PART
I
ITEM
1. BUSINESS
General
We
are a holding company. Until December 2017, we were focused exclusively on the ready-to-drink segment of the beverage industry.
In December 2017, we announced that we were expanding our attention to include the exploration of, and investment in, opportunities
that leverage the benefits of Blockchain technology. We changed our name from “Long Island Iced Tea Corp.”
to “Long Blockchain Corp.” and reserved the web domain www.longblockchain.com. We also changed our trading symbol
from “LTEA” to “LBCC” in connection with the name change.
Blockchain
Business Overview
We
are seeking to become a full service Blockchain technology company. The Blockchain is built by a chronological addition of
transactions, which are grouped into blocks. Each new block requires a mathematical problem to be solved before it can be confirmed
and added to the Blockchain. Our aim is to provide products and services to contribute and generate revenues from all aspects
of the Blockchain eco-system, including digital trading (such as operating an exchange), facilitation of digital currency storage
(Crypto wallets), capital raising activities (such as initial coin offerings, or “ICO’s”) or Distributed Ledger
Technology (“DLT”)-based initiatives (Smart KYC). As a public company, we believe that we are in a prime position
to build and acquire technology with global applications using Blockchain technology.
As
our first step to becoming a full service Blockchain technology company, in March 2018 we entered into a sale and purchase
agreement (the “Hashcove Agreement”), as amended on March 16, 2018, with the shareholders (“Hashcove Shareholders”)
of Hashcove Limited (“Hashcove”). Pursuant to the Hashcove Agreement, we will acquire all of the outstanding
shares of Hashcove from the Hashcove Shareholders and Hashcove will become our wholly owned subsidiary. The closing of
the transaction, which is expected to occur by the third quarter of 2018, is subject to customary closing conditions,
including, among others, that neither we nor Hashcove suffers a material adverse effect as described in the agreement.
Hashcove
is an early stage UK-based technology company focused on developing and deploying globally scalable distributed ledger technology
solutions. Among its planned product offerings, Hashcove is developing tokenized platforms, crypto-exchanges and wallets, smart
contracts for ICOs, know-your-customer (“KYC”) and financial clearing technology on Blockchain, and other related
Blockchain applications. Hashcove’s product team is comprised of 25 employees, including developers, with proven
experience in enterprise financial trading algorithmic software.
Hashcove
would provide us with in-house expertise in a number of Blockchain products and strategic leadership as to Blockchain/DLT
product development and delivery. We believe moving in this direction will enable us to generate maximum revenue while
maintaining full control over the intellectual property related to such technologies. Assuming consummation of the
transaction with Hashcove, we intend to seek to build decentralized Blockchain applications for clients around the globe,
across industries, for uses as varied as peer-to-peer lending, healthcare and education. The opportunities could
include developing Blockchain applications on various Blockchain platforms including Ethereum and EOS. We would also look to
leverage the core capability of Hashcove to build its other planned products including Crypto wallet, Crypto exchange, ICO
Smart contracts and KYC / Clearing on Blockchain.
Following
our acquisition of Hashcove, we intend to look to expand our business to allow for the generation of end-client acquisitions
and formulate a solid distribution model. This will be driven by our recent minority investments in Stater Blockchain Limited
(“SBL”) and TSLC PTE Ltd. (“TSLC”). SBL focuses on developing and deploying globally scalable blockchain
technology solutions in the financial markets. SBL’s wholly-owned subsidiary, Stater Global Markets (“SGM”),
is a Financial Conduct Authority (“FCA”) regulated brokerage that facilitates market access across multiple instruments
including spot FX, exchange traded futures and contracts for difference (“CFDs”). TSLC is a major stakeholder
of CASHe, a leading provider of digital money and short-term financial products to young millennials across India. TSLC owns all
of the intellectual property developed by CASHe and has the worldwide rights outside of India to the application of its intellectual
property for its lending and money transfer platform. We will seek to leverage our investment in SBL to help Hashcove cross market
and diversify its products and offerings, and will seek to leverage our investment in TSLC to diversify our distribution
base for Blockchain-based products. SBL and TSLC offer us entry ways to very different segments of the financial services market
but that still have a need for Blockchain-based products. We believe this will allow Hashcove’s technology to service the
full spectrum of customer segments and hopefully lead to additional avenues for its products.
Beverage
Business Overview
Our
wholly-owned subsidiary, LIBB, is focused on the ready-to-drink segment of the beverage industry. Through LIBB, we are
engaged in the production and distribution of premium Non-Alcoholic Ready-to-Drink, or “NARTD,” beverages.
LIBB’s mission is to provide consumers with “better-for-you” premium beverages offered at an affordable
price.
Our
beverage business is currently organized around our flagship iced 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. Long Island Iced Tea®
is sold in approximately 21 states across the U.S., primarily on the East Coast, through a network of national and regional
retail chains and distributors.
We
also sell The Original Long Island Brand™ Lemonade, which is a NARTD functional beverage made from a proprietary recipe
with quality components. Since February 2016, we have also 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.
In
February 2018, our board of directors approved management’s intentions to spin off LIBB (the “Spinoff”). The
Spinoff will allow us to focus exclusively on our move into the Blockchain technology industry. We aim to structure and complete
the Spinoff by the third quarter of 2018.
Corporate
History
We
were incorporated on December 23, 2014 in the State of Delaware under the name “Long Island Iced Tea Corp.” as a wholly
owned subsidiary of Cullen.
On
May 27, 2015, we closed the business combination (the “Business Combination”) contemplated by 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 Cullen, us, Cullen Merger Sub, Inc., LIBB Acquisition Sub, LLC, LIBB, Philip Thomas and Thomas Panza, who formerly owned
a majority of the outstanding membership units of LIBB, and the other former members of LIBB executing a joinder thereto. Pursuant
to the Merger Agreement, (i) Cullen Merger Sub, Inc. merged with and into Cullen, with Cullen surviving as a wholly owned subsidiary
of ours and the stockholders of Cullen receiving one share of our common stock for every 15 shares of Cullen common stock held
by them and (ii) LIBB Acquisition Sub, LLC merged with and into LIBB, with LIBB surviving as a wholly owned subsidiary of ours
and the members of LIBB receiving an aggregate of 2,633,334 shares of our common stock.
Upon
the closing of the Business Combination, we became the new public company, Cullen and LIBB became wholly-owned subsidiaries of
ours and the stockholders of Cullen and the members of LIBB became our stockholders. In addition, the historical financial statements
of LIBB became our financial statements. As a result of the Business Combination, the business of LIBB became our business. Cullen
is currently inactive and no significant operations are being undertaken by it. LIBB was formed as a limited liability company
under the laws of New York on February 18, 2011.
On
December 21, 2017, we amended our certificate of incorporation to change our name from “Long Island Iced Tea Corp.”
to “Long Blockchain Corp.”
Our
principal executive offices are located at 12-1 Dubon Court, Farmingdale, New York 11735. Our telephone number is (855) 542-2832.
Our website addresses are www.longblockchain.com and www.longislandicedtea.com. The information contained on, or accessible from,
our corporate websites are not part of this annual report and you should not consider information contained on our websites to
be a part of this annual report or in deciding whether to purchase our common stock.
Listing
Developments
On
October 9, 2017, we received a notice from the Listing Qualifications Department of The Nasdaq Stock Market (“NASDAQ”)
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 “MVLS Rule”). Pursuant
to the notice, we had until April 9, 2018 to regain compliance with the MVLS Rule. In order to regain compliance, the market value
of our listed securities was required to remain at $35 million or more for a minimum of ten consecutive business days. On January
23, 2018, we were notified by NASDAQ that we had regained compliance with the MVLS Rule. Then, on February 15, 2018, we received
a notice from NASDAQ stating that NASDAQ had determined to delist our securities under the discretionary authority granted to
NASDAQ pursuant to NASDAQ Rule 5101. The notification letter stated that NASDAQ believed that we made a series of public statements
designed to mislead investors and to take advantage of public interest in bitcoin and Blockchain technology, thereby raising
concerns about our suitability for exchange listing. The notification letter also stated that NASDAQ was revoking its January
23, 2018 notification to us that we had regained compliance with the MVLS Rule.
