a
limited availability of market quotations for our securities;
|
|
●
|
reduced
liquidity with respect to our securities;
|
|
●
|
a
determination that our shares of common stock are “penny stock” which will require brokers trading in our shares
of common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary
trading market for our shares of common stock;
|
|
●
|
a
limited amount of news and analyst coverage for our company; and
|
|
●
|
a
decreased ability to issue additional securities or obtain additional financing in the future.
|
The
trading price and trading volume of our common stock may be volatile.
The
price and volume of our common stock may be volatile and subject to fluctuations. Our stock has traded at a low of $2.01 to a
high of $12.55 since January 1, 2016, and the current stock price is $2.55 as of November 20, 2017. Some of the factors that could
cause fluctuations in the stock price or trading volume of our common stock include:
|
●
|
general
market and economic conditions and market trends, including in the beverage industry
and the financial markets generally;
|
|
|
|
|
●
|
the
political, economic and social situation in the U.S.;
|
|
|
|
|
●
|
actual
or expected variations in operating results;
|
|
|
|
|
●
|
announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures,
capital commitments, or other business developments;
|
|
|
|
|
●
|
adoption
of new accounting standards affecting the industry in which we operate;
|
|
●
|
operations
and stock performance of competitors;
|
|
|
|
|
●
|
litigation
or governmental action involving or affecting us or our subsidiaries;
|
|
|
|
|
●
|
recruitment
or departure of key personnel;
|
|
|
|
|
●
|
purchase
or sales of blocks of our common stock; and
|
|
|
|
|
●
|
operating
and stock performance of the companies that investors may consider to be comparable.
|
There
can be no assurance that the price of our common stock will not fluctuate or decline significantly. The stock market in recent
years has experienced considerable price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of individual companies and that could materially adversely affect the price of our common stock, regardless of our
operating performance. You should also be aware that price volatility might be worse if the trading volume of shares of our common
stock is low, as it historically has been.
Our
outstanding warrants and options will increase the number of shares outstanding and available for sale in the public markets,
which may have an adverse effect on the market price of our common stock.
We
presently have outstanding (i) stock options to purchase 1,065,989 shares of common stock at exercise prices of between $3.75
and $5.50 per share held by certain of our executive officers, directors and employees and (ii) warrants to purchase up to 1,130,570
shares of common stock at exercise prices of between $4.18 and $6.875 per share. Additionally, we will issue to the investors
in this offering [Class A] warrants to purchase up to an additional _____ shares of common stock. If and to the extent these warrants
and options are exercised, you may experience dilution to your holdings and/or it may have an adverse effect on the market price
of our common stock. The market price of our common stock also may be adversely affected, if and to the extent the shares registered
for resale pursuant to this prospectus are sold in the public markets.
The
substantial number of shares that are eligible for sale pursuant to our resale registration statement could cause the market price
for our common stock to decline or make it difficult for us to sell equity securities in the future.
We
have an effective registration statement registering the resale by certain of our stockholders of up to 4,348,889 shares of our
common stock. Expectations that shares of our common stock may be sold by the selling stockholders could create an “overhang”
that may adversely affect the market price for our common stock.
We
cannot predict the effect on the market price of our common stock from time to time as a result of (i) sales by the stockholders
of some or all of the 4,348,889 shares of our common stock under our resale registration statement, (ii) the availability of such
shares of common stock for sale by the selling stockholders, or (iii) the perception that such shares may be offered for sale
by the selling stockholders. Sales of substantial amounts of shares of our common stock in the public market, or the perception
that those sales will occur, could cause the market price of our common stock to decline or make future offerings of our equity
securities more difficult. Any sale, or perceived impending sale, of a substantial number of shares of our common stock could
cause our stock price to fluctuate or decline.
We
have the ability to issue additional shares of common stock and “blank check” preferred stock, which could affect
the rights of holders of the common stock.
Our
amended and restated certificate of incorporation allows our board of directors to issue 35,000,000 shares of common stock and
1,000,000 shares of preferred stock and to set the terms of such preferred stock. As of November 15, 2017, we have 23,047,835
authorized but unissued shares of common stock available for issuance after appropriate reservation for our outstanding options
and warrants (excluding any warrants that may be issued to the investors in this offering). The issuance of additional common
stock may dilute the economic and voting rights of our existing stockholders. In addition, the terms of such preferred stock may
materially adversely impact the dividend and liquidation rights of holders of the common stock.
Provisions
in our amended and restated certificate of incorporation and Delaware law may inhibit a takeover of us, which could limit the
price investors might be willing to pay in the future for our common stock and could entrench management.
Our
charter contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best
interests. These provisions include a staggered board of directors and the ability of the board of directors to designate the
terms of and issue new series of preferred stock. We are also subject to anti-takeover provisions under Delaware law, which could
delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage
transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Our
senior executive officers and directors may not be able to successfully manage a publicly traded company.
Not
all of our senior executive officers or directors have extensive experience managing a publicly traded company, and they may not
be successful in doing so. The demands of managing a publicly traded company, like ours, is much greater as compared to those
of a private company, and some of our senior executive officers and directors may not be able to successfully meet those increased
demands.
We
are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging
growth companies will make our common stock less attractive to investors.
We
are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (“JOBS Act”),
and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies.
These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”), reduced disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive
because we rely, or may rely, on these exemptions. If some investors find our common stock less attractive as a result, the price
of our common stock may be reduced, there may be a less active trading market for our common stock and the price of our common
stock may be more volatile.
In
addition, under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until
such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption
from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as
other public companies that are not “emerging growth companies.”
We
could remain an “emerging growth company” until December 31, 2020, although a variety of circumstances could cause
us to lose that status earlier. For as long as we take advantage of the reduced reporting obligations, the information that we
provide stockholders may be different from information provided by other public companies.
Obligations
associated with being a public company require significant company resources and management attention, which may have a material
adverse effect on our financial condition and results of operations.
We
are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,”
and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act. The Exchange Act requires, among other things,
that we file annual, quarterly and current reports with respect to our business and financial condition and the Sarbanes-Oxley
Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial
reporting. These reporting and other obligations place significant demands on our management, administrative, operational and
accounting resources, make certain activities more time-consuming and cause us to incur significant legal, accounting and other
expenses. In order to comply with these obligations, we may need to upgrade our systems or create new systems, implement additional
financial and management controls, reporting systems and procedures, expand or outsource our internal audit function, and hire
additional accounting and finance staff. Because our resources are limited compared to many public companies, these requirement
may impose a disproportionate financial burden on us. Furthermore, our limited management resources may exacerbate the difficulties
in complying with these reporting and other requirements and prevent us from focusing on executing our business strategy. In addition,
if we are unable to comply with the financial reporting requirements and other rules that apply to reporting companies, the market
price of our common stock could be adversely affected.
As
an “emerging growth company” and a “smaller reporting company” we intend to continue to take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies” or “smaller reporting companies,” including, but not limited to, not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements and other scaled disclosure requirements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not
previously approved. In general, we will remain an “emerging growth company” until December 31, 2020, although a variety
of circumstances could cause us to lose that status earlier, and will remain a “smaller reporting company” for each
fiscal year where our public float remains below $75 million as of the last day of the second fiscal quarter of the prior fiscal
year. We intend to take advantage of some or all of these exemptions and reduced reporting requirements until we are no longer
an “emerging growth company” and/or a “smaller reporting company,” at which time, we expect to incur significant
additional expenses and devote substantial management effort toward ensuring compliance with these additional requirements.
There
is currently no public market for the [Class A] warrants offered in this offering, and we can provide no assurance that a market
for the [Class A] warrants may develop, which may make it difficult for our investors to sell their [Class A] warrants.
There
is currently no market for the [Class A] warrants offered hereby. Holders of our [Class A] warrants therefore have no access to
information about prior market history on which to base their investment decisions. Even though we plan to apply to list the [Class
A] warrants on the Nasdaq Capital Market, an active trading market for the [Class A] warrants may never develop or, if developed,
it may not be sustained. Our investors may not be able to sell [Class A] warrants unless a market can be established and sustained.
In addition, following this offering, the price of our [Class A] warrants may vary significantly due to general market or economic
conditions.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds of approximately $ , and approximately
$ million if the underwriters exercise their option to purchase additional shares
and [Class A] warrants in full but assuming no exercise of the [Class A] warrants offered hereby or the Representative’s
Warrant, after deducting underwriting discounts and commissions and estimated expenses payable by us.
We
intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, sales
and marketing activities, product development, general and administrative matters, capital expenditures and acquisitions. In the
event that any net proceeds are not immediately applied, we may temporarily hold them as cash, deposit them in banks or invest
them in cash equivalents or securities.
DIVIDEND
POLICY
The
declaration, timing and amount of any dividend is subject to the discretion of our board of directors and will be dependent upon
our earnings, financial condition, market prospects, capital expenditure requirements, investment opportunities, overall market
conditions and other factors. We have not declared any dividends since our inception. Our board of directors may review and amend
our dividend policy from time to time in light of our plans for future growth and other factors. In addition, since we are a holding
company with no material assets other than the shares of our subsidiaries and affiliates through which we conduct our operations,
our ability to pay dividends will depend on our subsidiaries and affiliates distributing to us their earnings and cash flow.
PRICE
RANGE OF OUR COMMON STOCK
The
historical trading price of our common stock includes the trading of Cullen common stock from prior to the consummation of the
business combination with Cullen and LIBB. Since July 29, 2016, our common stock has been listed on the Nasdaq Capital Market
under the symbol “LTEA”. Prior to July 29, 2016, our common stock was quoted on the over-the-counter markets, as follows:
from October 1, 2015 to July 28, 2016, on the OTCQB under the symbol “LTEA”; from July 27, 2015 to September 30, 2015,
on the OTCBB under the symbol “LTEA”; and from June 1, 2015 (the effective date of the business combination for market
trading purposes) to July 26, 2015, on the OTCBB under the symbol “OLIC.” Prior to June 1, 2015, Cullen’s common
stock was quoted on the OTCBB under the symbol “CAGZ.” All historical trading prices have been adjusted to reflect
the effective 15-to-1 reverse stock split that occurred as a result of the exchange ratio under the merger agreement, which provided
for Cullen stockholders to receive one share of our common stock for every 15 shares of Cullen common stock held by them immediately
prior to the business combination. The following table sets forth the range of high and low sales prices for the applicable period
on a post-split basis.
|
|
Common
Stock
|
|
|
|
High
($)
|
|
|
Low
($)
|
|
Fiscal
Year Ended December 31, 2017:
|
|
|
|
|
|
|
|
|
Fourth
Quarter*
|
|
$
|
2.85
|
|
|
$
|
2.33
|
|
Third
Quarter
|
|
|
5.50
|
|
|
|
2.01
|
|
Second
Quarter
|
|
|
6.68
|
|
|
|
3.54
|
|
First
Quarter
|
|
|
4.60
|
|
|
|
3.70
|
|
Fiscal
Year Ended December 31, 2016:
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
5.91
|
|
|
$
|
3.73
|
|
Third
Quarter
|
|
|
8.39
|
|
|
|
4.00
|
|
Second
Quarter
|
|
|
12.55
|
|
|
|
6.81
|
|
First
Quarter
|
|
|
10.70
|
|
|
|
3.99
|
|
Fiscal
Year Ended December 31, 2015:
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
9.75
|
|
|
$
|
3.35
|
|
Third
Quarter
|
|
|
10.00
|
|
|
|
6.95
|
|
Second
Quarter**
|
|
|
11.25
|
|
|
|
1.00
|
|
First
Quarter
|
|
|
15.00
|
|
|
|
2.85
|
|
*
|
|
Through
November 20, 2017.
|
**
|
|
We
consummated the business combination with Cullen and LIBB on May 27, 2015, which became effective for market trading purposes
on June 1, 2015.
|
CAPITALIZATION
The
following table sets forth our capitalization as of September 30, 2017:
|
●
|
on
an actual basis,
|
|
|
|
|
●
|
On
a pro forma basis, after giving effect to the issuance of 607,500 shares of our common stock at a public offering price of
$2.05 completed by us in October 2017, and
|
|
|
|
|
●
|
on
a pro forma basis after this offering, after giving effect to the sale by us of all ____ shares and [Class A] warrants offered
hereby, and after deducting the estimated offering expenses payable by us.
|
You
should read this table together with our financial statements and the related notes thereto, as well as “
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
” and the other financial information appearing
elsewhere in this prospectus.
|
|
September
30, 2017
|
|
|
|
Actual
|
|
|
Pro
Forma
|
|
|
Pro
Forma As Adjusted
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
429,673
|
|
|
$
|
1,665,048
|
|
|
$
|
|
|
Total
Assets
|
|
$
|
4,830,399
|
|
|
$
|
6,065,774
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Indebtedness
|
|
$
|
71,403
|
|
|
$
|
71,403
|
|
|
$
|
71,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Common
stock, par value $0.0001; authorized 35,000,000 shares; 9,148,107 shares issued and outstanding on an actual basis; 9,755,607
shares issued and outstanding on a pro forma basis; [●] shares issued and outstanding on a pro forma as adjusted basis
|
|
|
915
|
|
|
|
976
|
|
|
|
|
|
Additional
paid in capital
|
|
|
25,191,297
|
|
|
|
26,426,611
|
|
|
|
|
|
Accumulated
deficit
|
|
|
(24,570,061
|
)
|
|
|
(24,570,061
|
)
|
|
|
|
|
Total
Stockholders’ Equity
|
|
$
|
622,151
|
|
|
$
|
1,857,526
|
|
|
$
|
|
|
Total
Capitalization
|
|
$
|
693,554
|
|
|
$
|
1,928,929
|
|
|
$
|
|
|
DILUTION
If
you invest in our shares, your ownership interest will be diluted to the extent of the difference between the price you paid per
share of common stock in this offering and the net tangible book value per share of our common stock after this offering. For
purposes of calculating the dilution in this offering, none of the purchase price has been allocated to the warrants offered hereby.
Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding.
Our
net tangible book value as of September 30, 2017 was approximately ($0.1) million, or approximately ($0.01) per share of common
stock. Our pro forma net tangible book value as of September 30, 2017 would have been approximately $1.2 million, or approximately
$0.12 per share of common stock, after giving effect to the recent stock issuance. Our pro forma as adjusted net tangible book
value as of September 30, 2017 would have been approximately $[●] million, or $[●] per share of common stock, after
giving effect to the sale by us of all [●] shares in this offering at the offering price of $[●] per share, and after
deducting the estimated offering expenses payable by us. This represents an immediate increase in net tangible book value of $[●]
per share to existing stockholders and an immediate dilution of $[●] per share to new investors in this offering.
The
following table illustrates this dilution on a per share basis for investors purchasing shares at $[●] per share:
Public
offering price per share to investors in this offering
|
|
|
|
|
|
$
|
[●]
|
|
Pro
forma net tangible book value per share as of September 30, 2017
|
|
$
|
0.12
|
|
|
|
|
|
Increase
in net tangible book value attributable to this offering
|
|
|
[●]
|
|
|
|
|
|
Pro
forma as adjusted net tangible book value per share as of September 30, 2017
|
|
|
|
|
|
|
[●]
|
|
Dilution
per share to investors in this offering
|
|
|
|
|
|
$
|
[●]
|
|
The
calculations above are based on 9,148,107 shares of common stock outstanding on September 30, 2017, 9,755,607 shares of common
stock as of September 30, 2017 after giving effect to recent share issuance and [●] shares of common stock outstanding as
of September 30, 2017 after giving effect to the sale of all [●] shares in this offering. The calculations above do not
take into account the 2,196,558 shares of common stock subject to our currently outstanding warrants and options, with exercise
prices ranging from $3.75 to $6.875 per share, or the warrants to purchase up to [●] shares of common stock that may be
issued to the investors in this offering.
Because
there is no minimum amount of shares that must be sold as a condition to closing this offering, the dilution per share to new
investors may be more than that indicated above in the event that the actual number of shares sold, if any, is less than the maximum
number of shares we are offering. In addition, if we issue additional shares of our common stock in the future, including upon
the exercise of outstanding options or warrants or the vesting of the restricted stock units, you may experience further dilution.
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
information set forth below should be read in conjunction with “Capitalization,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements
and related notes included elsewhere in this prospectus.
The
selected consolidated data as of September 30, 2017 has been derived from our unaudited condensed consolidated financial statements
included elsewhere in this prospectus. The selected consolidated financial data for the nine months ended September 31, 2017 and
2016, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus.
The selected consolidated financial data as of December 31, 2016 and 2015 and for the years then ended have been derived from
our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated financial data
as of December 31, 2014, 2013 and 2012 and for the years then ended is derived from audited financial statements of LIBB, as our
predecessor, which are not included in this prospectus.
|
|
For
the Nine Months Ended
September 30,
|
|
|
For
the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
3,901,145
|
|
|
$
|
3,412,961
|
|
|
$
|
4,558,030
|
|
|
$
|
1,899,230
|
|
|
$
|
1,744,440
|
|
|
$
|
886,061
|
|
|
$
|
1,003,502
|
|
Cost
of Goods Sold
|
|
|
3,663,404
|
|
|
|
3,253,278
|
|
|
|
4,239,317
|
|
|
|
1,556,140
|
|
|
|
1,504,146
|
|
|
|
733,736
|
|
|
|
930,546
|
|
Gross
profit
|
|
|
237,741
|
|
|
|
159,683
|
|
|
|
318,713
|
|
|
|
343,090
|
|
|
|
240,294
|
|
|
|
152,325
|
|
|
|
72,956
|
|
General
and administrative expenses
|
|
|
5,169,174
|
|
|
|
3,957,763
|
|
|
|
4,958,076
|
|
|
|
1,946,270
|
|
|
|
1,073,867
|
|
|
|
308,800
|
|
|
|
161,054
|
|
Selling
and marketing expenses
|
|
|
6,308,503
|
|
|
|
2,031,873
|
|
|
|
3,149,710
|
|
|
|
1,449,049
|
|
|
|
2,207,510
|
|
|
|
107,645
|
|
|
|
40,726
|
|
Operating
loss
|
|
|
(11,239,936
|
)
|
|
|
(5,829,953
|
)
|
|
|
(7,789,073
|
)
|
|
|
(3,052,229
|
)
|
|
|
(3,041,083
|
)
|
|
|
(264,120
|
)
|
|
|
(128,824
|
)
|
Other
(expense) income
|
|
|
(38,986
|
)
|
|
|
4,070
|
|
|
|
(3,593
|
)
|
|
|
(3,327
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest
expense
|
|
|
(313,573
|
)
|
|
|
(976,427
|
)
|
|
|
(1,066,969
|
)
|
|
|
(124,713
|
)
|
|
|
(110,298
|
)
|
|
|
(53,812
|
)
|
|
|
(44,108
|
)
|
Loss
on inducement
|
|
|
-
|
|
|
|
(1,587,954
|
)
|
|
|
(1,587,954
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
other expense
|
|
|
(352,559
|
)
|
|
|
(2,560,311
|
)
|
|
|
(2,658,516
|
)
|
|
|
(128,040
|
)
|
|
|
(110,298
|
)
|
|
|
(53,812
|
)
|
|
|
(44,108
|
)
|
Net
loss
|
|
$
|
(11,592,495
|
)
|
|
$
|
(8,390,264
|
)
|
|
$
|
(10,447,589
|
)
|
|
$
|
(3,180,269
|
)
|
|
$
|
(3,151,381
|
)
|
|
$
|
(317,932
|
)
|
|
$
|
(172,932
|
)
|
Net
loss per share
|
|
$
|
(1.36
|
)
|
|
$
|
(1.55
|
)
|
|
$
|
(1.77
|
)
|
|
$
|
(0.85
|
)
|
|
$
|
(1.20
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.07
|
)
|
Weighted
average shares outstanding - basic and diluted
|
|
|
8,529,399
|
|
|
|
5,407,036
|
|
|
|
5,889,428
|
|
|
|
3,744,931
|
|
|
|
2,633,334
|
|
|
|
2,633,334
|
|
|
|
2,633,334
|
|
|
|
As
of
September 30,
|
|
|
As
of
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
429,673
|
|
|
$
|
1,249,550
|
|
|
$
|
207,192
|
|
|
$
|
398,164
|
|
|
$
|
604,841
|
|
|
$
|
25,960
|
|
Accounts
receivable, net
|
|
|
1,556,801
|
|
|
|
1,627,058
|
|
|
|
363,096
|
|
|
|
174,637
|
|
|
|
118,102
|
|
|
|
133,102
|
|
Inventories,
net
|
|
|
1,697,251
|
|
|
|
1,187,941
|
|
|
|
712,558
|
|
|
|
561,107
|
|
|
|
165,907
|
|
|
|
234,491
|
|
Restricted
cash
|
|
|
-
|
|
|
|
103,603
|
|
|
|
127,580
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Short
term investments
|
|
|
-
|
|
|
|
2,389,521
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
263,820
|
|
|
|
91,072
|
|
|
|
48,237
|
|
|
|
9,573
|
|
|
|
77,708
|
|
|
|
29,646
|
|
Total
current assets
|
|
|
3,947,545
|
|
|
|
6,648,745
|
|
|
|
1,458,663
|
|
|
|
1,143,481
|
|
|
|
966,558
|
|
|
|
423,199
|
|
Property
and equipment, net
|
|
|
148,425
|
|
|
|
218,036
|
|
|
|
360,920
|
|
|
|
242,123
|
|
|
|
33,717
|
|
|
|
54,383
|
|
Intangible
assets
|
|
|
170,000
|
|
|
|
22,500
|
|
|
|
27,494
|
|
|
|
32,498
|
|
|
|
20,000
|
|
|
|
-
|
|
Other
assets
|
|
|
56,635
|
|
|
|
52,470
|
|
|
|
67,438
|
|
|
|
11,706
|
|
|
|
12,150
|
|
|
|
4,900
|
|
Deferred
financing costs
|
|
|
507,794
|
|
|
|
842,533
|
|
|
|
1,838,082
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
assets
|
|
$
|
4,830,399
|
|
|
$
|
7,784,284
|
|
|
$
|
3,752,597
|
|
|
$
|
1,429,808
|
|
|
$
|
1,032,425
|
|
|
$
|
482,482
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,047,727
|
|
|
$
|
886,316
|
|
|
$
|
601,681
|
|
|
$
|
825,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Accrued
expenses
|
|
|
1,380,097
|
|
|
|
911,843
|
|
|
|
458,938
|
|
|
|
112,819
|
|
|
|
85,110
|
|
|
|
15,829
|
|
UBS
Credit Line
|
|
|
-
|
|
|
|
1,280,275
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,400,000
|
|
|
|
-
|
|
Line
of credit - member
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491,110
|
|
Current
portion of automobile loans
|
|
|
8,640
|
|
|
|
11,446
|
|
|
|
19,231
|
|
|
|
17,915
|
|
|
|
-
|
|
|
|
-
|
|
Current
portion of equipment loan
|
|
|
47,910
|
|
|
|
39,979
|
|
|
|
36,627
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
current liabilities
|
|
|
110,576
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
3,594,950
|
|
|
|
3,129,859
|
|
|
|
1,116,477
|
|
|
|
955,778
|
|
|
|
1,485,110
|
|
|
|
506,939
|
|
Line
of credit, related party
|
|
|
-
|
|
|
|
-
|
|
|
|
1,091,571
|
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
-
|
|
Subcsriptions
payable
|
|
|
563,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
liabilities
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
92,466
|
|
|
|
-
|
|
|
|
-
|
|
Deferred
rent
|
|
|
4,695
|
|
|
|
1,807
|
|
|
|
4,648
|
|
|
|
5,966
|
|
|
|
-
|
|
|
|
-
|
|
Long
term portion of automobile loans
|
|
|
11,066
|
|
|
|
17,580
|
|
|
|
36,864
|
|
|
|
56,096
|
|
|
|
-
|
|
|
|
-
|
|
Long
term portion of equipment loan
|
|
|
3,787
|
|
|
|
36,495
|
|
|
|
76,477
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
liabilities
|
|
|
4,208,248
|
|
|
|
3,215,741
|
|
|
|
2,356,037
|
|
|
|
2,610,306
|
|
|
|
1,485,110
|
|
|
|
506,939
|
|
Total
stockholders’ equity (deficit)
|
|
|
622,151
|
|
|
|
4,568,543
|
|
|
|
1,396,560
|
|
|
|
(1,180,498
|
)
|
|
|
(452,685
|
)
|
|
|
(24,457
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
4,830,399
|
|
|
$
|
7,784,284
|
|
|
$
|
3,752,597
|
|
|
$
|
1,429,808
|
|
|
$
|
1,032,425
|
|
|
$
|
482,482
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial
information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties,
and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of
many factors. See “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”
Overview
We
are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of
premium Non-Alcoholic ready-to-drink (“NARTD”) beverages. We are currently organized under our flagship brand, Long
Island Iced Tea, a premium NARTD tea made from a proprietary recipe and with quality components. Our mission is to provide consumers
with premium beverages offered at an affordable price.
We
aspire to be a market leader in the development of beverages that are convenient and appealing to consumers. There are two major
target markets for our beverages: “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 options perceived as less healthy, such as carbonated soft drinks, towards alternative beverages such as iced tea.
We
continually seek to expand our product line. Our current products include iced tea, lemonade and aloe vera juice.
We
produce a 100% brewed iced 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,
half tea and half lemonade. We also offer lower calorie iced tea in flavor options that include mango, raspberry and peach. We
also sell the iced tea in gallon bottles with flavor options including lemon, peach, green tea and honey, half and half lemonade,
sweet tea, mango and unsweetened.
During
April 2017, we expanded our brand to include lemonade. Lemonade is offered in nine flavors including traditional, lime, pink lemonade,
kiwi & strawberry, cherry, peach, watermelon, wild berries and strawberry and is offered at retail in 18oz. bottles.
We
also distribute an aloe vera derived juice beverage (“ALO Juice”) in 500ml and 1.5 liter bottles. ALO Juice is offered
in six flavors including original, pomegranate, mango, raspberry, pineapple and coconut. Our plans for ALO Juice include increasing
brand support through our existing sales and marketing team, ultimately accelerating points of distribution throughout current
(and future) distributor and retail partnerships alongside our flagship iced tea and lemonade products. In addition, in order
to service certain vending contracts, we sell snacks and other beverage products on a limited basis.
We
are also seeking to better develop emerging markets, as well as expand our overall geographic footprint. The United States (“US”)
market represents approximately $7 billion of a global $57 billion NARTD international market (Sources: Euromonitor international,
“Versatility of NARTD Tea Generates Bright Spot in Global Soft Drinks”, 2014, and Euromonitor International “NARTD
in the US”, February 2017). The recognition globally of our flagship ‘Long Island Iced Tea’ brand makes international
expansion a key business objective. We continue to retain the consulting services of an international beverage specialist, and
have during the quarter, applied additional consulting resources to look at opportunities in Northeast Asia. During 2017, we announced
the appointment of a New Zealand based distributor and an Australian based distributor, as well as an Australian based co-packer
with capability to produce products for Australasia and Asia. We have also focused on the development of markets in South America,
and have announced expansion into Costa Rica, Columbia, Honduras, Ecuador and other Latin American countries. We also worked alongside
existing distributor partnerships in Puerto Rico, Canada and South Korea to further expand distribution points throughout their
respective markets. Additional 2017 developments include new retail partnerships opened with supermarket chains such as Pueblos
and Supermax in Puerto Rico and Loblaws in Canada, and multiple reorders received from the South Korean distributor.
We
were incorporated on December 23, 2014 in the State of Delaware. Our corporate offices are located at 12-1 Dubon Court, Farmingdale,
NY 11735 and our telephone number at that location is (855) 542-2832.
Recent
Developments
January
2017 Offering
In
January 2017, we consummated the January 2017 Offering of an aggregate of 376,340 shares of our common stock, through Alexander
Capital, L.P., as placement agent, pursuant to the terms of a selling agent agreement, dated January 25, 2017, with the placement
agent and subscription agreements with each of the investors in the offering. Of the aggregate number of shares sold, 300,000
shares were sold to the public at a price of $4.00 per share and 76,340 of the shares were sold to our officers and directors
at a price of $4.10 per share, the most recent closing bid price of the common stock at the time the officers and directors executed
their subscription agreements. The offering generated gross proceeds of $1,513,000 and net proceeds of $1,429,740, after payment
of the placement agent fees and other offering expenses.
The
offering was made pursuant to our existing Shelf Registration which was filed with the SEC on September 30, 2016 and declared
effective by the SEC on October 14, 2016, and is described in more detail in a prospectus supplement dated January 27, 2017 and
the accompanying Base Prospectus.
June
2017 Offering
In
June 2017, we consummated the June 2017 Offering of an aggregate of 256,848 shares of our common stock, through Alexander Capital,
L.P., as placement agent, pursuant to subscription agreements with each of the investors in the offering. Of the aggregate number
of shares sold, 231,850 shares were sold to the public at a price of $5.00 per share and 24,998 of the shares were sold to our
officers and directors at a price of $5.60 per share, the most recent closing bid price of the common stock at the time the officers
and directors executed their subscription agreements. The offering generated gross proceeds of $1,299,250 and net proceeds of
$1,259,415, after payment of the placement agent fees and other offering expenses.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated June 14,
2017 and the accompanying Base Prospectus.
July
2017 Offering
In
July 2017, we consummated the July 2017 Offering of an aggregate of 448,160 shares of our common stock, through Alexander Capital,
L.P., as placement agent, pursuant to subscription agreements with each of the investors in the offering. The shares were sold
at a price of $5.00 per share. Of the shares sold, 200,000 were sold to lead investors who, as a result of purchasing more than
$500,000 in shares, each received (i) an additional number of shares of common stock equal to 7% of the total number of shares
of common stock purchased by such lead investors in this offering (or an aggregate of 14,000 shares) and (ii) three-year warrants
up to that number of shares of common stock equal to 20% of the total number of shares purchased by such lead investors in this
offering (or warrants to purchase an aggregate of 40,000 shares). These warrants have an exercise price of $5.50 and were fully
vested upon issuance. The sale of common stock generated gross proceeds of $2,240,800 and net proceeds of $2,134,487 after deducting
commissions and other offering expenses.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated July 6,
2017 and the accompanying Base Prospectus.
October
2017 Offering
In
October 2017, we consummated the October 2017 Offering of an aggregate of 607,500 shares of our common stock. The shares were
sold at a price of $2.05 per share. The sale of common stock generated gross proceeds of $1,245,375 and estimated net proceeds
of $1,235,375 after deducting expenses. Each investor in the offering also received a warrant to purchase 50% of the number of
shares for which such investor subscribed in the offering (or a total aggregate number of shares underlying such warrants equal
to 303,750 shares). The warrants have an exercise price of $2.40 per share, subject to adjustment, and expire one year from the
closing of the offering.
The
offering was made pursuant to our Shelf Registration, and is described in more detail in a prospectus supplement dated September
27, 2017 and the accompanying Base Prospectus.
Brooklyn
Sports and Entertainment
Nassau
Veterans Memorial Coliseum
On
February 16, 2017, we formed an alliance with Brooklyn Sports and Entertainment to become the official iced tea of Nassau Veterans
Memorial Coliseum presented by New York Community Bank. We have the exclusive iced tea serving rights in the venue including all
concession stands and luxury suites. The alliance also includes high profile interior and exterior LED branding, as well as digital
and retail promotional opportunities. After a complete refurbishment, the venue reopened on April 5, 2017.
Barclays
Center
On
September 21, 2017, we expanded our alliance with Brooklyn Sports and Entertainment to become the official iced tea of Barclays
Center. We have the exclusive iced tea serving rights in the venue including all concession stands and luxury suites. The alliance
also includes high profile interior and exterior LED branding, as well as digital and retail promotional opportunities.
Lemonade
On
March 14, 2017, we announced the expansion of our brand to include lemonade. The Original Long Island Brand™ Lemonade range
consists of nine real-fruit flavors, and is offered at retail in 18oz. bottles. This premium lemonade is intended to be differentiated
from other lemonade beverages in the US market. It is made with 100% raw cane sugar and non-GMO ingredients that incorporate the
“better-for-you” attributes that are prominent within our iced tea brand, and will complement Long Island Iced Tea®.
This product became available in select markets during the second quarter of 2017. It is our objective to grow market share and
offer this product alongside our iced tea products.
Big
Geyser Strategic Distribution Partnership
On
March 14, 2017, we entered into a long-term strategic distribution agreement, in certain regions, with Big Geyser, a large independent
non-alcoholic beverage distributor in metro New York, pursuant to which Big Geyser became the exclusive distributor of our iced
tea bottle products in the region. 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 our distribution footprint and allow us to streamline our business
and brings additional focus to building our brand. As part of the distribution agreement, we have issued warrants to Big Geyser
in the second and third quarter of 2017 which vest upon the achievement of certain performance targets.
ALO
Juice
On
September 18, 2017, we entered into an exclusive Licensing Agreement with Wilnah ALO Juice brand owners, providing us with worldwide
rights to produce, distribute and sell the ALO Juice brand. As compensation to Wilnah for these rights, we paid an initial fee
of $150,000, which was applied against the Seba accounts receivable upon the closing and have agreed to pay to Wilnah a 7.0% royalty
on our gross sales of ALO Juice delivered to our customers after the closing of this agreement. The majority owner of Wilnah is
the former owner of Seba and the guarantor of its obligations. We believe that ALO Juice complements our “better for you”
beverage strategy, and as such, we intend to further leverage and grow the ALO Juice brand and distribution.
Highlights
We
generate income through the sale of our beverage products. The following are highlights of our operating results for the three
and nine months ended September 30, 2017:
|
●
|
Net
sales
. During the three months ended September 30, 2017, we had net sales of $1,554,895 representing, an increase of $253,770
over the three months ended September 30, 2016. The increase is due principally to revenue improvements in iced tea and the
introduction of lemonade, offset by declines in gallons and ALO Juice. During the nine months ended September 30, 2017, we
had net sales of $3,901,145, an increase of $488,184 over the nine months ended September 30, 2016.
|
|
|
|
|
●
|
Margin
.
Our gross profit percentage decreased by 4% and our gross profit decreased by $35,705 for the three months ended September
30, 2017 as compared to the three months ended September 30, 2016. Our gross profit percentage increased by 1% and our gross
profit increased by $78,058 for the nine months ended September 30, 2017 as compared to the nine months ended September 30,
2016. The decrease for the three months ended September 30, 2017 was principally attributable to increases in discounts and
allowances. The increase for the nine months ended September 30, 2017 was primarily due to improvements in our gallon iced
tea and lemonade product lines.
|
|
|
|
|
●
|
Operating
expenses
. During the three months ended September 30, 2017, our operating expenses were $3,867,258, representing an increase
of $1,035,489 as compared to the three months ended September 30, 2016. During the nine months ended September 30, 2017, our
operating expenses were $11,477,677, representing an increase of $5,488,041 as compared to the nine months ended September
30, 2016. The increase in operating expenses related primarily to increased payroll (including stock-based compensation),
Strategy Committee and Board of Directors fees, professional fees and services, freight, advertising, bad debt expense and
product development.
|
Historically,
our cash generated from operations has not been sufficient to meet our expenses. During 2017, we have principally financed our
business through the sale of equity interests. During the nine months ended September 30, 2017, our cash flows used in operating
activities were $7,403,966, our net cash provided by investing activities was $2,446,069 and our net cash provided by financing
activities was $4,138,020. We had working capital of $352,595 as of September 30, 2017.
In
order to execute our long-term growth strategy, we expect to continue to raise additional funds through equity offerings, debt
financings, or other means. There are no assurances that we will be able to raise such funds on acceptable terms or at all. See
Sources of Liquidity and Going Concern below.
Uncertainties
and Trends in Our Business
We
believe that the key uncertainties and trends in our business are as follows:
|
●
|
We
believe that using various marketing tools, which may result in significant advertising expenses, will be necessary to increase
product awareness in order to compete with our competitors, including large and well established brands with access to significant
capital resources.
|
|
|
|
|
●
|
Customer
trends and tastes can change for a variety of reasons including health consciousness, government regulations and variation
in demographics. We will need to be able to adapt to changing preferences in the future.
|
|
|
|
|
●
|
Our
sales growth is dependent upon maintaining our relationships with existing and future customers who may generate substantial
portions of our revenue. These include sales to retailers where there may be concentrations.
|
|
|
|
|
●
|
Our
sales are subject to seasonality. Our sales are typically the strongest in the summer months.
|
|
|
|
|
●
|
We
are currently involved in litigation. Please refer to Note 8 of the condensed consolidated financial statements included elsewhere
in this prospectus. There are no assurances that there will be successful outcomes to these matters.
|
|
|
|
|
●
|
Our
portfolio includes a gallon iced tea product line featuring six of our existing flavors. Our gallon iced tea product line
has previously sold below cost. There are no assurances we will be successful in increasing margins on this product line.
|
|
|
|
|
●
|
We
operate in highly competitive markets.
|
|
|
|
|
●
|
Costs
for our raw materials may increase substantially.
|
|
|
|
|
●
|
Our
intellectual property rights could be infringed upon or we could infringe upon the intellectual property rights of others.
|
|
|
|
|
●
|
Adverse
events regarding licensed intellectual property, including termination of distribution rights, could harm our business.
|
|
|
|
|
●
|
We
have experienced cash losses from operations and our ability to grow and compete in the future will be adversely affected
if adequate capital is not available to us.
|
|
|
|
|
●
|
We
have a limited operating history.
|
Accounting
Policies
The
preparation of the financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues
and expenses, and the disclosure of contingent assets and liabilities in these consolidated financial statements. We believe that,
of our significant accounting policies (see Note 2 of our condensed consolidated financial statements included elsewhere in this
prospectus), the following policies are the most critical.
Revenue
Recognition
Revenue
is stated net of sales discounts, rebates paid to customers, establishment incentives, placement fees and returns. Net sales are
recognized when all of the following conditions are met: (1) the price is fixed and determined; (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 until such recognition criteria are met.
Customer
Marketing Programs and Sales Incentives
We
participate 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 attaining agreed upon sales levels or for participating
in specific marketing programs. We believe that our participation in these programs is essential to ensuring volume and revenue
growth in a competitive marketplace. The costs of all these various programs are recorded as a reduction of sales in the financial
statements.
Additionally,
we may be required to occasionally pay fees to our customers (“Placement Fees”) in order to place our products in
the customers’ stores. In most cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than
the right to place our product in the customers’ stores. The Placement Fees are recorded as a reduction of sales. If, at
the time the Placement Fees are recognized in the statement of operations, we have cumulative negative sales with that particular
customer, such negative sales are reclassified and recorded as a part of selling and marketing expense.
Accounts
Receivable
We
sell products to distributors and directly to retailers, and extend credit, generally without requiring collateral, based on our
evaluation of the customer’s financial condition. Potential losses on our receivables are dependent on each individual customer’s
financial condition and sales adjustments granted after the balance sheet date. We carry our trade accounts receivable at net
realizable value. Typically, accounts receivable have terms of net 30 days and do not bear interest. We monitor our exposure to
losses on receivables and maintains allowances for potential losses or adjustments. We determine these allowances by (1) evaluating
the aging of our receivables; (2) analyzing our history of sales adjustments; and (3) reviewing our high-risk customers. Past
due receivable balances are written off when our efforts have been unsuccessful in collecting the amount due. Accounts receivable
are stated at the amounts management expects to collect. For sales where certain revenue recognition criteria have not been met
at the date of delivery, we defer recognition of such accounts receivable until such recognition criteria are met.
Inventories
Our
inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists
of bottled and packaged iced tea, lemonade and ALO Juice. We value our inventories at the lower of cost or net realizable value.
Cost is determined using the first-in, first-out (FIFO) method. Included in inventory at September 30, 2017 and December 31, 2016,
was finished goods inventory with a cost of approximately $95,000 and $320,000, respectively which was delivered to a distributor,
and is held in inventory until revenue recognition criteria are met.
Results
of Operations
Comparison
for the three and nine months ended September 30, 2017 and 2016
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net
sales
|
|
$
|
1,554,895
|
|
|
$
|
1,301,125
|
|
|
$
|
3,901,145
|
|
|
$
|
3,412,961
|
|
Cost
of goods sold
|
|
|
1,486,265
|
|
|
|
1,196,790
|
|
|
|
3,663,404
|
|
|
|
3,253,278
|
|
Gross
profit
|
|
|
68,630
|
|
|
|
104,335
|
|
|
|
237,741
|
|
|
|
159,683
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,543,786
|
|
|
|
2,170,522
|
|
|
|
5,169,174
|
|
|
|
3,957,763
|
|
Selling
and marketing expenses
|
|
|
2,323,472
|
|
|
|
661,247
|
|
|
|
6,308,503
|
|
|
|
2,031,873
|
|
Total
operating expenses
|
|
|
3,867,258
|
|
|
|
2,831,769
|
|
|
|
11,477,677
|
|
|
|
5,989,636
|
|
Operating
Loss
|
|
|
(3,798,628
|
)
|
|
|
(2,727,434
|
)
|
|
|
(11,239,936
|
)
|
|
|
(5,829,953
|
)
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
-
|
|
|
|
4,070
|
|
|
|
(38,986
|
)
|
|
|
4,070
|
|
Interest
expense, net
|
|
|
(114,150
|
)
|
|
|
(579,710
|
)
|
|
|
(313,573
|
)
|
|
|
(976,427
|
)
|
Loss
on inducement
|
|
|
-
|
|
|
|
(1,587,954
|
)
|
|
|
-
|
|
|
|
(1,587,954
|
)
|
Net
loss
|
|
$
|
(3,912,778
|
)
|
|
$
|
(4,891,028
|
)
|
|
$
|
(11,592,495
|
)
|
|
$
|
(8,390,264
|
)
|
Comparison
of the Three Months Ended September 30, 2017 and 2016
Net
Sales and Gross Profit
Net
sales for the three months ended September 30, 2017 increased by $253,770, or 20%, to $1,554,895 as compared to $1,301,125 for
the three months ended September 30, 2016. The increase is driven by $390,953 of lemonade sales and an increase of $242,189 in
18/20oz iced tea sales. This was partially offset by a $238,300 decline in sales of our ALO Juice product line.
Gross
profit decreased by $35,705, or 34%, to $68,630 for the three months ended September 30, 2017 from $104,335 for the three months
ended September 30, 2016. The change in gross profit amount consisted of a decrease of approximately $40,000 in gross profit for
iced tea sold in gallons, and a decrease in gross profit of approximately $57,000 for ALO Juice, offset by an increase in gross
profit of approximately $75,000 on sales of lemonade. Our gross profit percentage decreased by approximately 4% for the three
months ended September 30, 2017, as compared to 2016, on account of increases in discounts and allowances.
General
and administrative expenses
General
and administrative expenses for the three months ended September 30, 2017 decreased by $626,736, or 29%, to $1,543,786 as compared
to $2,170,522 for the three months ended September 30, 2016. We incurred a decrease of $656,826 in stock-based compensation costs.
The remainder of the cost increases are primarily related to costs incurred in support of the expansion of the business, including
increases in rent and storage fees, insurance costs, website and internet costs.
Selling
and marketing expenses
Selling
and marketing expenses for the three months ended September 30, 2017 increased by $1,662,225, or 251%, to $2,323,472 as compared
to $661,247 for the three months ended September 30, 2016. The increase was principally the result of key management hires to
expand the capabilities of the sales and marketing organization, strategic spending in support of brand and investor awareness
and increases in freight out and other costs consistent with the revenue growth. Specifically, our personnel cost increased by
approximately $457,000 in connection with the hiring of additional sales and marketing staff, our brand awareness investor and
public relations costs increased by $662,600 due to increased investor relation spending, and we increased advertising expense
by $179,775.
Interest
expense, net
Interest
expense, net, for the three months ended September 30, 2017 decreased by $465,560, or 80%, to $114,150 as compared to $579,710
for the three months ended September 30, 2016. Interest expense for the three months ended September 30, 2017, principally consisted
of the amortization of deferred financing costs of $111,580.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
Net
Sales and Gross Profit
Net
sales for the nine months ended September 30, 2017 increased by $488,184, or 14%, to $3,901,145 as compared to $3,412,961 for
the nine months ended September 30, 2016. The increase was primarily due to the introduction of the lemonade flagship brand in
the second quarter, which contributed $592,526 to the increase in net sales. Net sales of our ALO Juice during the nine months
ended September 30, 2017 decreased by $147,352 to $648,381 as compared to $795,733 for the nine months ended September 30, 2016.
Net sales of our 18/20oz. iced tea product increased by $200,981 after a decrease to net sales of $255,634 on account of a non-cash
incentive to Big Geyser in the nine months ended September 30, 2017.
Gross
profit increased by $78,058, or 49%, to $237,741 for the nine months ended September 30, 2017 from $159,683 for the nine months
ended September 30, 2016. The change in gross profit consisted of an increase of approximately $190,000 in gross profit for iced
tea sold in gallons, an increase in gross profit of approximately $114,000 for lemonade, a decrease in gross profit of approximately
$29,000 in sales of ALO Juice and a decrease in gross profit of approximately $115,000 for iced tea sold in 18/20oz. Our gross
profit percentage increased to approximately 6% for the nine months ended September 30, 2017 as compared to approximately 5% for
the nine months ended September 30, 2016, on account of improvements in gallons and the introduction of lemonade.
General
and administrative expenses
General
and administrative expenses for the nine months ended September 30, 2017 increased by $1,211,411, or 31%, to $5,169,174 as compared
to $3,957,763 for the nine months ended September 30, 2016. This increase was principally the result of our efforts to build out
our management and support team to support our growth and enhance our corporate governance. Specifically, we incurred costs of
approximately $826,000 associated with accounting, other consulting and legal in support of the business expansion and complexity.
We incurred bad debt charges of $516,392. These were principally off-set by a decrease in our personnel costs of $271,855 and
a decrease in stock-based compensation costs of $142,543. The remainder of the cost increases are primarily related to costs incurred
in support of the expansion of the business, including increases in rent and storage fees, insurance costs, website and internet
costs.
Selling
and marketing expenses
Selling
and marketing expenses for the nine months ended September 30, 2017 increased by $4,276,630, or 210%, to $6,308,503 as compared
to $2,031,873 for the nine months ended September 30, 2016. The increase was principally the result of key management hires to
expand the capabilities of the sales and marketing organization, strategic spending in support of brand and investor awareness
and increases in freight out and other costs consistent with the revenue growth. Specifically, our personnel cost increased by
$1,226,182 in connection with the hiring of additional sales and marketing. We incurred an increase of $206,906 in stock-based
compensation costs and an increase of $462,501 in advertising expenses. Our brand awareness investor and public relations costs
increased by $1,429,195 due to new investor relations agreements and increased spending. We incurred an increase of $191,450 in
connection with our new product initiatives and ALO Juice development.
Interest
expense, net
Interest
expense, net for the nine months ended September 30, 2017 decreased by $662,854, or 68%, to $313,573 as compared to $976,427 for
the nine months ended September 30, 2016. Interest expense for the nine months ended September 30, 2017, principally consisted
of the amortization of deferred financing costs of $334,739. Interest expense was offset by interest and dividend income on investments
of $20,358.
Comparison
of the years ended December 31, 2016 and December 31, 2015
|
|
For
the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
4,558,030
|
|
|
$
|
1,899,230
|
|
Cost
of goods sold
|
|
|
4,239,317
|
|
|
|
1,556,140
|
|
Gross
profit
|
|
|
318,713
|
|
|
|
343,090
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
4,958,076
|
|
|
|
1,946,270
|
|
Selling
and marketing expenses
|
|
|
3,149,710
|
|
|
|
1,449,049
|
|
Total
operating expenses
|
|
|
8,107,786
|
|
|
|
3,395,319
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(7,789,073
|
)
|
|
|
(3,052,229
|
)
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(3,593
|
)
|
|
|
(3,327
|
)
|
Interest
expense
|
|
|
(1,066,969
|
)
|
|
|
(124,713
|
)
|
Loss
on inducement
|
|
|
(1,587,954
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,447,589
|
)
|
|
$
|
(3,180,269
|
)
|
Net
Sales and Gross Profit
Net
sales for the year ended December 31, 2016 increased by $2,658,800, or 140%, to $4,558,030 as compared to $1,899,230 for the year
ended December 31, 2015. The increase is due to a combination of iced tea brand momentum and an increase in distribution. During
the year ended December 31, 2016, our iced tea product distribution expanded into 11 additional states and into over 1,000 new
retail outlets. The increase was also bolstered by the sale of the Company’s iced tea product line in gallon containers.
Net sales of our iced tea product in gallons during the year ended December 31, 2016 increased by $891,665 and were $1,243,074
as compared to $351,409 for the year ended December 31, 2015. During 2016, we began selling our iced tea and other purchased products
in vending machines. Vending machine sales were $185,285 during the 2016 year. During the first quarter of 2016, we began selling
a line of aloe juice products realizing year one revenues of $1,054,990.
Gross
profit decreased by $24,377, or 7%, to $318,713 for the year ended December 31, 2016 from $343,090 for the year ended December
31, 2015. Our gross profit percentage decreased to 7% for the year ended December 31, 2016 as compared to 18% for the year ended
December 31, 2015. The decrease in gross profit percentage was due to (a) selling our gallon containers at or below costs to certain
distributors in order to acquire more shelf space and consumer visibility for the brand; (b) an increase in costs to produce certain
new package offerings for our 20oz product line; and (c) introductory pricing given to new customers on our 20oz product line
during the year ended December 31, 2016.
General
and administrative expenses
General
and administrative expenses for the year ended December 31, 2016 increased by $3,011,806, or 155%, to $4,958,076 as compared to
$1,946,270 for the year ended December 31, 2015. This increase was principally the result of our efforts to build out our management
and support team to support our growth, enhance our corporate governance and the effects of bearing public company costs for the
full year of 2016. Specifically, our personnel costs increased by approximately $524,000 in connection with hiring our executive
chairman, chief financial officer and other supporting personnel. We incurred an increase of approximately $1,013,585 in stock-based
compensation costs, an increase of approximately $252,000 in costs in connection with the compensation of our Board of Directors
and Advisory Board and an increase of approximately $520,000 in the costs of being a public company, consisting principally of
legal, accounting, filing and related costs. The remainder of the cost increases primarily related to costs incurred in support
of the expansion of business, including increases in rent and storage fees, insurance costs, website and internet costs and depreciation
expense related to the purchase of vending machines in the fourth quarter of 2015.
Selling
and marketing expenses
Selling
and marketing expenses for the year ended December 31, 2016 increased by $1,700,661, or 117%, to $3,149,710 as compared to $1,449,049
for the year ended December 31, 2015. The increase was principally the result of key management hires to expand the capabilities
of the sales and marketing organization, strategic spending in support of brand and investor awareness and increases in freight
out and other costs consistent with the revenue growth. Specifically, our personnel cost increased by approximately $250,568 in
connection with the hiring of our vice president of national sales and marketing and other supporting personnel. We incurred an
increase of $85,000 in stock-based compensation costs. Sales commissions paid to brokers increased by approximately $64,000 in
support of new sales distribution. Our investor and public relations costs increased by $719,609, consisting of $513,940 in cash
costs and $205,669 for stock-based compensation. We incurred an increase of approximately $127,596 in connection with our exploration
of opportunities for expansion into the liquor industry. Freight out increased by $293,434 during the year ended December 31,
2016 as compared to the year ended December 31, 2015 due to increased volume as well as increased freight rates resulting from
shipments from a storage facility located in Georgia.
Interest
expense
Interest
expense for the year ended December 31, 2016 increased by $942,256, or 756%, to $1,066,969 as compared to $124,713 for the year
ended December 31, 2015. Interest expense for the year ended December 31, 2016, principally consisted of the amortization of deferred
financing costs of $995,550 (including a $408,000 charge to proportionally reduce the deferred financing costs with the reduction
of the credit facility) and interest of $72,226 in connection with the Brentwood line of credit.
Loss
on induced conversion of credit facility and warrants
During
the year ended December 31, 2016, the Company recorded a non-cash charge of $1,587,954 for an induced conversion of its credit
facility and related warrants. No such charge was recorded during the year ended December 31, 2015.
Liquidity
and Capital Resources
Sources
of Liquidity and Going Concern
The
following table provides an overview of our borrowing agreements as of September 30, 2017:
Description
of Debt
|
|
Holder
|
|
Interest
Rate
|
|
|
Balance
at
September 30, 2017
|
|
Line
of Credit
|
|
Brentwood
LIIT Inc.
|
|
|
Prime
Plus 7.5
|
%
|
|
$
|
-
|
|
Automobile
loans
|
|
Various
|
|
|
3.59%
to 10.74
|
%
|
|
$
|
19,706
|
|
Equipment
Loan Reimbursement Agreement
|
|
Magnum
Vending Corp.
|
|
|
10.0
|
%
|
|
$
|
51,697
|
|
Historically,
our cash generated from operations has not been sufficient to meet our expenses. We have financed our operations principally through
the raising of equity capital, debt and through trade credit with our vendors. Our ability to continue our operations and to pay
our obligations when they become due is contingent upon obtaining additional financing. Management’s plans include raising
additional funds through equity offerings, debt financings, or other means.
We
believe that we will be able to raise sufficient additional capital to finance our planned operating activities, although there
are no assurances that we will be able to raise such capital on terms acceptable to the Company or at all. If we are unable to
obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned market development activities,
and/or consider reductions in personnel costs or other operating costs. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. The condensed consolidated financial statements filed with the SEC on November 13, 2017,
do not include any adjustments that might result from the outcome of these uncertainties.
Line
of Credit
Brentwood
LIIT Corp-Line of Credit
On
November 23, 2015, we entered into the Credit and Security Agreement (the “Credit Agreement”) with LIBB and Brentwood
LIIT, Inc. (“Brentwood”). Brentwood is controlled by a related party, Eric Watson, who beneficially owns approximately
14.4% of our outstanding common stock as of September 30, 2017. The Credit Agreement, which expires on November 23, 2018, provides
for a revolving credit facility in an amount of up to $3,500,000, with funding subject to approval by Brentwood. As of September
30, 2017 and December 31, 2016, there was no amount outstanding under the Credit Agreement.
UBS
Line of Credit
On
October 27, 2016, we 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 June 30, 2017, the
interest rate on the UBS Credit Line was 3.732 %. The UBS Credit Line, when drawn, is collateralized by certain of our short-term
investments. As of September 30, 2017 and December 31, 2016, the outstanding balance on the line of credit was $0 and $1,280,275,
respectively. As of September 30, 2017 and December 31, 2016, our borrowing capacity under the UBS Credit line was $0 and $19,725,
respectively. At July 21, 2017, the credit line was closed.
Magnum
Vending Corp
On
November 23, 2015, we entered into a reimbursement agreement with Magnum Vending Corp. (“Magnum”), an entity managed
by Philip Thomas, our Chief Executive Officer and one of our directors, and certain of his family members. In exchange for the
exclusive right to stock vending machines owned by Magnum, we 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 us. As of September 30, 2017 and
December 31, 2016, $51,697 and $76,474, respectively, of principal and interest were outstanding under the agreement.
Private
Placements
In
January 2017, we consummated the January 2017 Offering of an aggregate of 376,340 shares of our common stock, through Alexander
Capital, L.P., as placement agent, pursuant to the terms of a selling agent agreement, dated January 25, 2017, with the placement
agent and subscription agreements with each of the investors in the offering. Of the aggregate number of shares sold, 300,000
shares were sold to the public at a price of $4.00 per share and 76,340 of the shares were sold to our officers and directors
at a price of $4.10 per share, the most recent closing bid price of the common stock at the time the officers and directors executed
their subscription agreements. The offering generated total net proceeds, after payment of the placement agent fees and other
offering expenses, of $1,429,740.
In
June 2017, we consummated the June 2017 Offering of an aggregate of 256,848 shares of our common stock, through Alexander Capital,
L.P., as placement agent, pursuant to subscription agreements with each of the investors in the offering. Of the aggregate number
of shares sold, 231,850 shares were sold to the public at a price of $5.00 per share and 24,998 of the shares were sold to our
officers and directors at a price of $5.60 per share, the most recent closing bid price of the common stock at the time the officers
and directors executed their subscription agreements. The offering generated gross proceeds of $1,299,250 and net proceeds of
$1,259,415, after payment of the placement agent fees and other offering expenses.
In
July 2017, we consummated the July 2017 Offering of an aggregate of 448,160 shares of our common stock, through Alexander Capital,
L.P., as placement agent, pursuant to subscription agreements with each of the investors in the offering. The shares were sold
at a price of $5.00 per share. Of the shares sold, 200,000 were sold to lead investors who, as a result of purchasing more than
$500,000 in shares, each received (i) an additional number of shares of common stock equal to 7% of the total number of shares
of common stock purchased by such lead investors in this offering (or an aggregate of 14,000 shares) and (ii) three-year warrants
up to that number of shares of common stock equal to 20% of the total number of shares purchased by such lead investors in the
offering (or warrants to purchase an aggregate of 40,000 shares). These warrants have an exercise price of $5.50 and are fully
vested upon issuance. The sale of common stock generated gross proceeds of $2,240,800 and net proceeds of $2,134,487 after deducting
commissions and other offering expenses.
In
October, we consummated the October 2017 Offering of an aggregate of 607,500 shares of our common stock in a public offering at
a price of $2.05 per share. We received gross proceeds of $1,245,375 and estimated net proceeds of $1,235,375 after deducting
commissions and other offering expenses. Each investor in the offering also received a warrant to purchase 50% of the number of
shares for which such investor subscribed in the offering (or a total aggregate number of shares underlying such warrants equal
to 303,750 shares). The warrants have an exercise price of $2.40 per share, subject to adjustment, and expire one year from the
closing of the offering. Prior to October 1, 2017, we received $563,750 from this offering and accordingly, as at September 30,
2017, $563,750 is included in subscriptions payable within the condensed consolidated balance sheets.
Cash
flows
Net
cash used in operating activities
Net
cash used in operating activities was $7,403,966 for the nine months ended September 30, 2017 as compared to net cash used in
operating activities of $4,693,408 for the nine months ended September 30, 2016. Cash used in operating activities for the nine
months ended September 30, 2017 was primarily the result of a net loss of $11,592,495. The net loss was offset primarily by non-cash
charges of $2,664,809, consisting principally of $1,320,512 of stock based compensation, $551,626 of bad debt expense and $334,739
of amortization of deferred financing costs. The cash used in operating activities decreased on account of a $1,847,072 and $941,754
increase in accounts payable and accrued expenses, respectively, and increased due to an increase of $730,956 in accounts receivable.
Cash used in operating activities for the nine months ended September 30, 2016 was primarily the result of the net loss of $8,390,264
offset by non-cash charges of $3,715,230.
Net
cash provided by (used in) investing activities
Net
cash provided by investing activities was $2,446,069 for the nine months ended September 30, 2017 as compared to net cash provided
by investing activities of $2,389,219 for the nine months ended September 30, 2016. Net cash provided by investing activities
for the nine months ended September 30, 2017 consisted principally of the proceeds from the sales of short-term investment securities
of $2,408,632. Cash used in investing activities for the nine months ended September 30, 2016 resulted primarily from the purchase
of short-term investments of $2,507,302.
Net
cash provided by financing activities
Net
cash provided by financing activities was $4,138,020 for the nine months ended September 30, 2017 as compared to net cash provided
by financing activities of $7,235,048 for the nine months ended September 30, 2016. Cash flows from financing activities were
primarily the result of $1,429,740 from the net proceeds of our January 2017 Offering, $1,259,415 from the net proceeds of our
June 2017 Offering and $2,134,487 from the net proceeds of our July 2017 Offering. Net cash used in financing activities consisted
of repayments of the UBS Line of Credit of $1,280,275. Cash provided by financing activities for the nine months ended September
30, 2016, was primarily due to $5,867,217 in net proceeds from an equity offering.
BUSINESS
This
discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially
from those anticipated in these forward-looking statements as a result of many factors. See “Cautionary Statement Regarding
Forward-Looking Statements” and “Risk Factors.”
Overview
We
are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of
premium Non-Alcoholic Ready-to-Drink (“NARTD”) beverages. We are currently organized around our flagship tea product,
under the brand Long Island Iced Tea
®
. The Long Island Iced Tea name for a cocktail originated in Long Island in
the 1970’s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and
bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe
and with quality components.
We
sell our 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,
Rhode Island and parts of the Midwest. As of September 30, 2017, our products are available in 20 states and in the Caribbean,
Canada and Latin America.
Since
February 2016, we have been engaged in the aloe juice business, under the brand ALO Juice. ALO Juice is a NARTD functional beverage
made from juice derived from the aloe plant known as aloe vera. ALO Juice sources its aloe plants from harvests in Thailand. The
plants are exported from there to South Korea where they are processed in a unique whole leaf manner to ensure the nutritional
and health benefits are maintained from the plant all the way through to the bottling process.
On
March 14, 2017, we announced the extension of our brand with the launch of The Original Long Island Brand™ Lemonade. This
lemonade is a NARTD functional beverage made from a proprietary recipe with quality components.
Our
mission is to provide consumers with “better-for-you” premium beverages offered at an affordable price.
We
aspire to be a market leader in the development of beverages that are convenient and appealing to consumers. There are two major
target markets for our beverages: 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 options perceived as less healthy such
as carbonated soft drinks (“CSDs”) towards alternative beverages such as iced tea.
Industry
Opportunity
Non-Alcoholic
Beverage Market
Iced
Tea
Globally,
NARTD tea products are ranked as the 4th largest beverage category, behind carbonated soft drinks, water and dairy. The non-alcohol
iced tea global category size is estimated at $55 billion and growing at a 6.6% compound annual growth rate (“CAGR”).
(Source: Euromonitor International, “Versatility of RTD Tea Generates Bright Spot in Global Soft Drinks”, May 2014.
We
have executed a select number of international distribution opportunities – recruiting an international beverage consultant
- with a mandate to initially effect distribution and co-pack agreements in Australia and New Zealand. We have also established
a footprint in South America with distribution agreements in Costa Rica, Columbia, Honduras and Ecuador, with other relationships
pending.
The
U.S. non-alcoholic liquid refreshment beverage market consists of a number of different products, and CSDs are the top selling
beverage category. However, consumers are increasingly coming to view CSDs (typically caffeinated as well as high in sugar and
preservatives) with disfavor. In volume, the CSD category declined 0.6% in 2016, 1.5% in 2015, 1.6% in 2014, 2.3% in 2013 and
1.5% in 2012. (Sources: Euromonitor International, “Carbonates in the US”, February 2017).
CSDs
have historically dominated the non-alcoholic liquid refreshment beverage market and been primarily controlled by two industry
giants, Coca-Cola and PepsiCo. However, a number of beverages began to emerge in the 1990s as alternatives to CSDs as part of
a societal shift towards beverages that are perceived to be healthier. The alternative beverage category of the market has resulted
in the birth of multiple new product segments that include sports drinks, energy drinks and NARTD teas.
According
to a 2017 Euromonitor International industry report, the U.S. NARTD tea segment was expected to have $7.1 billion of revenue in
2016, a 7.9% increase from the prior year and an 8.3% annualized growth rate over the last 5 years (2011 – 2016) (Source:
Euromonitor International , “RTD Tea in the US”, February 2017). The industry report also forecasted an annual revenue
growth rate of 5.3% over the coming five years, with revenues reaching $9.2 billion in 2021.
In
2016, consumers showed special interest in healthier versions of NARTD teas, preferring unsweetened teas.
RTD
Tea Industry Revenue by Type (2017)
Black
Tea
|
|
|
58.9
|
%
|
Green
and White Tea
|
|
|
24.7
|
%
|
Herbal
Tea
|
|
|
16.4
|
%
|
(Source:
IBISWorld Industry Report OD4297, “RTD Tea Production in the US”, October 2017).
Lemonade
According
to IBISWorld, lemonade comprises 8.2% of the $12.0 billion U.S. juice market in 2016. About 6.7 billion liters of juice were consumed
in 2015, of which Lemonade sales totaled 451 million liters. (Source: IBISWorld Industry Report 31211c, “Juice Production
in the US”, January 2017) According to a Technavio report, the Global lemonade drinks market is expected to grow at a CAGR
of over 6% from 2017-2021. (Source: Technavio Market Research Report, “Global Lemonade Drinks Market 2017-2021”, July
2017)
ALO
Juice
The
global aloe vera-based drinks market is an expanding category, expected to grow at a CAGR of close to 10% during the forecast
period for 2016 through 2020, according to a Technavio report dated November 2016. The Americas is expected to grow at an 11.24%
CAGR over the same period. (Source: Technavio Market Research Report, “Aloe Vera-Based Drinks Market”, November 2016)
Other
Brands
With
the growing and sustainable distribution base, we now have the opportunity to develop domestic US and international brand portfolios
via merger and acquisition opportunities, together with distribution and licensing opportunities. The building blocks we put in
place over the last twelve months across the East Coast, including our partnership with Big Geyser, provides us with the infrastructure
and management capabilities to pursue these extended goals.
Our
Products and Services
Long
Island Iced Tea® was first launched in the New York metro market by LIBB in July 2011, positioning itself as a premium iced
tea beverage offered at an affordable price. We help differentiate ourselves from competitors with a proprietary recipe and quality
components. Long Island Iced Tea® is a 100% brewed tea, using black tea leaves and purified water via reverse osmosis. It
is gluten-free, free of genetically modified organisms, or “GMOs,” and certified Kosher with no artificial colors
or preservatives.
Long
Island Iced Tea® is primarily produced and bottled in the U.S. Northeast. This production in the Northeast, combined with
its “Made in America” tag-line and brand name, all improve its credentials as a part of the local community from which
we take our name.
We
have developed ten flavors of Long Island Iced Tea® in an effort to ensure that our products meet the desired taste preferences
of consumers. Regular flavors, which use natural cane sugar as a sweetener, include lemon, peach, raspberry, green tea & honey,
half tea & half lemonade, guava, mango, and sweet tea. Diet flavors, which use sucralose (generic Splenda) instead of natural
cane sugar as a sweetener, include diet lemon and diet peach. These flavors are currently available in twelve packs of 18oz. polyethylene
terephthalate bottles.
We
have recently transitioned to a new 18oz. bottle and label design for our flagship Long Island Iced Tea® brand, which replaced
our 20oz bottle size. The sleeker and slimmer 18oz. bottle design accentuates an authentic and fresh spirit of Long Island Iced
Tea® products. The bold and cleanly designed label aligns with our core brand image, clearly emphasizing the brand’s
premium ingredients and better-for-you positioning. Both the label and customized bottle cap include informative health cues that
include “non-GMO,” “100% raw cane sugar,” “no additives,” and “low calories” for
diet flavors.
We
have also developed three twenty-four pack of sixty calorie flavors that are served in 12oz. bottles. The sixty calorie flavors
have reduced sugar content, are caffeine free and include mango, peach, and raspberry. This package was designed to meet certain
nutritional guidelines for sales in schools. During May 2015, we launched four flavors, lemon, peach, mango, and green tea and
honey, in gallon containers. During February 2016, we also launched sweet tea, which is also served in a gallon container.
We
have also recently developed The Original Long Island Brand™ Lemonade, which comes in nine real-fruit flavors, and is available
in both single 18oz. bottles and 12-packs. Lemonade is offered in flavors including traditional, lime, pink lemonade, kiwi strawberry,
cherry, peach, watermelon, wild berries and strawberry.
ALO
Juice has been distributed in New York City since 2008, and in Florida since 2012. We commenced distribution of ALO Juice in February
2016. It is packed in 0.5 liter and 1.5 liter bottles, with a wide variety of flavors including Original, Mango, Pomegranate,
Pineapple, Coconut and Raspberry. Aloe vera juice contains nutrients which include vitamins A, C, E, and B12, as well as minerals
like potassium, zinc, and magnesium. It also provides antioxidants, helps to balance metabolism, and supports normal circulation
and blood pressure.
Our
Competitive Strengths
We
believe that a differentiated brand will be a key competitive strength in the NARTD tea segment. Key points of differentiation
for Long Island Iced Tea® and Long Island Brand™ Lemonade include:
●
|
A
highly experienced beverage management team, supported by a strong Board of Directors and strategic advisors;
|
|
|
●
|
Ownership
of the “Long Island Iced Tea” trademark in the United States in the non-alcoholic beverage segment, which carries
immediate brand recognition;
|
|
|
●
|
A
distribution partnership in the New York region with Big Geyser, the largest independent
non-alcoholic beverage distributor in metro New York that has in excess of 25,000 doors;
|
●
|
Strong
and growing distribution in the Northeast (company’s origin), with expanding distribution in the Midwest and South;
|
|
|
●
|
Offered
at an affordable price;
|
|
|
●
|
A
widely recognized US brand name, reinforced with “Made in America” positioning, highly relevant to the three largest
global RTD tea markets – USA, China and Japan;
|
●
|
The
use of non-GMO ingredients; and
|
|
|
●
|
A
product that meets shifting consumer demands, our flagship brands being corn free, hormone/antibiotic free, gluten free, natural
and having no artificial color or flavor.
|
The
NARTD beverage market is a crowded space and, as a result, we believe in pricing our products competitively. We highlight to consumers
our use of premium ingredients and our affordable price. The suggested retail price for a 18oz. bottle of Long Island Iced Tea®
is $1.00 to $1.50 and the suggested retail price of The Original Long Island Brand™ Lemonade is $1.25 to $1.79 per 18oz
bottle. ALO Juice has a suggested retail price of $1.49 to $1.79 for the 500 ml bottle and $2.39 to $2.79 for the 1.5 liter bottle.
Management has set pricing levels to reflect current pricing dynamics in the industry. There has been downward pressure on prices,
which management believes is caused by the entrance of major multinational beverage corporations into the alternative beverage
category. This is starting to lead towards industry consolidation, in what is currently considered a somewhat fragmented marketplace.
Our
Business Strategies
We
are seeking to organically grow our NARTD tea and related product sales by, capitalizing on an iconic name with unique brand awareness
to create familiar and easily recognizable beverages.
We
intend to increase our market share in our existing geographic markets and expand into additional geographic markets in the U.S.
We have established distribution in a number of small international markets and are exploring distribution in additional international
markets on a highly selective and limited basis, which may include royalty and licensing agreements. As discussed below in “
Our
Customers
,” we generally focus our sales efforts on approaching beverage distributors and taking advantage of their
unique positioning in the retail industry. However, a portion of our sales efforts are also dedicated to direct sales to retailers,
because some wholesale chains request direct shipments from the product supplier. In addition, we are exploring several new sales
channels. We currently are conducting a small scale business trial in which we sell our beverage product alongside other snacks
in vending machines. We also sell our twelve ounce lower calorie products in schools, in some cases through sales to purchasing
cooperatives that represent multiple school districts, but also via the vending machine business trial.
In
March 2017, we entered into a long-term strategic distribution agreement with Big Geyser, a large independent non-alcoholic beverage
distributor in metro New York, pursuant to which Big Geyser became the exclusive distributor of our iced tea bottle products.
The agreement 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 has the potential to significantly increase our distribution footprint
and allow us to streamline our business and brings additional focus to building our brand. We are committed to building this relationship,
including the recruitment of Robert Stefanizzi and a team of experienced industry professionals focused on expanding our products
into Big Geyser’s distribution network.
We
continually seek to better develop emerging markets, as well as expand our overall geographic footprint. We have entered into
new business arrangements involving international specialists contracted to (i) identify new market opportunities and (ii) assist
in the overall management of our international expansion efforts. During 2017, we announced the appointment of a New Zealand based
distributor and an Australian based distributor, as well as an Australian based co-packer with capability to produce products
for Australasia and Asia. We have also focused on the development of markets in South America, and have announced expansion into
Costa Rica, Columbia, Honduras, Ecuador and other Latin American countries. We have worked alongside existing distributor partnerships
in Puerto Rico, Canada and South Korea to further expand distribution points throughout their respective markets.
Our
strategy for ALO Juice includes increasing brand support through our existing sales and marketing team, ultimately accelerating
points of distribution throughout current (and future) distributor and retail partnerships alongside our flagship iced tea and
lemonade products.
We
are currently securing ownership of the “Long Island Iced Tea” trademark in selective international jurisdictions
via the Madrid protocol. Domestically, we are building our brand primarily by establishing comprehensive marketing plans that
include but are not limited to trade marketing, customer appreciation programs, social media, pricing promotions and demos via
brand ambassadors.
In
the past twelve months, we have secured two material brand building, awareness and trial mechanics through the sponsorships of
1) Nassau Veterans Memorial Coliseum and 2) Barclays Center. These properties reinforce brand ownership in our key New York markets
and promote trial and adoption across key demographics.
We
also use co-op advertising (advertisements by retailers that include the specific mention of manufacturers, who, in turn, repay
the retailers for all or part of the cost of the advertisement) and special promotions, together with its retail partners, so
as to complement other marketing efforts towards brand awareness.
We
also seek to expand our product line. From time to time, we explore and test market potential of new NARTD products that may,
in the future, contribute to our operating performance. We expect that the introduction of The Original Long Island Brand™
Lemonade and growth of ALO Juice will be able to attract a new market segment of beverage drinkers.
Manufacturing
and Raw Materials
Long
Island Iced Tea® and Long Island Brand™ Lemonade are currently produced by Brooklyn Bottling Group, Wayne County Foods,
Inc., Polar Corp., and LiDestri Spirits, all of which are established co-packing companies with reputable quality control. We
intend to identify additional co-packers in the U.S. and other countries to support the continued growth of the brand. ALO Juice
is purchased as a finished product from a third party supplier in South Korea.