We
appealed the foregoing delisting to a NASDAQ Hearings Panel, which appeal hearing was held on March 22, 2018. On April 10, 2018,
we were notified that the NASDAQ Hearings Panel determined to affirm the delisting of our shares from NASDAQ, and suspended trading
effective at the open of business on April 12, 2018. We intend to apply for our common stock to be quoted and traded on the OTCQB
Market. Effective April 12, 2018, our common stock will be eligible for trading and quotation on the Pink Current Information
tier operated by the OTC Markets Group Inc. (the “OTC”). Our trading symbol will remain LBCC.
Capital
Raising 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 net proceeds of $1,235,088 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.
Radium2
Capital Inc
.
On
November 27, 2017, we completed a financing with Radium2 Capital Inc. (“Radium”). Pursuant to an Agreement
for the Purchase and Sale of Future Receipts with Radium the (“Radium Agreement”), we received cash
of $750,000, less $7,500 of fees and expenses. The Radium borrowing is repaid at a minimum amount per week, based upon 15% of
our gross sales, until we have repaid a total of $986,250. The Radium Agreement further provides for a discount on the
repayment amount, provided such prepay obligation of $838,313 is paid within 126 business days from the date of funding. The Radium
Agreement was accounted for as a borrowing, with the difference between the repayment obligation and the net amount funded being
recorded as an original issue discount, amortized using the interest method over the expected term of the arrangement. As of December
31, 2017, the balance of the obligation, net of the discount was $688,038, and was presented as note payable, current, within
the consolidated financial statements. Since the repayment terms are based upon our actual future sales, which are not fixed,
we classified the obligation as a current liability. During the year ended December 31, 2017, accreted discount amortization was
$ 47,437, and was reflected as interest expense within the consolidated statements of operations and comprehensive loss.
Court
Cavendish Ltd.
On
December 20, 2017, we entered into the Option and Loan Agreement the (“Cavendish Loan Agreement”)
with Court Cavendish Ltd (“Cavendish”). The Cavendish Loan Agreement provides for the availability of an initial
$2,000,000 (“Initial Facility Amount”). Cavendish also agreed to allow for two extensions of $1,000,000 each (“Extended
Facility Amount”, and together with the Initial Facility Amount, the “Facilities”), as long as we continued
moving towards specific ventures related to the Blockchain technology and the Company remained compliant with its Nasdaq
regulations, to increase the Facilities to $4,000,000 subject to Cavendish’s approval. Interest on the Facilities shall
accrue monthly, at a rate of 12.5% per annum, on the unpaid principal balance commencing on the date of the first drawdown and
shall be due and payable, without demand or notice, at our election quarterly in cash or in our shares valued at the lower of
$3.00 or the closing price per share on the preceding date the interest payment is due. All principal and accrued interest under
the Facilities is due and payable on December 21, 2018. On such date, at Cavendish’s election, we shall repay the outstanding
amount together with accrued interest either in cash or in shares of our common stock at the lower of $3.00 or the closing price
per share on such date, but not lower than $2.00 per share. In connection with the Cavendish Loan Agreement, a facility fee of
5% (“Original Issue Discount” or “OID”) of each of the Initial Facility Amount and the Extended Facility
Amount is payable on the date of the first drawdown under each such facility and payable in either cash or stock. The facility
fee on the Initial Facility Amount of $100,000 was withheld from the proceeds of the initial $750,000 funding under the Cavendish
Loan Agreement.
In
connection with the Initial Facility Amount, we issued to Cavendish a warrant to purchase 100,000 shares of the Company’s
common stock with a three year life and an exercise price of $3.00 per share. This warrant had a gross fair value of $165,645,
using the Black-Scholes option pricing model. Upon the first draw under the Extended Facility Amount, we shall issue a warrant
to purchase an additional 50,000 shares of our common stock, with the same terms, for each of the $1,000,000 extensions that are
made available under the Extended Facility Amount.
The
$100,000 fee and the warrant to issue 100,000 shares of our common stock were considered costs of the Initial Facility Amount.
For
the Initial Facility Amount, the $100,000 fee was charged in full as a cost of the facility and the warrant was charged on a relative
fair value basis, or in the amount of $152,363. These costs were initially charged to deferred financing costs, since these
costs were associated with the Initial Facility Amount and not to a single funding. Thereafter, these deferred costs shall be
charged on a pro rata basis as a direct offset against the fundings as they occur, and such costs would be amortized using the
interest method over the term of each funding loan.
On
December 21, 2017, we requested a funding of $750,000 under the Initial Financing Facility, which was received by us on December
22, 2017. OID costs of $37,500 and warrant costs of $57,136, were from deferred financing costs were directly offset against this
funding.
We
then evaluated the funding transaction to determine whether or not there was a beneficial conversion feature. Accordingly, we
determined that after the effect of the OID and the warrant, that the effective conversion price was $2.13 per share. With a market
price of our common stock on December 20, 2017, of $2.44, we were determined to have a beneficial conversion feature with a value
of $94,636. The beneficial conversion feature was accounted for as a credit to additional paid in capital and a direct offset
to the funded loan amount, with such costs amortized using the interest method over the term of each funding loan.
On
December 26, 2017, Cavendish elected to convert the initial drawdown amount, plus interest, of $750,700 into shares of our common
stock. Pursuant to the Cavendish Loan Agreement, the conversion price was $3.00 per share. Accordingly, an aggregate of 250,233
shares of common stock were issued to Cavendish. Accordingly, in recording the conversion, we recognized $189,272 in interest
expense for the unamortized debt discount and then the principal value of the note of $750,000 was credited to additional paid
in capital and common stock.
On
January 15, 2018, Cavendish funded an additional drawdown of $750,000. We received the final drawdown of $500,000 of the Initial
Facility Amount on January 30, 2018. Since we are no longer listed on NASDAQ, the remaining amount under the Extended Facility
Amount will not be available to us unless Cavendish were to waive this requirement.
Blockchain
Developments
Agreement
with Hashcove Limited
On
March 15, 2018, the Company entered into the Hashcove Agreement with the Hashcove Shareholders.
Pursuant
to the Hashcove Agreement, the Company is purchasing (the “Hashcove Purchase”) the entire issued share capital of
Hashcove from the Hashcove Shareholders. In exchange, the Company will issue 531,250 shares of common stock of the Company to
the Hashcove Shareholders. Additionally, the Shareholders may earn up to an aggregate of 1,533,750 of additional shares of common
stock of the Company (the “Contingent Shares”) upon the achievement of the following milestones: (a) if (i) the Company’s
net revenue (as defined in the Agreement) equals or exceeds $10,000,000 during any 12-calendar month period beginning six months
after the closing (as defined below) and ending no later than 36 months after the closing; (ii) Hashcove’s net revenue equals
or exceeds $5,000,000 during any 12-calendar month period beginning six months after the closing and ending no later than 36 months
after the closing; or (iii) the closing sale price of the Company’s common stock equals or exceeds $8.00 for a minimum of
30 consecutive trading days during the 36 months following the closing, the Shareholders shall receive an aggregate of an additional
1,135,312 shares of common stock of the Company; and (b) if Hashcove completes the crypto exchange, ICO smart contract solution,
“clearing on blockchain” and “KYC on blockchain” products in accordance with the Agreement during the
24 months following the closing, the Hashcove Shareholders shall receive an aggregate of an additional 398,438 shares of
common stock of the Company. The Contingent Shares will be placed in escrow at the Closing and will be released to the Hashcove
Shareholders upon achievement of the applicable milestones.
Upon
closing of the Hashcove Purchase, Kunal Nandwani, Hashcove’s Chief Executive Officer, will become an executive officer
and director of the Company.
The
Hashcove Shareholders have agreed to certain restrictions on transfer of the shares they receive under the Hashcove Agreement.
Hashcove Shareholders will also have no right to any economic benefit resulting from the Spinoff.
The
Company has also agreed to file, as promptly as practicable in its reasonable discretion following the closing, a registration
statement with the Securities and Exchange Commission (“SEC”) registering the resale of the shares of common stock
of the Company to be issued to the Hashcove Shareholders pursuant to the Hashcove Agreement and agreed to seek to
have such registration statement declared effective by the SEC as promptly as practicable thereafter.
Agreement
with Stater Blockchain Limited
On
March 19, 2018, the Company entered into a contribution and exchange agreement (the “Stater Agreement”) with SBL,
and simultaneously closed the transactions contemplated thereby.
SBL
is a New Zealand-based technology company focused on developing and deploying globally scalable blockchain technology solutions
in the financial markets. SBL plans to develop multiple blockchain and digital currency technology solutions, such as its “Smart
Settlements” and “Smart KYC” platforms, for the global financial markets where significant disintermediation
opportunities exist. SBL owns SGM, a United Kingdom-based FCA-regulated prime-of-prime brokerage, which facilitates
market access across multiple instruments including foreign exchange, exchange traded futures and CFDs.
Pursuant
to the Stater Agreement, SBL issued to the Company 99 ordinary voting shares in SBL (“SBL Shares”) which, immediately
following completion of the transaction contemplated by the Stater Agreement, constituted 9.9% of the total SBL Shares then issued
and outstanding, in exchange for 1,135,435 shares of common stock of the Company, which constituted 9.9% of the total shares of
common stock of the Company then issued and outstanding (the “Exchange”).
Upon
closing, Shamyl Malik, the Company’s Chief Executive Officer, was appointed as a director of SBL and Ramy Soliman, SBL’s
Chief Executive Officer, was appointed as a director of the Company.
Upon
closing, the Company, SBL and the majority shareholder of SBL entered into a shareholders’ agreement (the “Stater
Shareholders’ Agreement”), governing the management and ownership of SBL. The Stater Shareholders’ Agreement
includes the Company’s right to appoint one director of SBL, so long as the Company holds at least 9.9% of the SBL Shares
then on issue, certain restrictions on transfer and preemptive rights with respect to the issuance of new securities of SBL.
Upon
Completion, the Company, SBL and LIIT entered into a voting agreement (the “Voting Agreement”), pursuant to
which SBL agreed, if necessary, to vote its shares of common stock of the Company (i) in favor of the Company’s distributing
the shares of common stock of LIIT held by it (the “LIIT Shares”) to the Company’s stockholders
by way of a dividend (the “Spinoff”), and/or (ii) if requested by the Company against any agreement which would prevent
the Spinoff. Additionally, until the earlier of (i) one year from the consummation of the Spinoff or (ii) the date on which LIIT
Shares become listed on a national securities exchange, in the event any vote of LIIT’s stockholders is necessary
to effectuate any corporate action, SBL agreed to vote the LIIT Shares it directly or indirectly receives upon consummation
of the Spinoff (i) in favor of any corporate action recommended by the then existing board of directors of LIIT (a “LIIT
Action”) and/or (ii) against any action or agreement which would impede, interfere with or prevent any LIIT Action
from being consummated. Pursuant to the Voting Agreement, SBL also agreed to appoint the Company or LIIT as its proxy to
vote SBL’s shares of common stock of the Company or LIIT Shares, as applicable, if so requested by the Company. The
voting requirements set forth in the Voting Agreement shall expire if the Spinoff is not consummated by November 13, 2018 or if
prior to such date, the Company’s board of directors unanimously decides not to proceed with the Spinoff.
Agreement
with CASHe
On
March 22, 2018, we entered into and closed on a contribution and exchange agreement (the “CASHe Agreement”) with TSLC.
TSLC
is the parent company of CASHe. TSLC also owns all of the intellectual property developed by CASHe and has the worldwide rights
outside of India to the application of its intellectual property for its lending and money transfer platform. CASHe provides short-term
financial products using modern technology combined with intelligent big data analytics and proprietary algorithms to map young
professionals across the country based on their mobile digital footprint and their social behaviour patterns to rate their credit
worthiness. CASHe has also implemented distributed ledger enabled digital tokens using smart contracts on its lending platform.
The distributed ledger technology allows the platform to record transactions in a secure and transparent manner by creating an
audit trail.
Pursuant
to the CASHe Agreement, TSLC issued us 1,145,960 shares of its voting capital stock (the “
TSLC Capital Stock
”),
equal to 7.00% of the TSLC Capital Stock on a fully diluted basis, in exchange for (i) 1,949,736 shares of our common stock, equal
to 17.00% of our total common stock issued and outstanding as of the date of the CASHe Agreement, and (ii) the right to receive,
if a Material Adverse Effect (as defined in the CASHe Agreement) occurs with respect to the Company within ninety (90) days of
the date of the CASHe Agreement, an additional 332,602 shares of our common stock, equal to 2.90% of our total issued and outstanding
common stock as of the date of the CASHe Agreement. As of April 12, 2018, we were delisted from NASDAQ, which triggered the
Material Adverse Effect under the CASHe Agreement, and therefore we owe
to TSLC an additional 332,602 shares of
our common stock.
Pursuant
to the CASHe Agreement, one person from TSLC will be appointed to our board of directors. Such person has not been appointed
to our board of directors as of the date of this Form 10-K.
Pursuant
to the CASHe Agreement, TSLC agreed to vote its Company common stock received pursuant to the CASHe Agreement (i) in favor of
the Spinoff, and/or (ii) if requested by us against any agreement which would prevent the Spinoff. Additionally, until the earlier
of (i) one year from the consummation of the Spinoff or (ii) the date on which the LIIT Shares become listed on a national
securities exchange, in the event any vote of the stockholders of LIIT is necessary to effectuate any LIIT Action,
TSLC agreed to vote the LIIT Shares it directly or indirectly receives upon consummation of the Spinoff (i) in favor of
any LIIT Action and/or (ii) against any action or agreement which would impede, interfere with or prevent any LIIT
Action from being consummated.
Pursuant
to the CASHe Agreement, TSLC granted us the rights to develop the business of CASHe in the Latin American market, subject to the
parties entering into a mutually acceptable license agreement having terms customary for such agreements, including, without limitation,
those relating to payment of license fees and royalties by us to TSLC (which terms have not yet been negotiated).
We
agreed (a) to use our reasonable best efforts to file a registration statement to register the resale of the Company common stock
issued pursuant to the CASHe Agreement as soon as practicable and have such registration statement declared effective as soon
as possible thereafter and (b) file any necessary notices with the OTC Markets relating to the Company’s
common stock as soon as reasonably possible to allow shares issued pursuant to the CASHe Agreement to be traded on the OTC.
Beverage
Developments
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. As part of the distribution
agreement, we 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. At
December 31, 2017, we fully impaired the ALO Juice intellectual property because we have de-emphasized the sale of our ALO Juice
in order to better manage our liquidity.
Blockchain
Business
Background
on Blockchain Technology
During
September 2008, the global banking system was under tremendous strain, resulting in the financial services sector needing liquidity
injections to avoid collapse. This situation lead to the birth of an idea for a peer-to-peer transactions system that would build
trust in financial transactions using technology that was crowd-consensus driven and decentralized. The concept became what is
now known as “Bitcoin,” a digital virtual global currency, and the underlying technology that enabled it was termed
“Blockchain.”
The
Blockchain architecture gives participants the ability to share a ledger that is updated, through peer-to-peer replication, every
time a transaction occurs. The Blockchain network is economical and efficient because it eliminates duplication of effort and
reduces the need for intermediaries. The Blockchain is less vulnerable because it uses consensus models to validate information;
transactions are secure, authenticated and verifiable.
The
Blockchain satisfies the global need of transaction networks that are fast and that provide a mechanism that establishes trust
while requiring no specialized equipment. The Blockchain network has no chargebacks or monthly fees and provides a collective
bookkeeping solution ensuring transparency and trust.
Blockchain
has the ability to bring greater efficiencies in how information is created, shared, accessed, and secured, and relies upon crowd
efforts for validating the correctness of the information. Decentralization is the core theme of Blockchain. After Blockchain’s
apparent successful support of Bitcoin for years, it is ready for implementation and experimentation in various other industries
and use cases, including, digitization of assets, ownership of assets and various other financial market applications.
Blockchain
Technology
In
a Blockchain, copies of a ledger are “distributed” and validated by a consensus process, with multiple users independently
verifying ledger changes. Blockchain is a sequential transaction database, which contains a continuously growing list of all the
transactions which have occurred in the system. All the recent valid transactions are bunched into a block (hence the name blockchain),
which are then time-stamped and stored using strong cryptography. Blockchain relies on cryptography driven mining, to stamp all
transactions uniquely, which builds the trust in collaborative transparent technology process.