The
principal raw materials we use in our iced tea and lemonade business are bottles, caps, labels, packaging materials, tea essence
and tea base, lemonade base, sugar, natural flavors and other sweeteners, juice, electricity, fuel and water. Our principal suppliers
for the year ended December 31, 2016, were Zuckerman-Honickman, Inc. (bottles) and Allen Flavors, Inc. (natural flavors) who,
together with Lidestri Spirits (copacker), accounted for 46% of our purchases of inventory and copacking fees. In addition, 23%
of our purchases were related to the purchase of finished bottled ALO Juice, which is purchased from suppliers located in South
Korea. Our principal iced tea suppliers for the year ended December 31, 2015 were Zuckerman-Honickman, Inc. (bottles), Dominos
Food, Inc. (sugar) and Allen Flavors, Inc. (natural flavors) who, together with Union Beverage Packers LLC (copacker), accounted
for 80% of our purchases of raw materials inventory and copacking fees.
Our
relationships with our suppliers and co-packers are typically governed by short-term purchase orders or similar arrangements.
We do not have any material contracts or other material arrangements with these parties and presently do not mitigate our exposure
to volatility in the prices of raw materials or co-packing services through the use of forward contracts, pricing agreements or
other hedging arrangements. Accordingly, we are subject to fluctuations in the costs of our raw materials and co-packing services.
Furthermore,
some of our raw materials, such as bottles, caps, labels, tea essence and tea base, sugar, natural flavors and other sweeteners,
and juice, are available from only a few suppliers. As a result, we may be subject to substantial increases in prices or shortages
of raw materials, if the suppliers are unable or unwilling to meet our requirements.
Our
Customers
We
sell our products to a mix of independent mid-to-large size beverage 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. We have also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts,
New Hampshire, Nevada, Rhode Island, North Carolina, South Carolina and parts of the Midwest. Our products are currently available
in twenty states and in the Caribbean, Canada and Latin America as of September 30, 2017. While we primarily sell our products
indirectly through distributors, at times we sell directly to the retail outlets and we may sell to certain retail outlets both
directly and indirectly through distributors. We also sell our products directly to the distribution facilities of some of our
retailers and through “road shows,” which are temporary installations at retail outlets staffed by our employees or
contractors.
For
the nine months ended September 30, 2017, two customers, Garden Foods and Big Geyser accounted for 21% and 12% of our net sales,
respectively. For the year ended December 31, 2016, our top customers, Seba Distribution LLC and Garden Foods, accounted for 20%
and 11% of the Company’s net sales, respectively. For the year ended December 31, 2015, one customer, Wakefern Food Corp.,
accounted for 10% of net sales.
Our
sales are typically governed by short-term purchase orders. We do not have any material contracts or other material arrangements
with our customers or distributors and do not obtain commitments from them to purchase or sell a minimum amount of our products
or to purchase or sell such products at a minimum price. Because our sales may be concentrated with a few customers, our results
of operations may be materially adversely affected if one of these customers significantly reduces the volume of its purchases
or demands a reduction in price, which may occur at any time due to the absence of such purchase commitments.
Management
Our
management team consists of persons with substantial experience in the beverage industry. Philip Thomas, our Chief Executive Officer
and LIBB’s co-founder, has over 20 years of beverage experience. Mr. Thomas served as our Chairman of the Board from May
2015 until June 2016, and has been Chief Executive Officer since the consummation of the business. Julian Davidson, our Executive
Chairman, has over 25 years of experience in the beverage industry, including most recently serving as Chief Executive Officer
of Independent Liquor NZ’s businesses in New Zealand, the U.S. and Canada. Independent Liquor NZ is a manufacturer and distributor
of pre-mixed ARTD beverages, as well as having beer, spirit and cider portfolios. Jeff David, our Controller, has over 12 years
of accounting experience with a broad background in controllership, full-cycle accounting, auditing, and corporate taxation. Robert
Stefanizzi, our Vice President of the New York Region, has nearly 20 years of beverage industry experience in the New York metro
region, most recently as Director of Sales for Venturing and Emerging Brands at Coca-Cola and prior to that as a Regional Sales
Manager at Honest Tea. We intend to expand our current management and recruit other skilled officers and employees with experience
relevant to our business focus as needed
Operations
and Assets
We
currently use co-packing companies, Brooklyn Bottling Group, Wayne County Foods, Inc., Polar Corp., and LiDestri Spirits to manufacture
Long Island Iced Tea® and Long Island Brand™ Lemonade. The product is shipped directly to distributors or retailers
as well as to our warehouse in Farmingdale, NY or our other storage facilities prior to delivery to sales partners. Principal
assets include vehicles to support the marketing of the brand and to transport the product, as well as storage equipment for the
warehouse. Our principal assets also include display equipment such as vending machines, refrigerators and racks. This equipment
is strategically placed at retail locations in order to market our product line.
We
purchase our aloe juice product through a third party supplier in its finished form. There are no current operations or assets;
however, after the close of the asset purchase agreement we will acquire only the intellectual property to produce ALO Juice including
tradenames, formulas, and recipes.
In
September 2017, the Company entered into an exclusive perpetual licensing agreement granting the Company the worldwide rights
to produce, distribute and sell the ALO Juice brand. As compensation for these rights, the Company has agreed to pay a 7.0% royalty
on the Company’s gross sales of ALO Juice delivered to the Company’s customers.
Seasonality
The
beverage market is subject to some seasonal variations. As the iced tea beverage segment, including Long Island Iced Tea®,
experiences its highest levels of demand during the warm spring and summer months, cold or rainy weather during this time may
have a short-term impact on customer demand and therefore result in lower sales.
Competition
The
beverage industry is extremely competitive. Long Island Iced Tea® and Long Island Brand™ Lemonade are competing with
a wide range of beverages that are produced by a large number of manufacturers. Most of these brands have enjoyed broad public
recognition for many years, accomplished through continuous and well-funded marketing campaigns. We will compete with all types
of beverages, both CSDs and non-CSDs, facing higher competition from direct product competitors in the NARTD tea and lemonade
market. Key direct competitors are Arizona Beverage Company, Unilever, Dr. Pepper Snapple Group, Inc., Nestle SA and The Coca-Cola
Company. In order to be able to compete successfully in the industry, we have to distinguish our products in price and in taste
and flavor, and offer attractive promotions to customers and appealing packaging. Moreover, we will have to well position the
brand with targeted sales and marketing campaigns.
The
aloe juice business is a fast growing industry as consumer demand grows for a “better-for-you” beverage that has healthy
benefits and is great tasting. The aloe juice segment is projected to experience high growth worldwide for the foreseeable future
and there will be opportunities for new entrances in the market. The presence of small and large vendors makes the global aloe
vera-based drinks market extremely fragmented. Intense competition prevails in the market in terms of price, quality, innovation,
reputation, and distribution. Key direct competitors that provide a high quality aloe juice product are OKF Aloe King, Alo Farms,
Forever Living Products, and Houssy Global.
Intellectual
Property
“Long
Island Iced Tea” is a trademark of ours. We currently have federal registration of the trademark “Long Island Iced
Tea” and are pursuing such registration of the trademark “The Original Long Island Brand.” We intend to seek
registration of such trademarks in other countries as well. In addition, we are seeking or plan to seek a number of other trademarks
for tag lines and product designs.
We
filed applications with the USPTO for the registration of the trademark “Long Island Brand Iced Tea” on August 28,
2012 and subsequently for the registration of the trademark “Long Island Iced Tea” on July 23, 2013. Both applications
encountered resistance to registration as a result of the existence of the mark “Long Island” for “iced tea.”
We determined that the mark “Long Island” for “iced tea” was abandoned. As a result we filed a petition
to cancel the registration on this ground. In January 2015, the petition was granted and the mark was cancelled. Accordingly,
we petitioned for the mark “Long Island Iced Tea” to be placed on the supplemental register. On April 19, 2016, the
USPTO registered the mark “Long Island Iced Tea” (Registration No. 4,943,056) on the supplemental register. Registration
on the supplemental register allows the use of the “®” symbol, blocks later filed applications for confusingly
similar marks, and allows us to sue infringers in federal court which has well-settled case law and standards. Notwithstanding
the foregoing, the supplemental register does not provide all the protection of a registration on the principal register. At this
time, the mark is not “incontestable” and we may be open to claims of others contesting the trademark.
In
addition, we have filed trademark applications for “The Original Long Island Brand” as a standard character mark and
as a stylized mark, which are pending before the USPTO. In each case, the application is for use of the trademark with iced tea,
tea based products, juices, water, beverages and other similar products. “The Original Long Island Brand” standard
character trademark has been in use in commerce by us since at least as early as February 29, 2012. We also plan to file for stylized
marks protecting certain other tag lines and product designs. With respect to the pending trademark applications for “The
Original Long Island Brand” (standard character mark and stylized mark), the USPTO has made an initial determination that
both marks are geographically descriptive. This determination is refutable and the USPTO has afforded the company the opportunity
to produce evidence to establish that the marks have become distinctive of the goods in commerce. Similar issues, or other issues,
also may arise in connection with the other marks for which we are seeking registration or intend to seek registration. Registration
of these marks will allow us to utilize the “®” symbol to notify others that our marks are federally registered
and allow us to enforce these marks in federal court, among other benefits. There can be no assurance, however, that the USPTO
will approve these applications.
Our
intellectual property is protected through the acquisition of registered and unregistered trademarks as described above, the acquisition
of patents, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those
who are, in our opinion, infringing our intellectual property rights. We intend to aggressively assert our rights under trade
secret, unfair competition, trademark, copyright and other similar laws to protect our intellectual property, including product
design, product research and concepts and trademarks, against any infringer. Although any assertion of our rights could result
in a substantial cost to us, and diversion of our efforts, management believes that the protection of our intellectual property
will be a key component of our operating strategy. Notwithstanding the foregoing, there can be no assurance that the trademarks
described above or our other intellectual property rights will adequately protect information that we deem to be proprietary.
In
an effort to further develop our branding strategy, we acquired the uniform resource locator (URL)
www.longislandicedtea.com
.
Environmental
and Other Regulations
The
conduct of our businesses, and the production, distribution, sale, advertising, labeling, safety, transportation and use of our
products, are and will be subject to various laws and regulations administered by federal, state and local governmental agencies
in the U.S., as well as to foreign laws and regulations administered by government entities and agencies in markets where we may
operate and sell products.
In
the U.S., we are or may be required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety
and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, laws governing equal employment
opportunity, customs and foreign trade laws and regulations, laws regulating the sales of products in schools, and various other
federal statutes and regulations. We will rely on legal and operational compliance programs, as well as local counsel, to guide
our businesses in complying with applicable laws and regulations of the jurisdictions in which we do business. Our third-party
co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of our product.
We
also may in the future be affected by other existing, proposed and potential future regulations or regulatory actions, including
those described below, any of which could adversely affect our business, financial condition and results of operations. Changes
in government regulation, or failure to comply with existing regulations, could adversely affect our business. Public health officials
and health advocates are increasingly focused on the public health consequences associated with obesity, especially as the disease
affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an
increased focus on caffeine content in beverages.
Legislation
has been enacted in certain U.S. states in which our products may be sold that requires collection and recycling of containers
or that prohibits the sale of our beverages in certain non-refillable containers unless a deposit or other fee is charged. It
is possible that similar or more restrictive legal requirements may be proposed or enacted in the future.
We
do not anticipate at this time that the cost of compliance with U.S. and foreign laws will have a material financial impact on
our operations, business or financial condition, but there are no guarantees that new regulatory and tariff legislation may not
have a material negative effect on our business in the future.
Research
and Development
We
have incurred approximately $47,067 and $13,333 to research opportunities related to new product initiatives. These costs were
reflected in research and development expense for the years ended December 31, 2016 and 2015, respectively.
Employees
At
September 30, 2017, we had 25 full time employees and one part-time employee. We also engaged the services of independent contractors
to assist our management team in developing our product offerings.
MANAGEMENT
The
Company’s directors and executive officers are as follows:
Name
|
|
Age
|
|
Position
|
Julian
Davidson
|
|
52
|
|
Executive
Chairman
|
Philip
J. Thomas
|
|
41
|
|
Chief
Executive Officer and Director
|
Tom
Cardella
|
|
62
|
|
Director
|
Edward
Hanson
|
|
41
|
|
Director
|
Richard
Y. Roberts
|
|
65
|
|
Director
|
Julian
Davidson
has been the Company’s Executive Chairman since June 2016 and a consultant to the Company since June 2015.
Mr. Davidson has also served on the board of Smartfoods Limited, a privately held food manufacturing, marketing and distribution
company, since May 2015. From October 2011 to June 2015, Mr. Davidson served on the board of the Lantern Hotel Group, an Australian
Stock Exchange-listed company. From April 2009 to December 2014, Mr. Davidson was Chief Executive Officer of Independent Liquor
(NZ) Limited. From February 2007 to April 2009, Mr. Davidson was Chief Financial Officer of Independent Liquor Group. From September
2006 to January 2007, Mr. Davidson acted as a consultant to a consortium of private equity investors who acquired Independent
Liquor (NZ) Limited. From April 2005 to October 2006, Mr. Davidson formed and ran Consolidated Hotels and Taverns Limited, an
investment company which purchased and operated a portfolio of hotels and taverns. From 1991 to 2005, Mr. Davidson held senior
management and leadership roles in Lion Nathan, Australasia’s largest brewer, including as Managing Director of Lion Breweries
(NZ) Limited from January 2002 to March 2005. Commencing September 2001, Mr. Davidson completed three months at Harvard Business
School, graduating with a Program for Management Development (PMD) in December 2011. From March 1998 to September 2001, Mr. Davidson
served as Managing Director of the Tooheys Brewery. From September 1996 to March 1998, Mr. Davidson acted as Finance Director
for Lion Nathan Australia. From August 1995 to September 1996, Mr. Davidson worked at Pepsi Cola Bottlers Australia/New Zealand
(a Lion Nathan/Pepsi Cola International JV) as Finance Director. From August 1992 to August 1995, he served as the Finance Director
of the Swan Brewery in Western Australia. From August 1991 to August 1992, Mr. Davidson was the Lion Nathan Group Internal Audit
Manager. From 1985 to 1991, Mr. Davidson worked as an auditor with Deloitte. Mr. Davidson’s tertiary education was at the
Auckland Technical Institute (1983 – 1986). Mr. Davidson is a Chartered Accountant (NZ). The Company believes Mr. Davidson’s
contacts and past business experience in the U.S. and global beverage industry make him well suited to serve as a member of the
Board.
Philip
J. Thomas
has served as the Company’s Chief Executive Officer and as member of the Board since the consummation
of the Business Combination on May 27, 2015. Mr. Thomas also served as the Company’s Chairman of the Board from May 2015
until June 2016. Mr. Thomas also has served as the Chief Executive Officer of LIBB since its formation in February 2011 and previously
served as the Managing Member and a member of the board of managers of LIBB from February 2011 until May 2015. Since 2005, Mr.
Thomas has also served as President of Capital Link LLC, a nationally recognized ATM processing network that he founded. Capital
Link partnered with, among others, WSFS Bank (NASAQ: WSFS), Cash Connect, RBSWorldPay (RBS) and Switch Commerce, and these parties,
in the aggregate, fund over 13,000 ATMs in all 50 states with over $8 billion annually. From 2008 to November 2010, he served
as Chief Executive Officer of KarbonEx Corp, a company he founded dedicated to creating innovative, market driven solutions to
address climate change and resolve the way businesses impact the environment. Prior to this, Mr. Thomas revitalized his family’s
45 year old food and beverage distribution business, Magnum Enterprises, by creating strategic partnerships with Coca-Cola, Vitamin
Water and Kelloggs. Mr. Thomas began his career in 1998 while attending college at James Madison University where he created Highlawn
Restaurant & Lounge, which he sold in 2001. Mr. Thomas received a B.S. from James Madison University, where he was a Division
I GTE scholar athlete. The Company believes Mr. Thomas’ business experience in the beverage industry makes him well suited
to serve as a member of the Board.
Tom
Cardella
has served as a member of the Board since April 2016. Mr. Cardella is the founder of Cardella & Associates
LLC and is a beverage industry consultant. Prior to founding Cardella & Associates in February 2015, Mr. Cardella was the
President and Chief Executive Officer of Tenth and Blake Beer Company, a division of MillerCoors, from June 2010 to January 2015.
He also served as President Eastern Division for MillerCoors from June 2008 to June 2010, where he was responsible for all commercial
operations in the eastern half of the United States. Prior to the merger with Coors, Mr. Cardella was Executive Vice President
of Sales and Distribution for Miller Brewing Company from May 2006 to June 2008. From August 2005 through April 2006, he held
the position of Senior Vice President of Market Development and Import Brands with Miller. Prior to rejoining the Miller Brewing
Company in August 2005, Mr. Cardella spent nearly a decade at InBev where he held several senior-level positions, including U.S.
Vice President of Sales from September 2004 through August 2005, Chief Executive Officer of Beck’s North America from June
2003 through August 2004, Vice President of Strategy for FEMSA Cerveza in Monterey, Mexico (joint venture of InBev/Femsa) from
January 2001 through May 2003, and Vice President of Marketing at Labatt USA from January 1996 through December 2000. Mr. Cardella
spent the earlier years of his career with Miller Brewing Co. from 1978 through 1995 in various sales and marketing positions.
Mr. Cardella has served on the board of directors of the Green Bay Packers since July 2010, the United Way of Greater Milwaukee
since March 2010 and the Marcus Center for Performing Arts since July 2012. He also has served on the board of directors for the
North American Brewing Company (parent company is FIFCO, San Jose, Costa Rica) since January 2016. Mr. Cardella received a B.A.
from the State University of New York College at Geneseo and completed the Advanced Management Program at Harvard Business School
in 2000. The Company believes Mr. Cardella’s contacts and past business experience in the beverage industry make him well
suited to serve as a member of the Board.
Edward
Hanson
has been a member of the Board since the consummation of the Business Combination on May 27, 2015. Mr. Hanson also
has been a member of Cullen’s board of directors since October 2009. Mr. Hanson has served as a principal of Global Partners
Fund, a private equity fund investing in asset backed businesses, since 2009. Prior to this, he was a director of Babcock &
Brown (UK) Ltd. Babcock & Brown was a principal investment firm headquartered in Sydney and Mr. Hanson worked in the London
office from 1997 to 2009. He focused on Private Equity and Real Estate. Mr. Hanson received a Bachelor of Commerce from the University
of Auckland in New Zealand. The Company believes Mr. Hanson’s business experience and contacts and relationships make him
well suited to serve as a member of the Board.
Richard
Y. Roberts
has been a member of the Board since the consummation of the Business Combination on May 27, 2015. Mr. Roberts
also has been a member of Cullen’s board of directors since October 2009. In March 2006, Mr. Roberts co-founded a regulatory/legislative
consulting firm, Roberts, Raheb & Gradler LLC. He was a partner with Thelen Reid & Priest LLP, a national law firm, from
January 1997 to March 2006. From August 1995 to January 1997, Mr. Roberts was a consultant at Princeton Venture Research, Inc.,
a private consulting firm. From 1990 to 1995, Mr. Roberts was a commissioner of the SEC, and, in this capacity, was actively involved
in, has written about or has testified on, a wide range of subjects affecting the capital markets. Since leaving the SEC, Mr.
Roberts has been a frequent media commentator and writer on various securities public policy issues and has assisted the Governments
of Romania and Ukraine in the development of a securities market. Mr. Roberts was a director of Red Mountain Resources, Inc.,
an oil and natural gas exploration public company, from October 2011 until February 2016. He was a director of Nyfix, Inc. from
September 2005 to December 2009, Endeavor Acquisition Corp. from July 2005 to December 2007, a director of Victory Acquisition
Corp. from January 2007 to April 2009 and a director of Triplecrown from June 2007 to October 2009. From 1987 to 1990, he was
the chief of staff for Senator Richard Shelby. He is a member of the Alabama Bar and the District of Columbia Bar. Mr. Roberts
is a member of the Advisory Board of Securities Regulation & Law Reports, of the Advisory Board of the International Journal
of Disclosure and Governance, and of the Editorial Board of the Municipal Finance Journal. Mr. Roberts also previously served
as a member of the District 10 Regional Consultative Committee of the Financial Industry Regulatory Authority, the Market Regulation
Advisory Board of the FINRA, and the Legal Advisory Board of the FINRA. Mr. Roberts received a B.E.E. from Auburn University in
1973, a J.D. from the University of Alabama School of Law in 1976, and a Master of Laws from the George Washington University
Law Center in 1981. The Company believes Mr. Roberts’ contacts and past business experience, including at the SEC, make
him well suited to serve as a member of the Board.
Family
Relationships
There
are no family relationships among any of the Company’s directors or executive officers.
Leadership
Structure
The
Board is divided into two classes, Class 1 and Class 2. The Class 1 directors will hold office until the annual meeting of directors
to be held in 2018 and the Class 2 directors will hold office until the annual meeting of directors to be held in 2017. Thereafter,
each director holds office until the second succeeding annual meeting of stockholders after his or her election, or until his
or her death, resignation, removal or the earlier termination of his or her term of office. Edward Hanson and Richard Y. Roberts
are the Class 1 directors and Julian Davidson, Philip Thomas and Tom Cardella are the Class 2 directors.
The
Board has determined to keep the positions of chairman of the board and principal executive officer separate at this time. This
permits the Company’s principal executive officer to concentrate his efforts on managing the Company’s business operations
and development. This also allows the Company to maintain an independent chairman of the board who oversees, among other things,
communications and relations between the Board and senior management, consideration by the Board of the Company’s strategies
and policies and evaluation by the Board of the Company’s principal executive officer.
Independence
of Directors
The
Company’s common stock is listed on the Nasdaq Capital Market and the Company adheres to the Nasdaq listing standards in
determining whether a director is independent. The Board consults with its counsel to ensure that its determinations are consistent
with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Nasdaq requires
that a majority of the Board must be composed of “independent directors,” which is defined generally as a person other
than an officer of a company, who does not have a relationship with the company that would interfere with the director’s
exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, the
Company has determined that each of Messrs. Hanson, Roberts and Cardella and Ms. Kennedy is an independent director.
Board
Role in Risk Oversight
The
Board’s primary function is one of oversight. The Board as a whole works with the Company’s management team to promote
and cultivate a corporate environment that incorporates enterprise-wide risk management into strategy and operations. Management
periodically reports to the Board about the identification, assessment and management of critical risks and management’s
risk mitigation strategies. Each committee of the Board is responsible for the evaluation of elements of risk management based
on the committee’s expertise and applicable regulatory requirements. In evaluating risk, the Board and its committees consider
whether the Company’s programs adequately identify material risks in a timely manner and implement appropriately responsive
risk management strategies throughout the organization. The audit committee focuses on assessing and mitigating financial risk,
including risk related to internal controls, and receives at least quarterly reports from management on identified risk areas.
In setting compensation, the compensation committee strives to create incentives that encourage behavior consistent with the Company’s
business strategy, without encouraging undue risk-taking. The nominating committee considers areas of potential risk within corporate
governance and compliance, such as management succession. Each of the committees reports regularly to the Board as a whole as
to their findings with respect to the risks they are charged with assessing.
Board
Meetings and Committees
The
Board has three separately standing committees: the audit committee, the compensation committee and the nominating committee.
Each committee is composed entirely of independent directors as determined in accordance with the rules of Nasdaq for directors
generally, and where applicable, with the rules of Nasdaq for such committee. In addition, each committee has a written charter,
a copy of which is available free of charge on the Company’s website at http://investors.longislandicedtea.com/charters.
Audit
Committee
The
audit committee consists of Tom Cardella, Edward Hanson and Richard Y. Roberts, each of whom is “independent” as defined
in Rule 10A-3 of the Exchange Act and the Nasdaq listing standards, with Mr. Hanson serving as chairman. The audit committee’s
duties, which are specified in the audit committee charter, include, but are not limited to:
|
●
|
reviewing
and discussing with management and the independent auditor the annual audited financial statements, and recommending to the
Board whether the audited financial statements should be included in the Form 10-K;
|
|
|
|
|
●
|
discussing
with management and the independent auditor significant financial reporting issues and judgments made in connection with the
preparation of the Company’s financial statements;
|
|
●
|
discussing
with management major risk assessment and risk management policies;
|
|
|
|
|
●
|
monitoring
the independence of the independent auditor;
|
|
|
|
|
●
|
verifying
the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner
responsible for reviewing the audit as required by law;
|
|
|
|
|
●
|
inquiring
and discussing with management the Company’s compliance with applicable laws and regulations;
|
|
●
|
pre-approving
all audit services and permitted non-audit services to be performed by the independent auditor, including the fees and terms
of the services to be performed;
|
|
|
|
|
●
|
appointing
or replacing the independent auditor;
|
|
|
|
|
●
|
determining
the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management
and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related
work;
|
|
|
|
|
●
|
establishing
procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting
controls or reports which raise material issues regarding the Company’s financial statements or accounting policies;
and
|
|
|
|
|
●
|
reviewing
and approving any related party transactions the Company may enter into. The audit committee will consider all relevant factors
when determining whether to approve a related party transaction, including whether the related party transaction is on terms
no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and
the extent of the related party’s interest in the transaction.
|
Financial
Experts on Audit Committee
The
audit committee will at all times be composed exclusively of “independent directors” who are “financially literate”
as defined under the Nasdaq listing standards. The definition of “financially literate” generally means being able
to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash
flow statement. The Company has determined that Edward Hanson qualifies as an “audit committee financial expert,”
as defined under rules and regulations of the SEC.
Compensation
Committee
The
compensation committee consists of Tom Cardella and Richard Y. Roberts, each of whom is an independent director, with Mr. Cardella
serving as chairman. The principal functions of the compensation committee are:
|
●
|
evaluating
the performance of the Company’s officers,
|
|
|
|
|
●
|
reviewing
any compensation payable to the Company’s directors and officers,
|
|
|
|
|
●
|
preparing
compensation committee reports, and
|
|
|
|
|
●
|
administering
the issuance of any common stock or other equity awards granted to the Company’s
officers and directors.
|
The
compensation committee makes all decisions regarding executive officer compensation. The compensation committee periodically reviews
the elements of compensation for the executive officers and, subject to any existing employment agreements, sets each element
of compensation for the Chief Executive Officer and the other executive officers, including annual base salary, annual incentive
bonus and equity compensation. The compensation committee also periodically reviews the terms of employment agreements with the
executive officers, including in connection with any new hire or the expiration of any existing employment agreements. The compensation
committee will consider the recommendations of the Executive Chairman and the Chief Executive Officer when determining compensation
for the other executive officers. Executive officers do not determine any element or component of their own pay package or total
compensation amount. The Chief Executive Officer has no role in determining and is not present for any discussions regarding his
own compensation.
The
compensation committee also reviews and approves the Company’s compensation plans, policies and programs and administers
the Company’s equity incentive plans. In addition, the Executive Chairman, the Chief Executive Officer and other members
of management make recommendations to the compensation committee with regard to overall pay strategy including program designs,
annual incentive design, and long-term incentive plan design for all employees. Management from time to time provides the compensation
committee with market information and relevant data analysis as requested.
The
compensation committee retains sole authority to engage compensation consultants, including determining the nature and scope of
services and approving the amount of compensation for those services, and legal counsel or other advisors. The compensation committee
assesses the independence of any consultants pursuant to the rules and regulations of the SEC and the listing standards of Nasdaq.
The Company will provide for appropriate funding, as determined by the compensation committee, for payment of any such investigations
or studies and the compensation to any consulting firm, legal counsel or other advisors retained by the compensation committee.
The Company engaged a compensation consultant as part of its development of an overall compensation strategy and establishment
of individual compensation arrangements during the fiscal year ended December 31, 2016.
Nominating
Committee
The
nominating committee consists of Edward Hanson, who is an independent director under the Nasdaq listing standards. The nominating
committee is responsible for overseeing the selection of persons to be nominated to serve on the Board. The nominating committee
will consider persons identified by its members, management, stockholders and others.
The
guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to
be nominated:
|
●
|
should
have demonstrated notable or significant achievements in business, education or public service;
|
|
|
|
|
●
|
should
possess the requisite intelligence, education and experience to make a significant contribution
to the
Board and bring
a range of skills, diverse perspectives and backgrounds to its deliberations; and
|
|
|
|
|
●
|
should
have the highest ethical standards, a strong sense of professionalism and intense dedication
to serving the interests of the stockholders.
|
The
nominating committee will consider a number of qualifications relating to management and leadership experience, background and
integrity and professionalism in evaluating a person’s candidacy for membership on the Board. The nominating committee may
require certain skills or attributes, such as financial or accounting experience, to meet specific Board needs that arise from
time to time. Though the Board does not have specific guidelines on diversity, it is one of many criteria considered by the Board
when evaluating candidates. The nominating committee does not distinguish among nominees recommended by stockholders and other
persons. The Company does not pay any fee to or otherwise engage any third party or parties to identify or evaluate or assist
in identifying or evaluating potential nominees.
The
nominating committee does not have a written policy or formal procedural requirements for stockholders to submit recommendations
for director nominations. However, the nominating committee will consider recommendations from stockholders. Stockholders should
communicate nominee suggestions directly to the nominating committee and accompany the recommendation with biographical details
and a statement of support for the nominee. The suggested nominee must also provide a statement of consent to being considered
for nomination. There have been no material changes to the procedures by which security holders may recommend nominees to our
board of directors.
In
addition, pursuant to the Agreement and Plan of Reorganization (the “
Merger Agreement
”), dated as of December
31, 2014 and amended as of April 23, 2015, by and among the Company, Cullen, Cullen Merger Sub, Inc., LIBB Acquisition Sub, LLC,
LIBB and certain of the former members of LIBB, the parties to the agreement have agreed to take all necessary action so that
Messrs. Thomas, Hanson and Roberts are elected as directors through 2018.
Strategy
Committee
The
strategy committee, which was formed during 2017, consists of Tom Cardella, Julian Davidson and Philip Thomas. The strategy committee
is responsible for reviewing the overall strategic and financial plans of the Company.
Advisors
to the Strategy Committee
The
strategy committee has engaged advisors to assist its management in exploring business opportunities. These advisors regularly
provide the Company with advice on product development and business opportunities. The advisors have entered into confidentiality
agreements with the Company and retain no intellectual property rights to the Company’s products. They are compensated for
their time through awards of stock and annual cash fees. The current advisors are:
John
Carson
. Mr. Carson is Chairman of the Board of Intercontinental Beverage Capital Inc. (“
IBC
“). He
is former Chairman, Chief Executive Officer and President of several leading beverage companies including Marbo, Inc. and Triarc
Beverages, both private equity backed corporations. As Chairman of Triarc Beverages (RC Cola), he led the acquisition and integration
of Snapple Beverages and expanded business internationally by leading negotiations in China, Japan, Mexico, South America, Russia
and Poland. Mr. Carson led the sale of the entire beverage portfolio of Triarc to Cadbury Schweppes, generating a significant
return for investors. He is former President of Cadbury Schweppes North America where he led the expansion of the Schweppes brand
beyond mixers and into adult soft drinks. He also led the expansion of the Tampico brand throughout new markets, including Mexico,
Brazil and the emerging U.S. Hispanic and African American markets. Mr. Carson is a Board Member of the National Soft Drink Association
and Director of Water Source Inc.
Dan
Holland
. Mr. Holland is the former Chief Executive Officer of XXIV Karat Wines, which was founded in 2012 and offers the
first gold infused sparkling wine. He is the former President and Chief Executive Officer of The Rising Beverage Co (Los Angeles,
CA) and prior to that served as an adviser for First Beverage Group. Mr. Holland began his career at Mission Beverage, where he
served as president for 15 years. During his tenure as President of Mission Beverage, Mr. Holland served on many distributor and
supplier councils, which help companies such as Coors Brewing Co., Heineken, Guinness, Anheuser-Busch InBev and Glaceau, direct
their business nationally and internationally.
David
“Bump” Williams
. Mr. Williams is the President and Chief Executive Officer of The BWC Company, a consulting
company that works across the entire 6-tier network of beverages. Mr. Williams began his career at Procter & Gamble (“P&G”)
where he developed a National Sales Program (Publishers Clearing House) that incorporated all P&G brands being merchandised
across the United State with key national retailers. In 1986 he left P&G to head up Analytics and National Accounts at the
A.C. Nielsen Company where he developed the industry’s first Beverage Vertical servicing a multitude of manufacturers, retailers
and distributors. In 1994 he joined Information Resources, Inc. as the President of Global Consulting where he was responsible
for the use of store-level data and consumer segmentation analyses that allowed the beverage industry to develop specific advertising,
point of sale and new product launches at targeted consumers and specific demographic audiences. In 2008, Mr. Williams resigned
his post at IRI and retired but has continued to provide consulting to several retailers to conduct analyses on the health of
their beverage business and determine business plans and strategies designed to capitalize on changing consumer purchase behavior.
He works on new product launches, pricing and promotion analytics, mergers and acquisitions, market expansion and strategic business
planning. Mr. Williams serves on several boards of directors and advisors across the beverage alcohol and non-alcoholic beverage
community.
Andres
Siefken.
Mr. Siefken is currently the EVP Marketing and Communications for Mastercard, having joined Mastercard in April
2017. In this role, he is responsible for the well-known Priceless marketing platform, the company’s reputation and competitive
differentiation, and driving business for Mastercard products and services in North America. Prior to Mastercard, from 2015 to
2017, Mr. Siefken served as Principal and Advisor for The New England Consulting Group (“NECG”). As member of the
retail, digital, consumer and innovation practices of NECG, Mr. Siefken helped CPG and Retail Executives find transformational
strategies to accelerate growth. Prior to the NECG, from 2006 to 2015, Mr. Siefken served as Chief Marketing Officer and Executive
Vice President of Daymon Worldwide, a global leader in private brand development and retail services. During that time, he was
responsible for leading the corporate branding, global marketing, analytics and innovation teams for the company’s five
businesses, as well as the operation of the Galileo Global Brand Group agency. Mr. Siefken began his career at Procter & Gamble
before moving to escalating roles with beverage global leaders Allied Domecq Spirits and Wine, and Anheuser-Busch InBev.
EXECUTIVE
COMPENSATION
Executive
Compensation
Summary
Compensation Table
The
following table sets forth all compensation of our Chief Executive Officer and each of our two most highly compensated executive
officers other than our Chief Executive Officer (together, the ”
Named Executive Officers
“) for the fiscal
years ended December 31, 2016 and 2015.
Name
and Principal
Position
|
|
Year
|
|
|
Salary
(S)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards
($)
(1)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Julian
Davidson
(2)
|
|
|
2016
|
|
|
|
-
|
|
|
|
211,250
|
(6)
|
|
|
381,161
|
(7)
|
|
|
776,933
|
(9)
|
|
|
167,499
|
(14)
|
|
|
1,536,843
|
|
Executive
Chairman
|
|
|
2015
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Philip
Thomas
(3)
|
|
|
2016
|
|
|
|
150,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,155
|
(12)
|
|
|
177,639
|
|
Chief
Executive Officer
|
|
|
2015
|
|
|
|
99,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
497,600
|
(10)
|
|
|
13,572
|
(12)
|
|
|
610,472
|
|
Richard
Allen
(4)
|
|
|
2016
|
|
|
|
100,538
|
|
|
|
-
|
|
|
|
181,582
|
(8)
|
|
|
-
|
|
|
|
19,500
|
(13)
|
|
|
301,610
|
|
Former
Chief Financial Officer
|
|
|
2015
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Peter
Dydensborg
(5)
|
|
|
2016
|
|
|
|
130,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,235
|
(12)
|
|
|
154,735
|
|
Former
Chief Operating Officer
|
|
|
2015
|
|
|
|
135,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
364,909
|
(11)
|
|
|
21,211
|
(12)
|
|
|
521,928
|
|
|
(1)
|
Represents
the aggregate grant date fair value of awards computed in accordance with the Financial Accounting Standards Board’s
Accounting Standards Codification Topic 718. Assumptions used in the calculation of these amounts are disclosed in Note 10
to our audited consolidated financial statements for the year ended December 31, 2016 contained herein.
|
|
|
|
|
(2)
|
The
information in the table includes compensation to Mr. Davidson from June 6, 2016, which was the date he became the Executive
Chairman of the Company, as well as fees paid to him prior to such date during 2016.
|
|
|
|
|
(3)
|
The
information in the table includes compensation to Mr. Thomas from LIBB prior to the consummation of the Business Combination
on May 27, 2015. Mr. Thomas became our Chief Executive Officer on such date.
|
|
|
|
|
(4)
|
Mr.
Allen was hired by the Company on June 6, 2016. On August 15, 2017, Mr. Allen resigned.
|
|
|
|
|
(5)
|
The
information in the table includes compensation paid to Mr. Dydensborg by LIBB prior to the consummation of the Business Combination
on May 27, 2015. Mr. Dydensborg became our Chief Operating Officer on such date. On August 30, 2017, Mr. Dydensborg resigned.
|
|
|
|
|
(6)
|
The
bonus includes Mr. Davidson’s earned cash bonuses.
|
|
|
|
|
(7)
|
This
amount includes 1,667 shares issued on July 29, 2016 as part of the June consulting agreement. This amount also includes 15,000
shares which were issued on October 4, 2016 as part of the amended consulting agreement on September 29, 2016. In addition,
52,635 shares were also issued on October 4, 2016 as part of the June consulting agreement. All shares were issued at $5.50.
|
|
|
|
|
(8)
|
The
amount includes the aggregate grant date fair value of 8,333 shares of its common stock the Company will grant to Mr. Allen
on May 31, 2017. The amount also includes shares which shall have fair market values equal to $50,000 which will be granted
to Mr. Allen on each of May 31, 2018 and 2019. The amount includes the grant date fair value of shares issued to Mr. Allen
as a consultant.
|
|
|
|
|
(9)
|
The
amount excludes the fair value of 71,686 options which were issued in February 2017 upon the completion of raising $3,000,000.