Every
new block added to the Blockchain database contains a hash (cryptographic hash) of the previous block, which makes it tamper-resistant.
This is because changing any particular transaction in the Blockchain database would change the hash of the block being tampered
with, which would cascade to all the subsequent blocks added in the Blockchain. The Blockchain database may be stored fully or
partially by a set of nodes, which can verify any transaction being done on the Blockchain and these act in “consensus”.
In
traditional businesses and networks, the authority to make decisions is still centralized though the actual processing is distributed
across several nodes globally. Although businesses previously employed a centralized data location, companies today use distributed
networks to store and access data in order to avoid latency and connectivity problems. AWS, BitTorrent and Akamai are a few examples
of centralized but distributed networks.
Differences
between Centralized, Decentralized and Distributed Networks
Source:
SharesPost Research,
https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274
Blockchain
can be programmed to record many items of value in our lives, such as: birth and death certificates, marriage licenses, deeds
and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes and anything else
that can be expressed in code. Using Blockchain, we can build businesses and conduct transactions directly among participants
with less friction from outside intermediaries like banks, brokers and governments. Institutions like banks or governments can
embrace this technology to revamp their operations, cut costs, boost trust, increase commerce and create new value for their stakeholders.
Types
of Blockchain
The
following are some of the more commonly used Blockchains:
|
●
|
Bitcoin
Blockchain –The original native Blockchain, which is the most used one in the market.
|
|
|
|
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|
Ethereum
–Invented to write trigger conditions based outcomes, called “smart contracts” within a software code, on
top of the Blockchain. It is most widely used for Blockchain development of new tokens within ICOs.
1
|
|
|
|
|
●
|
Multichain
– A faster and flexible version of Bitcoin Blockchain, that lets you easily define assets, alter mining and consensus
process that make the platforms more efficient.
|
|
|
|
|
●
|
Hyperledger
– An open source collaborative effort created to advance cross-industry Blockchain technologies. It is a global collaboration,
hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing and
technology.
|
There
are many more Blockchain platforms available.
Key
Factors To Be Considered in Evaluating Blockchain Use
The
following are some of the key factors that are considered when evaluating Blockchain use:
|
●
|
Shared
beneficial ownership
– Bitcoin Blockchain is owned by the public, striving to build a decentralized financial system
where trust is built in a democratic fashion. While Bitcoin was initially a fringe technology, it was scaled by the tech community
and eventually became mainstream, because it seemed to help the whole world and everyone had an equal opportunity to leverage
the benefits of a secured decentralized ledger towards their business (like miners, bitcoin exchanges, developers of e. wallets,
etc.). Wikipedia, Linux and several other open and crowd-sourced platforms have scaled in a similar fashion.
|
|
|
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●
|
Independent
mining achieves trust
– Blockchain does not create trust inherently. Several nodes independently validating
all transactions, for some incentive, build trust in a Blockchain. If the Blockchain application did not have enough
independent participants, the Blockchain transactions would not be so trustworthy.
|
|
●
|
True
decentralization
– To be truly decentralized, there must be no central point of
failure. There is no dependence on one person, one node, one company, one nation or one leader.
|
|
|
|
|
●
|
No
contract among transacting parties
– In a transaction, payee and payer do not need to know each other.
They do not need to have a legal agreement between them defining terms and conditions of their transaction.
|
|
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|
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●
|
Other
factors
– There are other factors that need consideration, including, multiple parties executing the transactions,
transparency of transactions acceptable to all parties, public or private Blockchain, among others.
|
All
the above factors are very critical in evaluating whether or not one needs Blockchain in their business.
1
Source : https://techcrunch.com/2017/06/08/how-ethereum-became-the-platform-of-choice-for-icod-digital-assets/
Business
Strategy
We
are seeking to become a full service Blockchain technology company. Our aim is to provide products and services to contribute
and generate revenues from all aspects of the Blockchain eco-system, including digital trading (such as operating an exchange),
facilitation of digital currency storage (Crypto wallets), capital raising activities (ICO’s) or DLT-based initiatives (Smart
KYC). As a public company, we believe that we are in a prime position to build and acquire technology with global applications
using Blockchain technology.
As
our first step to becoming a full service Blockchain technology company, we entered into the Hashcove Agreement in March
2018. Pursuant to the Hashcove Agreement, we will acquire all of the outstanding shares of Hashcove from the Hashcove
Shareholders and Hashcove will become our wholly owned subsidiary. The closing of the transaction, which is expected to occur
by the third quarter of 2018, is subject to customary closing conditions, including among others that neither we
nor Hashcove suffers a material adverse effect as described in the agreement. Accordingly, there is no assurance that the transaction
will be consummated.
Hashcove
is an early stage UK-based technology company focused on developing and deploying globally scalable distributed ledger technology
solutions. Among its planned product offerings, Hashcove is developing tokenized platforms, crypto-exchanges and wallets, smart
contracts for ICO’s, KYC and financial clearing technology on Blockchain, and other related Blockchain applications. Hashcove’s
product team includes 25 employees, including developers, with proven experience in enterprise financial trading algorithmic software.
Hashcove
would provide us with in-house expertise in a number of Blockchain products and strategic leadership as to Blockchain/DLT product
development and delivery. We believe moving in this direction will enable us to generate maximum revenue while maintaining full
control over the intellectual property related to such technologies. Assuming consummation of the transaction with Hashcove, we
intend to seek to build decentralized Blockchain applications for clients around the globe, across industries, for uses as
varied as peer-to-peer lending, healthcare and education. The opportunities could include developing Blockchain applications
on various Blockchain platforms including Ethereum and EOS. We would also look to leverage the core capability of Hashcove to
build its other planned products including Crypto wallet, Crypto exchange, ICO Smart contracts and KYC / Clearing on Blockchain.
Assuming
our acquisition of Hashcove is consummated,
we will look to expand our business to allow for the generation of end-client acquisitions and formulate a solid distribution
model. This will be driven by our recent minority investments in SBL and TSLC. SBL focuses on developing and deploying globally
scalable blockchain technology solutions in the financial markets. SBL’s wholly-owned subsidiary, SGM, is a FCA-regulated
brokerage that facilitates market access across multiple instruments including spot FX, exchange traded futures and CFDs. TSLC
is the parent company of CASHe, a leading provider of digital money and short-term financial products to young millennials across
India. TSLC also owns all of the intellectual property developed by CASHe and has the worldwide rights outside of India to the
application of its intellectual property for its lending and money transfer platform. We will seek to leverage our investment
in SBL to help Hashcove cross market and diversify its products and offerings and will seek to leverage our investment in TSLC
to diversity our distribution base for Blockchain-based products. SBL and TSLC offer us entry ways to very different segments
of the financial services market but that still have a need for Blockchain-based products. We believe this will allow Hashcove’s
technology to service the full spectrum of customer segments and hopefully lead to additional avenues for its products.
Competitive
Strengths
We
believe that we have a competitive advantage over other companies by being an early public company in the Blockchain industry.
We are looking to take advantage of this opportunity by assembling a team of professionals qualified to identify opportunities
in the Blockchain industry. We currently utilize the experience and knowledge base of our management and independent and non-independent
directors to analyze potential opportunities. We are currently headed by Shamyl Malik, our Chief Executive Officer. Mr. Malik
brings over 13 years of experience at top tier investment banks and trading institutions. Prior to joining our company, Mr. Malik
was Global Head of Trading at Voltaire Capital, a leading liquidity provider in the foreign exchange market. Prior to joining
Voltaire Capital, he served as Head of FX Electronic Trading at Morgan Stanley and Head of Electronic Market Making for Emerging
Markets and Precious Metals in the Capital Markets Division at Citibank. Mr. Malik began his investment banking career at Lehman
Brothers, working in both New York and London across various derivative trading roles in fixed income, commodities and currencies.
For nearly all his career he has been extremely focused on building and enhancing technology solutions in the financial markets
space.
Loretta
Joseph, one of our independent directors, has a significant background and experience in evaluating Blockchain opportunities.