The amount includes the fair value of 286,744 options issued to Mr. Davidson on August 18, 2016.
|
|
|
|
|
(10)
|
This
amount includes options granted to Mr. Thomas in connection with the Business Combination on May 27, 2015.
|
|
|
|
|
(11)
|
This
amount includes options granted to Mr. Dydensborg in connection with the Business Combination on May 27, 2015.
|
|
|
|
|
(12)
|
This
amount represents medical insurance and travel allowances paid to the officers by the Company.
|
|
|
|
|
(13)
|
This
amount represents medical insurance and travel allowances as well as $7,500 which was paid to Mr. Allen in conjunction with
his consulting agreement prior to becoming the Chief Financial Officer.
|
|
|
|
|
(14)
|
This
amount includes consulting fees paid to Mr. Davidson during 2016 for his services as a consultant.
|
Compensation
Arrangements
The
Company’s compensation policies are intended to provide for compensation that is sufficient to attract, motivate and retain
executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and
the creation of stockholder value.
Compensation
Prior to the Business Combination
Paul
N. Vassilakos served as Cullen’s sole executive officer during the period from January 1, 2015 to May 27, 2015, the date
the Business Combination was consummated. Based on Cullen’s level of operations, financial condition and results of operations,
Cullen’s board of directors, in consultation with its compensation committee, determined not to pay any compensation to
Cullen’s officers during these periods. Mr. Vassilakos also served as the Company’s Chief Executive Officer from the
Company’s inception through May 27, 2015. The Company did not pay him any compensation for such services.
Philip
Thomas served as LIBB’s Chief Executive Officer during the period from January 1, 2015 to May 27, 2015, for which LIBB paid
him $26,000 per year for such services. LIBB also reimbursed him for all out-of-pocket expenses he incurred on LIBB’s behalf.
Peter
Dydensborg served as LIBB’s Chief Operating Officer during the period from January 1, 2015 to May 27, 2015, pursuant to
a written employment agreement. Such agreement provided for Mr. Dydensborg to receive a base salary of $170,000 per year. Additionally,
Mr. Dydensborg was entitled to an incentive bonus of not less than 15% of his base salary. The employment agreement with Mr. Dydensborg
contained provisions for the protection of LIBB’s intellectual property and for non-compete restrictions during employment
and in the event of termination (generally imposing restrictions on (i) employment or consultation with competing companies or
customers, (ii) recruiting or hiring employees for a competing company and (iii) soliciting or accepting business from LIBB’s
customers for a period of one year following termination).
Compensation
after the Business Combination
Upon
consummation of the Business Combination, Mr. Vassilakos resigned as the Company’s Chief Executive Officer. Messrs. Thomas
and Dydensborg became the Company’s Chief Executive Officer and Chief Operating Officer, respectively, and also retained
their respective positions with LIBB.
In
connection with the closing of the Business Combination, Messrs. Thomas and Dydensborg entered into new employment agreements
with the Company to serve as the Company’s Chief Executive Officer and Chief Operating Officer, respectively. Each employment
agreement has a term of two years from the closing of the Business Combination, except that the agreement with Mr. Dydensborg
provides that either the Company or the executive can terminate the agreement with six months’ advance notice. The employment
agreements provide for Messrs. Thomas and Dydensborg to receive base salaries of $150,000 and $130,000, respectively. Additionally,
each is entitled to an incentive bonus of up to 50% and 40% of his base salary, respectively.
Pursuant
to their employment agreements, upon the closing of the Business Combination, Messrs. Thomas and Dydensborg also received a five-year
option to purchase 80,000 shares of the Company’s common stock and 58,667 shares of the Company’s common stock, respectively,
at an exercise price of $3.75 per share. The options vest quarterly in equal proportions over the two year employment term. If
Mr. Thomas or Dydensborg’s employment is terminated by the Company without “cause” or by such executive with
“good reason,” then the option granted to him will become vested in full and will be exercisable for one year from
the date of termination. In addition, the options will be accelerated upon the occurrence of certain non-negotiated change of
control transactions. In the event of certain negotiated change of control transactions, the compensation committee may, (i) accelerate
the vesting of the options, or (ii) require the executive to relinquish the option to the Company upon the tender by the Company
to the executive of cash in an amount equal to the repurchase value of such award.
On
March 10, 2017, the employment agreement of Mr. Thomas was amended and restated in its entirety to extend the term to December
31, 2019, and increase the annual compensation to $250,000. In addition, Mr. Thomas’ incentive bonuses were changed so that
he is eligible to be paid bonuses from time to time based on the achievement of performance goals for Mr. Thomas and the Company
as established by the compensation committee. The agreement also included a one-time cash payment of $83,000 upon signing of agreement
and an option award with a term of five years to purchase 75,000 shares of the Company’s common stock, with an exercise
price of $4.50 per share. Of such shares, 25,000 shares are vested on the date of grant and the remaining 50,000 shares will vest
in equal portions on March 10, 2018 and March 10, 2019.
Unless
terminated by the Company without “cause” or by the executive with “good reason” (as such terms are defined
in the employment agreements), upon termination the executives will be entitled only to their base salary through the date of
termination, valid expense reimbursements and certain unused vacation pay. If terminated by the Company without “cause”
or by the executives with “good reason,” each executive is entitled to be paid severance (base salary for a period
of six months), valid expense reimbursements and accrued but unused vacation pay.
Each
of the employment agreements contains provisions for the protection of the Company’s intellectual property and confidential
information and certain non-competition restrictions for the executives (generally imposing restrictions during employment and
until May 27, 2017 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).
In
June 2016, Julian Davidson became the Company’s Executive Chairman and Richard Allen became the Company’s Chief Financial
Officer.
On
June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial
Officer. The employment agreement has a term of three years, and automatically renews for additional one year periods thereafter
unless either party provides notice of its decision not to renew. The employment agreements provides for Mr. Allen to receive
a base salary of $170,000. If prior to December 31, 2016, the Company completes an equity offering with gross proceeds of at least
$5,000,000 or the Company has net sales of at least $1,000,000 during any calendar month, Mr. Allen’s base salary will become
$185,000 commencing on June 6, 2017, and $200,000 commencing on June 6, 2018. Additionally, he is entitled to an incentive bonus
of up to 50% of his base salary. Furthermore, the Company will grant Mr. Allen 8,333 shares of the Company’s common stock
on May 31, 2017 and a number of shares of the Company’s common stock having a fair market value equal to $50,000 on each
of May 31, 2018 and 2019.
Unless
terminated by the Company without “cause” or by Mr. Allen with “good reason” (as such terms are defined
in the employment agreements) or upon death or disability of Mr. Allen, upon termination Mr. Allen will be entitled only to his
base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated upon
death or disability of Mr. Allen, upon termination Mr. Allen will be entitled to his base salary through the date of termination,
valid expense reimbursements and certain unused vacation pay, and all equity awards will vest to the extent they would have been
vested at the next scheduled vesting date and will remain exercisable for at a certain period of time. If terminated by the Company
without “cause” or by Mr. Allen with “good reason,” Mr. Allen is entitled to be paid severance equal to
base salary for nine months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current year, valid
expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and will remain
exercisable for a certain period of time. If Mr. Allen’s agreement is not renewed, Mr. Allen is entitled to be paid severance
equal to his base salary for five months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current
year, valid expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and
will remain exercisable for a certain period of time.
The
employment agreement contains provisions for protection of the Company’s confidential information and certain non-competition
restrictions for Mr. Allen (generally imposing restrictions during employment and for a period of nine months after the term of
the employment 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
June 6, 2016, the Company amended its consulting agreement with Julian Davidson to provide, among other things, for him to serve
as the Company’s Executive Chairman. Pursuant to the amendment, the Company agreed (a) to pay to Mr. Davidson $10,000 per
month, and (b) to grant to Mr. Davidson 1,667 shares of the Company’s common stock per month. Upon the Company’s completing
an equity raise with gross proceeds of at least $10,000,000, the monthly cash fee to Mr. Davidson under the consulting agreement
would increase to $20,000 per month, the monthly stock grant to Mr. Davidson would be eliminated and Mr. Davidson would receive
a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock. In addition, upon
completion of the aforementioned equity raise and Mr. Davidson obtaining a work visa, Mr. Davidson could enter into an employment
agreement with the Company in the form attached to the consulting agreement or into an amended consulting agreement with substantially
similar terms (either such agreement, a “
Replacement Agreement
“). Mr. Davidson also could enter into a Replacement
Agreement if more than two months had elapsed since the equity raise and he had not obtained a work visa.
The
Company completed an equity raise in July 2016, but the gross proceeds were less than the $10,000,000 threshold described above.
Effective as of August 18, 2016, the Company amended the consulting agreement to reduce the $10,000,000 threshold to $6,900,000
(which was less than the gross proceeds of the July 2016 equity raise). As a result of reducing the threshold, Mr. Davidson’s
monthly cash fee increased to $20,000, his monthly stock grant was eliminated and he received a one-time cash bonus of $95,000
and a one-time grant of 50,000 shares of the Company’s common stock, all as described above. Also, as a result of the threshold
reduction, Mr. Davidson would have the right to enter into a Replacement Agreement upon obtaining a work visa or upon the elapse
of two months from the closing of the July 2016 equity raise. In addition, under the amendment, Mr. Davidson received stock options
to purchase 286,744 shares of the Company’s common stock (in place of a stock option previously provided for in the form
of Replacement Agreement) and certain of the terms of the form of Replacement Agreement were modified.
On
September 29, 2016, after the expiration of two months from the July 2016 equity raise, Mr. Davidson elected to enter into a Replacement
Agreement with the Company by amending and restating his consulting agreement. Under the amended and restated consulting agreement,
as had been provided in the form of Replacement Agreement, (a) the Company will pay to Mr. Davidson a fee of $20,833 per month,
(b) the Company paid Mr. Davidson an incentive of $75,000 on the date of the agreement and will pay to him $165,000 on the first
anniversary of such date, (c) the Company granted Mr. Davidson 15,000 shares of the Company’s common stock on the date of
the agreement, (d) Mr. Davidson will be eligible to receive an annual additional fee of up to 50% of his annual fee based on Consultant’s
performance over each calendar year, and (e) if the Company completes an additional equity raise with gross proceeds of at least
$3,000,000, then the Company will issue to Mr. Davidson 20,000 shares of the Company’s common stock and an option to purchase
a 71,686 shares of the Company’s common stock with an exercise price equal to the fair market value of the common stock
as of such date. If Mr. Davidson obtains a work visa, he has the right to enter into an employment agreement in the form attached
to the amended and restated consulting agreement, which contains substantially the same compensation terms as the amended and
restated consulting agreement. The form of employment agreement otherwise has similar terms to Mr. Allen’s employment agreement.
The
exercise price of the stock options to purchase 286,744 shares of the Company’s common stock issued to Mr. Davidson on August
18, 2016 is $5.50 per share. One-third of such stock options are immediately vested and the remaining two-thirds vest in equal
installments on July 28, 2017 and 2018. The exercise price of the stock options to purchase 71,686 shares of the Company’s
common stock that may be issued pursuant to the amended and restated consulting agreement will have an exercise equal to the market
price of the Company’s common stock on the date of grant. These stock options will vest on the same schedule as the stock
options issued on August 18, 2016. All the stock options will expire on July 28, 2021. If Mr. Davidson’s service to the
Company is terminated by the Company without “cause” or by him with “good reason,” then the stock options
granted to him will become vested in full and will be exercisable for one year from the date of termination. In addition, the
stock options will be accelerated upon the occurrence of certain non-negotiated change of control transactions. In the event of
certain negotiated change of control transactions, the compensation committee may, (i) accelerate the vesting of the stock options,
or (ii) require the executive to relinquish the stock options to the Company upon the tender by the Company to the executive of
cash in an amount equal to the repurchase value of such award. Notwithstanding the foregoing, none of the stock options are exercisable
prior to the Company’s stockholders approving them. The stock options will be deemed cancelled, if the Company’s stockholders
do not approve them.
Either
Mr. Davidson or the Company may terminate the amended and restated consulting agreement with 30 days’ prior written notice.
The amended and restated consulting agreement contains certain provisions for protection of the Company’s intellectual property
and confidential information and certain 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).
In
connection with the Business Combination, the Company adopted the 2015 Plan, which is administered by the Company’s compensation
committee. The committee may grant stock options, stock appreciation rights, restricted stock or other stock-based awards under
the plan to the Company’s employees, officers, directors and consultants. The Board has reserved 466,667 shares of the Company’s
common stock for issuance under the plan. No awards had been granted under the plan as of December 31, 2016. On January 18, 2017,
the shareholders approved the amendments to the 2015 Plan (i) to increase the number of shares authorized for issuance from 466,667
to 750,000 shares, and (ii) to increase the number of shares that may be granted to a single participant in a calendar year from
100,00 to 300,000 shares.
Outstanding
Equity Awards Table
The
following table sets forth unexercised options, unvested stock and equity incentive plan awards outstanding for the Named Executive
Officers as of December 31, 2016.
Outstanding
Option Awards at Fiscal Year-End for 2016
Name
|
|
Number
of securities underlying unexercised
options
(#) exercisable
|
|
|
Number
of securities underlying unexercised
options (#)
unexercisable
|
|
|
Option
exercise
price ($)
|
|
|
Option
expiration
date
|
|
Julian
Davidson
|
|
|
95,581
|
|
|
|
191,163
|
(1)
|
|
$
|
5.50
|
|
|
|
7/18/2021
|
|
Philip
Thomas
|
|
|
60,000
|
|
|
|
20,000
|
(2)
|
|
$
|
3.75
|
|
|
|
5/27/2020
|
|
Richard
Allen
|
|
|
-
|
|
|
|
-
|
(3)
|
|
$
|
-
|
|
|
|
-
|
|
Peter
Dydensborg
|
|
|
44,000
|
|
|
|
14,667
|
(4)
|
|
$
|
3.75
|
|
|
|
5/27/2020
|
|
|
(1)
|
The
options vest in two annual installments on July 18, 2017 and July 18, 2018. The amount excludes the fair value of 71,686 options
which were issued in February 2017 upon the completion of raising $3,000,000 subsequent to September 29, 2016 and the fair
value of an option to purchase 31,630 shares of common stock issued on January 5, 2017.
|
|
|
|
|
(2)
|
The
options vest in two equal quarterly installments on February 27, 2017 and May 27, 2017. The amount excludes the fair value
of an option to purchase 75,000 shares of common stock issued on March 10, 2017 in connection with the March 10, 2017 amended
employment agreement of Mr. Thomas and the fair value of an option to purchase 45,547 shares of common stock issued on January
5, 2017.
|
|
|
|
|
(3)
|
Excludes
the fair value of an option to purchase 30,111 shares of common stock issued on January 5, 2017.
|
|
|
|
|
(4)
|
The
options vest in two equal quarterly installments on February 27, 2017 and May 27, 2017. Excludes the fair value of option
to purchase 31,579 shares of common stock issued on January 5, 2017.
|
Outstanding
Stock Awards at Fiscal Year-End for 2016
Name
|
|
Number
of
shares
or units
of
stock that
have
not vested
(#)
|
|
|
Market
value of
shares or
units of
stock that
have not
vested
(#)
|
|
|
Equity
incentive
plan
awards:
number
of
unearned
shares,
units
or other
rights
that have
not
vested
(#)
|
|
|
Equity
incentive plan awards: market or payout value of unearned shares, units or other
rights
that have not vested ($)
|
|
Julian
Davidson
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Philip
Thomas
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Richard
Allen
|
|
|
32,314
|
(1)
|
|
|
84,749
|
(1)
|
|
|
-
|
|
|
|
-
|
|
Peter
Dydensborg
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
The
amount 8,333 shares of its common stock the Company will grant to Mr. Allen on May 31, 2017 at the stock price of $4.17 on
December 31, 2016. The amount also excludes shares which shall have fair market values equal to $50,000 which will be granted
to Mr. Allen on each of May 31, 2018 and 2019. For the purpose of the number of shares in the disclosure, the value of the
stock of $4.17 per share was utilized. Number of shares not vested consist of 8,333 shares which will be issued on December
31, 2016 and an aggregate of 23,981 shares to be issued to Mr. Allen on each of May 31, 2018 and 2019, respectively. This
represents stock valued at $34,748, 50,000 and 50,000, to be issued on May 31, 2018 and 2019, respectively.
|
Director
Compensation
The
following table sets forth all compensation of our directors for the fiscal year ended December 31, 2016. The compensation for
Mr. Davidson, who is our Executive Chairman, and Mr. Thomas, who is our Chief Executive Officer, is fully reflected in the Summary
Compensation Table above.
Director
Compensation for 2016
Name
|
|
Fees
earned or paid in cash ($)
|
|
|
Stock
awards
($)
(1)
|
|
|
Total
($)
|
|
Paul
Vassilakos
|
|
|
30,000
|
|
|
|
35,000
|
|
|
|
65,000
|
|
Edward
Hanson
|
|
|
30,000
|
|
|
|
35,000
|
|
|
|
65,000
|
|
Kerry
Kennedy
|
|
|
30,000
|
|
|
|
35,000
|
|
|
|
65,000
|
|
Thomas
Cardella
|
|
|
26,500
|
(2)
|
|
|
35,000
|
|
|
|
61,500
|
|
Richard
Y. Roberts
|
|
|
30,000
|
|
|
|
35,000
|
|
|
|
65,000
|
|
|
(1)
|
On
January 17, 2017, each of Messrs. Vassilakos, Hanson, Cardella and Roberts and Ms. Kennedy were granted 8,393 shares of our
common stock for their service as directors in 2016. The stock awards are not subject to vesting or other contractual restrictions.
The amounts reported in the stock awards column represent the aggregate grant date fair value of awards computed in accordance
with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718. Assumptions used in the
calculation of these amounts are disclosed in our audited consolidated financial statements for the year ended December 31,
2016 contained herein.
|
|
|
|
|
(2)
|
The
amount includes $4,000, which was paid to Mr. Cardella for his services on the Company’s Advisory Board prior to becoming
a member of the Board of Directors.
|
Director
Compensation
In
connection with the consummation of the Business Combination on May 27, 2015, we adopted compensation arrangements for our nonemployee
directors. For the period from July 1, 2015 to December 31, 2015, each non-employee director received an annual award of $30,000
in shares of our common stock, valued as of December 31, 2015. Thereafter, each non-employee director receives an annual cash
fee of $30,000. In addition, each non-employee director receives an annual award of $35,000 in shares of our common stock, valued
as of December 31
st
of such year. The stock awards are not subject to vesting or other contractual restrictions.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Related
Party Transactions
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 member of the Board, and certain of his
family members, and owned by Mr. Thomas’ father. In exchange for the exclusive right to stock vending machines owned by
Magnum, the Company agreed to reimburse Magnum for certain costs that Magnum incurred to acquire the machines. The reimbursements
will be made in 35 monthly payments, the first three in the amount of $14,544 and the remaining payments in the amount of $3,819.
Upon completion of these payments, Magnum will transfer the vending machines to the Company. In addition, in exchange for the
right to stock certain other vending machines that Magnum 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. The Company
may terminate the agreement and all obligations to make future payments on ten days’ written notice to Magnum.
Also
on November 23, 2015, the Company entered into a Credit and Security Agreement, as amended as of January 10, 2016 and April 7,
2016 (the “
Credit Agreement
”), with Brentwood LIIT Inc., which subsequently assigned its interest to Brentwood
LIIT (NZ) Ltd. ( the “
Lender
”). The Lender is controlled by Eric Watson, who beneficially owned approximately
17.0% of the Company’s outstanding common stock as of June 27, 2017. The Credit Agreement provides for a revolving credit
facility (the “
Credit Facility
”) in an available amount of up to $1,500,000, subject to increases as provided
in the Credit Agreement (the “
Available Amount
”), up to a maximum amount of $3,500,000 (the “
Facility
Amount
”). The Company paid the Lender a one-time facility fee of $87,500, which was capitalized and added to the principal
amount of the loan, and will pay the Lender $30,000 for its expenses at the maturity date, November 23, 2018. In addition, in
connection with the establishment of the Credit Facility, the Company issued a warrant to the Lender (the “
Lender Warrant
”)
entitling the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50. The Credit Facility bears interest
at rate equal to the prime rate plus 7.5%, compounded quarterly, and matures on November 23, 2018. The loans under the Credit
Agreement are evidenced by a secured promissory note (the “
Lender Note
”). The Lender may elect to convert the
outstanding principal and interest under the Lender Note into shares of the Company’s common stock at a conversion price
of $4.00 per share. As of September 30, 2017, December 31, 2016 and December 31, 2015, the outstanding balance of the loans
under the Credit Facility was approximately $0, $0 and $1,091,571. The largest amount outstanding since the inception of
the loans was $1,669,376. No interest was paid in cash on the loans, although $81,896 of interest was compounded by adding to
the outstanding balance of the loans. Upon the closing of the Company’s July 2016 equity raise, the Company completed a
recapitalization transaction with the Lender in accordance with to the April 7, 2016 amendment to the Credit Agreement (the “
Recapitalization
”).
Pursuant to the Recapitalization, all of the outstanding principal and interest under the Lender Note was converted into 421,972
shares of common stock and the Lender Warrant was exchanged for 486,111 shares of common stock. The Company may continue to request
advances under the credit facility subject to the terms and conditions of the Credit Agreement.
On
April 28, 2015, the Company received $150,000 as proceeds from a loan from Bass Properties, LLC, a stockholder of the Company.
This note had an interest rate of 10% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued
interest of $152,425 were converted into 38,107 shares of common stock.
On
May 4, 2015, the Company received $400,000 as proceeds from a loan with Ivory Castle Limited, a stockholder of the Company. This
note has an interest rate of 6% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued
interest of $403,485 were converted into 100,872 shares of common stock.
On
June 30, 2015, a family member of Paul Vassilakos, a member of the Board, purchased 12,500 shares of common stock for $4.00 per
share for an aggregate of $50,000. In addition, on June 30, 2015, family members of Philip Thomas, Chief Executive Officer and
a member of the Board purchased 12,500 shares of common stock for $4.00 per share for an aggregate of $50,000.
On
September 17, 2015, as part of a private placement by the Company, Paul Vassilakos, a member of the Board, purchased 6,250 units
from the Company at a purchase price of $4.00 per unit, for an aggregate of $25,000. On November 30, 2015 and March 14, 2016,
as part of the February Private Placement, Mr. Vassilakos purchased 10,000 units and 7,500 units, respectively, in each case at
a purchase price of $4.00 per unit, for an aggregate of $70,000. On September 30, 2015, as part of the October Private Placement,
Philip Thomas, Chief Executive Officer and a member of the Board, purchased 6,250 units from the Company for a purchase price
of $4.00 per unit, for an aggregate of $25,000. Ivory Castle Limited, a stockholder of the Company, purchased 22,500 units from
the Company for a purchase price of $4.00 per unit, for an aggregate of $90,000 and Bass Properties LLC, a stockholder of the
Company, purchased 15,000 units from the Company for a purchase price of $4.00 per unit, for an aggregate of $60,000.
Philip
Thomas, the Company’s Chief Executive Officer, a member of the Board and the beneficial owner of 8.8% of the Company’s
outstanding common stock as of November 20, 2017, and Thomas Panza, the beneficial owner of 8.8% of the Company’s
outstanding common stock as of March 27, 2017, are parties to the Merger Agreement and certain related agreements, including
a registration rights agreement. Pursuant to the Merger Agreement, upon consummation of the Business Combination on May 27, 2015,
each of Messrs. Thomas and Panza were issued 721,641 shares of the Company’s common stock.
Pursuant
to the lock-up agreements, Messrs. Thomas and Panza will not be able to sell any of the shares of the Company’s common stock
that they received as a result of the Business Combination until May 27, 2016, subject to certain limited permitted transfers
and subject to early release from such restrictions in the event that the Company consummates a liquidation, merger, stock exchange
or other transaction that results in all of its stockholders having the right to exchange their shares of common stock for cash,
securities or property.
Pursuant
to the registration rights agreement, the former members of LIBB (the “
LIBB members
”), including Messrs. Thomas
and Panza, are entitled to demand that the Company register the shares issued to them pursuant to the Merger Agreement under the
Securities Act of 1933, as amended. The LIBB members can elect to exercise these registration rights at any time after the closing
of the Business Combination. In addition, the LIBB members have certain “piggy-back” registration rights with respect
to registration statements filed subsequent to consummation of the Business Combination. Notwithstanding such registration rights,
the lock-up restrictions described above shall remain in effect for the balance of the twelve month period. These shares were
registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared
effective by the SEC on January 31, 2017.
James
Meehan, who was the Company’s Chief Accounting Officer until September 19, 2016 was paid $83,077 and $154,785 as compensation
as an employee for the years ended December 31, 2016 and 2015, respectively. In 2016, Mr. Meehan also received 12,000 shares of
the Company’s common stock for consulting services provided to the Company. In 2015, Mr. Meehan also received a five-year
option to purchase 16,000 shares of the Company’s common stock, at an exercise price of $3.75 per share. Upon Mr. Meehan’s
resignation, the option to purchase 16,000 shares was forfeited.
Thomas
Panza, who as of March 27, 2017 beneficially owned 8.8% of the Company’s outstanding common stock, and served as the LIBB
purchasing manager until October 31, 2016. In connection with this role, for the years ended December 31, 2016 and 2015, Mr. Panza
was paid $70,769 and $53,077, respectively. In addition, at the closing of the Business Combination, he received a five-year option
to purchase 40,000 shares of the Company’s common stock at an exercise price of $3.75 per share, vesting quarterly in equal
proportions over the two year employment term. Upon Mr. Panza’s resignation, the option to purchase 40,000 shares was forfeited.
Cullen
Investments Ltd., a company controlled by Eric Watson, who beneficially owned approximately 15.1% of the Company’s common
stock as of November 20, 2017, and Petrina Advisors, Inc., a company owned by Paul Vassilakos, a member of the Board, have paid
certain expenses on the Company’s behalf. As of September 30, 2017, December 31, 2016 and December 31, 2015, accounts
payable and accrued expenses to these parties were $10,237, $4,032 and $87,258, respectively.
We
record revenue related to sales to Magnum. For the nine months ended September 30, 2017, sales to this related party were $879.
For years ended December 31, 2016 and 2015, sales to this related party were $3,451 and $4,800, respectively. As of September
30, 2017, December 31, 2016 and December 31, 2015, there was $879, $0 and $518, respectively, due from this related party
which was included in accounts receivable in the consolidated balance sheets. The Company also purchases product to supplement
certain vending sales from this entity. For the nine months ended September 30, 2017, the Company purchased $14,631 of product
from this entity. For the year ended December 31, 2016 and 2015, the Company purchased $27,557 and $9,356, respectively, of
product from this entity. As of September 30, 2017, December 31, 2016 and 2015, the outstanding balance due to this entity
included in accounts payable was $0, $10,043 and $3,242, respectively.
On
December 27, 2016, the Company consummated the December Offering of 406,550 shares of the Company’s common stock (including
2,375 shares being sold to a member of the Board of Directors), through Network 1 Financial Securities, Inc. and Dawson James
Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016, between the Company
and Network 1, as representative of the underwriters. The Shares were sold for a price to the public of $4.00 per share. The Offering
generated total net proceeds, after underwriting discounts and payment of other offering expenses, of $1,423,128.
Effective
on March 21, 2017, an entity controlled by Eric Watson, a stockholder who beneficially owns 15.1% of our shares on November
20, 2017, Philip Thomas (Chief Executive Officer), Julian Davidson (Executive Chairman), Richard Allen (Chief Financial Officer),
and Paul Vassilakos (Director) committed to fund the Company’s net cash requirements through March 31, 2018. In consideration
of this commitment, the Company granted the entity controlled by Eric Watson a one-year warrant to purchase up to 165,000 shares
of the Company’s common stock at an exercise price of $4.18 per share. The exercise price and number of shares issuable
upon exercise of the warrant may be adjusted in certain circumstances including in the event of a stock dividend, stock split,
or the Company’s reorganization, merger or consolidation, or the Company’s dissolution in connection with the sale
of its assets.
Cullen
Related Party Transactions
The
holders of the majority of the Founders’ Shares (as defined below) are entitled to make up to two demands that Cullen register
such shares pursuant to a registration rights agreement entered into with the predecessor in connection with the predecessor’s
initial public offering. The “Founders’ Shares” are shares that were acquired from Cullen’s predecessor
prior to such predecessor’s initial public offering. The holders of such Founders’ Shares became stockholders of Cullen
upon consummation of Cullen’s business combination with the predecessor and became stockholders of the Company’s upon
consummation of the Business Combination between the Company, Cullen and LIBB. These shares were registered under the Securities
Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared effective by the SEC on January
31, 2017.
On
December 31, 2014, Cullen entered into a Sale and Purchase Agreement with Hart Acquisitions LLC (“
Hart
”), an
affiliate of Richard Watson, a former director of Cullen and the brother of Eric Watson, Cullen’s former Chief Executive
Officer and current principal stockholder, pursuant to which, on January 31, 2015, Cullen sold to Hart certain assets and intellectual
property related to Cullen’s former agricultural business for an aggregate of $125,000. The assets consisted of all of Cullen’s
remaining equipment, including computer equipment, agricultural equipment, vehicles, a mower, and a tractor. The intellectual
property consisted of Cullen’s proprietary farming system (including forage growth and yields, animal genetics and milking
systems) that was developed by adapting established grazing science, processes, technology, and genetics to liquid milk production
in the Southeastern United States. Additionally, in the event that Hart sells the intellectual property subject to the agreement
or licenses the intellectual property to a third party at any time prior to January 31, 2020, Cullen will be entitled to 20% of
the amount received from such sale or license.
Related
Person Policy
Upon
consummation of the Business Combination, the Company adopted a Related Person Policy that requires the Company (and the Company’s
subsidiaries, including LIBB) to avoid, wherever possible, all related party transactions that could result in actual or potential
conflicts of interests, except as approved by unconflicted executives, the Board, or audit committee in accordance with guidelines
approved by the Board (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate
amount involved will or may be expected to exceed the lesser of $120,000 or one percent of the average of the Company’s
total assets at year-end for the last two completed fiscal years, (2) the Company or any of its subsidiaries is a participant,
and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of the
Company’s shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has
or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial
owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make
it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member
of his or her family, receives improper personal benefits as a result of his or her position.
The
Company’s audit committee, pursuant to its written charter, will be responsible for reviewing and approving related-party
transactions to the extent the Company enters into such transactions. The audit committee will consider all relevant factors when
determining whether to approve a related party transaction, including whether the related party transaction is on terms no less
favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent
of the related party’s interest in the transaction. No director may participate in the approval of any transaction in which
he is a related party, but that director is required to provide the audit committee with all material information concerning the
transaction. Additionally, the Company will require each of its directors and executive officers to complete an annual directors’
and officers’ questionnaire that elicits information about related party transactions.
These
procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents
a conflict of interest on the part of a director, employee or officer.
DESCRIPTION
OF CAPITAL STOCK AND WARRANTS
Introduction
In
the discussion that follows, we have summarized selected provisions of our amended and restated certificate of incorporation,
bylaws and the Delaware General Corporation Law, or “DGCL,” relating to our capital stock. This summary is not complete.
This discussion is subject to the relevant provisions of Delaware law and is qualified in its entirety by reference to our certificate
of incorporation and our bylaws. You should read the provisions of our certificate of incorporation and our bylaws as currently
in effect for provisions that may be important to you.
Authorized
Capital Stock
We
are authorized to issue up to 36,000,000 shares of capital stock consisting of: 35,000,000 shares of common stock, par value $0.0001
per share, and 1,000,000 shares of preferred stock, par value of $0.0001 per share. As of November 20, 2017, there were 9,755,607
shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding.
Common
Stock
The
holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders.
There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of
the shares voted for the election of directors can elect all of the directors. Subject to any preferential rights of any outstanding
preferred stock, holders of our common stock are entitled to receive ratably the dividends, if any, as may be declared from time
to time by the board of directors out of legally available funds. If there is a liquidation, dissolution or winding up of our
company, holders of our common stock would be entitled to share ratably in our net assets legally available for distribution to
stockholders after the payment of all our debts and liabilities and any preferential rights of any outstanding preferred stock.
Holders of our common stock do not have any conversion, preemptive or other subscription rights and there are no sinking fund
or redemption provisions applicable to the common stock.
Preferred
Stock
Our
amended and restated certificate of incorporation authorizes the issuance of 1,000,000 shares of preferred stock with such designations,
rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors will
be empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of our common stock. In addition, the preferred stock
could be utilized as a method of discouraging, delaying or preventing a change in control of our company.
Warrants,
Options and Convertible Securities
We
presently have outstanding (i) warrants to purchase up to 404,475 shares of common stock at an exercise price of $6.00 per share
that were issued in private placement offerings conducted by us, (ii) warrants to purchase 34,573 shares of common stock at an
exercise price of $4.50 per share that were issued to the placement agent in the private placement offerings (and its designees),
(iii) warrants to purchase 230,000 shares of common stock at an exercise price of $4.50 per share that were issued to a distributor
for achieving certain sales incentives, (iv) warrants to purchase 205,000 shares of common stock at an exercise price to be determined
based upon the Company’s future stock price that were issued to a distributor as a sales incentive, (v) warrants to purchase
40,000 shares of common stock at an exercise price of $5.50 per share that were issued to certain lead investors in a public offering,
(vi) a warrant to purchase 165,000 shares of common stock at an exercise price of $4.18 per share that was issued as compensation
for a commitment letter, (vii) a warrant to purchase 20,000 shares of common stock at an exercise price of $4.90 per share that
was issued as compensation for a commitment letter, (viii) employee stock options to purchase 138,667 shares of common
stock at an exercise price of $3.75 per share held by certain of our executive officers, (ix) employee stock options to
purchase 286,744 shares of common stock at an exercise price of $5.50 per share held by our executive chairman, (x) options
to purchase 128,392 shares of common stock at an exercise price of $5.00 per share held by our employees and executives, (xi)
an option to purchase 71,686 shares of common stock at an exercise price of $4.09 per share held by our executive chairman, (xii)
options to purchase 385,000 shares of common stock at an exercise price of $4.50 per share held by our executives, (xiii) options
to purchase 55,000 shares of common stock at an exercise price of $3.76 per share held by our employees and (v) warrants to
purchase 31,522 shares of common stock at any exercise price of $6.875 per share that were issued to the placement agent
in a public offering conducted by us. Furthermore, we may issue additional equity awards covering up to, 125,170 shares
of common stock under our 2015 Long-Term Incentive Equity Plan and 605,895 shares of common stock under our 2017 Long-Term
Incentive Equity Plan. The plans provide 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 us and our subsidiaries.
We
also have a revolving credit facility available in an amount up to $3,500,000, subject to approval by the lender, which expires
on November 23, 2018. If we take out money against this credit facility, the principal balance of the note and accrued interest
thereon would be convertible into shares of our common stock at $4.00 per share. However, as of date of this prospectus,
there was no principal balance or accrued interest outstanding under the note.
[Class
A Warrants
Duration
and Exercise Price
.
Each
Class A warrant offered hereby will have an exercise price per share equal to $____ per share. The Class A warrants will be immediately
exercisable and will expire on the fifth anniversary of the original issuance date. The exercise price and number of common stock
issuable upon exercise is subject to appropriate adjustment in the event of share dividends, share splits, reorganizations or
similar events affecting our common stock and the exercise price. The Class A warrants will be issued separately from the common
stock, and all of the Class A warrants may be transferred separately immediately thereafter. A Class A warrant to purchase one
share of common stock will be issued for every one share sold in this offering.
Exercisability
.
The
Class A warrants will be exercisable, at the option of each holder, in whole or in part, by delivering to us a duly executed exercise
notice accompanied by payment in full for the number of shares purchased upon such exercise (except in the case of a cashless
exercise as discussed below). A holder (together with its affiliates) may not exercise any portion of a Class A warrant to the
extent that the holder would own more than 4.99% of the outstanding common stock after exercise, except that upon at least 61
days’ prior notice from the holder to us, the holder may increase or decrease the amount of ownership of outstanding shares
after exercising the holder’s Class A warrants, as applicable, up to 9.99% of the number of our common stock outstanding
immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the
Class A warrants. No fractional shares will be issued in connection with the exercise of a Class A warrant. Fractional shares
will be addressed as provided for in the DGCL.
Cashless
Exercise
.
If,
at the time a holder exercises its Class A warrant, there is no effective registration statement registering, or the prospectus
contained therein is not available for an issuance of the shares underlying the Class A warrants to the holder, then in lieu of
making the cash payment otherwise contemplated to be made to us upon such exercise in payment of the aggregate exercise price,
the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares determined according
to a formula set forth in the Class A warrant.
Fundamental
Transactions
In
the event of any fundamental transaction, as described in the Class A warrants and generally including any merger with or into
another entity, sale of all or substantially all of our assets, tender offer or exchange offer, or reclassification of our common
stock, then upon any subsequent exercise of a Class A warrant, the holder will have the right to receive as alternative consideration,
for each share of our shares that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental
transaction, the number of shares of the successor or acquiring corporation or of our company, if it is the surviving corporation,
and any additional consideration receivable upon or as a result of such transaction by a holder of the number of shares of our
common stock for which the Class A warrants are exercisable immediately prior to such event.
Transferability
Subject
to applicable laws and the restriction on transfer set forth in the Class A warrants, the Class A warrants may be transferred
at the option of the holder upon surrender of the Class A warrants to us together with the appropriate instruments of transfer.
Listing
We
have applied to list the Class A warrants on the Nasdaq Capital Market under the symbol “LTEAW.” However, no assurance
can be given that an active trading market for the Class A warrants will develop and continue. Without an active trading market,
the liquidity of the Class A warrants will be limited.
Right
as a Shareholder
Except
as otherwise provided in the Class A warrants or by virtue of such holder’s ownership of our common stock, the holders of
the Class A warrants do not have the rights or privileges of holders of our common stock, including any voting rights, until they
exercise their Class A warrants.
Waivers
and Amendments
The
warrant agreement governing the Class A warrants provides that the terms of the warrants may be amended without the consent of
any holder to cure any ambiguity or correct any defective provision, but requires the approval, by written consent or vote, of
the holders of at least 50% of the then outstanding Class A warrants in order to make any change that adversely affects the interests
of the registered holders.
General
Limitation
on Directors’ Liability
Our
amended and restated certificate of incorporation provides that no director of ours will be personally liable to us or any of
our stockholders for monetary damages arising from the director’s breach of fiduciary duty as a director. However, this
does not apply with respect to any action in which the director would be liable under Section 174 of the DGCL nor does it apply
with respect to any liability in which the director (i) breached his duty of loyalty to us or our stockholders; (ii) did not act
in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation
of law; or (iv) derived an improper personal benefit. This provision could have the effect of reducing the likelihood of derivative
litigation against our directors and may discourage or deter our stockholders or management from bringing a lawsuit against our
directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our
stockholders.
Our
amended and restated certificate of incorporation also provides that we will indemnify any director or officer of ours to the
fullest extent permitted by law. Our bylaws further provide that we will indemnify to the fullest extent permitted by law any
person who becomes party to a proceeding by reason of the fact that he is or was an director, officer, employee or agent of ours,
or by reason of the fact that he is or was serving at our request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. We have entered, and intend to continue to enter, into separate indemnification
agreements with our directors, executive officers and other key employees, in addition to the indemnification provided for in
our amended and restated certificate of incorporation and bylaws. We also maintain directors’ and officers’ liability
insurance.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or person controlling
us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
Anti-Takeover
Provisions
Provisions
of the DGCL and our amended and restated certificate of incorporation and bylaws could make it more difficult to acquire us by
means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized
below, are expected to discourage certain types of coercive takeover practices and takeover bids that our board of directors may
consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with our board of directors.
We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among
other things, negotiation of these proposals could result in improved terms for our stockholders.
Delaware
Anti-Takeover Statute.
We are subject to Section 203 of the DGCL, an anti-takeover statute. In general, Section 203 of the
DGCL prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested
stockholder” for a period of three years following the time the person became an interested stockholder, unless the business
combination or the acquisition of shares that resulted in a stockholder becoming an interested stockholder is approved in a prescribed
manner. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting
in a financial benefit to the interested stockholder. Generally, an “interested stockholder” is a person who, together
with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status did own)
15% or more of a corporation’s voting stock. The existence of this provision would be expected to have an anti-takeover
effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by stockholders.
Amendments
to Our Certificate of Incorporation.
Under the DGCL, the affirmative vote of a majority of the outstanding shares entitled
to vote thereon and a majority of the outstanding stock of each class entitled to vote thereon is required to amend a corporation’s
certificate of incorporation. Under the DGCL, the holders of the outstanding shares of a class of our capital stock shall be entitled
to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if
the amendment would:
|
●
|
increase
or decrease the aggregate number of authorized shares of such class;
|
|
|
|
|
●
|
increase
or decrease the par value of the shares of such class; or
|
|
|
|
|
●
|
alter
or change the powers, preferences or special rights of the shares of such class so as to affect them adversely.
|
If
any proposed amendment would alter or change the powers, preferences or special rights of one or more series of any class of our
capital stock so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so
affected by the amendment shall be considered a separate class for the purposes of this provision.
Classified
Board
. Our board of directors is divided into two classes. The number of directors in each class is as nearly equal as possible.
Commencing at the first annual meeting of stockholders, and at each annual meeting thereafter, directors elected to succeed those
directors whose terms expire shall be elected for a term of office to expire at the second succeeding annual meeting of stockholders
after their election. The classified board may extend the time required to make any change in control of the board when compared
to a corporation with an unclassified board. It may take two annual meetings for our stockholders to effect a change in control
of the board, because in certain circumstances less than a majority of the members of the board will be elected at a given annual
meeting. Because our board is classified and our amended and restated certificate of incorporation does not otherwise provide,
under Delaware law, our directors may only be removed for cause.
Vacancies
in the Board of Directors.
Our amended and restated certificate of incorporation and bylaws provide that, subject to limitations,
any vacancy occurring in our board of directors for any reason may be filled by a majority of the remaining members of our board
of directors then in office, even if such majority is less than a quorum. Each director so elected shall hold office until the
expiration of the term for the class for which such director is chosen. Each such directors shall hold office until his or her
successor is elected and qualified, or until the earlier of his or her death, resignation or removal.
Special
Meetings of Stockholders.
Under our bylaws, special meetings of stockholders may be called by the directors, or the president
or the chairman, and shall be called by the secretary at the request in writing of stockholders owning a majority in amount of
the entire capital stock of the corporation issued and outstanding and entitled to vote.
No
Cumulative Voting.
The DGCL provides that stockholders are denied the right to cumulate votes in the election of directors
unless our certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for cumulative voting.
Transfer
Agent and Warrant Agent
The
registrar and transfer agent for our common stock and the warrant agent for our Class A Warrants is Continental Stock Transfer
& Trust Company.
Listing
Our
common stock are listed on the Nasdaq Capital Market under the symbol “LTEA”. We have applied to list the Class A
warrants offered hereby on the Nasdaq Capital Market under the symbol “LTEAW.”
SHARE
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of the Company’s common stock as of November 20,
2017 by:
|
●
|
each
person known by the Company to be the beneficial owner of more than 5% of the Company’s
outstanding
shares
of common stock;
|
|
|
|
|
●
|
each
of the Company’s officers and directors; and
|
|
|
|
|
●
|
all
of the Company’s officers and directors as a group.
|
The
beneficial ownership of each person was calculated based on 9,755,607 shares of the Company’s common stock outstanding as
of November 20, 2017. Unless otherwise indicated, the Company believes that all persons named in the table below have sole voting
and investment power with respect to all the shares of common stock beneficially owned by them.
Name
and Address of Beneficial Owner(1)
|
|
Amount
and
Nature
of
Beneficial
Ownership
|
|
|
Percentage
of Beneficial
Ownership
|
|
Current
Directors and Officers:
|
|
|
|
|
|
|
|
|
Richard
Y. Roberts (2)
|
|
|
46,944
|
|
|
|
*
|
|
Edward
Hanson (3)
|
|
|
38,016
|
|
|
|
*
|
|
Tom
Cardella (4)
|
|
|
70,893
|
|
|
|
*
|
|
Julian
Davidson (5)
|
|
|
363,457
|
|
|
|
3.6
|
%
|
Phil
Thomas (6)
|
|
|
874,712
|
|
|
|
8.8
|
%
|
All
directors and executive officers (6 persons)
|
|
|
1,394,022
|
|
|
|
13.7
|
%
|
Five
Percent Holders:
|
|
|
|
|
|
|
|
|
Eric
J. Watson (7)
|
|
|
1,502,821
|
|
|
|
15.1
|
%
|
Ivory
Castle Limited (8)
|
|
|
875,243
|
|
|
|
9.0
|
%
|
*
|
Less
than one percent.
|
|
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals is 12-1 Dubon Court, Farmingdale, NY 11735.
|
|
|
(2)
|
Mr.
Roberts’ business address is Roberts, Raheb & Gradler, LLC, 1200 New Hampshire Avenue N.W., Suite 300, Washington,
D.C. 20036.
|
|
|
(3)
|
Mr.
Hanson’s business address is 94 Draycott Ave, London SW3 3AD, United Kingdom.
|
|
|
(4)
|
Includes
25,000 shares subject to warrants that are currently exercisable.
|
|
|
(5)
|
Includes
263,102 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not
include 151,958 shares subject to stock options that will not become exercisable within 60 days.
|
|
|
(6)
|
Includes
(i) 6,250 shares subject to warrants that are currently exercisable, and (ii) 136,107 shares subject to stock options that
are currently exercisable or will become exercisable within 60 days. Does not include 89,440 shares subject to stock options
that will not become exercisable within 60 days.
|
|
|
(7)
|
Mr.
Watson resigned from his positions as an officer and director of Cullen in November 2013. Represents shares of common stock
held by Cullen Holdings, an entity controlled by Mr. Watson. Mr. Watson’s business address is Level 9, 68 Shorthand
Street, P.O. Box 91296, Auckland, New Zealand. Includes 185,000 shares subject to warrants that are currently exercisable.
|
|
|
(8)
|
John
Matthew Ashwood and Michael Raymond Shue have voting and dispositive control over the shares of common stock held by Ivory
Castle Limited. Ivory Castle Limited’s business address is c/o Suite 5501, 55th Floor, Central Plaza, 18 Harbour Road,
Wanchai, Hong Kong. Includes 22,500 shares subject to warrants that are currently exercisable.
|
UNDERWRITING
Under
the terms and subject to the conditions of an underwriting agreement dated the date of this prospectus, the underwriters named
below, for whom Maxim Group LLC is acting as the Representative and sole book-running manager have severally agreed to purchase,
and we have agreed to sell to them, the number of units indicated below:
Name
|
|
Number
of common stock and
Class A Warrants
|
Maxim
Group LLC
|
|
[●]
|
Total
|
|
[●]
|
The
underwriters are offering the common stock and Class A Warrants subject to their acceptance of the common stock and Class A Warrants
from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay
for and accept delivery of the common stock and Class A Warrants offered by this prospectus are subject to the approval of certain
legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the
common stock and Class A Warrants offered by this prospectus if any such common stock and Class A Warrants are taken. However,
the underwriters are not required to take or pay for the common stock and Class A Warrants covered by the underwriters’
over-allotment option described below.
We
have agreed to pay the underwriters a cash fee equal to eight percent (8%) of the aggregate gross proceeds raised in this offering.
We have also agreed to issue to the Representative a warrant to purchase that number of common stock equal to an aggregate of
five percent (5%) of the common stock sold in the offering. Such Representative’s Warrant will be non-exercisable for 180
days following the effective date of the registration statement of which this prospectus forms a part, shall have an exercise
price equal to $[●] per share, which is 110% of the public offering price, will provide for cashless exercise and shall
terminate five years after the date the warrant is first exercisable, and otherwise have the same terms as the warrants sold in
this offering except that (1) they will not be subject to redemption by the Company and (2) for a period of seven years commencing
six months after the effective date of this offering, they will provide for unlimited “piggyback” registration rights
with respect to the underlying shares, and, (3) for a period of five years after the effective date of this offering, one demand
registration of the sale of the underlying common stock at our expense. Such Representative’s Warrant will be subject to
FINRA Rule 5110(g)(1) in that, except as otherwise permitted by FINRA rules, for a period of 180 days following the effective
date of the registration statement of which this prospectus forms a part, the Representative’s Warrant shall not be (A)
sold, transferred, assigned, pledged, or hypothecated, or (B) the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of the securities by any person except as permitted by FINRA
Rule 5110(g)(2).
We
have granted to the underwriters an option, exercisable for 45 days from the date of this prospectus supplement, to purchase up
to an additional [●] common stock and/or [●] Class A Warrants at the public offering price listed on the cover page
of this prospectus, less underwriting discounts and commissions. The option may be exercised in whole or in part, during the 45
day option period. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made
in connection with the offering contemplated by this prospectus. To the extent the option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase about the same percentage of the additional common stock and Class
A Warrants as the number listed next to the underwriter’s name in the preceding table bears to the total number of common
stock and Class A Warrants listed next to the names of all underwriters in the preceding table.
The
Representative has advised us that it proposes to offer the common stock and Class A Warrants to the public at the public offering
price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $
per share. The underwriters may allow, and certain dealers may re-allow, a discount from the concession not in excess of $
per share to certain brokers and dealers. After this offering, the public offering price, concession and reallowance to dealers
may be reduced by the Representative. No such reduction shall change the amount of proceeds to be received by us as set forth
on the cover page of this prospectus. The securities are offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that
they do not intend to confirm sales to any accounts over which they exercise discretionary authority.
The
following table shows the price per share of common stock and Class A warrant and total public offering price, underwriting discounts
and commissions, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the
underwriters’ option to purchase up to an additional [●] shares of common stock and [●] Class A Warrants.
|
|
Total
|
|
|
|
|
Per
Share and
Class A
Warrant
|
|
|
|
No
Exercise
|
|
|
|
Full
Exercise
|
|
Public
offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting
discounts and commissions to be paid by us:
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds,
before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The
estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $[●].
We have also agreed to pay the Representative accountable expenses, including legal fees for Representative’s legal counsel,
at the closing of the offering in an aggregate amount of up to $90,000.
Our
common stock trade on the Nasdaq Capital Market under the symbol “LTEA.” We have applied to list the Class A warrants
offered hereby on the Nasdaq Capital Market under the symbol “LTEAW.”
Subject
to certain exceptions, we, all of our executive officers and directors, and certain affiliates have entered into lock-up agreements
with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of the
Representative to offer, sell, contract to sell or otherwise dispose of or hedge common stock or securities convertible into or
exchangeable for common stock. These restrictions will be in effect for a period of six months after the date of the closing of
this offering.
The
Representative has no present intention to waive or shorten the lock-up period; however, the terms of the lock-up agreements may
be waived at its discretion. In determining whether to waive the terms of the lockup agreements, the Representative may base its
decision on its assessment of the relative strengths of the securities markets and companies similar to ours in general, and the
trading pattern of, and demand for, our securities in general.
In
addition, during the lock-up period, we will not be permitted, subject to certain exceptions, to file any registration statement
relating to, and each of our executive officers, directors and the aforementioned shareholders have agreed not to make any demand
for, or exercise any right relating to, the registration of any common stock or any securities convertible into or exercisable
or exchangeable for common stock, without the prior written consent of the Representative.
Upon
the declaration of effectiveness of the registration statement of which this prospectus is a part, we will enter into an underwriting
agreement with the Representative. The terms of the underwriting agreement provide that the obligations of the underwriters are
subject to certain conditions precedent, including the absence of any material adverse change in our business and the receipt
of certain certificates, opinions and letters from us, our counsel and our auditors.
In
order to facilitate the offering of the common stock and Class A warrants, the underwriters may engage in transactions that stabilize,
maintain or otherwise affect the price of our common stock and Class A Warrants. Specifically, the underwriters may sell more
common stock and Class A Warrants than they are obligated to purchase under the underwriting agreement, creating a short position.
A short sale is covered if the short position is no greater than the number of common stock and Class A Warrants available for
purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising
the over-allotment option or purchasing common stock or Class A Warrants in the open market. In determining the source of common
stock or Class A Warrants to close out a covered short sale, the underwriters will consider, among other things, the open market
price of common stock and Class A Warrants compared to the price available under the over-allotment option. The underwriters may
also sell common stock or Class A Warrants in excess of the over-allotment option, creating a naked short position. The underwriters
must close out any naked short position by purchasing common stock or Class A Warrants in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common
stock or Class A Warrants in the open market after pricing that could adversely affect investors who purchase in this offering.
As an additional means of facilitating this offering, the underwriters may bid for, and purchase, common stock or Class A Warrants
in the open market to stabilize the price of our common stock or Class A Warrants. These activities may raise or maintain the
market price of our common stock or Class A Warrants above independent market levels or prevent or retard a decline in the market
price of our common stock or Class A Warrants. The underwriters are not required to engage in these activities and may end any
of these activities at any time.
The
underwriting agreement provides for indemnification between the underwriters and us against specified liabilities, including liabilities
under the Securities Act, and for contribution by us and the underwriters to payments that may be required to be made with respect
to those liabilities. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification liabilities
under the Securities Act is against public policy as expressed in the Securities Act, and is therefore, unenforceable.
We
have granted the underwriter a right of first refusal to act as sole book runner and lead manager for any and all future public
and private equity, convertible or debt offerings of our securities for a period of nine months from the closing of this offering.
A
prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members,
if any, participating in this offering. The Representative may agree to allocate a number of common stock and Class A Warrants
to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the Representative
to underwriters that may make Internet distributions on the same basis as other allocations.
Certain
of the underwriters and their affiliates from time to time have performed investment banking, commercial banking and advisory
services to us, for which they have received customary fees and expenses. The underwriters and their affiliates may from time
to time perform investment banking and advisory services for us and our affiliates in the ordinary course of business for which
they may in the future receive customary fees and expenses.
Selling
Restrictions
Foreign
Regulatory Restrictions on Purchase of Shares Generally
No
action may be taken in any jurisdiction other than the United States that would permit a public offering of the common stock and
Class A Warrants or the possession, circulation or distribution of this prospectus in any jurisdiction where action for that purpose
is required. Accordingly, the common stock and Class A Warrants may not be offered or sold, directly or indirectly, and neither
the prospectus nor any other offering material or advertisements in connection with the common stock and Class A Warrants may
be distributed or published in or from any country or jurisdiction except under circumstances that will result in compliance with
any applicable rules and regulations of any such country or jurisdiction.
In
addition to the public offering of the common stock and Class A Warrants in the United States, the underwriters may, subject to
the applicable foreign laws, also offer the common stock and Class A Warrants to certain institutions or accredited persons in
certain countries.
European
Economic Area
In
relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant
Member State”) an offer to the public of any common stock or Class A Warrants may not be made in that Relevant Member State,
except that an offer to the public in that Relevant Member State of any common stock or Class A Warrants may be made at any time
under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
|
(a)
|
to
any legal entity which is a qualified investor as defined in the Prospectus Directive;
|
|
|
|
|
(b)
|
to
fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive,
150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under
the Prospectus Directive, subject to obtaining the prior consent of the representative for any such offer; or
|
|
|
|
|
(c)
|
in
any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of common stock
or Class A Warrants shall result in a requirement for the publication by us or any underwriter of a prospectus pursuant to
Article 3 of the Prospectus Directive.
|
For
the purposes of this provision, the expression an “offer to the public” in relation to any common stock or Class A
Warrants in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms
of the offer and any common stock or Class A Warrants to be offered so as to enable an investor to decide to purchase any common
stock or Class A Warrants, as the same may be varied in that Member State by any measure implementing the Prospectus Directive
in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including
the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing
measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
United
Kingdom
Each
underwriter has represented and agreed that:
|
(a)
|
it
has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with
the issue or sale of the common stock or Class A Warrants in circumstances in which Section 21(1) of the FSMA does not apply
to us; and
|
|
|
|
|
(b)
|
it
has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to
the common stock in, from or otherwise involving the United Kingdom.
|
Canada
This
prospectus constitutes an “exempt offering document” as defined in and for the purposes of applicable Canadian securities
laws. No prospectus has been filed with any securities commission or similar regulatory authority in Canada in connection with
the offer and sale of the shares. No securities commission or similar regulatory authority in Canada has reviewed or in any way
passed upon this prospectus or on the merits of the shares and any representation to the contrary is an offence.
Canadian
investors are advised that this prospectus has been prepared in reliance on section 3A.3 of National Instrument 33-105
Underwriting
Conflicts
(“NI 33-105”). Pursuant to section 3A.3 of NI 33-105, this prospectus is exempt from the requirement
that the Company and the underwriter(s) provide Canadian investors with certain conflicts of interest disclosure pertaining to
“connected issuer” and/or “related issuer” relationships that may exist between the Company and the underwriter(s)
as would otherwise be required pursuant to subsection 2.1(1) of NI 33-105.
Resale
Restrictions
The
offer and sale of the shares in Canada is being made on a private placement basis only and is exempt from the requirement that
the Company prepares and files a prospectus under applicable Canadian securities laws. Any resale of shares acquired by a Canadian
investor in this offering must be made in accordance with applicable Canadian securities laws, which may vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance with Canadian prospectus requirements, pursuant
to a statutory exemption from the prospectus requirements, in a transaction exempt from the prospectus requirements or otherwise
under a discretionary exemption from the prospectus requirements granted by the applicable local Canadian securities regulatory
authority. These resale restrictions may under certain circumstances apply to resales of the shares outside of Canada.
Representations
of Purchasers
Each
Canadian investor who purchases shares will be deemed to have represented to the Company, the underwriters and to each dealer
from whom a purchase confirmation is received, as applicable, that the investor is (i) purchasing as principal, or is deemed to
be purchasing as principal in accordance with applicable Canadian securities laws, for investment only and not with a view to
resale or redistribution; (ii) an “accredited investor” as such term is defined in section 1.1 of National Instrument
45-106
Prospectus Exemptions
or, in Ontario, as such term is defined in section 73.3(1) of the
Securities Act
(Ontario);
and (iii) is a “permitted client” as such term is defined in section 1.1 of National Instrument 31-103
Registration
Requirements, Exemptions and Ongoing Registrant Obligations
.
Taxation
and Eligibility for Investment
Any
discussion of taxation and related matters contained in this prospectus does not purport to be a comprehensive description of
all of the tax considerations that may be relevant to a Canadian investor when deciding to purchase the shares and, in particular,
does not address any Canadian tax considerations. No representation or warranty is hereby made as to the tax consequences to a
resident, or deemed resident, of Canada of an investment in the shares or with respect to the eligibility of the shares for investment
by such investor under relevant Canadian federal and provincial legislation and regulations.
Rights
of Action for Damages or Rescission
Securities
legislation in certain of the Canadian jurisdictions provides certain purchasers of securities pursuant to an offering memorandum
(such as this prospectus), including where the distribution involves an “eligible foreign security” as such term is
defined in Ontario Securities Commission Rule 45-501
Ontario Prospectus and Registration Exemptions
and in Multilateral
Instrument 45-107
Listing Representation and Statutory Rights of Action Disclosure Exemptions
, as applicable, with a remedy
for damages or rescission, or both, in addition to any other rights they may have at law, where the offering memorandum, or other
offering document that constitutes an offering memorandum, and any amendment thereto, contains a “misrepresentation”
as defined under applicable Canadian securities laws. These remedies, or notice with respect to these remedies, must be exercised
or delivered, as the case may be, by the purchaser within the time limits prescribed under, and are subject to limitations and
defences under, applicable Canadian securities legislation. In addition, these remedies are in addition to and without derogation
from any other right or remedy available at law to the investor.
Language
of Documents
Upon
receipt of this document, each Canadian investor hereby confirms that it has expressly requested that all documents evidencing
or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation
or any notice) be drawn up in the English language only.
Par la réception de ce document, chaque investisseur canadien
confirme par les présentes qu’il a expressément exigé que tous les documents faisant foi ou se rapportant
de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant,
pour plus de certitude, toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.
LEGAL
MATTERS
Graubard
Miller, New York, New York, is acting as our counsel in connection with the registration of our securities under the Securities
Act, and as such, will pass upon the validity of the securities offered in this offering. The underwriters are being represented
by Pryor Cashman LLP, New York, New York.
EXPERTS
The
consolidated financial statements of Long Island Iced Tea Corp. as of and for the years ended December 31, 2016 and 2015, included
in this registration statement of which this Prospectus forms a part, have been audited by Marcum LLP, an independent registered
public accounting firm, as set forth in their report, thereon, appearing elsewhere in this prospectus, and are included in reliance
on such report given on the authority of such firm as experts in auditing and accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We
file annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available
to the public over the Internet at the SEC’s web site at http://www.sec.gov. You may also read and copy any document we
file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC
at 1-800-SEC-0330 for further information about the public reference room.
We
have filed with the SEC a registration statement under the Securities Act relating to the offering of these securities. The registration
statement, including the attached exhibits, contains additional relevant information about us and the securities. This prospectus
does not contain all of the information set forth in the registration statement. You can obtain a copy of the registration statement,
at prescribed rates, from the SEC at the address listed above.
INDEX
TO FINANCIAL STATEMENTS
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
Index
to Financial Statements
|
Page
No.
|
|
|
Long
Island Iced Tea Corp. and Subsidiaries for the Three and Nine Months Ended September 30, 2017 (Unaudited)
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
|
F-1
|
Condensed
Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016
|
F-2
|
Condensed
Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2017
|
F-3
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
|
F-4
|
Notes
to Condensed Consolidated Financial Statements
|
F-5
|
|
|
Long
Island Iced Tea Corp. and Subsidiaries for the Years Ended December 31, 2016 and 2015
|
|
Report
of Independent Registered Public Accounting Firm
|
F-31
|
Consolidated
Balance Sheets as of December 31, 2016 and 2015
|
F-32
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016 and 2015
|
F-33
|
Consolidated
Statement of Changes in Shareholders’ Equity for the Years Ended December 31, 2016 and 2015
|
F-34
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016 and 2015
|
F-35
|
Notes
to Consolidated Financial Statements
|
F-36
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
ASSETS
|
|
|
(unaudited)
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
429,673
|
|
|
$
|
1,249,550
|
|
Accounts
receivable, net
|
|
|
1,556,801
|
|
|
|
1,627,058
|
|
Inventories,
net
|
|
|
1,697,251
|
|
|
|
1,187,941
|
|
Restricted
cash
|
|
|
-
|
|
|
|
103,603
|
|
Short
term investments
|
|
|
-
|
|
|
|
2,389,521
|
|
Prepaid
expenses and other current assets
|
|
|
263,820
|
|
|
|
91,072
|
|
Total
current assets
|
|
|
3,947,545
|
|
|
|
6,648,745
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
148,425
|
|
|
|
218,036
|
|
Intangible
assets
|
|
|
170,000
|
|
|
|
22,500
|
|
Other
assets
|
|
|
56,635
|
|
|
|
52,470
|
|
Deferred
financing costs
|
|
|
507,794
|
|
|
|
842,533
|
|
Total
assets
|
|
$
|
4,830,399
|
|
|
$
|
7,784,284
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,047,727
|
|
|
$
|
886,316
|
|
Accrued
expenses
|
|
|
1,380,097
|
|
|
|
911,843
|
|
UBS
Credit Line
|
|
|
-
|
|
|
|
1,280,275
|
|
Current
portion of automobile loans
|
|
|
8,640
|
|
|
|
11,446
|
|
Current
portion of equipment loan
|
|
|
47,910
|
|
|
|
39,979
|
|
Other
current liabilities
|
|
|
110,576
|
|
|
|
-
|
|
Total
current liabilities
|
|
|
3,594,950
|
|
|
|
3,129,859
|
|
|
|
|
|
|
|
|
|
|
Subscription
payable
|
|
|
563,750
|
|
|
|
-
|
|
Other
liabilities
|
|
|
30,000
|
|
|
|
30,000
|
|
Deferred
rent
|
|
|
4,695
|
|
|
|
1,807
|
|
Long
term portion of automobile loans
|
|
|
11,066
|
|
|
|
17,580
|
|
Long
term portion of equipment loan
|
|
|
3,787
|
|
|
|
36,495
|
|
Total
liabilities
|
|
|
4,208,248
|
|
|
|
3,215,741
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies, Note 8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, par value $0.0001; authorized 35,000,000 shares; 9,148,107 and 7,715,306 shares issued and outstanding, as of September
30, 2017 and December 31, 2016, respectively
|
|
|
915
|
|
|
|
772
|
|
Additional
paid-in capital
|
|
|
25,191,297
|
|
|
|
17,575,583
|
|
Accumulated
deficit
|
|
|
(24,570,061
|
)
|
|
|
(12,977,566
|
)
|
Accumulated
other comprehensive loss
|
|
|
-
|
|
|
|
(30,246
|
)
|
Total
stockholders’ equity
|
|
|
622,151
|
|
|
|
4,568,543
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
4,830,399
|
|
|
$
|
7,784,284
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,554,895
|
|
|
$
|
1,301,125
|
|
|
$
|
3,901,145
|
|
|
$
|
3,412,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
1,486,265
|
|
|
|
1,196,790
|
|
|
|
3,663,404
|
|
|
|
3,253,278
|
|
Gross
profit
|
|
|
68,630
|
|
|
|
104,335
|
|
|
|
237,741
|
|
|
|
159,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,543,786
|
|
|
|
2,170,522
|
|
|
|
5,169,174
|
|
|
|
3,957,763
|
|
Selling
and marketing expenses
|
|
|
2,323,472
|
|
|
|
661,247
|
|
|
|
6,308,503
|
|
|
|
2,031,873
|
|
Total
operating expenses
|
|
|
3,867,258
|
|
|
|
2,831,769
|
|
|
|
11,477,677
|
|
|
|
5,989,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(3,798,628
|
)
|
|
|
(2,727,434
|
)
|
|
|
(11,239,936
|
)
|
|
|
(5,829,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
-
|
|
|
|
4,070
|
|
|
|
(38,986
|
)
|
|
|
4,070
|
|
Interest
expense, net
|
|
|
(114,150
|
)
|
|
|
(579,710
|
)
|
|
|
(313,573
|
)
|
|
|
(976,427
|
)
|
Loss
on inducement
|
|
|
-
|
|
|
|
(1,587,954
|
)
|
|
|
-
|
|
|
|
(1,587,954
|
)
|
Total
other expenses
|
|
|
(114,150
|
)
|
|
|
(2,163,594
|
)
|
|
|
(352,559
|
)
|
|
|
(2,560,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,912,778
|
)
|
|
$
|
(4,891,028
|
)
|
|
$
|
(11,592,495
|
)
|
|
$
|
(8,390,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on investments
|
|
|
-
|
|
|
|
-
|
|
|
|
30,246
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(3,912,778
|
)
|
|
$
|
(4,891,028
|
)
|
|
$
|
(11,562,249
|
)
|
|
$
|
(8,390,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
9,076,959
|
|
|
|
6,514,295
|
|
|
|
8,529,399
|
|
|
|
5,407,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.43
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(1.36
|
)
|
|
$
|
(1.55
|
)
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(unaudited)
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2017
|
|
|
7,715,306
|
|
|
$
|
772
|
|
|
$
|
17,575,583
|
|
|
$
|
(12,977,566
|
)
|
|
$
|
(30,246
|
)
|
|
$
|
4,568,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in connection with the January public offering, net of costs
|
|
|
376,340
|
|
|
|
38
|
|
|
|
1,429,702
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,429,740
|
|
Issuance
of common stock in connection with the June public offering, net of costs
|
|
|
256,848
|
|
|
|
25
|
|
|
|
1,259,390
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,259,415
|
|
Issuance
of common stock in connection with the July public offering, net of costs
|
|
|
462,160
|
|
|
|
46
|
|
|
|
2,134,441
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,134,487
|
|
Issuance
of common stock to the Advisory Board and the Board of Directors
|
|
|
46,965
|
|
|
|
5
|
|
|
|
192,645
|
|
|
|
-
|
|
|
|
-
|
|
|
|
192,650
|
|
Issuance
of common stock to consultants and vendors
|
|
|
270,488
|
|
|
|
27
|
|
|
|
1,023,392
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,023,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation - issuance of common stock to an executive officer
|
|
|
20,000
|
|
|
|
2
|
|
|
|
81,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
81,800
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,238,712
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,238,712
|
|
Issuance
of Big Geyser warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
255,634
|
|
|
|
-
|
|
|
|
-
|
|
|
|
255,634
|
|
Change
in unrealized loss on investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,246
|
|
|
|
30,246
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,592,495
|
)
|
|
|
-
|
|
|
|
(11,592,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2017
|
|
|
9,148,107
|
|
|
$
|
915
|
|
|
$
|
25,191,297
|
|
|
$
|
(24,570,061
|
)
|
|
$
|
-
|
|
|
$
|
622,151
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,592,495
|
)
|
|
$
|
(8,390,264
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
551,626
|
|
|
|
35,234
|
|
Depreciation
and amortization expense
|
|
|
111,528
|
|
|
|
120,871
|
|
Deferred
rent
|
|
|
2,888
|
|
|
|
(1,938
|
)
|
Loss
on sale of securities
|
|
|
37,882
|
|
|
|
-
|
|
Severance
expense charged against accounts receivable
|
|
|
50,000
|
|
|
|
-
|
|
Warrants
issued to distributor
|
|
|
255,634
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
1,320,512
|
|
|
|
1,010,820
|
|
Loss
on disposal of property and equipment
|
|
|
-
|
|
|
|
515
|
|
Amortization
of deferred financing costs
|
|
|
334,739
|
|
|
|
883,969
|
|
Paid-in-kind
interest
|
|
|
-
|
|
|
|
77,805
|
|
Inducement
expense
|
|
|
-
|
|
|
|
1,587,954
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(730,956
|
)
|
|
|
(1,141,804
|
)
|
Inventory
|
|
|
(459,723
|
)
|
|
|
(265,601
|
)
|
Prepaid
expenses and other current assets
|
|
|
(40,688
|
)
|
|
|
(39,417
|
)
|
Other
assets
|
|
|
(4,165
|
)
|
|
|
11,805
|
|
Accounts
payable
|
|
|
1,847,072
|
|
|
|
430,620
|
|
Accrued
expenses
|
|
|
941,754
|
|
|
|
986,023
|
|
Other
current liabilities
|
|
|
(29,574
|
)
|
|
|
-
|
|
Total
adjustments
|
|
|
4,188,529
|
|
|
|
3,696,856
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(7,403,966
|
)
|
|
|
(4,693,408
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Proceeds
from held-to-maturity investments
|
|
|
2,408,632
|
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(39,419
|
)
|
|
|
(9,497
|
)
|
Release
of restricted cash
|
|
|
103,603
|
|
|
|
127,580
|
|
Purchase
of short term investments
|
|
|
(26,747
|
)
|
|
|
(2,507,302
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
2,446,069
|
|
|
|
(2,389,219
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Repayment
of automobile loans
|
|
|
(9,320
|
)
|
|
|
(22,977
|
)
|
Repayment
of equipment loans
|
|
|
(24,777
|
)
|
|
|
(27,232
|
)
|
Repayment
of line of credit
|
|
|
(1,280,275
|
)
|
|
|
-
|
|
Proceeds
from line of credit
|
|
|
-
|
|
|
|
500,000
|
|
Proceeds
from the January public offering, net of costs
|
|
|
1,429,740
|
|
|
|
-
|
|
Proceeds
from the June public offering, net of costs
|
|
|
1,259,415
|
|
|
|
-
|
|
Proceeds
from the July public offering, net of costs
|
|
|
2,134,487
|
|
|
|
-
|
|
Advances
from a related party
|
|
|
65,000
|
|
|
|
-
|
|
Proceeds
from subscription payable
|
|
|
563,750
|
|
|
|
-
|
|
Proceeds
from the Public Offering, net of costs
|
|
|
-
|
|
|
|
5,867,217
|
|
Proceeds
from disgorgement of short swing profit
|
|
|
-
|
|
|
|
56,250
|
|
Proceeds
from the sale of common stock and warrants, net of costs
|
|
|
-
|
|
|
|
861,790
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
4,138,020
|
|
|
|
7,235,048
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash
|
|
|
(819,877
|
)
|
|
|
152,421
|
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
1,249,550
|
|
|
|
207,192
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
429,673
|
|
|
$
|
359,613
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
6,006
|
|
|
$
|
19,898
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance
of common stock to consultants, vendors and customers
|
|
$
|
1,023,419
|
|
|
$
|
205,700
|
|
Issuance
of insurance obligation in other current liabilities
|
|
$
|
75,150
|
|
|
$
|
-
|
|
Issuance
of common stock in exchange for Brentwood line of credit and related warrants
|
|
$
|
-
|
|
|
$
|
1,669,376
|
|
Purchase
of IP applied against outstanding accounts receivable
|
|
$
|
150,000
|
|
|
$
|
-
|
|
Finished
goods inventory received and applied against outstanding accounts receivable
|
|
$
|
49,587
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN
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”) beverages. 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 beverages 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.