Ms. Joseph has over 25 years of experience in the global financial services industry, and is a Blockchain and technology advisor
to companies, organizations and governments. She has held senior positions at investment banks across Asia and India where she
was responsible for managing multiple asset classes and emerging markets environments, including RBS, Macquarie Group, Deutsche
Bank, Credit Suisse and Elara Capital. Ms. Joseph has advised international banks, and global hedge and pension funds in the areas
of portfolio management and exposure to derivatives and related products in emerging markets. Ms. Joseph serves as the Chair of
the Advisory Board of ADCCA (Australian Digital Currency and Commerce Association), an advocacy group dedicated to ensuring the
responsible adoption of Blockchain regulation. She also sits on the advisory boards of University of Western Sydney Business School
and Blume Ventures, one of India’s leading tech-focused early stage VCs, and is an adjunct fellow at UWS Australia. She
received Fintech Australia’s “FinTech Leader of 2017” and “Female Leader of 2016” awards, and the
“Alumni Award for Social Impact” in 2016 from Sancta Sophia College.
Additionally,
Kunal Nandwani, Hashcove’s Chief Executive Officer, recently joined our Blockchain Strategy Committee and upon consummation
of the transaction with Hashcove, will become an executive officer and director of our company. Mr. Nandwani has been working
on Blockchain since early 2016. He is a consultant to the Indian Finance Ministry for policy making on various Fintech
subjects including algorithmic trading and Blockchain. Mr. Nandwani also cofounded uTrade Solutions, a product firm which offers
trading, algorithmic and risk platforms in more than 10 countries. Previously, Mr. Nandwani worked at Lehman Brothers, Nomura
& BNP Paribas in London. Mr. Nandwani also runs an angel network in India and is an advisor to the Indian commerce ministry
on Artificial Intelligence.
We
plan to include additional members on the Blockchain Strategy Committee in the future.
We
also will seek to leverage the resources and experience of the management teams of our existing minority investments, as they
are already collaborating and participating in the Blockchain industry. These minority investments in early stage assets provide
first-hand experience and knowledge to enable future technological developments, as well as create exposure to a number of diversified
touchpoints into potential revenue streams derived from Blockchain sources.
Business
Opportunities
Blockchain
provides a digital ledger that can be programmed to record many items of value in our lives, such as: birth and death certificates,
marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims,
votes and anything else that can be expressed in code. Using Blockchain, we can build businesses and conduct transactions directly
among participants with less friction from outside intermediaries like banks, brokers and governments. Institutions like banks
or governments can embrace this technology to revamp their operations, cut costs, boost trust, increase commerce and create new
value for their stakeholders.
Assuming
completion of the Hashcove acquisition, our product offerings would include the following:
Crypto
Exchange – this would be a digital asset exchange utilizing Blockchain technology. There are currently over 170 exchanges
in various countries with limited regulatory oversight, weak technology (when compared to exchanges for other asset classes) and
opaque KYC practices. By being a public company operating a robust digital exchange in a regulated environment, we believe there
is a large amount of institutional trading volume in digital trading that can generate significant revenues for us.
Smart
Contracts for ICO’s – we believe the ICO market will be the primary capital raising method for companies utilizing
Blockchain technology in the very near future replacing typical public offerings. Based on public information, approximately $5.6
billion was raised by startup’s in 2017 using ICO’s. We believe providing the technology and legal framework behind
the ICO process is a sensible way to capitalize on the shift to ICO usage.
Crypto
Wallets – as more and more digital trading is executed by more traditional investors (retail and institutional), the demand
for Crypto wallets will increase. As part of a turnkey solution strategy in conjunction with the Crypto Exchange, we would seek
to offer Crypto Wallets to customers that interact with us on our exchanges but also build technology that can be resold/white-labelled
for other exchanges or industries that require Crypto Wallet facilities.
Competition
We
may encounter intense competition from other entities having a business objective similar to ours. Some of these entities are
well established and have management with significant experience in the Blockchain technology industry. Furthermore, many of these
competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited
when contrasted with those of many of these competitors. Competitors may include start up companies that are just seeking to enter
the Blockchain technology industry as well as companies who are seeking to expand their existing businesses into the Blockchain
technology industry such as:
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●
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large
companies like Chain, IBM and Accenture;
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blockchain
platforms like Multichain, Ripple and OmiseGo; and
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●
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several
midsize Blockchain services firms like Opencrowd and Chainwork.
|
As
our market grows and rapidly changes, we expect it will continue to attract new companies, including smaller emerging companies,
which could introduce new products and services. In addition, we may expand into new markets and encounter additional competitors
in such markets. There is no assurance that we will be able to compete effectively with these or other companies in our industry.
Intellectual
Property
We
expect that our success will depend in part upon our ability to protect and use our core technology and intellectual property
rights. We intend to rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual provisions and confidentiality
procedures to protect our intellectual property rights. We will also seek to leverage the intellectual property rights that Hashcove
has with its existing products if we consummate our transaction with Hashcove.
Regulations
Currently
the regulatory framework for Blockchain applications and technology is in its early stages. Certain Blockchain technologies that
deal with cryptocurrencies will likely be regulated in the near term. Many U.S. regulators, including the SEC, the Financial Crimes
Enforcement Network of the U.S. Department of the Treasury, the Commodity Futures Trading Commission, the U.S. Internal Revenue
Service, and state regulators, including the New York Department of Financial Services, have made official pronouncements or issued
guidance or rules regarding the treatment of Blockchain technology and digital currencies. However, other U.S. and state agencies
have not made official pronouncements or issued guidance or rules regarding the treatment of Blockchain technology or digital
currencies. Similarly, the treatment of this industry is often uncertain or contradictory in other countries. The regulatory uncertainty
surrounding Blockchain technology could create risks for our business going forward.
Beverage
Business
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 carbonated soft drinks (“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.
As
shown below, consumers showed special interest in healthier versions of NARTD teas, preferring unsweetened teas.
RTD
Tea Industry Revenue by Type (2017)
Black
Tea
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58.9
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%
|
Green
and White Tea
|
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24.7
|
%
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Herbal
Tea
|
|
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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.
During
2017, we unveiled a new 18oz bottle and label design for our flagship Long Island Iced Tea® Brand, which replaced our 20oz
size. The sleeker and slimmer 18oz design accentuates an authentic and fresh spirit of Long Island Iced Tea® products, which
we believe will have a positive impact on our product gross margins. 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 The Original Long Island Brand™ Lemonade, which comes in nine real-fruit flavors, that are sold in the
same locations as our iced tea.
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 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:
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●
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A
better and bolder tasting bottled iced tea as a result of premium ingredients that include natural cane sugar (sucralose for
diet flavors), hot-filled using black and green tea leaves, that is offered at an affordable price;
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|
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●
|
Immediate
global recognition of the “Long Island Iced Tea” phrase associated with the cocktail;
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|
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●
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Made
in America;
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|
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|
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●
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Strong
Northeast roots where it is locally produced;
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●
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The
use of non-GMO ingredients; and
|
|
|
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●
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Our
product being corn free, hormone/antibiotic free, gluten free, natural and having no artificial color/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 a 18oz. bottle of Long Island Iced
Tea® is $1.00 to $1.50, and the suggested retail price for a 12oz. bottle is $1.00 to $1.25. The suggested retail price for
our gallon containers is $2.99 to $3.49. 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, 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 iced
tea suppliers for the year ended December 31, 2017 were Zuckerman-Honickman, Inc. (bottles), US Sweeteners Corp. (sugar) and Allen
Flavors, Inc. (natural flavors) who, together with Brooklyn Bottling Corp. (copacker), accounted for 70% of our purchases of raw
materials inventory and copacking fees. 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
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, Maryland, North Carolina, South Carolina and parts of the Midwest. Our products are currently available
in twenty one states that have a cumulative population of 100 million. 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.
For
the year ended December 31, 2017, two customers, Garden Foods and Big Geyser, accounted for 25% and 14% 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
our net sales, respectively.
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
We
have established a beverage sub-committee of our board to provide oversight of the beverage business. The sub-committee has delegated
day-to-day management of the beverage business to Philip Thomas, the former Chief Executive Officer of the Company. Mr.
Thomas has substantial experience in the beverage industry.
Operations
and Assets
We
currently use co-packing companies, Brooklyn Bottling Group, 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.