The
Company produces a 100% brewed iced 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,
half tea and half lemonade. The Company also offers lower calorie iced tea in flavor options that 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,
half and half lemonade, sweet tea, mango and unsweetened.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
Overview,
continued
During
April 2017, the Company expanded its brand to include lemonade. Lemonade is offered in nine flavors including traditional, lime,
pink lemonade, kiwi & strawberry, cherry, peach, watermelon, wild berries and strawberry and is offered at retail in 18oz.
bottles.
The
Company also distributes an aloe vera derived juice beverage (“ALO Juice”) in 500ml and 1.5 liter bottles. ALO Juice
is offered in six flavors including original, pomegranate, mango, raspberry, pineapple and coconut. See below regarding the ALO
Juice business. In addition, in order to service certain vending contracts, the Company sells snacks and other beverage products
on a limited basis.
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, Rhode Island and parts of the Midwest. As of September 30, 2017, the Company’s products are available in
20 states and in the Caribbean, Canada and Latin America.
The
ALO Juice Business
Asset
Purchase Agreement
On
December 8, 2016, the Company entered into an asset purchase agreement with The Wilnah International, LLC (“Wilnah”).
Julio X. Ponce (“Mr. Ponce”) is the majority interest member of Wilnah. Pursuant to the agreement, the Company intended
to acquire the intellectual property (“IP”) (trade names, formulas, recipes) for ALO Juice. During September 2017,
the Company determined that it would license, rather than purchase the ALO Juice IP. Accordingly, on September 18, 2017, the Company
terminated the asset purchase agreement with Wilnah.
Seba
Personal Guarantees
Mr.
Ponce is the former majority owner of Seba Distribution LLC (“Seba”). In order to provide credit enhancement to Seba’s
obligations to the Company, Seba issued notes payable to the Company which were personally guaranteed by Mr. Ponce. On March 14,
2017, Seba issued to the Company a note payable in the amount of $467,444, which Mr. Ponce, individually, has fully guaranteed
(“March 2017 Note and Guarantee”) in support of certain obligations of Seba that are owed to the Company. On September
18, 2017, Seba issued to the Company a note payable in the amount of $403,216, which Mr. Ponce, individually, has fully guaranteed,
and for which Julio Ponce Sr. (the father of Mr. Ponce) has guaranteed certain receivables up to $300,000 in the aggregate (“September
2017 Note and Guarantee”) in support of certain additional obligations of Seba that are owed to the Company.
Licensing
Agreement – ALO Juice
On
September 18, 2017, the Company entered into an exclusive perpetual licensing agreement (“Licensing Agreement”) with
Wilnah granting the Company the worldwide rights to produce, distribute and sell the ALO Juice brand. As compensation to Wilnah
for these rights, the Company paid an initial fee of $150,000, which was applied against the Seba accounts receivable upon the
closing and has agreed to pay to Wilnah a 7.0% royalty on the Company’s gross sales of ALO Juice sales delivered to the
Company’s customers after the closing of this agreement.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
The
ALO Juice Business, continued
Employment
Agreement
Effective
January 1, 2017, the Company had entered into an employment agreement with Mr. Ponce, to expand the Company’s sales of Long
Island branded products and ALO Juice products within the Southeast U.S. and Latin American regions. On September 1, 2017, the
Company terminated the employment agreement of Mr. Ponce.
On
September 1, 2017, the Company entered into a separation agreement (the “Separation Agreement”) with Mr. Ponce. Mr.
Ponce received as compensation under the Separation Agreement a lump sum payment of $50,000, which was applied against the Seba
accounts receivable.
Sales
Broker Agreement
Effective
September 1, 2017, the Company entered into a broker arrangement (“Broker Arrangement”) with Mr. Ponce, whereby Mr.
Ponce will be paid a commission of 2.5% on net collected revenues from the sale of the Company’s products (excluding ALO
Juice) into certain distributor and retail relationships introduced by Mr. Ponce.
Seba’s
Obligations to the Company
From
September 18, 2017, all payments which the Company would make to Seba, Mr. Ponce, or Wilnah, pursuant to the Licensing Agreement,
Separation Agreement or Broker Arrangement are to be applied first to outstanding receivables owed to the Company by Seba and
then paid in cash only after such receivables have been paid in full.
Liquidity
and Going Concern
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 September 30, 2017, the Company had cash of $429,673. As of September 30, 2017, the Company had working capital of $352,595.
The Company incurred net losses of $3,912,778 and $11,592,495 for the three and nine months ended September 30, 2017, respectively.
As of September 30, 2017, the Company’s stockholders’ equity was $622,151.
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.
On
June 14, 2017, the Company sold 256,848 shares of the Company’s common stock in a public offering at an average price of
$5.06 per share. Of the shares sold, 231,850 were sold to the public at an offering price of $5.00 while the remaining 24,998
shares were sold to officers and directors of the Company at a price of $5.60 per share. The sale of common stock generated gross
proceeds of $1,299,250 and net proceeds of $1,259,415 after deducting commissions and other offering expenses.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
Liquidity
and Going Concern, continued
On
July 6, 2017, the Company sold 448,160 shares of the Company’s common stock in a public offering at a price of $5.00 per
share. Of the shares sold, 200,000 were sold to lead investors who, as a result of purchasing more than $500,000 in shares, each
received (i) an additional number of shares of common stock equal to 7% of the total number of shares of common stock purchased
by such lead investors in this offering (or an aggregate of 14,000 shares) and (ii) three-year warrants up to that number of shares
of common stock equal to 20% of the total number of shares purchased by such lead investors in this offering (or warrants to purchase
an aggregate of 40,000 shares). These warrants have an exercise price of $5.50 and were fully vested upon issuance. The sale of
common stock generated gross proceeds of $2,240,800 and net proceeds of $2,134,487 after deducting commissions and other offering
expenses.
On
October 4, 2017, the Company sold 607,500 shares of the Company’s common stock in a public offering at a price of $2.05
per share. The Company received gross proceeds of $1,245,375 and estimated net proceeds of $1,235,375 after deducting other offering
expenses. Each investor in the offering also received a warrant to purchase 50% of the number of shares for which such investor
subscribed in the offering (or a total aggregate number of shares underlying such warrants equal to 303,750 shares). The warrants
have an exercise price of $2.40 per share, subject to adjustment, and expire one year from the closing of the offering. Prior
to October 1, 2017, the Company received $563,750 from this offering and accordingly, as at September 30, 2017, $563,750 is included
in subscriptions payable within the condensed consolidated balance sheets.
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).
Historically,
the Company has financed its operations through the raising of equity capital and through trade credit with its vendors. The Company’s
ability to continue its operations and to pay its obligations when they become due is contingent upon the Company obtaining additional
financing. Management’s plans include raising additional funds through equity offerings, debt financings, or other means.
The
Company believes that it will be able to raise sufficient additional capital to finance the Company’s planned operating
activities. There are no assurances that the Company will be able to raise such capital on terms acceptable to the Company or
at all. If the Company is unable to obtain sufficient amounts of additional capital, it may be required to reduce the scope of
its planned market development activities, and/or consider reductions in personnel costs or other operating costs. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. These condensed consolidated financial
statements do not include any adjustments that might result from the outcome of these uncertainties.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and nine months ended September 30, 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 31, 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.
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, the recognition of revenue, 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 including Sign On 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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer
Marketing Programs, including Sign On and Sales Incentives
The
Company participates in various programs and arrangements with customers designed to incent new distribution, incent the introduction
of a new product line, or to increase the sale of its products. Among these programs are arrangements under which allowances can
be earned by customers for introducing a product (sign on incentives, for example), 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. Depending upon the program, those incentives are paid in either
cash or the issuance of equity instruments. During the three months ended September 30, 2017 and 2016, these allowances resulted
in reductions in net sales of $195,153 and $0, respectively. During the nine months ended September 30, 2017 and 2016, these allowances
resulted in reductions in net sales of $596,335 and $45,165, respectively. Included in these amounts for the three and nine months
ended September 30, 2017 are (income) costs of ($1,388) and $255,634, respectively, representing the non-cash costs of a sign-on
incentive, presented net of mark-to-market adjustments for unvested awards related to warrants issued in connection with the signing
of a distribution agreement and the first order with Big Geyser Inc. (“Big Geyser”) (See Notes 7 and 8).
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 $184,423 and
$117,998, for the three months ended September 30, 2017 and 2016, respectively and $381,151 and $319,668 for the nine months ended
September 30, 2017 and 2016, respectively.
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 $196,758 and $84,433 for the three months ended September 30, 2017 and 2016,
respectively, and $513,522 and $114,980, for the nine months ended September 30, 2017 and 2016, respectively.
Research
and Development
Costs
related to new product initiatives incurred were included in selling and marketing expenses within the condensed consolidated
statements of operations and totaled $30,375 and $24,464 for the three months ended September 30, 2017 and 2016, respectively,
and $335,101 and $143,651 for the nine months ended September 30, 2017 and 2016, respectively. Other research and development
costs were included in general and administrative expenses within the condensed consolidated statements of operations and totaled
$0 and $0 for the three months ended September 30, 2017 and 2016, respectively and $829 and $46,667 for the nine months ended
September 30, 2017 and 2016, respectively. The other research and development expenses incurred during the three and nine months
ended September 30, 2016 were incurred pursuant to an alcohol beverage 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 September 30, 2017, $50,000 was
included in accrued expenses in the condensed consolidated balance sheet related to the 2016 arrangement.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term
Investments
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
September 30, 2017 and 2016, the unrealized gain was $0 and $0, respectively, and during the nine months ended September 30, 2017
and 2016, the unrealized gain was $30,246 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, which were fully liquidated during the nine months ended September
30, 2017:
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
U.S.
government securities
|
|
$
|
-
|
|
|
$
|
195,374
|
|
Fixed
income mutual funds
|
|
|
-
|
|
|
|
2,194,147
|
|
|
|
$
|
-
|
|
|
$
|
2,389,521
|
|
|
|
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
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Within
one year
|
|
$
|
-
|
|
|
$
|
94,967
|
|
Within
one to five years
|
|
|
-
|
|
|
|
100,407
|
|
|
|
$
|
-
|
|
|
$
|
195,374
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Accounts
receivable, net, is as follows:
|
|
As
of
|
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Accounts
receivable, gross
|
|
$
|
2,232,968
|
|
|
$
|
1,859,474
|
|
Allowance
for doubtful accounts
|
|
|
(676,167
|
)
|
|
|
(232,416
|
)
|
Accounts
receivable, net
|
|
$
|
1,556,801
|
|
|
$
|
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 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 one
bank. The Company is exposed to credit risk with regard to two customers who accounted for 19% and 17%, or 36% in the aggregate,
and 46% of the Company’s trade receivables as of September 30, 2017 and December 31, 2016, respectively. The account representing
the 19% is further collateralized by notes receivable from Seba and personal guarantees (See Note 1). Otherwise, the Company does
not generally require collateral or other security to support customer receivables.
The
Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
The
Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory
consists of bottled iced tea, lemonade and ALO Juice. As of September 30, 2017 and December 31, 2016, included in inventory was
finished goods inventory with a cost of approximately $95,000 and $320,000, respectively, which 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 net realizable value. Cost is determined using the first-in, first-out
(FIFO) method. As of September 30, 2017 and December 31, 2016, the Company recorded reserves of $115,125 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
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Finished
goods
|
|
$
|
853,157
|
|
|
$
|
905,642
|
|
Raw
materials and supplies
|
|
|
844,094
|
|
|
|
282,299
|
|
Total
inventories
|
|
$
|
1,697,251
|
|
|
$
|
1,187,941
|
|
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 September 30, 2017 and 2016, depreciation expense was $32,322
and $39,420, respectively. For the nine months ended September 30, 2017 and 2016, depreciation expense was $109,028 and $117,118,
respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 with a net book value of $0 and $2,500 as of September 30, 2017 and December 31, 2016, respectively.
The estimated useful life of the capitalized costs of the Company’s website was 3 years and was depreciated on a straight
line basis. As of September 30, 2017, the cost of the website development was $15,000 and the accumulated amortization was $15,000.
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 September 30, 2017 and 2016, amortization expense was $0 and $1,251, respectively, and $2,500 and $3,753 for
the nine months ended September 30, 2017 and 2016, respectively.
Intangible
assets with indefinite useful lives are tested for impairment when circumstances indicate that there could be an impairment. As
of September 30, 2017, the cost of the ALO Juice IP, which has an indefinite useful life, was $150,000 (See Note 1).
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.
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.
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
Internal
Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers (“NOLs”) when the stock ownership
of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased
on a cumulative basis by more than 50 percentage points. The Company’s preliminary analysis indicated that such shares have
increased by more than 50% since the last Section 382 limitation on May 27, 2015. The Company is currently evaluating the impact
of the new Section 382 limitation.
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:
|
|
As
of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options
to purchase common stock
|
|
|
1,074,155
|
|
|
|
465,411
|
|
Warrants
to purchase common stock
|
|
|
1,130,570
|
|
|
|
470,570
|
|
Total
potentially dilutive securities
|
|
|
2,204,725
|
|
|
|
935,981
|
|
Fair
Value of Financial Instruments
The
carrying amounts of cash, short term investments, accounts receivable, 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.
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.
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
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 September 30, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments at December 31, 2016
|
|
$
|
2,389,521
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Stock-based
Compensation
The
Company accounts for stock options granted to consultants pursuant to the accounting guidance included in ASC 505-50 “Equity-Based
Payments to Non-Employees” (“ASC 505-50”). Stock-based compensation cost is measured at the grant date and at
the end of each reporting period for unvested awards, based on the fair value of the award, and is recognized as expense over
the consultant’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s
stock options granted to consultants are estimated using the Black Scholes option-pricing model with the following assumptions:
expected volatility, dividend rate, risk free interest rate and the expected life.
In
accordance with ASC 505-50, the Company recorded adjustments at the end of each reporting period to reflect the mark-to-market
adjustment of the fair value of unvested awards granted to consultants. In connection with the mark-to-market adjustments at September
30, 2017, the Company utilized the closing price of the Company’s common stock, as quoted on the NASDAQ Stock Market LLC
(“Nasdaq”), as an input to the Black Scholes option-pricing model for the fair value of its common stock.
Recent
Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board (“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 is 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.
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
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 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 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.
In
May 2016, the FASB issued 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.
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
August 2016, the FASB issued 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 ASU 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.
In
May 2017, the FASB issued ASU No. 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the
effects of a modification unless all of the following are met: The fair value of the modified award is the same as the fair value
of the original award immediately before the original award is modified, the vesting conditions of the modified award are the
same as the vesting conditions of the original award immediately before the original award is modified and the classification
of the modified award an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The provisions of this update are effective for annual and interim periods beginning after
December 15, 2017, with early adoption permitted. 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 Going Concern, 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 September 30, 2017 and December 31, 2016, the outstanding balance
on the equipment loan was $51,697 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 June
30, 2017, the interest rate on the UBS Credit Line was 3.732 %. The UBS Credit Line, when drawn, is collateralized by certain
of the Company’s short-term investments. As of September 30, 2017 and December 31, 2016, the outstanding balance on the
line of credit was $0 and $1,280,275, respectively. As of September 30, 2017 and December 31, 2016, the Company’s borrowing
capacity under the UBS Credit line was $0 and $19,725, respectively. As of July 21, 2017, the credit line has been closed.
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 14.4% of the Company as of September 30, 2017. The Credit Agreement, which expires November
23, 2018, 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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 – STOCKHOLDERS’ EQUITY
2017
Issuances
On
January 3, 2017, the Company issued 1,790 shares of the Company’s common stock to a product broker. The shares had a fair
value of $7,500.
On
January 17, 2017, the Company issued 41,965 shares of the Company’s 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.
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 and as a retainer for services to be provided. The shares were valued based upon the value of such services.
The fair value was $213,550. As of September 30, 2017, $36,684 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.
On
April 17, 2017, the Company issued 25,000 shares of the Company’s common stock, valued at $100,751, to an employee of the
Company in consideration for services provided prior to their being employed by the Company.
On
August 25, 2017, the Company issued 5,000 shares of the Company’s common stock to directors of the Company. The shares were
issued in satisfaction of accrued director’s fees and had a fair value of $17,650.
On
August 25, 2017, the Company issued 41,033 shares of the Company’s common stock to consultants of the Company in consideration
of services provided. The fair value of these shares was $151,167.
NOTE
7 – STOCK-BASED COMPENSATION
Long-Term
Equity Incentive Plans
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
April 14, 2017, the Company’s board of directors adopted the 2017 Long-Term Incentive Equity Plan (“2017 Stock Option
Plan”), which was approved by the Company’s stockholders on August 9, 2017. 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
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Options
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, under the 2015 Stock Option Plan. 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, under the 2015
Stock Option Plan. 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.
On
April 17, 2017, the Company issued to various officers, directors, and employees options to purchase an aggregate of 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. The options will expire five years from the date of grant, have an exercise price of $4.50 per share,
and vest in three annual installments beginning on the date of grant. The options have a fair value of $404,600.
On
August 24, 2017, the Company issued an option to purchase 12,000 shares of the Company’s common stock to an employee of
the Company under the 2017 Stock Option Plan. The option will expire five years from the date of grant and have an exercise price
of $3.76. The option vests one-third on the date of grant and one-third in each November 2017 and 2018. The option has a fair
value of $17,693.
On
August 24, 2017, the Company issued an option to purchase 20,000 shares of the Company’s common stock to an employee of
the Company under the 2017 Stock Option Plan. The option will expire five years from the date of grant, have an exercise price
of $3.76 and be fully vested upon issuance. The option has a fair value of $29,488.
On
August 24, 2017, the Company issued to employees of the Company options to purchase an aggregate of 23,500 shares of the Company’s
common stock under the 2017 Stock Option Plan. The options will expire five years from the date of grant, have an exercise price
of $3.76 and vest in three annual installments beginning on the date of grant. The options have a fair value of $34,649.
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 Nine Months Ended
September 30, 2017
|
|
Stock
price
|
|
|
$
3.73 - $5.10
|
|
Exercise
price
|
|
|
$
3.76 - $5.00
|
|
Dividend
yield
|
|
|
0%
|
|
Expected
volatility
|
|
|
57%
- 75%
|
|
Risk-Free
interest rate, per annum
|
|
|
1.05%
– 1.57%
|
|
Expected
life (in years)
|
|
|
0.85
- 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
|
|
|
808,200
|
|
|
|
4.55
|
|
|
|
1.63
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired,
forfeited or cancelled
|
|
|
(159,456
|
)
|
|
|
4.79
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2017
|
|
|
1,074,155
|
|
|
$
|
4.66
|
|
|
$
|
2.50
|
|
|
|
3.3
|
|
|
$
|
-
|
|
Exercisable
at September 30, 2017
|
|
|
699,963
|
|
|
$
|
4.60
|
|
|
$
|
2.79
|
|
|
|
2.7
|
|
|
$
|
-
|
|
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 September 30, 2017, there was a total of $647,084 of unrecognized compensation expense related to unvested stock options. This
cost is expected to be recognized through 2019 over a weighted average period of 0.79 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
On
March 29, 2017, in consideration for a prior commitment for financing the Company through March 31, 2018 from a stockholder, 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 warrant
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.
On
May 12, 2017, in consideration for a prior commitment for financing the Company through May 15, 2018 from a stockholder, 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. The warrant had a grant date
fair value of $22,039, which was fully charged to general and administrative expense during the three months ended June 30, 2017.
The fair value of the warrant was determined utilizing the Black-Scholes option pricing model, based upon a common stock price
of $4.87 per share, dividend yield of 0%, expected volatility of 57%, risk free interest rate of 1.11%, and an expected life in
years of 1.00.
On
April 24, 2017, in connection with a distribution agreement with Big Geyser (the “Big Geyser Distribution Agreement”)
(see Note 8), the Company issued a warrant to purchase 85,000 shares of the Company’s common stock at an exercise price
of $4.50 per share. The warrant vests depending on certain sales levels achieved by that distributor. The warrant has an expiration
date of April 23, 2022. The warrant had a grant date fair value of $226,134. For the three months ended September 30, 2017, the
Company recognized expense of $1,503 and a reduction of the second quarter incentive by $2,891 due to mark-to-market adjustments,
resulting in a net reduction of expense of $1,388, related to this warrant. For the nine months ended September 30, 2017, the
Company recognized expense of $2,896, related to this warrant.
On
April 24, 2017, in connection with the same distribution agreement, the Company issued a second warrant to purchase 95,000 shares
of the Company’s common stock at an exercise price that will be equal to the average of the closing prices of the common
stock for the thirty consecutive trading days ending on April 23, 2018 (or the 30 days preceding the beginning of the measurement
period for this warrant). The warrant vests depending on certain sales levels achieved by that distributor during the period April
24, 2018 through April 23, 2019. The warrant has an expiration date of April 23, 2022. The initial valuation of this warrant will
not occur until the measurement period begins on April 24, 2018.
On
April 24, 2017, in connection with the same distribution agreement, the Company issued a warrant to purchase 145,000 shares of
the Company’s common stock at an exercise price of $4.50 per share. The warrant vests as follows for certain milestones
being achieved: 95,000 shares upon the receipt of the first purchase order of the Company’s iced tea products, 25,000 shares
upon the receipt of the first purchase order of the Company’s lemonade products, and 25,000 shares upon the receipt of the
first purchase order for half-gallon containers of the Company’s products. The warrant has an expiration date of April 23,
2022. The warrant had a grant date fair value of $385,758. For the three and nine months ended September 30, 2017, the Company
recorded expense of $0 and $252,738, respectively, related to this warrant.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Warrants, continued
On
July 6, 2017, in connection with the public offering the Company issued warrants to purchase an aggregate of 40,000 shares of
the Company’s common stock to lead investors (See Note 1).
On
August 16, 2017, in connection with the Big Geyser Distribution Agreement, the Company issued a warrant to purchase 110,000 shares
of the Company’s common stock at an exercise price that will be equal to the average of the closing prices of common stock
for the thirty consecutive trading days ending on April 23, 2019 (or the 30 days preceding the beginning of the measurement period
for this warrant). The warrant vests depending on certain sales levels achieved by that distributor during the period April 24,
2019 through April 23, 2020. The warrant has an expiration date of April 23, 2022. The initial valuation of this warrant will
not occur until the measurement period begins on April 24, 2019.
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
|
|
|
660,000
|
|
|
$
|
4.49
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding
September 30, 2017
|
|
|
1,130,570
|
|
|
$
|
5.23
|
|
|
|
2.5
|
|
Exercisable
at September 30, 2017
|
|
|
790,570
|
|
|
$
|
5.36
|
|
|
|
1.7
|
|
Stock-Based
Compensation Expense
The
following tables summarize total stock-based compensation costs recognized for the three and nine months ended September 30, 2017
and 2016:
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
$
|
279,603
|
|
|
$
|
438,113
|
|
|
$
|
1,044,147
|
|
|
$
|
740,820
|
|
Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
194,565
|
|
|
|
30,000
|
|
Common
Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
81,800
|
|
|
|
240,000
|
|
Total
|
|
$
|
279,603
|
|
|
$
|
438,113
|
|
|
$
|
1,320,512
|
|
|
$
|
1,010,820
|
|
The
total amount of stock-based compensation was reflected within the statements of operations and comprehensive loss as:
|
|
For
the Three Months Ended
September 30,
|
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General
and administrative
|
|
$
|
259,460
|
|
|
$
|
412,439
|
|
|
$
|
966,705
|
|
|
$
|
853,859
|
|
Sales
and marketing
|
|
|
20,143
|
|
|
|
25,674
|
|
|
|
353,807
|
|
|
|
156,961
|
|
Total
|
|
$
|
279,603
|
|
|
$
|
438,113
|
|
|
$
|
1,320,512
|
|
|
$
|
1,010,820
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 the 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.
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. On June 23, 2017, both defendants filed
motions to dismiss based upon delays in producing documents, which were fully submitted. On August 7, 2017, oral arguments were
held. Thereafter, the court denied the motions to dismiss and each of the parties has completed their discovery. On October
6, 2017, the Company filed a Note of Issue and Certificate of Readiness. The case has been certified by the court as ready for
trial. The Company is currently awaiting defendants’ summary judgement motions.
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. Commissions to these brokers ranged from 1-5% of sales. In addition, the
Company sells its products through alternative vending channels. Commissions resulting from sales through these channels were
$19,151 and $(1,174) for the three months ended September 30, 2017 and 2016, respectively, and $50,648 and $54,436 for the nine
months ended September 30, 2017 and 2016, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment
Agreements
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).
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 (See Note 7).
On
September 1, 2017, the Company terminated the employment agreement with Ms. Morris. Pursuant to the employment agreement, Ms.
Morris was entitled to receive severance of two months of her base salary. In lieu of cash, Ms. Morris and the Company agreed
that Ms. Morris would be issued 22,000 shares of the Company’s common stock for accrued severance. As of September 30, 2017,
the Company included $52,149 in accrued expenses within the condensed consolidated balance sheets related to Ms. Morris’s
severance. On September 1, 2017, in connection with her termination, Ms. Morris’s option to purchase 70,000 shares of the
Company’s common stock became fully vested. This option will expire if not exercised by September 1, 2018.
Separation
Agreement
On
July 11, 2017, the Company entered into a separation agreement with Richard Allen, the Company’s Chief Financial Officer.
Pursuant to the separation agreement, Mr. Allen would continue as the Company’s Chief Financial Officer until August 15,
2017. Pursuant to the separation agreement, the Company was obligated to pay Mr. Allen $61,668 in two installments on or about
July 18, 2017 and on or about August 22, 2017. The Company paid the first cash portion on August 4, 2017, and on September 17,
2017, Mr. Allen agreed to accept 15,000 shares in lieu of the second cash payment. In addition, 50% of his unvested stock options
vested immediately and together with previously vested portions of such options will be exercisable until May 15, 2018. The separation
agreement contains provisions for protection of the Company’s confidential information and certain non-competition restrictions.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements
Julian
Davidson
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
October 2, 2017, the Company agreed to pay Mr. Davidson, in lieu of a cash bonus of $165,000 due to him under his existing compensation
arrangements (i) a one-time stock bonus of 48,000 shares of the Company’s common stock and (ii) a deferred cash payment
of $65,000 to be made at a time determined by the Compensation Committee of the Company’s Board of Directors, but no later
than December 31, 2017, with no interest to accrue on such payment obligation. The shares of the Company’s common stock
were granted under the Company’s 2017 Long-Term Incentive Equity Plan.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Investor
Relations
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.
On
October 1, 2017, the Company entered into a master service agreement with the investor relations and communications firm. The
agreement commenced on October 1, 2017 for an initial term of two months. The agreement may be renewed monthly by the Company
up to a maximum of 180 days from the date of the agreement. In consideration of services, the only adjustment from the March 1,
2017 agreement is that the number of shares to be issued on the 5
th
day of each month was increased to 15,000.
Distribution
Agreements
On
March 14, 2017, the Company entered into the Big Geyser Distribution Agreement. Big Geyser became the exclusive distributor of
the Company’s iced tea products in certain regions. 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 (See
Note 7).
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 for its principal office and warehouse space in Hicksville, NY. The lease
commenced on July 1, 2014 and was expired on August 31, 2017.
On
July 14, 2017, the Company entered into a lease agreement for its principal office and warehouse space in Farmingdale, NY. The
lease commenced on August 15, 2017 and extends through September 30, 2022. The Company has the option to extend the lease for
an additional three years.
Rent
expense for the three months ended September 30, 2017 and 2016 was $22,219 and $15,428, respectively, and for the nine months
ended September 30, 2017 and 2016 was $44,817 and $36,510, respectively.
Total
future minimum payments required under the Farmingdale lease are as follows:
Year
Ended December 31,
|
|
|
|
2017
(three months)
|
|
$
|
24,749
|
|
2018
|
|
|
99,984
|
|
2019
|
|
|
102,983
|
|
2020
|
|
|
106,073
|
|
2021
|
|
|
109,255
|
|
Thereafter
|
|
|
83,564
|
|
Total
|
|
$
|
526,608
|
|
In
addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the three months ended September
30, 2017 and 2016 was $26,761 and $22,662, respectively, and for the nine months ended September 30, 2017 and 2016 was $39,741
and $76,493, respectively.
NOTE
9 – MAJOR CUSTOMERS AND VENDORS
For
the three months ended September 30, 2017 and 2016, two customers accounted for 28% and 14%, or 42% in the aggregate, and three
customers accounted for 22%, 11% and 11%, or 44% in the aggregate, of the Company’s net sales, respectively. For the nine
months ended September 30, 2017 and 2016, two customers accounted for 21% and 12%, or 33% in the aggregate, and three customers
accounted for 13%, 12% and 10%, or 35% in the aggregate, of the Company’s net sales, respectively.
For
the three months ended September 30, 2017 and 2016, four vendors accounted for 22%, 21%, 12% and 12%, or 67% in the aggregate,
and five vendors accounted for 19%, 17%, 17%, 15% and 10%, or 78% in the aggregate, of purchases, respectively. For the nine months
ended September 30, 2017 and 2016, two vendors accounted for 35% and 20%, or 55% in the aggregate, and four vendors accounted
for 20%, 17%, 16% and 16%, or 69% in the aggregate, of purchases, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 30,
2017 and 2016, sales to this related party were $0 and $426, respectively. For the nine months ended September 30, 2017 and 2016,
sales to this related party were $879 and $3,063, respectively. As of September 30, 2017 and December 31, 2016, there was $879
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 September 30, 2017 and 2016, the Company purchased $6,616 and $0, respectively, and for the nine months ended September
30, 2017 and 2016, the Company purchased $14,631 and $17,514, respectively, of product from this entity. As of September 30, 2017
and December 31, 2016, the outstanding balance due to this entity included in accounts payable was $0 and $10,043, respectively.
As
of September 30, 2017 and December 31, 2016, the Company is indebted to Mr. Thomas in the amounts of $65,000 and $0, respectively,
for a short-term loan to the Company. This loan is included in other current liabilities within the condensed consolidated balance
sheets.
On
March 27, 2017, the Company issued an option to purchase 70,000 shares of the Company’s common stock to a party who was,
until October 5, 2017, 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 September 30, 2017 and December 31, 2016 accounts payable and accrued expenses to a
company wholly owned by this former director were $10,237 and $4,032, respectively.
For
the three and nine months ended September 30, 2017, the Company incurred expenses of $18,000 and $30,000, respectively, related
to an entity whose majority shareholder is Eric Watson, who beneficially owned approximately 14.4% of the Company as of September
30, 2017. As of September 30, 2017 and December 31, 2016, accounts payable due to this entity were $19,410 and $0.
NOTE
11 – SUBSEQUENT EVENTS
NASDAQ
Notice
On
October 9, 2017, the Company received a notice from the Listing Qualifications Department of the Nasdaq Stock Market (“NASDAQ”).
The notice stated that the Company’s enterprise market value fell below the minimum NASDAQ threshold for thirty consecutive
business days. The Company has 180 calendar days from the notice date to regain compliance with this standard by exceeding the
minimum threshold for ten consecutive business days. The notification has no effect on the listing of the Company’s common
stock at this time.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Audit Committee of the Board of Directors and Stockholders of Long Island Iced Tea Corp. and Subsidiaries
We
have audited the accompanying consolidated balance sheets of Long Island Iced Tea Corp. and Subsidiaries (the “Company”)
as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’
equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Long Island Iced Tea Corp. and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations
and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of
America.
/s/
Marcum LLP
|
|
Melville,
NY
|
|
March
30, 2017
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,249,550
|
|
|
$
|
207,192
|
|
Accounts
receivable, net (including amounts due from related parties of $55,615 and $67,992, respectively)
|
|
|
1,627,058
|
|
|
|
363,096
|
|
Inventories,
net
|
|
|
1,187,941
|
|
|
|
712,558
|
|
Restricted
cash
|
|
|
103,603
|
|
|
|
127,580
|
|
Short
term investments
|
|
|
2,389,521
|
|
|
|
-
|
|
Prepaid
expenses and other current assets
|
|
|
91,072
|
|
|
|
48,237
|
|
Total
current assets
|
|
|
6,648,745
|
|
|
|
1,458,663
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
218,036
|
|
|
|
360,920
|
|
Intangible
assets
|
|
|
22,500
|
|
|
|
27,494
|
|
Other
assets
|
|
|
52,470
|
|
|
|
67,438
|
|
Deferred
financing costs
|
|
|
842,533
|
|
|
|
1,838,082
|
|
Total
assets
|
|
$
|
7,784,284
|
|
|
$
|
3,752,597
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
886,316
|
|
|
$
|
601,681
|
|
Accrued
expenses
|
|
|
911,843
|
|
|
|
458,938
|
|
UBS
Credit Line
|
|
|
1,280,275
|
|
|
|
-
|
|
Current
portion of automobile loans
|
|
|
11,446
|
|
|
|
19,231
|
|
Current
portion of equipment loan
|
|
|
39,979
|
|
|
|
36,627
|
|
Total
current liabilities
|
|
|
3,129,859
|
|
|
|
1,116,477
|
|
|
|
|
|
|
|
|
|
|
Line
of credit, related party
|
|
|
-
|
|
|
|
1,091,571
|
|
Other
liabilities
|
|
|
30,000
|
|
|
|
30,000
|
|
Deferred
rent
|
|
|
1,807
|
|
|
|
4,648
|
|
Long
term portion of automobile loans
|
|
|
17,580
|
|
|
|
36,864
|
|
Long
term portion of equipment loan
|
|
|
36,495
|
|
|
|
76,477
|
|
Total
liabilities
|
|
|
3,215,741
|
|
|
|
2,356,037
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies, Note 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, par value $0.0001; authorized 35,000,000 shares; 7,715,306 and 4,635,783 shares issued and outstanding, as of December
31, 2016 and 2015, respectively
|
|
|
772
|
|
|
|
463
|
|
Additional
paid-in capital
|
|
|
17,575,583
|
|
|
|
3,926,074
|
|
Accumulated
deficit
|
|
|
(12,977,566
|
)
|
|
|
(2,529,977
|
)
|
Accumulated
other comprehensive loss
|
|
|
(30,246
|
)
|
|
|
-
|
|
Total
stockholders’ equity
|
|
|
4,568,543
|
|
|
|
1,396,560
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
7,784,284
|
|
|
$
|
3,752,597
|
|
The
accompanying notes are an integral part of these consolidated financial statements
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|
|
For
the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net
sales (including sales to related parties of $23,040 and $54,849, respectively)
|
|
$
|
4,558,030
|
|
|
$
|
1,899,230
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
4,239,317
|
|
|
|
1,556,140
|
|
Gross
profit
|
|
|
318,713
|
|
|
|
343,090
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
4,958,076
|
|
|
|
1,946,270
|
|
Selling
and marketing expenses
|
|
|
3,149,710
|
|
|
|
1,449,049
|
|
Total
operating expenses
|
|
|
8,107,786
|
|
|
|
3,395,319
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(7,789,073
|
)
|
|
|
(3,052,229
|
)
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(3,593
|
)
|
|
|
(3,327
|
)
|
Interest
expense
|
|
|
(1,066,969
|
)
|
|
|
(124,713
|
)
|
Loss
on inducement
|
|
|
(1,587,954
|
)
|
|
|
-
|
|
Total
other expenses
|
|
|
(2,658,516
|
)
|
|
|
(128,040
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,447,589
|
)
|
|
$
|
(3,180,269
|
)
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on investments
|
|
|
(30,246
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$
|
(10,477,835
|
)
|
|
$
|
(3,180,269
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
5,889,428
|
|
|
|
3,744,931
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(1.77
|
)
|
|
$
|
(0.85
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Accumulated
Other Comprehensive
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2015
|
|
|
2,633,334
|
|
|
|
263
|
|
|
|
3,184,574
|
|
|
|
(4,365,335
|
)
|
|
|
-
|
|
|
|
(1,180,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reverse
Merger with Cullen Agricultural Holding Corp.
|
|
|
1,518,749
|
|
|
|
152
|
|
|
|
1,872,344
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,872,496
|
|
Common
stock issued as payments to vendors
|
|
|
28,085
|
|
|
|
3
|
|
|
|
134,267
|
|
|
|
-
|
|
|
|
-
|
|
|
|
134,270
|
|
Conversion
of loans payable and accrued interest to stockholders’ equity
|
|
|
138,979
|
|
|
|
14
|
|
|
|
555,896
|
|
|
|
-
|
|
|
|
-
|
|
|
|
555,910
|
|
Issuance
of common stock, net of costs
|
|
|
142,636
|
|
|
|
14
|
|
|
|
568,454
|
|
|
|
-
|
|
|
|
-
|
|
|
|
568,468
|
|
Issuance
of common stock and warrants, net of costs
|
|
|
174,000
|
|
|
|
17
|
|
|
|
540,929
|
|
|
|
-
|
|
|
|
-
|
|
|
|
540,946
|
|
Issuance
of warrants to lenders
|
|
|
-
|
|
|
|
-
|
|
|
|
1,725,934
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,725,934
|
|
Stock
based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
359,303
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359,303
|
|
Reclassification
of the historical losses of Long Island Brand Beverages LLC to additional paid in capital upon the date of the reverse merger
with Cullen Agricultural Holding Corp.
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,015,627
|
)
|
|
|
5,015,627
|
|
|
|
-
|
|
|
|
-
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,180,269
|
)
|
|
|
-
|
|
|
|
(3,180,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
|
|
4,635,783
|
|
|
|
463
|
|
|
|
3,926,074
|
|
|
|
(2,529,977
|
)
|
|
|
-
|
|
|
|
1,396,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock to consultants, employees, vendors, and customers
|
|
|
190,935
|
|
|
|
19
|
|
|
|
970,343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
970,362
|
|
Issuance
of common stock and warrants, net of costs
|
|
|
230,475
|
|
|
|
23
|
|
|
|
861,767
|
|
|
|
-
|
|
|
|
-
|
|
|
|
861,790
|
|
Issuance
of warrants to placement agent
|
|
|
-
|
|
|
|
-
|
|
|
|
38,056
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38,056
|
|
Issuance
of common stock to the Advisory Board and Board of Directors
|
|
|
65,824
|
|
|
|
7
|
|
|
|
239,993
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240,000
|
|
Issuance
of common stock, net of costs
|
|
|
406,550
|
|
|
|
41
|
|
|
|
1,423,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,423,141
|
|
Issuance
of common stock and warrants in the Public Offering, net of costs
|
|
|
1,270,156
|
|
|
|
127
|
|
|
|
5,867,090
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,867,217
|
|
Issuance
of common stock in exchange for principal and warrants on Brentwood line of credit
|
|
|
908,083
|
|
|
|
91
|
|
|
|
3,257,239
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,257,330
|
|
Stock
based compensation
|
|
|
7,500
|
|
|
|
1
|
|
|
|
935,671
|
|
|
|
-
|
|
|
|
-
|
|
|
|
935,672
|
|
Disgorgement
on short swing profit
|
|
|
-
|
|
|
|
-
|
|
|
|
56,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,250
|
|
Unrealized
loss on investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,246
|
)
|
|
|
(30,246
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,447,589
|
)
|
|
|
-
|
|
|
|
(10,447,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
|
|
7,715,306
|
|
|
$
|
772
|
|
|
$
|
17,575,583
|
|
|
$
|
(12,977,566
|
)
|
|
$
|
(30,246
|
)
|
|
$
|
4,568,543
|
|
The
accompanying notes are an integral part of these consolidated financial statements
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(10,447,589
|
)
|
|
$
|
(3,180,269
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
192,634
|
|
|
|
22,279
|
|
Depreciation
and amortization expense
|
|
|
162,500
|
|
|
|
114,467
|
|
Deferred
rent
|
|
|
(2,841
|
)
|
|
|
(1,318
|
)
|
Stock
based compensation
|
|
|
1,175,672
|
|
|
|
359,303
|
|
Amortization
of deferred financing costs
|
|
|
995,549
|
|
|
|
65,797
|
|
Paid-in-kind
interest
|
|
|
77,805
|
|
|
|
4,071
|
|
Loss
on inducement
|
|
|
1,587,954
|
|
|
|
-
|
|
Loss
on disposal of property and equipment
|
|
|
233
|
|
|
|
3,327
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,456,596
|
)
|
|
|
(220,238
|
)
|
Inventory
|
|
|
(475,383
|
)
|
|
|
(151,451
|
)
|
Prepaid
expenses and other current assets
|
|
|
(42,835
|
)
|
|
|
(18,163
|
)
|
Other
assets
|
|
|
14,968
|
|
|
|
(55,732
|
)
|
Accounts
payable
|
|
|
1,194,997
|
|
|
|
(240,088
|
)
|
Accrued
expenses
|
|
|
550,728
|
|
|
|
433,305
|
|
Other
liabilities
|
|
|
-
|
|
|
|
(92,466
|
)
|
Total
adjustments
|
|
|
3,975,385
|
|
|
|
223,093
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(6,472,204
|
)
|
|
|
(2,957,176
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(14,622
|
)
|
|
|
(100,843
|
)
|
Investment
in restricted cash
|
|
|
(103,603
|
)
|
|
|
(127,580
|
)
|
Release
of restricted cash
|
|
|
127,580
|
|
|
|
-
|
|
Purchase
of short term investments
|
|
|
(2,419,767
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(2,410,412
|
)
|
|
|
(228,423
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Repayment
of automobile loans
|
|
|
(27,069
|
)
|
|
|
(17,916
|
)
|
Repayment
of equipment loans
|
|
|
(36,630
|
)
|
|
|
(4,813
|
)
|
Proceeds
from line of credit
|
|
|
1,280,275
|
|
|
|
-
|
|
Proceeds
from line of credit, related party
|
|
|
500,000
|
|
|
|
1,000,000
|
|
Advances
from a stockholder
|
|
|
199,900
|
|
|
|
-
|
|
Repayments
to a stockholder
|
|
|
(199,900
|
)
|
|
|
-
|
|
Payments
of deferred financing costs
|
|
|
-
|
|
|
|
(60,445
|
)
|
Proceeds
from the reverse merger with Cullen Agricultural Holding Corporation
|
|
|
-
|
|
|
|
120,841
|
|
Proceeds
from the Public Offering, net of costs
|
|
|
5,867,217
|
|
|
|
-
|
|
Proceeds
from the sale of common stock, net of costs
|
|
|
1,423,141
|
|
|
|
568,468
|
|
Proceeds
from the sale of common stock and warrants, net of costs
|
|
|
861,790
|
|
|
|
588,492
|
|
Proceeds
from the disgorgement of short swing profit
|
|
|
56,250
|
|
|
|
-
|
|
Proceeds
from Bass Properties LLC loan
|
|
|
96,123
|
|
|
|
150,000
|
|
Repayments
to Bass Properties LLC
|
|
|
(96,123
|
)
|
|
|
-
|
|
Proceeds
from Cullen Agricultural Holding Corporation loan
|
|
|
-
|
|
|
|
250,000
|
|
Proceeds
from Ivory Castle Limited loan
|
|
|
-
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
9,924,974
|
|
|
|
2,994,627
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
1,042,358
|
|
|
|
(190,972
|
)
|
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
207,192
|
|
|
|
398,164
|
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
1,249,550
|
|
|
$
|
207,192
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
22,247
|
|
|
$
|
5,496
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Conversion
of loans payable and accrued interest to stockholders’ equity
|
|
$
|
3,257,330
|
|
|
$
|
555,910
|
|
Purchase
of equipment with loan payable
|
|
$
|
-
|
|
|
$
|
117,917
|
|
Costs
related to issuance of common stock and warrants included in accrued expenses
|
|
$
|
-
|
|
|
$
|
47,546
|
|
Purchase
of a truck in exchange for accounts receivable
|
|
$
|
-
|
|
|
$
|
9,500
|
|
Net
assets acquired in reverse merger
|
|
$
|
-
|
|
|
$
|
1,751,655
|
|
Warrants
issued to Brentwood LIIT Inc.
|
|
$
|
-
|
|
|
$
|
1,725,934
|
|
Deferred
financing costs incurred with other liabilities and debt
|
|
$
|
-
|
|
|
$
|
117,500
|
|
Payment
of accounts payable through the issuance of common stock
|
|
$
|
-
|
|
|
$
|
134,270
|
|
Issuance
of common stock to consultants, vendors, employees, and customers
|
|
$
|
970,362
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS
Business
Organization
Long
Island Iced Tea Corp, a Delaware C-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”), Long Island Brand Beverages LLC and the founders of LIBB (“Founders”). Pursuant to the merger
agreement, (a) Cullen Merger Sub was to be merged with and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary
of LIIT and (b) LIBB Merger Sub was to be merged with and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary
of LIIT (the “Mergers”). As a result of the merger which was 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 Company merger on May 27, 2015, the holders of the LIBB membership interests (the
“LIBB members”) received 2,633,334 shares of common stock of Holdco (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 hold a large percent of the Long Island Iced Tea Corp.’s shares and will exercise significant influence over
the operating and financial policies of the consolidated entity and the Company 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 consolidated balance sheets, statements of operations, and statements of
cash flows of LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical 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 energy beverages such as iced tea.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS (CONTINUED)
Overview,
continued
The
Company produces and distributes premium ready-to-drink iced tea, with a proprietary recipe and quality components. 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 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 has also introduced four of its flavors in gallon bottles in 2015. The flavors
packaged in gallon bottles include lemon, peach, green tea and honey, and mango. During February 2016, the Company also launched
sweet tea, which is also served in a gallon container. In addition, the Company, in order to service certain vending contracts
sells snacks and other beverage products on a limited basis in 2016.
During
the second quarter of 2016, the Company began distributing an aloe vera derived juice beverage (“ALO Juice”) and commenced
selling a private label version of its iced tea product. For the year ended December 31, 2016, the Company’s ALO Juice product
accounted for approximately 23% of the Company’s consolidated net sales.
On
March 14, 2017, the Company announced that it is expanding its brand to include lemonade. Lemonade will be offered in 9 flavors,
and be offered in both single 18oz bottles and 12-packs.
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. During 2016, the Company has also begun expansion into other geographic
markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. As of December
31, 2016, the Company’s products are available in 27 states. The Company has also begun to sell its products globally in
regions such as South Korea and in multiple Caribbean nations.
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 early Spring 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 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 December 31, 2016, the Company had cash of $1,249,550 and short term investments of $2,389,521. As of December 31, 2016, the
Company had working capital of $3,518,886. The Company incurred net losses of $10,447,589 and $3,180,269 for the years ended December
31, 2016 and 2015, respectively. As of December 31, 2016, the Company’s stockholders’ equity was $4,568,543.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS (CONTINUED)
Liquidity
and Management’s Plan, continued
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 Brentwood LIIT Inc., as the lender. Brentwood LIIT Inc.’s interest in the Credit Agreement
and the related agreements and instruments thereunder was subsequently transferred to Brentwood LIIT (NZ) Ltd. (the “Lender”).
Brentwood LIIT Inc. and the Lender are controlled by a related party, Eric Watson, who beneficially owned approximately 16% of
the Company on November 23, 2015 and 17.1% as of December 31, 2016. The Credit Agreement provides for a revolving credit facility
in an initial amount of up to $1,000,000, subject to increases at the Lender’s discretion as provided in the Credit Agreement
(the “Available Amount”), up to a maximum amount of $5,000,000 (which was subsequently reduced to $3,500,000 in connection
with the closing of the Offering, as defined below) (the ” Facility Amount”). 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.
On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting
the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by
$500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved
advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result
of which the Available Amount was borrowed in full.
On
July 28 and 29, 2016, the Company sold 1,270,156 shares (the “Shares”) of common stock in a public offering (the “Public
Offering”) at an offering price of $5.50 per share, pursuant to the Company’s registration statement on Form S-1.
The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $5,867,217 after deducting commissions and other
offering expenses. In connection with sale of the Shares, the Company’s common stock was approved for listing on the NASDAQ
Capital Market under its current symbol, “LTEA.” The Offering was terminated on August 4, 2016. No further sales of
shares were made in the Offering.
In
connection with the sale of the Shares, the Company completed a recapitalization transaction (the “Recapitalization”)
with the Lender. Pursuant to the Recapitalization, the Lender converted all of the outstanding principal and interest ($1,669,376)
under the Credit Agreement into 421,972 shares of common stock and exchanged its warrant for 486,111 shares of common stock. As
of December 31, 2016, the balance under the Credit Agreement was $0. (See Note 8)
In
connection with the consummation of the Offering, on July 29, 2016, the selling agents were issued warrants to purchase an aggregate
of 31,522 shares of common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875
per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock
issuable upon exercise of the warrants are subject to adjustment for stock splits and similar adjustments. The warrants contain
provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an
additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights
at the Company’s expense until July 28, 2021.
On
October 12, 2016, the Company filed a “shelf” registration statement on Form S-3, under which the Company may from
time to time, sell any combination of debt or equity securities up to an aggregate initial offering price not to exceed $50,000,000.
The shelf registration statement was declared effective by the Securities and Exchange Commission (“SEC”) on October
14, 2016 and is described in more detail in a prospectus supplement dated December 21, 2016 and the accompanying base prospectus
dated October 14, 2016.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS (CONTINUED)
Liquidity
and Management’s Plan, continued
On
October 27, 2016, the Company entered into a credit line (the “UBS Credit Line”) with UBS Bank USA (“UBS”).
The UBS Credit Line has a borrowing capacity of $1,300,000 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 December 31, 2016,
$1,280,275 was outstanding on the UBS Credit Line.
On
December 27, 2016, Long Island Iced Tea Corp. the Company consummated its underwritten public offering (the “December Offering”)
of 406,550 shares of the Company’s common stock through Network 1 Financial Securities, Inc. (“Network 1”) and
Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016,
between the Company and Network 1, as representative of the underwriters. The Shares were sold for a price to the public of $4.00
per share. The Offering generated gross proceeds of $1,626,200 and net proceeds of $1,423,141 after deducting underwriting discounts
and payment of other offering expenses. The December Offering was made pursuant to the Company’s existing shelf registration
statement on Form S-3.
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 $1,396,740 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 December 31, 2016, its cash resources will be sufficient to fund the Company’s net cash requirements
through March 31, 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 March 21, 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 March 31, 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 the commitment for financing from a stockholder, on March 29, 2017, the Company’s Board of Directors issued
to a 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 is fully vested upon issuance.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements for the years ended December 31, 2016 and 2015 have been prepared in accordance
and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
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.
Principles
of Consolidation
The
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 consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The costs of all these various programs that were included as
a reduction in net sales, totaled $310,089 and $124,121 for the years ended December 31, 2016 and 2015, respectively. Included
in the total for the year ended December 31, 2016, was $13,600 related to the issuance of 3,400 shares to customers and the owners
of customers.
Additionally,
the Company may be required to occasionally pay fees to its customer (“Placement Fees”) in order to place its products
in the customers’ stores. In some cases, the Placement Fees carry no further benefit or minimum revenue guarantee other
than the right to place the Company’s product in the store of the customer. The Placement Fees are recorded as a reduction
of revenue. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative
revenue with that particular customer, such negative revenue is reclassified and recorded as a part of selling and marketing expense.
For the years ended December 31, 2016 and 2015, the Company recorded $11,087 and $9,000, respectively, of Placement Fees to sales
and marketing expense.
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 on the consolidated statements of operations and totaled $420,389 and $126,955, for
the years ended December 31, 2016 and 2015, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising
The
Company expenses advertising costs as incurred. For the years ended December 31, 2016 and 2015, advertising expense was $151,438
and $246,997, respectively.
Research
and Development
The
Company expenses the costs of research and development as incurred. For the years ended December 31, 2016 and 2015, research and
development expense related to new product initiatives was $47,067 and $13,333, respectively. These expenses 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 December 31, 2016, $50,000 was included in accrued expenses in the consolidated balance sheet
related to the arrangement, after the Company’s payout of $10,000.
Operating
Leases
The
Company records rent related to its operating leases on a straight line basis over the lease term.
Cash
The
Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
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 year ended December
31, 2016, the unrealized loss was $30,246. 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 record such gains or losses as interest and other income/(expense), net.
The
following table sets forth the available-for-sale securities:
|
|
As
of
December 31, 2016
|
|
US
Government Securities
|
|
$
|
195,374
|
|
Fixed
income Mutual Funds
|
|
|
2,194,147
|
|
|
|
$
|
2,389,521
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term
Investment, continued
Short-term
investments included the following securities with gross unrealized losses included in other comprehensive loss:
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
December
31, 2016
|
|
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
December 31, 2016
|
|
Within
one year
|
|
$
|
94,967
|
|
Within
one to five years
|
|
|
100,407
|
|
|
|
$
|
195,374
|
|
Restricted
Cash
Pursuant
to the terms of the Credit Agreement with Brentwood LIIT Inc., the Company was required to utilize $150,000 of the $1,000,000
proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015,
$127,580 of the Company’s cash on hand was restricted for the use in the development of the alcohol business. During the
year ended December 31, 2015, the Company spent $22,420 primarily related to product development and costs of attending conferences.
On March 17, 2016, LIBB entered into an agreement with Brentwood LIIT, Inc., whereby such restriction was lifted.
As
of December 31, 2016, the Company had cash balances of $103,603 that are pledged against the Company’s UBS Credit Line.
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. Typically, accounts receivable have terms of net 30
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 CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable, continued
Accounts
receivable, net, is as follows:
|
|
As
of: December 31
|
|
|
|
2016
|
|
|
2015
|
|
Accounts
receivable, gross
|
|
$
|
1,859,474
|
|
|
$
|
405,096
|
|
Allowance
for doubtful accounts
|
|
|
(232,416
|
)
|
|
|
(42,000
|
)
|
Accounts
receivable, net
|
|
$
|
1,627,058
|
|
|
$
|
363,096
|
|
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 December 31, 2016, the Company was exposed to concentrations of credit risk through short-term
investments held with two financial institutions. As of December 31, 2016, one customer accounted for 46% of the Company’s
trade receivables. As of December 31, 2015, two customers accounted for 14% and 30% of the Company’s trade receivables.
The Company does not generally require collateral or other security to support customer receivables. 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. Included in inventory at December 31, 2016 was finished goods inventory with a cost
of approximately $320,000 that was delivered to a distributor, and is held in inventory until such 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 December 31, 2016 and 2015, the Company recorded reserves of $45,078 and $41,790, 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 December 31
|
|
|
|
2016
|
|
|
2015
|
|
Finished
goods
|
|
$
|
905,642
|
|
|
$
|
565,624
|
|
Raw
materials and supplies
|
|
|
282,299
|
|
|
|
146,934
|
|
Total
inventories
|
|
$
|
1,187,941
|
|
|
$
|
712,558
|
|
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property
and Equipment, continued
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.
Intangible
Assets
Intangible
assets with indefinite useful lives are not amortized, but are tested for impairment annually or when circumstances indicate that
there could be an impairment. The assessment of indefinite life is reviewed annually to determine whether the indefinite life
continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. As of
December 31, 2016 and 2015, the Company tested the domain name utilizing the qualitative method. Based on this analysis, it was
determined that there were no indicators of impairment as of December 31, 2016 and 2015.
Intangible
assets with indefinite useful lives consist of the cost to purchase an internet domain name for $20,000. The domain name is considered
to have a perpetual life and as such, is not amortized. Insignificant costs incurred associated with renewing this asset are expensed
as incurred.
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 $2,500 and $7,494 as of December 31, 2016 and December 31, 2015, 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 December
31, 2016, the cost of the website development was $15,000 and the accumulated amortization was $12,500. As of December 31, 2015,
the cost of the website development was $15,000 and the accumulated amortization was $7,506. For the years ended December 31,
2016 and 2015, amortization expense was $4,994 and $5,004, respectively. Expected future amortization of website development costs
is $2,500 for the year ended December 31, 2017.
Deferred
Financing Costs
The
Company capitalizes issuance costs related to lines of credit as deferred financing costs. The Company amortizes the deferred
financing costs over the term of the line of credit.
Deferred
Offering Costs
The
Company capitalizes the costs related to proposed offerings of its equity instruments as deferred offering costs and records the
deferred offering costs as an offset to additional paid in capital upon the completion of the associated capital raising activity.
Income
Taxes
Effective
May 27, 2015, the Company completed the Mergers, whereby LIBB was deemed to be the accounting acquirer of Cullen.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes, continued
The
historical financial statements were those of LIBB. From the date of the Mergers, the Company’s results of operations began
to be taxed as a C corporation. Prior to the Mergers, the Company’s operations were taxed as a limited liability company,
whereby the Company elected to be taxed as a partnership and the income or loss was required to be reported by each respective
member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying consolidated
financial statements for operating results prior to May 27, 2015.
The
Company accounts for income taxes in accordance with FASB ASC 740, “Income Taxes” (“ASC 740”). ASC 740
requires an asset and liability approach for financial accounting and reporting for income taxes and established for all the entities
a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain expanded disclosures.
The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered
in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting
and tax basis of the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences
are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance
when it is more likely than not that some portion or all the deferred tax assets will not be realized. 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
liability. In management’s opinion, adequate provisions for income taxes have been made. If actual taxable income by tax
jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Based
on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition
in the Company’s consolidated financial statements. The evaluation was performed for the 2016 and 2015 tax years, which
are the first years for which the Company is subject to corporate income taxes. The Company believes that its income tax positions
and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its
financial position or results of operations.
The
Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component
of income tax expense. There were no amounts accrued for penalties and interest for years ended December 31, 2016 and December
31, 2015. The Company does not expect its uncertain tax position to change during the next twelve months. Management is currently
unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
Stock
Based Compensation
The
Company accounts for stock based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).
ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, stock
based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over
the employee’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s
common stock options are estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility,
dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical
volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available
information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the
Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the
stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant
exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its
stock option awards issued using the simplified method.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock
Based Compensation, continued
The
simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and
when the award expires. The Company expenses stock-based compensation by using the straight-line method.
Earnings
per share
Basic
net earnings per common share is computed by dividing income/loss available to common stockholders 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 exercise of stock options. 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 diluted instruments in periods where the exercise
of such options would be antidilutive. As provided below:
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Options
to purchase common stock
|
|
|
425,411
|
|
|
|
194,667
|
|
Warrants
to purchase common stock
|
|
|
470,570
|
|
|
|
1,285,111
|
|
Shares
issuable upon conversion of outstanding debt under Credit Agreement
|
|
|
-
|
|
|
|
272,893
|
|
Total
potentially dilutive securities
|
|
|
895,981
|
|
|
|
1,752,671
|
|
Fair
Value of Financial Instruments
The
carrying amounts of cash, short term investments and accounts receivable, accrued expenses and automobile and equipment loans
and UBS Credit Line 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.
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments, continued
Fair
values for short-term money market investments are determined from quote 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 consolidated financial statements at December 31, 2016 and 2015
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 December 31, 2016
|
|
|
$
|
2,389,521
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments at December 31, 2015
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Seasonality
The
Company’s business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating
the largest net sales.
Recent
Accounting Pronouncements
In
August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update 2014-15, “Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern” related to disclosure of uncertainties
about an entity’s ability to continue as a going concern. The new standard provides guidance on determining when and how
reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management
to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date
of issuance of the entity’s financial statements. Additionally, an entity must provide certain disclosures if there is substantial
doubt about the entity’s ability to continue as a going concern. The new standard will be effective for fiscal years and
interim periods within those fiscal years, ending after December 15, 2016. Early adoption is permitted. The Company adopted this
standard effective December 31, 2016. The adoption did not have a material effect on the Company’s consolidated financial
statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements, continued
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 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 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 has determined that implementation of this guidance will not have a material effect on its 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 currently expects to complete its assessment of the full financial impact of the new revenue recognition guidance,
including the method of adoption, during the next nine months and to adopt the guidance when it becomes effective for the Company
on December 31, 2017.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 currently expects to complete its assessment
of the full financial impact of the new revenue recognition guidance, including the method of adoption, during the next nine months
and to adopt the guidance when it becomes effective for the Company on December 31, 2017.
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 has determined that implementation of this guidance will not have a material effect on its 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 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 and Note
15 – 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 CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment are as follows:
|
|
As
of: December 31
|
|
|
|
2016
|
|
|
2015
|
|
Displays
- racks
|
|
$
|
201,849
|
|
|
$
|
184,523
|
|
Trucks
and automobiles
|
|
|
113,763
|
|
|
|
136,092
|
|
Vending
machines
|
|
|
166,271
|
|
|
|
166,271
|
|
Cold
drink store fixtures and equipment
|
|
|
81,951
|
|
|
|
72,851
|
|
Furniture
and equipment
|
|
|
18,993
|
|
|
|
18,168
|
|
|
|
|
582,827
|
|
|
|
577,905
|
|
Less
– accumulated depreciation
|
|
|
(364,791
|
)
|
|
|
(216,985
|
)
|
Total,
net
|
|
$
|
218,036
|
|
|
$
|
360,920
|
|
For
the years ended December 31, 2016 and 2015, depreciation expense was $157,507 and $109,463, respectively. The Company’s
property and equipment does not relate to the production of inventory as the Company produces its inventory at third party locations.
As a result, depreciation expense was included in general and administrative expenses during the years ended December 31, 2016
and 2015. The Company disposed of one of its vehicles on July 18, 2016. In connection with the disposal, the Company recognized
a loss of $233.
NOTE
4 – AUTOMOBILE LOANS
During
2014, the Company financed the purchase of four vehicles with loans payable. As follows:
|
|
As
of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Loan
dated February 17, 2014 for $31,681 bearing interest at 3.59%. The loan requires 72 monthly payments of principal and interest
of $490 and matures on March 3, 2020.
|
|
$
|
18,067
|
|
|
$
|
23,143
|
|
|
|
|
|
|
|
|
|
|
Loan
dated April 3, 2014 for $23,206 bearing interest at 10.74%. The loan requires 36 monthly payments of principal and interest
of $758 and matures on April 10, 2017. The loan is guaranteed by a stockholder and CEO of the Company.
|
|
|
2,986
|
|
|
|
11,248
|
|
|
|
|
|
|
|
|
|
|
Loan
dated June 3, 2014 for $14,954 bearing interest at 4.99%. The loan requires 60 monthly payments of principal and interest
of $282 and matures on June 3, 2019.
|
|
|
7,973
|
|
|
|
10,852
|
|
|
|
|
|
|
|
|
|
|
Loan
dated June 3, 2014 for $14,954 bearing interest at 4.99%. The loan required 60 monthly payments of principal and interest
of $282 and was set to mature on June 3, 2019. The loan was repaid in full.
|
|
|
-
|
|
|
|
10,852
|
|
|
|
|
|
|
|
|
|
|
Total
automobile loans
|
|
|
29,026
|
|
|
|
56,095
|
|
|
|
|
|
|
|
|
|
|
Current
portion of automobile loans
|
|
|
11,446
|
|
|
|
19,231
|
|
|
|
|
|
|
|
|
|
|
Long
term portion of automobile loans
|
|
$
|
17,580
|
|
|
$
|
36,864
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 – AUTOMOBILE LOANS (CONTINUED)
As
of December 31, 2016, the gross carrying amount of fixed assets and accumulated depreciation of trucks and automobiles which serve
as collateral related to these loans were $88,637 and $49,255, respectively. As of December 31, 2015, the gross carrying amount
of fixed assets and accumulated depreciation of trucks and automobiles related to these loans were $108,592 and $37,577, respectively.
Future
payments of the principal amount of automobile loans are as follows:
|
|
|
For
the years the ended December 31,
|
|
2017
|
|
|
$
|
11,446
|
|
2018
|
|
|
|
8,730
|
|
2019
|
|
|
|
7,387
|
|
2020
|
|
|
|
1,463
|
|
Total
|
|
|
$
|
29,026
|
|
NOTE
5 – 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 14). The Company may terminate the agreement and all obligations to make future
payments on ten days’ written notice to Magnum. As of December 31, 2016 and 2015, the outstanding balance on the equipment
loan was $76,474 and $113,104, respectively. Future payments of the principal amount under the expense reimbursement agreement
are $39,979, and $36,495 for the years ended December 31, 2017 and 2018, respectively. As of December 31, 2016, the cost of vending
machines under this agreement was $117,917 with accumulated depreciation of $45,857. As of December 31, 2015, the cost of vending
machines under this agreement was $117,917 with accumulated depreciation of $4,913.
NOTE
6 – LOANS PAYABLE
Cullen
Loans
On
November 19, 2013 the Company and Cullen entered into a loan agreement (the “Cullen Loan Agreement”). Pursuant to
the Cullen Loan Agreement, Cullen loaned the Company $600,000, bearing interest at 6% per annum with principal and accrued interest
due on August 31, 2014. The Cullen Loan Agreement provided Cullen with the option to loan the Company an additional $600,000.
The Cullen Loan Agreement also required that the Company utilize $450,000 of the loan to repay the line of credit – member.
On December 5, 2013, Cullen exercised its option and extended to the Company an additional loan in the amount of $600,000 also
bearing interest at 6% per annum with principal and accrued interest due on August 31, 2014. On April 1, 2014, the Company received
$300,000 as proceeds from an additional loan from Cullen with interest at 6% per annum and a maturity of August 31, 2014. The
maturity date of the Cullen Loans had been extended until March 15, 2016.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – LOANS PAYABLE (CONTINUED)
Cullen
Loans, continued
These
Cullen loans were secured by the accounts receivable and inventory of the Company. On March 26, 2015, the Company received $250,000
as proceeds from an additional loan from Cullen, bearing interest at 6% per annum with principal and interest due and payable
on March 15, 2016. On May 27, 2015, the Company consummated the Mergers. In connection with the Mergers, $1,500,000 principal
amount of the loans were forgiven and the remaining $250,000 principal amount of the loans eliminate upon consolidation.
Ivory
Castle Loan
On
May 4, 2015, the Company received $400,000 as proceeds from a loan with Ivory Castle Limited (“Ivory Castle”), a stockholder
of the Company. This note bears interest at 6% per annum and matures on July 31, 2016. On June 30, 2015, the note and accrued
interest of $403,485 were converted into 100,872 shares of common stock.
Bass
Properties LLC
On
April 28, 2015, the Company received $150,000 as proceeds from a loan from Bass Properties, LLC, a stockholder of the Company.
This note bears interest at 10% per annum and matures on July 31, 2016. On June 30, 2015, the note and accrued interest of $152,425
were converted into 38,107 shares of common stock.
NOTE
7 – LINES OF CREDIT
UBS
Credit Line
On
October 27, 2016, the Company entered into the UBS Credit Line with UBS. The UBS Credit Line has a borrowing capacity of $1,300,000
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 December 31, 2016, the interest rate on the UBS Credit Line was 3.272 %.
The UBS Credit Line is collateralized by certain of the Company’s short-term investments. As of December 31, 2016, the outstanding
balance on the line of credit was $1,280,275.
NOTE
8 – LINE OF CREDIT – RELATED PARTIES
Brentwood
LIIT Corp.
On
November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the
full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000
to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance
from the Lender and during May 2016, LIBB obtained an additional $250,000 of the approved advances from the Lender, as a result
of which as of May 20, 2016 the Available Amount was borrowed in full.
As
of December 31, 2016 and December 31, 2015, the outstanding balance on the line of credit was $0 and $1,091,571, respectively.
The
credit facility bears interest at a rate equal to the prime rate (3.75% at December 31, 2016) plus 7.5%, compounded monthly, and
matures on November 23, 2018. Effective January 10, 2016, the Credit Agreement was amended such that interest was compounded on
a quarterly basis. Upon the occurrence of an event of default, the Credit Agreement provides for an additional 8% interest pursuant
to the terms of the agreement.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – LINE OF CREDIT – RELATED PARTIES (CONTINUED)
Brentwood
LIIT Corp., continued
The
outstanding principal and interest under the credit facility are payable in cash on the maturity date. The Company also paid the
Lender a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount
of the loan, and will pay the Lender $30,000 for its expenses at the maturity date. The compounded interest and capitalized fees
are excluded when determining whether the Available Amount has been exceeded. The credit facility is secured by a first priority
security interest in all of the assets of LIIT and LIBB, including the membership interests in LIBB held by LIIT. LIIT also has
guaranteed the repayment of LIBB’s obligations under the credit facility. In addition, the credit facility will be guaranteed
by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, in certain limited circumstances
up to a maximum amount of $200,000.
The
proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.
In
connection with the establishment of the credit facility, the Company issued a warrant to the Lender. The warrant entitled the
holder to purchase 1,111,111 shares of the Company’s common stock at an exercise price of $4.50 and included a cashless
exercise provision. Also, as part of the Recapitalization, the warrant was exchanged for 486,111 shares of the Company’s
common stock. (See Induced Conversion below for the accounting of the Recapitalization).
The
Lender will have certain “piggyback” registration rights, on customary terms, with respect to the shares of the Company’s
common stock issuable upon conversion of the lender note and upon exercise of the Brentwood Warrant. These shares were registered
under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared effected by
the SEC on January 31, 2017.
The
Lender may accelerate the credit facility upon the occurrence of certain events of default, including a failure to make a payment
under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing
of a bankruptcy petition or a similar event with respect to LIBB or the Company or the occurrence of an event of default under
other material indebtedness of LIBB or the Company. The Company and LIBB also made certain customary representations, warranties
and covenants, including negative covenants with respect to the incurrence of indebtedness. As of December 31, 2016, the Company
was in compliance with these covenants.
Deferred
financing costs related to the Credit Agreement, which are included in the accompanying consolidated balance sheet, are amortized
over the three year term of the line of credit agreement. As of December 31, 2016, the gross carrying amount of deferred financing
costs were $1,903,879 with accumulated amortization of $1,061,347. As of December 31, 2015, the gross carrying amount of deferred
financing costs were $1,903,879 with accumulated amortization of $65,797.
During
April 2016, the Company entered into an amendment to the agreement with the Lender, which provided for the Recapitalization. Upon
a capital raise of at least $5,000,000, the Lender agreed to convert all of the outstanding principal and interest under the Credit
Facility into 421,972 shares of common stock (assuming all approved advances are completed and there are no further advances by
the Lender) at the closing of the Offering. In addition, the Lender agreed to exchange its 1,111,111 warrants for 486,111 shares
of common stock at such time. The Credit Facility would remain outstanding except that the Facility Amount would be reduced to
$3,500,000.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – LINE OF CREDIT – RELATED PARTIES (CONTINUED)
Brentwood
LIIT Corp., continued
In
connection with the reduction in the capacity of the Credit Facility, the Company recorded a charge of $408,000 to interest expense
to reduce proportionally the unamortized deferred financing costs. Any amounts drawn from the Facility Amount require lender approval.
The Recapitalization was effectuated upon the closing of the Offering.
In
addition, the Company and LIBB entered into an Amendment No. 1 (the “Registration Rights Amendment”) to the Registration
Rights Agreement (the “Registration Rights Agreement”), dated as of December 3, 2015, by and among LIBB, the Company
and the Lender. The Registration Rights Amendment amended the Registration Rights Agreement, effective as of the closing of a
Qualified Public Offering, so that the “piggyback” registration rights granted to the Lender thereunder will apply
to the shares issuable in the Recapitalization.
Induced
conversion of the credit facility and the related warrants
As
disclosed above, on July 29, 2016, as part of the Recapitalization, the outstanding balance and accrued interest on the credit
facility and the Lender’s warrant to purchase 1,111,111 shares of the Company’s common stock was converted into a
total of 908,083 shares of the Company’s common stock. The Company accounted for this transaction as an “induced conversion”
in accordance with the ASC 470. The transaction qualifies as an inducement as the Company effectively lowered the exercise price
of the warrant in order to induce the holder to convert the debt and warrants to shares of common stock. The Company’s purpose
for the inducement was to improve the Company’s balance sheet and capitalization ahead of its proposed public offering.
ASC
470 prescribes that, upon an induced conversion of convertible debt, the Company should recognize in earnings the difference between
(a) the fair value of the securities issued upon conversion and (b) the fair value of the securities that would have been issued
in accordance with the original conversion terms. The Company determined that during April 2016, the Company’s common stock
had a fair value of $5.50 per share. During April 2016, the Company determined that its common stock did not have sufficient trading
volume for the market based trading price to be relied upon as a reliable measure of fair value. As such, the Company needed to
utilize another measure in order to determine fair value. The Company determined that the best measure of fair value was the $5.50
price of shares issued upon the consummation of the Offering, which closed in July 2016. This fair value was consistent with the
range of pricing established with the Company’s bankers ahead of the Offering, and aligned with the fact that the inducement
transaction would only be effected upon the closing of the Offering.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – LINE OF CREDIT – RELATED PARTIES (CONTINUED)
During
the year ended December 31, 2016, the Company recorded a non-cash charge of $1,587,954 related to the “induced conversion”,
which is recorded on the Statements of Operations as loss on induced conversion of line of credit and warrants. The induced conversion
charge was measured as of April 2016, the date the agreement was reached, and recorded on July 29, 2016, the date the conversion
was consummated. The charge was calculated as follows:
|
|
For
the year ended December 31, 2016
|
|
|
|
|
|
Fair
value of securities to be issued upon original conversion terms:
|
|
|
|
|
Line
of credit ($1,669,372 converted at $4.00 per share into 417,344 shares of common
stock,
which had a fair value of $5.50 per share)
|
|
$
|
2,295,392
|
|
Warrants
(1,111,111 shares of common stock at a fair value of $5.50 per share, less $5,000,000 in exercise proceeds)
|
|
|
1,111,111
|
|
Total
fair value of securities issued upon conversion
|
|
$
|
3,406,503
|
|
|
|
|
|
|
Fair
value of securities issued upon conversion:
|
|
|
|
|
Shares
of common stock
|
|
|
908,083
|
|
Fair
value per share
|
|
$
|
5.50
|
|
Aggregate
fair value of common stock to be issued upon original conversion terms
|
|
$
|
4,994,457
|
|
|
|
|
|
|
Loss
on induced conversion of line of credit and warrants
|
|
$
|
(1,587,954
|
)
|
NOTE
9 – STOCKHOLDERS’ EQUITY
2015
Issuances
In
connection with the Mergers, on May 27, 2015, 2,633,334 shares of common stock were issued to the former members of LIBB and 1,518,749
shares of common stock were issued to the former stockholders of Cullen.