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® is 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 market. Key direct competitors are Arizona Beverage Company,
Unilever, Dr. Pepper Snapple Group, Inc. and Nestle SA. 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 $359,554 and $192,857 to research opportunities related to new product initiatives. These costs were
reflected in research and development expense for the years ended December 31, 2017 and 2016, respectively.
Employees
At
December 31, 2017, we had 25 full time employees. We also engaged the services of independent contractors to assist our management
team in developing our product offerings.
Additional
Information
We
file or furnish reports, proxy statements and other information with the Securities and Exchange Commission (the “
SEC
”),
including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Such reports, proxy statements
and other information filed by us with the SEC are available free of charge on our website at www.longislandicedtea.com. The public
also may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room
1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains such reports, proxy statements
and other information regarding issuers that file electronically with the SEC. We also make copies of these reports, proxy statements
and other information available, free of charge through our website at
http://www.longislandicedtea.com
. The contents of
these websites are not incorporated into this filing. Further, any references to website URLs in this Form 10-K are intended to
be inactive textual references only.
ITEM
1A. 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 Blockchain Business
We
have virtually no operating history as a Blockchain business, which makes it hard to evaluate our ability to generate revenue
through operations, and at the date of this filing, we have not generated revenue from any Blockchain-based products.
Our
minimal operating history as a Blockchain business makes it difficult to evaluate our current business and future prospects. We
have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly
developing and changing industries, including challenges in forecasting accuracy, determining appropriate uses of our limited
resources, gaining market acceptance, managing a complex regulatory landscape and developing new products. Our current operating
model may require changes in order for us to scale our operations efficiently. Investors in our common stock should consider our
business and prospects in light of the risks and difficulties it faces as an early-stage company focused on developing products
in the field of financial technology. To date, we have focused on developing our business and exploring opportunities for novel
applications of Blockchain technology. As a result of our early stage of development, we have not generated revenue from any commercially
available Blockchain-based products. We have generated no revenue as a Blockchain business.
Our
management has relatively little experience in the blockchain technology industry.
Our
management only recently determined to shift our primary corporate focus towards the exploration of, and investment in, opportunities
that leverage the benefits of Blockchain technology. Our management has limited experience in the Blockchain technology industry.
While we intend to expand our staff with individuals with more experience in this industry and will closely scrutinize any individuals
we engage, we cannot assure you that well-qualified individuals will be available to us or that our assessment of individuals
we retain will prove to be correct. These individuals may be unfamiliar with the requirements of being involved in a public company
which could cause us to have to expend time and resources helping them become familiar with such requirements. This could be expensive
and time-consuming and could lead to various regulatory issues which may adversely affect our operations.
We
expect to develop new Blockchain-based products, but as of the date of this filing we have not commenced such development.
We
intend to develop new Blockchain-based products covering all aspects of the Blockchain eco-system. However, at the date of this
filing, we have not commenced development of any such products. Although we have entered into the Hashcove Agreement to acquire
Hashcove, which is developing certain Blockchain-based products, there can be no assurance that we will consummate such acquisition.
In addition, Hashcove is only in the preliminary stages of development of its Blockchain-based products. The development of such
products implicates complex technological considerations and raises numerous legal and regulatory issues that will need to be
addressed. As a result of these technological, legal and regulatory considerations, the Blockchain-based products may never be
developed and, if developed, may, for a variety of technological, legal and regulatory reasons, never become operational.
Even
if we successfully develop our Blockchain-based products, we may not be able to successfully market and launch them.
Our
Blockchain-based products, if successfully developed, may not meet customer or user expectations. Furthermore, despite good faith
efforts to develop and complete the launch of, and subsequently to maintain, such products, it is possible that they will experience
malfunctions or otherwise fail to be adequately maintained. We may not have or may not be able to obtain the technical skills,
expertise, or regulatory approvals needed to successfully develop our Blockchain-based products and progress them to a successful
launch. While we are seeking to retain, or acquire businesses who have retained, experts, there may, from time to time, be a general
scarcity of management, technical, scientific, research and marketing personnel with appropriate training to develop and maintain
such products. In addition, there are significant legal and regulatory considerations that will need to be addressed in order
to develop and maintain such products, and addressing such considerations will require significant time and resources. There can
be no assurance that we will be able to develop products that achieves our goals and satisfy the complex regulatory requirements
that are applicable. If we are not successful in our efforts to develop products that are compliant with all regulatory and legal
requirements and to demonstrate to customers and users the utility and value of the products, it may be impermissible to launch
the products or there may not be sufficient demand for the launch of the products to be commercially viable, and our business
would be materially adversely affected.
Our
Blockchain-based products, if successfully developed and launched, may not function properly.
Our
Blockchain technology may not function properly, which would have a material adverse effect on our plans, operations and financial
condition. We intend to build Blockchain-based products covering all aspects of the Blockchain eco-system, but if our technology
does not work as anticipated, there may be no satisfactory alternative available. Any problems in the functionality of our technology
would have a direct materially adverse effect on our plans and expectations for revenues. The technology may malfunction because
of internal problems or as a result of cyber-attacks or external security breaches. Any such technological problems would have
a material adverse effect on our prospects.
Our
Blockchain-based products, if successfully developed and launched, may not be widely adopted and may have limited users.
It
is possible that our Blockchain-based products, if successfully developed and launched, will not be used by a large number of
customers or users. In addition, legal and regulatory developments could render the products obsolete or impermissible. Such a
lack of use or interest could negatively impact the effectiveness of the products, and our business and financial position.
We
intend to offer advisory services to companies considering or pursuing ICOs, but we have not yet been engaged to do so.
We
intend to offer advisory services to companies considering or pursuing ICOs. To date, we have not been engaged to provide advisory
services to any other company considering or pursuing an ICO, and there can be no assurance that we will be engaged to provide
any such services in the future or that any such services, if provided, will be profitable. If we are engaged to provide any such
services, we could face claims from any dissatisfied clients and could incur liabilities in rendering any such services, any of
which could also damage our reputation and adversely affect other parts of our business.
The
popularity of digital assets and cryptocurrencies and ICOs may decrease in the future, which could have a material adverse effect
on the digital asset cryptocurrency industry and our operations and financial condition.
We
intend to develop and commercialize financial technology based on the use of digital assets, cryptocurrencies and Blockchain technology.
In recent years, digital assets and cryptocurrencies have become more widely accepted among investors and financial institutions,
but have been also faced increasingly complex legal and regulatory challenges and, to date, have not benefited from widespread
adoption by governments, central banks or established financial institutions. However, any significant decrease in the acceptance
or popularity of digital asset or cryptocurrency or ICOs may have a material adverse effect on our operations and financial condition
and a material adverse effect on us.
Acquisitions
we have made and may make will increase costs and regulatory and integration risks.
We
have purchased interests in SBL and TSLC. In addition, we may from time to time purchase interests in or acquire other businesses
or the assets of other businesses. Integrating an acquired business or its assets involves a number of risks and financial, managerial
and operational challenges. We may incur significant expenses in connection with purchases or acquisitions it has made in the
past or may make in the future. Further, acquisitions may also create a need for additional accounting, tax, compliance, documentation,
risk management and internal control procedures, and may require us to hire additional personnel to implement, perform and/or
monitor such procedures. To the extent our procedures are not adequate to appropriately implement, perform and/or monitor all
necessary procedures relating to any new or expanded business, we could be exposed to a material loss or regulatory sanction.
The occurrence of any of the foregoing could have a material adverse effect on our financial results and business.
If
we do not keep pace with technological changes, our solutions may become less competitive and our business may suffer.
The
market for Blockchain technology is characterized by rapid technological change, frequent product and service innovation and evolving
industry standards. If we are unable to provide enhancements and new features for our future product offerings that achieve market
acceptance or that keep pace with these technological developments, our business could be adversely affected. The success of enhancements,
new features and solutions depends on several factors, including the timely completion, introduction and market acceptance of
the enhancements or new features or solutions. Failure in this regard may significantly impair our revenue growth. In addition,
we may need to continuously modify and enhance our solutions to keep pace with changes in internet-related hardware, software,
communication, browser and database technologies. We may not be successful in either developing these modifications and enhancements
or in bringing them to market in a timely fashion. Furthermore, uncertainties about the timing and nature of new network platforms
or technologies, or modifications to existing platforms or technologies, could increase our research and development expenses.
Any failure of our solutions to keep pace with technological changes or operate effectively with future network platforms and
technologies could reduce the demand for our solutions, result in customer dissatisfaction and adversely affect our business.
We
may face substantial competition from a number of known and unknown competitors as well as the risk that one or more of them may
obtain patents covering technology critical to the operation of our products.
We
believe that a number of organizations are or may be working to develop products systems utilizing distributed ledger or Blockchain
technologies or other novel technologies that may be competitive to the technology we intend to develop. Some or all of such organizations
may have substantially greater technological expertise, experience with distributed ledger technologies and/or financial resources
than we have, and they may attempt to patent technologies that may be competitive with or similar to the technology we ultimately
use. If one or more other persons, companies or organizations, individually or together obtain a substantial share of our intended
market, or obtain a valid patent covering technology critical to our products, and we are unable or unwilling to license the technology,
we may be unable to sell our products or it could become impossible for our products to operate, which could have a material adverse
effect on our operations and financial condition.
Adverse
economic conditions or reduced technology spending may adversely impact our business.
Our
business depends on the overall demand for technology and on the economic health of our prospective customers. In general, worldwide
economic conditions remain unstable, and these conditions may make it difficult for our prospective customers and us to forecast
and plan future business activities accurately, and they could cause our prospective customers to reevaluate their decision to
purchase our solutions. Weak global economic conditions, or a reduction in technology spending even if economic conditions improve,
could adversely impact our business, financial condition and results of operations in a number of ways, including longer sales
cycles, lower prices for our solutions, reduced bookings and lower or no growth.
Our
ability to attract, train and retain qualified employees is crucial to our results of operations and any future growth.
To
execute our growth plan, we must attract and retain highly qualified personnel. Competition for these individuals is intense,
especially for engineers with high levels of experience in designing and developing software and internet-related services, senior
sales executives and professional services personnel with appropriate financial reporting experience. We have, from time to time,
experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications.
Many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees
from competitors or other companies, their former employers may attempt to assert that these employees have breached their legal
obligations or that we have induced such breaches, resulting in a diversion of our time and resources. If we fail to attract new
personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.
Our
planned products and any Blockchain on which our products may rely may be the target of malicious cyber-attacks or may contain
exploitable flaws in its underlying code, which may result in security breaches and the loss or theft of digital assets. If such
attacks occur or security is compromised, this could expose us to liability and reputational harm and could seriously curtail
the utilization of our products and cause a decline in the market price of the digital assets on that system, and could result
in claims against us.
If
our products are successfully developed and launched, our software, the software applications and other interfaces or applications
upon which they rely, and any software that may be built upon our products, will be unproven, and there can be no assurances that
our products and the creating, transfer or storage of digital assets on our products will be uninterrupted or fully secure, which
may result in impermissible transfers, a complete loss of users’ digital assets on that system or an unwillingness of customers
and users to access, adopt and utilize our products. Further, the digital assets with which are products are used (and any technology,
including Blockchain technology, on which they rely) may also be the target of malicious attacks seeking to identify and exploit
weaknesses in the software, the digital assets or our products, which may result in the loss or theft of digital assets on that
system. Such attacks may come in anticipated forms or unanticipated forms.
We
and our subsidiaries are, and our products, if developed and launched, and the Blockchain technology to be utilized by our products
will be, subject to cyber-attacks, security risks and risks of security breaches. An attack on any of them or a breach of security
of any of them could result in a loss of private data, unauthorized trades, and an interruption of trading for an extended period
of time. Any such attack or breach could adversely affect our ability to effectively operate or sell our Blockchain products,
which could have a material adverse effect on our operations and financial condition. Such an attack may also damage our reputation
and any breach of data security that exposes or compromises the security of any of the private digital keys used to authorize
or validate transaction orders, or that enables any unauthorized person to generate any of the private digital keys, could result
in unauthorized trades. The occurrence of any of the foregoing could result in claims against us and us and could have a material
adverse effect on us and the holders of our securities.
The
regulatory regime governing Blockchain technologies, cryptocurrencies, digital assets, and offerings of digital assets is uncertain,
and any new regulations or policies, may materially adversely affect the development and the value of such cryptocurrencies and
assets.
Regulation
of digital assets, cryptocurrencies, Blockchain technologies, and cryptocurrency exchanges is currently undeveloped and likely
to rapidly evolve as government agencies take greater interest in them. Regulation also varies significantly among international,
federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in
the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which
may severely impact the permissibility of digital assets and cryptocurrencies generally and the technology behind them or the
means of transaction or in transferring them. Failure by us to comply with any laws, rules and regulations, some of which may
not exist yet or are subject to interpretation and may be subject to change, could result in a variety of adverse consequences,
including civil penalties and fines.
Cryptocurrency
networks, distributed ledger technologies, and coin and token offerings also face an uncertain regulatory landscape in many foreign
jurisdictions. Various foreign jurisdictions may, in the near future, adopt laws, regulations or directives that may conflict
with those of the United States or may directly and negatively impact our business. The effect of any future regulatory change
is impossible to predict, but such change could be substantial and materially adverse to our business.
On
July 25, 2017 the SEC released an investigative report which states that the United States would, in some circumstances, consider
the offer and sale of blockchain tokens pursuant to an ICO subject to federal securities laws. Thereafter, China released statements
and took similar actions. Although the Company does not currently participate in ICOs, we intend to do so in the future, and these
actions may be a prelude to further action which chills widespread acceptance of Blockchain and cryptocurrency adoption and have
a material adverse effect the ability of the Company to continue as a going concern or to pursue this segment at all, which would
have a material adverse effect on the business, prospects or operations of the Company.
Our
business will be subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, technology, data protection,
and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in
claims, changes to our business practices, increased cost of operations or otherwise harm our business.
We
will be subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business,
including user privacy, Blockchain technology, data protection and intellectual property, among others. Foreign data protection,
privacy and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state
and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application
and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in
which we operate.
We
will adopt policies and procedures designed to comply with these laws. The growth of our business and its expansion outside of
the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our
being found in violation of these or other laws and regulations is further increased by the fact that many of them have not been
fully interpreted by the regulatory authorities or the courts, and are open to a variety of interpretations. Any action brought
against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur
significant legal expenses and divert our management’s attention from the operation of our business. If our operations are
found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the
violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by it,
and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business
and its financial results. These existing and proposed laws and regulations can be costly to comply with and can delay or impede
the development of new products, result in negative publicity, increase our operating costs, require significant management time
and attention, and subject us to claims or other remedies, including fines or demands that we modify or ceases our planned business
practices.
The
further development and acceptance of Blockchain networks, which are part of a new and rapidly changing industry, are subject
to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of Blockchain
networks and digital assets would have a material adverse effect on our business plans and could have a material adverse effect
on us.
The
growth of the Blockchain industry in general, as well as the Blockchain networks on which digital assets and cryptocurrencies
rely, is subject to a high degree of uncertainty. The factors affecting the further development of the digital asset and cryptocurrency
industry, as well as Blockchain networks, include, without limitation:
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worldwide
growth in the adoption and use of digital assets, cryptocurrencies and other Blockchain technologies;
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government
and quasi-government regulation of digital assets and cryptocurrencies and their use, or restrictions on or regulation of
access to and operation of Blockchain networks or similar systems;
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the
maintenance and development of the open-source software protocol of digital assets or cryptocurrency networks;
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changes
in consumer demographics and public tastes and preferences;
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the
availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including
new means of using government-backed currencies or existing networks;
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general
economic conditions and the regulatory environment relating to digital assets and cryptocurrencies; and
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a
decline in the popularity or acceptance of digital assets, cryptocurrencies or other Blockchain-based tokens.
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The
digital asset and cryptocurrency industries as a whole have been characterized by rapid changes and innovations and are constantly
evolving. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general
acceptance and adoption and usage of Bockchain networks and Blockchain assets may materially adversely affect our business plans.
The
development and operation of our business, including any or our Blockchain-based products, will likely require technology and
intellectual property rights.