On
May 27, 2015, the Company issued 19,047 shares of common stock to a vendor in payment of its accounts payable balance of $98,120.
On
June 30, 2015, loans from Ivory Castle Limited and Bass Properties LLC, together with accrued interest, of $555,910 were converted
into 138,979 shares of common stock.
On
June 30, 2015, the Company received gross proceeds of $50,000 through the issuance of 12,500 shares of common stock to family
members of a director and Chief Executive Officer of the Company.
On
June 30, 2015, the Company received gross proceeds of $50,000 through the issuance of 12,500 shares of common stock to a family
member of a director of the Company.
On
June 30, 2015, the Company received gross proceeds of $370,544 through the issuance of 92,636 shares of common stock Bass Properties
LLC.
On
June 30, 2015, the Company issued 9,038 shares of common stock to vendors in payment of accounts payable balances of $36,150.
On
July 8, 2015, the Company received proceeds of $100,000 through the issuance of 25,000 shares of common stock.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCKHOLDERS’ EQUITY (CONTINUED)
2015
Issuances, continued
On
September 30, 2015, the Company sold an aggregate of 72,750 units at a price of $4.00 per unit. The sale was part of a private
placement of up to $3,000,000 of units (the “Offering”) being conducted by the Company on a “best efforts”
basis through a placement agent (the “Placement Agent”). The Offering will terminate on the earlier of the sale of
the full $3,000,000 and October 30, 2015. The Company sold an aggregate of 65,500 units in the Offering on September 17, 2015.
Accordingly, the Company has received gross proceeds of $553,000. Included in the raise were 6,250 units issued to a member of
the Board of Directors, 6,250 units issued to the CEO and member of the Board of Directors, 22,500 units issued to Ivory Castle
Limited, and 15,000 units issued to Bass Properties LLC. The units consist of one share of the Company’s common stock and
one warrant. The units are separable immediately upon issuance and are issued separately as shares of common stock and warrants.
During October 2015, the Company sold an additional 17,500 units for gross proceeds $70,000 at a price per unit of $4.00 per unit
pursuant to the Offering.
Each
warrant entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share,
commencing immediately and expiring on September 17, 2018. The exercise price and number of shares of common stock issuable on
exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for
redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock
is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii)
the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the
first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised
prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have
no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
For
sales prior to October 31, 2015, the Placement Agent was entitled to a commission equal to (a) 10% of the aggregate purchase price
from the units sold to investors introduced to the Company by the Placement Agent, and (b) 5% of the aggregate purchase price
from the units sold to investors that were not introduced to the Company by the Placement Agent. In addition, the Company paid
the Placement Agent a non-accountable expense allowance equal to 3% of the aggregate purchase price from the units sold to investors
introduced to the Company by the Placement Agent. At the final closing, the Placement Agent also will receive warrants to purchase
a number of shares of the Company’s common stock equal to 10% of the total shares included in the units sold in the Placement,
with an exercise price of $4.50 per share. Furthermore, if the Company sells the full $3,000,000 of units in the Placement, for
the 12 month period commencing on the final closing of the Placement, the Placement Agent will have a right of first refusal to
act as passive book runner with respect to any proposed underwritten public distribution or private placement of the Company’s
securities. The Company also previously paid the Placement Agent a $15,000 commitment fee.
On
November 30, 2015 and December 14, 2015, the Company sold an additional 18,250 units for gross proceeds of $73,000 at a price
per unit of $4.00 per unit, including 10,000 units issued to a member of the Board of Directors. The sales were part of a private
placement of up to $3,000,000 of units (the “Second Offering”) being conducted by the Company on a “best efforts”
basis through a placement agent (the “Placement Agent”). The Offering will terminate on the earlier of the sale of
the full $3,000,000 and March 14, 2016.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCKHOLDERS’ EQUITY (CONTINUED)
2015
Issuances, continued
For
sales occurring subsequent to November 24, 2015 through March 1, 2016 the Placement Agent for the Second Offering will be paid
a commission equal to 10% of the aggregate purchase price from the Units sold to investors introduced to the Company by the Placement
Agent. The Company also will pay the Placement Agent a non-accountable expense allowance equal to 3% of the aggregate purchase
price from the Units sold to (i) investors introduced to the Company by the Placement Agent and (ii) investors not introduced
to the Company by the Placement Agent who purchase less than $500,000 of Units in the aggregate (together, the “Covered
Investors”). From March 1, 2016 through March 14, 2016, the Placement Agent will only be entitled to a 3% non-accountable
allowance for investors introduced by our Company to the Placement Agent. In addition, the Placement Agent will receive warrants
to purchase a number of shares of Common Stock equal to 10% of the total shares of Common Stock included in the Units sold in
the Second Offering to the Covered Investors, with an exercise price of $4.50 per share. Furthermore, if the Company sells the
full $3,000,000 of Units, for the 12 month period commencing on the final closing of the Second Offering, the Placement Agent
will have a right of first refusal to act as passive bookrunner with respect to any proposed underwritten public distribution
or private placement of the Company’s securities.
Each
warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Company’s common stock at
an exercise price of $6.00 per share, commencing immediately and expiring on November 30, 2018. The exercise price and number
of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company,
at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing
price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior
to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price
per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited
unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a
record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant
upon surrender of such warrant.
The
gross proceeds from the Offering and the Second Offering were $696,000. The direct costs related to the First and Second Offering
were $155,054. These direct costs as of December 31, 2015, include the value of 17,400 warrants to be issued to the Placement
Agent. The 17,400 warrants to be issued were valued at $38,056. The Black Scholes option pricing model was used to estimate fair
value as of the date of issuance using the following assumptions: a stock price of $4.00, a dividend yield of 0%, expected volatility
of 68%, a risk free interest rate of 1.76%, and a contractual life of 5 years.
2016
Issuances
From
January 1, 2016 to March 14, 2016, the Company sold 171,725 units to investors at $4.00 per unit for gross proceeds of $686,900.
Each unit consists of one share of common stock and a warrant to purchase one share of common stock. The Company incurred costs
of $60,110 related to these sales resulting in net proceeds of $626,790. As part of these sales 25,000 units were sold to Thomas
Cardella, who subsequently became a member of the Company’s Board of Directors, and 7,500 shares were sold to Paul Vassilakos,
a member of the Board of Directors. The sales were part of a private placement of up to $3,000,000 of units (the “Second
Offering”) conducted by the Company on a “best efforts” basis through a placement agent (the “Placement
Agent”) that commenced on November 24, 2015. The Offering terminated on March 14, 2016.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCKHOLDERS’ EQUITY (CONTINUED)
2016
Issuances, continued
The
Placement Agent for the Second Offering was paid a commission equal to 10% of the aggregate purchase price from the Units sold
to investors introduced to the Company by the Placement Agent. The Company also paid the Placement Agent a non-accountable expense
allowance equal to 3% of the aggregate purchase price from the Units sold to (i) investors introduced to the Company by the Placement
Agent and (ii) investors not introduced to the Company by the Placement Agent who purchase less than $500,000 of Units in the
aggregate (together, the “Covered Investors”). From March 1, 2016 through March 14, 2016, the Placement Agent was
only entitled to a 3% non-accountable allowance for investors introduced by our Company to the Placement Agent. In addition, the
Placement Agent received warrants to purchase a number of shares of common stock equal to 10% of the total shares of common stock
included in the Units sold in the Second Offering to the Covered Investors, with an exercise price of $4.50 per share.
Each
warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Company’s common stock at
an exercise price of $6.00 per share, commencing immediately and expiring on November 30, 2018. The exercise price and number
of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company,
at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing
price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior
to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price
per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited
unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a
record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant
upon surrender of such warrant.
During
the year ended December 31, 2015 and through March 14, 2016, the Company sold 345,725 units through the Placement Agent. As a
result, on March 29, 2016, 34,573 warrants were issued to the Placement Agent. The warrants have an exercise price of $4.50 per
share and expire on October 30, 2020.
On
March 29, 2016 and March 31, 2016, the Company entered into subscription agreements for the sale of 58,750 units for gross proceeds
of $235,000 at $4.00 per unit, including 2,500 units sold to family members of Philip Thomas, CEO and a member of the Board of
Directors and 2,500 to a relative of Thomas Panza, a greater than 10% owner of the Company (the “March Sales”). Each
unit consists of one share of common stock and a warrant to purchase one share of common stock. Such subscriptions were closed
and funded during April 2016.
Each
warrant issued in the March Sales entitles the holder to purchase one share of the Company’s common stock at an exercise
price of $6.00 per share, commencing immediately and expiring on March 29, 2019. The exercise price and number of shares of common
stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call
the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of
the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption
or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock
on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are
exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant
will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCKHOLDERS’ EQUITY (CONTINUED)
2016
Issuances, continued
During
the year ended December 31, 2015, the Company entered into agreements with four members of its Advisory Board. Upon signing the
agreement, each Advisory Board Member was entitled to receive 7,500 shares of common stock. These shares were issued on January
26, 2016.
On
January 26, 2016, 35,824 shares of common stock were issued to the non-employee members of the Board of Directors as compensation
for their services during the year ended December 31, 2015.
On
March 31, 2016, the Company issued 3,400 shares of common stock to customers of the Company. As a result, year ended December
31, 2016, the Company recorded $13,600 as a reduction to net sales in the accompanying consolidated statements of operations.
On
March 31, 2016, the Company issued 1,200 shares of common stock to suppliers of the Company. As a result, for the year ended December
31, 2016, the Company recorded $4,800 in cost of goods sold in the accompanying consolidated statements of operations.
On
March 31, 2016, the Company issued 2,000 shares of common stock to brokers of the Company. As a result, for the year ended December
31, 2016, the Company recorded $8,000 in selling and marketing expenses in the accompanying consolidated statements of operations.
On
March 31, 2016, the Company issued 6,700 shares of common stock to consultants of the Company. As a result, for year ended December
31, 2016, the Company recorded $0 and $26,800, respectively, in general and administrative expenses in the consolidated statements
of operations.
On
March 31, 2016, the Company issued 5,000 shares of common stock to a consultant pursuant to a consulting services agreement. The
terms of the agreement require the consultant to perform services for the Company through February 23, 2017. For the year ended
December 31, 2016, the Company recorded $16,364 of market research expense (reflected in selling and marketing expenses in the
Consolidated Statement of Operations) and as a result, $3,636 was included in prepaid expenses in the accompanying balance sheet
as of December 31, 2016.
On
March 31, 2016, the Company issued 15,833 shares of common stock to a consultant, who also became a member of the Company’s
Advisory Board on March 31, 2016. The shares were issued pursuant to a consulting agreement for future services. For the year
ended December 31, 2016, the Company recorded $63,332 of market research expense and as a result, $0, was included in prepaid
expenses in the accompanying balance sheet as of December 31, 2016. In addition, pursuant to the terms of the consulting agreement,
the Company was required to make an advance payment of $20,000 which was made during April 2016. In addition the consultant will
be paid an additional $30,000 in cash upon completion of the consultant’s services.
On
March 31, 2016, the Company issued 7,500 shares of common stock to an employee of the Company. During the year ended December
31, 2016, $30,000 was included in selling and marketing expenses in the accompanying consolidated statements of operations related
to this issuance.
On
April 6, 2016, $56,250 of proceeds was received from a shareholder who had purchased shares in September 2015 representing the
disgorgement of a short swing profit on the shareholder’s September 2015 sale of the Company’s stock.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCKHOLDERS’ EQUITY (CONTINUED)
2016
Issuances, continued
On
July 29, 2016, the Company issued 10,000 shares of common stock to its Chief Financial Officer pursuant to his employment agreement.
During the year ended December 31, 2016, $40,000 was included in general and administrative expenses in the accompanying consolidated
statements of operations related to this issuance.
On
July 29, 2016, the Company issued 5,000 shares of common stock to a consultant in exchange for services. During the year ended
December 31, 2016, $20,000 was included in general and administrative expenses in the accompanying consolidated statements of
operations related to this issuance.
On
July 29, 2016, the Company issued 1,667 shares of common stock to a consultant pursuant to a consulting services agreement. During
the year ended December 31, 2016, $9,169 was included in general and administrative expenses in the accompanying consolidated
statements of operations related to this issuance.
On
October 4, 2016 and October 7, 2016, the Company issued 140,135 shares of common stock to consultants for total expense of $764,662.
Included in this amount was 67,635 to Julian Davidson, Executive Chairman, and 1,500 shares of common stock to Richard Allen pursuant
to his consulting agreement prior to becoming Chief Financial Officer of the Company.
On
December 27, 2016, Long Island Iced Tea Corp. the Company consummated the December Offering of 406,550 shares of the Company’s
common stock (including 2,375 shares being sold to a member of the Board of Directors, through Network 1 Financial Securities,
Inc. and Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21,
2016, between the Company and Network 1, as representative of the underwriters. The Shares were sold for a price to the public
of $4.00 per share. The Offering generated total net proceeds, after underwriting discounts and payment of other offering expenses,
of $1,423,141.
NOTE
10 – 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. The total number
of shares of common stock reserved under the Plan is 466,667.
During
January 2017, the 2015 Stock Option Plan was amended to increase the aggregate number of shares authorized for issuance by 283,333
shares, from 466,667 shares to 750,000 shares.
On
May 27, 2015, as part of their employment agreements, the Company granted three officers of the Company and Mr. Panza, options
to purchase 194,667 shares at an exercise price of $3.75 which are exercisable until May 26, 2020. These options vest on a quarterly
basis over the two year period from the date of issuance. These options were not issued under the 2015 Stock Option Plan.
On
August 18, 2016, as part of his consulting agreement but not under the 2015 Stock Option Plan, the Company’s board of directors
granted to Julian Davidson, an option to purchase 286,744 shares of the Company’s common stock at an exercise price of $5.50
per share which expires on July 28, 2021. This option vested one third immediately, and then will vest one third on July 28, 2017
and the remainder on July 28, 2018.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – STOCK BASED COMPENSATION (CONTINUED)
Stock
Options, continued
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, 2016
|
|
|
194,667
|
|
|
$
|
3.75
|
|
|
$
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
286,744
|
|
|
|
5.50
|
|
|
|
2.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired,
forfeited or cancelled
|
|
|
(56,000
|
)
|
|
|
3.75
|
|
|
|
6.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
425,411
|
|
|
$
|
4.93
|
|
|
$
|
3.85
|
|
|
|
4.2
|
|
|
$
|
58,240
|
|
Exercisable
at December 31, 2016
|
|
|
199,582
|
|
|
$
|
4.56
|
|
|
$
|
4.38
|
|
|
|
4.2
|
|
|
$
|
36,400
|
|
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 December 31, 2016, there was a total of $610,702 of unrecognized compensation expense related to unvested options. The cost
is expected to be recognized through 2018 over a weighted average period of 1.19 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. For the years ended December 31, 2016 and 2015, the Company recorded stock based compensation
related to stock options of $905,672 and $359,303. In addition, the Company recorded $30,000 related to the issuance of 7,500
shares of common stock to an employee.
The
Black Scholes option pricing model was used to estimate fair value of options granted as of the date of grant during 2016 using
the following assumptions: a stock price of $5.50, a dividend yield of 0%, expected volatility of 75%, a risk free interest rate
of 1.12%, and an expected life of 3.0 years. The simplified method was used to determine the expected life as the options were
considered to be plain-vanilla options.
The
Black Scholes option pricing model was used to estimate fair value of options granted as of the date of grant during 2015 using
the following assumptions: a stock price of $8.70, a dividend yield of 0%, expected volatility of 79%, a risk free interest rate
of 0.99%, and an expected life of 3.25 years. The simplified method was used to determine the expected life as the options were
considered to be plain-vanilla options.
Stock
Warrants
During
the year ended December 31, 2015, the Company issued 1,285,111 warrants (See Note 9), which are all exercisable.
From
January 1, 2016 through March 14, 2016, in connection with the Second Offering, the Company issued warrants to purchase 171,725
shares of the Company’s common stock to investors at an exercise price of $6.00 per share. These warrants were fully vested
upon issuance and expire on November 30, 2018.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – STOCK BASED COMPENSATION (CONTINUED)
Stock
Warrants, continued
From
January 1, 2016 through March 14, 2016, in connection with the Second Offering, the Company issued warrants to purchase 34,573
shares of the Company’s common stock to the placement agent at an exercise price of $4.50 per share. These warrants were
fully vested upon issuance and expire on October 30, 2020.
On
March 29, 2016 and March 31, 2016 in connection with the March Sales, the Company issued warrants to purchase 58,750 shares of
the Company’s common stock at an exercise price of $6.00 per share. These warrants were fully vested upon issuance and expire
on March 29, 2019.
On
July 29, 2016, in connection with the consummation of the Offering, the Company issued warrants to purchase 31,522 shares of the
Company’s common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875
per share, commencing on January 14, 2017 and expiring on July 14, 2021.
The
following table summarizes the stock warrant activity of the Company:
|
|
Number
of shares
|
|
|
Weighted
average exercise price
|
|
|
Weighted
average contractual life (years)
|
|
Outstanding
- January 1, 2016
|
|
|
1,285,111
|
|
|
$
|
4.70
|
|
|
|
-
|
|
Issued
|
|
|
296,570
|
|
|
$
|
5.92
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Exchanged
|
|
|
(1,111,111
|
)
|
|
$
|
4.50
|
|
|
|
-
|
|
Outstanding
December 31, 2016
|
|
|
470,570
|
|
|
$
|
5.95
|
|
|
|
2.2
|
|
Exercisable
at December 31, 2016
|
|
|
470,570
|
|
|
$
|
5.95
|
|
|
|
2.2
|
|
The
following tables summarize total stock-based compensation costs recognized for the years ended December 31, 2016 and 2015:
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock
options
|
|
$
|
905,672
|
|
|
$
|
359,303
|
|
Common
Stock
|
|
|
270,000
|
|
|
|
-
|
|
Total
|
|
$
|
1,175,672
|
|
|
$
|
359,303
|
|
The
total amount of stock-based compensation was reflected within the statements of operations as:
|
|
For
the Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
General
and administrative
|
|
$
|
963,218
|
|
|
$
|
250,909
|
|
Sales
and marketing
|
|
|
212,454
|
|
|
|
108,394
|
|
Total
|
|
$
|
1,175,672
|
|
|
$
|
359,303
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – INCOME TAXES
Deferred
income taxes, if applicable, are provided for the differences between the basis of assets and liabilities for financial reporting
and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected
to be realized.
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
are as follows:
|
|
For
the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
3,093,358
|
|
|
$
|
713,603
|
|
Allowance
for uncollectible accounts
|
|
|
90,177
|
|
|
|
16,632
|
|
Stock-based
compensation
|
|
|
405,616
|
|
|
|
142,284
|
|
Accounts
payable
|
|
|
53,170
|
|
|
|
-
|
|
Other
accruals
|
|
|
293,601
|
|
|
|
95,040
|
|
Compensation
costs
|
|
|
11,058
|
|
|
|
11,286
|
|
Valuation
allowance
|
|
|
(3,955,042
|
)
|
|
|
(986,560
|
)
|
Charitable
Contributions
|
|
|
8,062
|
|
|
|
7,715
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
|
-
|
|
A
reconciliation of the provision for income taxes with the amounts computed by applying the statutory Federal income tax to income
from operations before provision for income taxes is as follows:
|
|
For
the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Statutory
federal tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State,
taxes, net of federal benefit
|
|
|
(4.8
|
)%
|
|
|
(5.6
|
)%
|
Permanent
differences:
|
|
|
|
|
|
|
|
|
Financing
costs- warrant amortization
|
|
|
3.4
|
%
|
|
|
0.8
|
%
|
Merger
costs
|
|
|
-
|
|
|
|
-
|
|
Pre-merger
LIBB book loss
|
|
|
-
|
|
|
|
8.1
|
%
|
Other
|
|
|
1.1
|
%
|
|
|
-
|
|
Loss
on inducement
|
|
|
5.9
|
%
|
|
|
-
|
|
Valuation
allowance
|
|
|
28.4
|
%
|
|
|
30.7
|
%
|
Effective
tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
Internal
Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers (“NOLs”) when the stock ownership
of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased
on a cumulative basis by more than 50 percentage points.
On
May 27, 2015, the Mergers represented a more than 50 percentage point change in ownership of Cullen, with the result that Cullen’s
NOLs are subject to a limitation under Section 382. Upon a change of ownership under Section 382, such losses, provided that certain
requirements for business continuity are met, would be subject to an annual limitation based upon the fair value of Cullen multiplied
by the long-term tax exempt bond rate. The Company determined that it did not meet the business continuity requirements, and as
such, Cullen’s NOLs in the aggregate gross amount of $5,327,000 were not eligible to be carried forward past the date of
the Mergers.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – INCOME TAXES (CONTINUED)
In
connection with the Mergers, the Company recorded gross deferred tax assets of $986,560, and net deferred tax assets of $0, after
consideration of a full valuation allowance of $986,560.
Based
on a history of cumulative losses at the Company and the results of operations for the years ended December 31, 2016 and 2015,
the Company determined that it is more likely than not that it will not realize benefits from the deferred tax assets. The Company
will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than
not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis,
the Company determined that a full valuation allowance against the deferred tax assets was required. As of December 31, 2016,
the Company has recorded a valuation allowance of $3,955,042.
As
of December 31, 2016, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$7,972,573 and $7,972,573, respectively.
The
Company remains subject to examination by tax authorities for tax years 2013 through 2015. The Company files income tax returns
in the U.S. federal jurisdiction and approximately 23 states.
As
of December 31, 2016, management does not believe the Company has any material uncertain tax positions that would require it to
measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will
continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial
statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over
the next year.
NOTE
12 – 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 financial position, results of operations or cash flows. Legal costs related to these matters are expensed
as they are incurred.
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 year ended December 31, 2016, commissions to these brokers currently
range from 2-5% of sales. In addition, the Company sells its products through alternative vending channels. Commissions resulting
from sales through these channels are 44% and 42% for the years ended December 31, 2016 and 2015, respectively.
Employment
Agreements
On
May 27, 2015, the Company entered into employment agreements with Messrs. Thomas and Mr. Dydensborg to serve as Chief Executive
Officer and Chief Operating Officer, respectively. Each has a term of two years except the agreement with Mr. Dydensborg provides
that either the Company or the executive can terminate the agreement with six months’ advance notice. The employment agreements
will provide for Messrs. Thomas and Dydensborg to receive base salaries of $150,000 and $130,000, respectively. Additionally,
each is entitled to an incentive bonus at the discretion of the Board of Directors of up to 50% and 40% such individual’s
base salary, respectively (see Note 15).
On
February 1, 2016, the Company entered into an agreement with an employee. The employee is to be paid a base salary of $120,000
per annum through December 31, 2018. In addition, the employee was awarded 7,500 shares of common stock at the inception of the
agreement (see Note 9).
On
June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial
Officer. The agreement has a term of three years, and automatically renews for one year periods thereafter unless either party
provides notice of its decision not to renew. Mr. Allen will receive a base salary of $170,000 and an incentive bonus of up to
50% of his base salary at the discretion of the Board of Directors. The Company will grant Mr. Allen 8,333 shares of its common
stock on May 31, 2017. The Company will grant to Mr. Allen that additional number of shares of the Company’s common stock
which shall have fair market values equal to $50,000 on each of May 31, 2018 and 2019.
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements
On
June 17, 2015, the Company announced that it had determined to explore potential opportunities in expanding the business into
alcoholic beverages. In connection with the proposed expansion, the Company engaged Julian Davidson as a consultant to spearhead
this new initiative. The Company will reimburse Julian Davidson for reasonable business expenses. In the event the Company raises
$10,000,000, Julian Davidson would become an employee of the Company.
During
the year ended December 31, 2015, the Company entered into agreements with four members of its Advisory Board. Upon signing the
agreement, each Advisory Board Member was entitled to receive 7,500 shares of common stock. These shares were issued on January
26, 2016. For each year of service after December 31, 2015, the Advisory Board members will be entitled to receive $30,000 worth
of common stock and $12,000 in cash on an annual basis. In addition, the members will be entitled to reimbursement of expenses
and $1,000 for each meeting attended. The agreements can be terminated by either party with 30 days’ notice. During the
year ended December 31, 2016 and 2015, the Company incurred $175,000 in costs which are included in general and administrative
expenses in the consolidated statements of operations.
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. (See Note 10)
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
12 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements, continued
Under
the Davidson Amendment, (a) starting on September 29, 2016, the Company will pay to Mr. Davidson an annual fee of $250,000, payable
$20,833 per month, (b) the Company will pay Mr. Davidson an incentive of $75,000 on the date of the agreement and will pay to
him $165,000 on the first anniversary of such date, (c) on September 29, 2016, the Company granted Mr. Davidson 15,000 shares
of the Company’s common stock, (d) Mr. Davidson will be eligible to receive annually an additional fee of up to 50% of his
annual fee based on Consultant’s performance over each calendar year, and (e) upon the Company completing an offering or
offerings that raises gross proceeds of at least $3,000,000 from the sale of its equity securities, then the Company will issue
to Mr. Davidson 20,000 shares of the Company’s common stock and an option to purchase a 71,686 shares of the Company’s
common stock with an exercise price equal to the fair market value of the common stock as of such date.
On
January 27, 2017, upon the closing of an offering, (See Note 15 – Subsequent Events), the Company achieved the threshold
of offerings with gross proceeds exceeding $3,000,000. In connection with the Davidson Amendment on September 29, 2016, Mr. Davidson
was issued 20,000 shares of the Company’s common stock and an option to purchase 71,686 shares of the Company’s common
stock.
Either
Mr. Davidson or the Company may terminate the consulting agreement with 30 days’ prior written notice. The consulting agreement
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).
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 years ended December 31, 2016 and 2015 was $47,655 and $46,459, respectively.
Future
minimum payments under the Company’s leases for the year ended December 31, 2017 is $26,523.
In
addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the year ended December 31,
2016 and 2015 was $86,290 and $50,236, respectively.
NOTE
13 – MAJOR CUSTOMERS AND VENDORS
For
the year ended December 31, 2016, two customers accounted for 20% and 11% of the Company’s net sales. For the year ended
December 31, 2015, one customer accounted for 10% of net sales.
For
the years ended December 31, 2016 and 2015, the largest vendors represented 69% (four vendors, including 23% related to the purchase
of ALO Juice from suppliers in Korea) and approximately 80% (four vendors) of purchases, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 - RELATED PARTIES
During
the year ended December 31, 2015, the Company entered into a Credit Agreement with Brentwood LIIT Inc., a related party (see Note
8).
The
Company recorded revenue related to sales to two entities, whose owners became employees of the Company during 2014. For the year
ended December 31, 2016 and 2015, sales to these related parties were $19,126 and $35,523, respectively. As of December 31, 2016,
accounts receivable from these customers were $10,676. As of December 31, 2015, accounts receivable from these customers were
$15,513.
The
Company recorded revenue related to sales to an entity, CFG Distributors LLC, whose owner became an employee of the Company during
2015. For the years ended December 31, 2016 and 2015, sales to this related party were $463 and $14,527, respectively. As of December
31, 2016 and 2015, accounts receivable from this customer were $44,939 and $51,961, respectively.
In
addition, 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 years ended December 31,
2016 and 2015, sales to this related party were $3,451 and $4,800, respectively. As of December 31, 2016 and December 31, 2015,
there was $0 and $518, respectively, due from this related party which was included in accounts receivable in the consolidated
balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the year ended December
31, 2016 and 2015, the Company purchased $27,557 and $9,356, respectively, of product from this entity. As of December 31, 2016
and 2015, the outstanding balance due to this entity included in accounts payable was $10,043 and $3,242, respectively.
During
the year ended December 31, 2016, the Company accrued $313,500 in expenses related to fees payable to the Company’s Board
of Directors which were included in general and administrative expenses in the statements of operations. The non-employee members
of the Board of Directors will receive $35,000 worth of stock for their services and $30,000 in cash. These shares were issued
in January 2017. During the year ended December 31, 2015, the Company accrued $120,000 in expenses related to fees payable to
the Company’s Board of Directors which were included in general and administrative expenses in the statements of operations.
These shares were issued on January 27, 2016.
A
stockholder and a company owned by member of the Board of Directors of the Company has paid certain expenses on behalf of the
Company. As of December 31, 2016 and 2015 accounts payable and accrued expenses to these parties were $4,032 and $87,258, respectively.
During
May and June 2016, the Company received short term advances of $199,900 from Eric Watson, a significant stockholder of the Company.
During August 2016, the Company repaid the loan balance with interest of $6,616.
During
May and June 2016, the Company received short term advances of $96,123 from Bass Properties LLC, a stockholder of the Company.
During August 2016, the Company repaid the loan balance along with interest of $3,081.
NOTE
15 – SUBSEQUENT EVENTS
Issuance
of Options
On
January 4, 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 5 years from the date of grant, have an exercise price of $5.00,
and vest quarterly over two years. The options have a fair value of $440,696.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 – SUBSEQUENT EVENTS (CONTINUED)
Issuance
of Options, continued
The
Company determined the fair value of the options using the Black-Scholes option pricing model and assumed the following: a stock
price of $4.32, a dividend yield of 0%, expected volatility of 75%, a risk free interest rate of 1.43%, and an expected life of
3.1 years.
On
March 27, 2017 the Company’s Board of Director’s approved the issuance of an option to purchase 70,000 shares of the
Company’s common stock to a member for the Board of Directors for services provided. The option has a term of five years,
an exercise price of $4.50 per share and vests in three equal annual installments commencing on the date of issuance. The option
has a fair value of $130,263.
The
Company determined the fair value of the option using the Black-Scholes option pricing model and assumed the following: a stock
price of $4.00, a dividend yield of 0%, expected volatility of 75%, a risk free interest rate of 1.51%, and an expected life of
3.0 years.
Issuance
of Common Stock
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.
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 accrued obligations.
On
March 27, 2017, the Company’s Board of Directors approved the issuance of 5,000, 15,000 and 45,000 shares of the Company’s
common stock to directors, consultants and employees, respectively, in consideration of services provided.
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.
Employment
Agreement
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 at an exercise price of $4.50 per share.
The option vested 25,000 shares immediately and the remaining 50,000 shares will vest in two equal portions on March 10, 2018
and March 10, 2019. The option will expire five years from the date of grant.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
15 – SUBSEQUENT EVENTS (CONTINUED)
Consulting
Agreement
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 may be renewed on a monthly basis by the Company,
and 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 ancillary
budget (at the Company’s discretion) due each month for the balance of the contract, (c) 10,000 shares of Rule 144 common
stock to be issue upon execution of the agreement and on the 5
th
day of each month until termination or renewal of
this contract, and (d) the Company will reimburse any pre-approved travel or other expenses monthly.
[●]
Shares of Common stock and
Class A Warrants to Purchase [●] Shares of Common stock
PROSPECTUS
Maxim
Group LLC
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other Expenses of Issuance and Distribution.
The
estimated expenses in connection with the sale of the securities being registered hereby, all of which will be borne by us, are
as follows:
SEC
registration fee
|
|
$
|
|
|
FINRA
filing fee
|
|
$
|
|
|
Legal
fees and expenses
|
|
$
|
|
|
Listing
fees
|
|
$
|
|
|
Accounting
fees and expenses
|
|
$
|
|
|
Printing
|
|
$
|
|
|
Miscellaneous
|
|
$
|
|
|
Total
|
|
$
|
|
|
Item
15. Indemnification of Directors and Officers.
Our
amended and restated certificate of incorporation provides that no director of ours will be personally liable to us or any of
our stockholders for monetary damages arising from the director’s breach of fiduciary duty as a director. However, this
does not apply with respect to any action in which the director would be liable under Section 174 of the DGCL nor does it apply
with respect to any liability in which the director (i) breached his duty of loyalty to us or its stockholders; (ii) did not act
in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation
of law; or (iv) derived an improper personal benefit. This provision could have the effect of reducing the likelihood of derivative
litigation against our directors and may discourage or deter our stockholders or management from bringing a lawsuit against our
directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our
stockholders.
Our
amended and restated certificate of incorporation also provides that we will indemnify any director or officer of ours to the
fullest extent permitted by law. Our bylaws further provide that we will indemnify to the fullest extent permitted by law any
person who becomes party to a proceeding by reason of the fact that he is or was an director, officer, employee or agent of ours,
or by reason of the fact that he is or was serving at our request as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. We have entered, and intend to continue to enter, into separate indemnification
agreements with our directors, executive officers and other key employees, in addition to the indemnification provided for in
our amended and restated certificate of incorporation and bylaws. We also maintain directors’ and officers’ liability
insurance.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or person controlling
us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is therefore unenforceable.
Item
16. Exhibits
A
list of the exhibits required by Item 601 of Regulation S-K to be filed as part of this registration statement is set forth in
the Exhibit Index on page II-4.
Item
17. Undertakings
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
Provided
,
however
, that:
Paragraphs
(a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the registration statement is on Form S-3 and the information
required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement, or is contained in a form of prospectus filed pursuant to Rule 424(b) that is part
of the registration statement.
(2)
That, for the purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(5)
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:
|
(i)
|
(A)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement
as of the date the filed prospectus was deemed part of and included in the registration statement; and
|
(B)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information
required by Section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement
as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale
of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and
any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
(ii)
Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in
a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date
of first use.
(b)
The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933,
each filing of the registrant’s annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(h)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf
by the undersigned, hereunto duly authorized, in Farmingdale, New York on November 22
nd
, 2017.
|
LONG
ISLAND ICED TEA CORP.
|
|
|
|
|
By:
|
/s/
Philip Thomas
|
|
Name:
|
Philip
Thomas
|
|
Title:
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
By:
|
/s/
Philip Thomas
|
|
Chief
Executive Officer
|
|
November
22, 2017
|
|
Philip
Thomas
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/
Julian Davidson
|
|
Executive
Chairman
|
|
November
22, 2017
|
|
Julian
Davidson
|
|
(Principal
Accounting and Financial Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/
Edward Hanson
|
|
Director
|
|
November
22, 2017
|
|
Edward
Hanson
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Richard Roberts
|
|
Director
|
|
November
22, 2017
|
|
Richard
Roberts
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Tom Cardella
|
|
Director
|
|
November
22, 2017
|
|
Tom
Cardella
|
|
|
|
|
Exhibit
List
Exhibit
No.
|
|
Description
|
|
|
|
1.1*
|
|
Form
of Underwriting Agreement.
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (incorporated by reference from Annex C of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
3.2
|
|
Bylaws (incorporated from Annex D of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
4.1
|
|
Specimen common stock Certificate of Long Island Iced Tea Corp (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
4.2*
|
|
Form
of Class A Warrant.
|
|
|
|
4.3*
|
|
Form
of Representative Warrant.
|
|
|
|
5.1*
|
|
Opinion
of Graubard Miller.
|
|
|
|
10.1
|
|
Form
of Registration Rights Agreement among Triplecrown Acquisition Corp. and the Triplecrown Founders (incorporated by reference
from Triplecrown Acquisition Corp.’s Registration Statement on Form S-1 (File Nos. 333-144523 and 333-146850) originally
filed on July 12, 2007).
|
|
|
|
10.2
|
|
Sale
and Purchase Agreement, dated as of December 31, 2014, by and between Cullen Agricultural Holding Corp. and Hart Acquisitions,
LLC (incorporated by reference from Exhibit 10.5 to Cullen’s Annual Report on Form 10-K filed on March 4, 2015).
|
|
|
|
10.3
|
|
Form of Lock-Up Agreement (incorporated from Exhibit 10.1 to Cullen’s Current Report on Form 8-K filed on January 6, 2015).
|
|
|
|
10.4
|
|
Form of Escrow Agreement (incorporated by reference from Exhibit 10.4 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.5
|
|
Form of Registration Rights Agreement (incorporated from Exhibit 10.3 to Cullen’s Current Report on Form 8-K filed on January 6, 2015).
|
|
|
|
10.6
|
|
Form of Employment Agreement between Long Island Iced Tea Corp. and Philip Thomas (incorporated by reference from Exhibit 10.9 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.7
|
|
Form of Employment Agreement between Long Island Iced Tea Corp. and Peter Dydensborg (incorporated by reference from Exhibit 10.10 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.8
|
|
Form of Employment Agreement between Long Island Iced Tea Corp. and James Meehan (incorporated by reference from Exhibit 10.11 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.9
|
|
Form of Employment Agreement between Long Island Brand Beverages LLC. and Thomas Panza (incorporated by reference from Exhibit 10.12 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.10
|
|
2015 Long-Term Incentive Equity Plan (incorporated by reference from Annex G of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
|
|
|
|
10.11
|
|
Form of Executive Stock Option Agreement (incorporated by from Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on March 23, 2016).
|
|
|
|
10.12
|
|
Form of Subscription Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015).
|
|
|
|
10.13
|
|
Form of Warrant (incorporated by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015).
|
|
|
|
23.1**
|
|
Independent Registered Public Accounting Firm’s Consent
|
*
To be filed by amendment.
**
Filed herewith