Our
ability to develop and operate Blockchain-based products may depend on technology and intellectual property rights that we may
license from unaffiliated third parties. If for any reason we were to fail to comply with our obligations under the applicable
license agreement, or were unable to provide or were to fail to provide the technology and intellectual property that our products
require, they would be unable to operate, which would have a material adverse effect on our operations and financial condition
and could have a material adverse effect on us.
We
may be accused of infringing intellectual property rights of third parties.
We
may be subject to claims that we have infringed the intellectual property rights of others, by offering allegedly infringing products
or otherwise. Any claims may result in significant expenditure of our financial and managerial resources, and may result in us
making significant damages or settlement payments or changes to our business. We could be prohibited from using software or business
processes, or required to obtain licenses from third parties, which could be expensive or unavailable. Any such difficulties could
have a material adverse effect on our financial results and business.
We
may be unable to protect our proprietary technology.
Our
success depends to a significant degree upon the protection of our software and other proprietary intellectual property rights.
We may be unable to protect it, in the United States or elsewhere, which could have a material adverse effect on our business.
Banks
and financial institutions may not provide banking services, or may cut off services, to businesses that provide blockchain-related
services or that accept cryptocurrencies as payment, including financial institutions of investors in the Company’s securities.
A
number of companies that provide Blockchain-related services have been unable to find banks or financial institutions that are
willing to provide them with bank accounts and other services. Similarly, a number of companies and individuals or businesses
associated with Blockchain technologies may have had and may continue to have their existing bank accounts closed or services
discontinued with financial institutions. We also may be unable to obtain or maintain these services for our business. The difficulty
that many businesses that provide cryptocurrency and/or other Blockchain-related services have and may continue to have in finding
banks and financial institutions willing to provide them services may be decreasing the usefulness of cryptocurrencies as a payment
system and harming public perception of cryptocurrencies and could decrease its usefulness and harm its public perception in the
future. Similarly, the usefulness of cryptocurrencies as a payment system and the public perception of Blockchain technologies
could be damaged if banks or financial institutions were to close the accounts of businesses providing cryptocurrency and/or other
Blockchain-related services. This could occur as a result of compliance risk, cost, government regulation or public pressure.
The risk applies to securities firms, clearance and settlement firms, national stock and commodities exchanges, the over the counter
market and the Depository Trust Company, which, if any of such entities adopts or implements similar policies, rules or regulations,
could result in the inability of our investors to open or maintain stock or commodities accounts, including the ability to deposit,
maintain or trade the Company’s securities. Such factors would have a material adverse effect the ability of the Company
to continue as a going concern or to pursue this segment at all, which would have a material adverse effect on the business, prospects
or operations of the Company and harm investors.
The
price of the Company’s shares could be subject to wide price swings since the value of cryptocurrencies may be subject to
pricing risk and have historically been subject to wide swings in value.
The
Company’s shares are subject to arbitrary pricing factors that are not necessarily associated with traditional factors that
influence stock prices or the value of non-cryptocurrency assets such as revenue, cashflows, profitability, growth prospects or
business activity levels since the value and price, as determined by the investing public, may be influenced by future anticipated
adoption or appreciation in value of cryptocurrencies or the Blockchain generally, factors over which the Company has little or
no influence or control. The Company’s share prices may also be subject to pricing volatility due to supply and demand factors
associated with few or limited public company options for investment in the segment, which may benefit the Company in the near
term and change over time.
In
addition, the success of the Company, the Company’s share price, and the interest in investors and the public in the Company
as an early entrant into the Blockchain and cryptocurrency ecosystem may in large part be the result of the Company’s early
emergence as a publicly traded company in which holders of appreciated cryptocurrency have an opportunity to invest inflated cryptocurrency
profits for shares of the Company, which could be perceived as a way to maintaining investing exposure to the Blockchain and cryptocurrency
markets without exposing the investor to the risk in a particular cryptocurrency. Cryptocurrency holders have realized exponential
value due to large increases in the prices of cryptocurrencies and may seek to lock in cryptocurrency appreciation, which investing
in the Company’s securities may be perceived as a way to achieve that result, but may not continue in the future. As a result,
the value of the Company’s securities, and the value of cryptocurrencies generally may be more likely to fluctuate due to
changing investor confidence in future appreciation (or depreciation) in market prices, profits from related or unrelated investments
or holdings of cryptocurrency. Such factors or events would have a material adverse effect on the ability of the Company to continue
as a going concern or to pursue this segment at all, or on the price of the Company’s securities, which would have a material
adverse effect on the business, prospects or operations of the Company and potentially the value of any cryptocurrencies the Company
holds or expects to acquire for its own account.
It
may become illegal in the future to acquire, own, hold, sell or use cryptocurrencies, participate in the Blockchain or utilize
similar digital assets in one or more countries, the ruling of which would adversely affect the Company.
Although
currently cryptocurrencies, the Blockchain and digital assets generally are not regulated or are lightly regulated in most countries,
including the United States, one or more countries may take regulatory actions in the future that could severely restrict the
right to acquire, own, hold, sell or use these digital assets or to exchange for fiat currency. Such restrictions may adversely
affect the Company. Such circumstances would have a material adverse effect on the ability of the Company to continue as a going
concern or to pursuing this segment at all, which would have a material adverse effect on the business, prospects or operations
of the Company and potentially the value of any cryptocurrencies the Company holds or expects to acquire for its own account and
harm investors.
The
markets for Blockchain/cryptocurrency based assets may be illiquid, and may be subject to manipulation.
Digital
assets that are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock
exchanges have listing requirements and vet issuers, requiring them to be subjected to rigorous listing standards and rules and
monitoring investors transacting on such platform for fraud and other improprieties. These conditions may not necessarily be replicated
on a distributed ledger platform, depending on the platform’s controls and other policies. The more lenient a distributed
ledger platform is about vetting issuers of digital assets or users that transact on the platform, the higher the potential risk
for fraud or the manipulation of digital assets. These factors may decrease liquidity or volume, or increase volatility of digital
securities or other assets trading on a ledger-based system, which may adversely affect the Company. Such circumstances would
have a material adverse effect on the ability of the Company to continue as a going concern or to pursue this segment at all,
which would have a material adverse effect on the business, prospects or operations of the Company and potentially the value of
any cryptocurrencies the Company holds or expects to acquire for its own account and harm investors.
Risks
Related to LIBB’s Beverage 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 bottlers and 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 year ended December 31, 2017, two customers, Garden Foods and Big Geyser accounted for 25% and 14% 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. 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 December 31, 2017, we had $742,113 of total indebtedness, consisting of auto and vending loans and a bridge financing agreement.
The bridge financing agreement ($688,038) is to be repaid based upon 15% of our future receipts. In December 2017, we entered
into a Loan and Option Agreement (the “Facility”) in which a borrowing facility of an aggregate of $2,000,000 was
made available, with the option to increase this amount to $4,000,000 with the consent of the lender. In connection with the Facility,
on December 22, 2017, we received an initial drawdown of $750,000. The Company paid a $100,000 facility fee upon execution. On
December 26, 2017, the $750,000 initial drawdown and accrued interest was converted by the lender into 250,233 shares of the Company’s
common stock. In January 2018, the Company drew an additional $1,250,000 under the Facility. While our existing level of debt
is not substantial and we will pay interest that accrues on these obligations, we may incur significant indebtedness in the future,
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:
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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;
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limit,
along with the restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds;
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limit
our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
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increase
our vulnerability to general adverse economic and industry conditions; and
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place
us at a competitive disadvantage compared to our competitors that have less debt.
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In
addition, if we are unable to make payments as they come due or comply with the restrictions and covenants in the 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 one or more of such 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,
they 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. 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 Philip Thomas. On February 20, 2018, Mr. Thomas
(co-founder of LIBB) resigned as our Chief Executive Officer. Under the direction of a special beverage committee of the Board,
Mr. Thomas is expected to lead the beverage business until after the Spinoff. As we have a limited operating history, we are highly
dependent upon this individuals’ knowledge, experience and reputation within the industry. We cannot be assured of how long
or under what conditions Mr. Thomas will continue to look after the beverage business. If Mr. Thomas were to stop looking after
the beverage business, we may not be able to find adequate replacements for him. Without his experience, expertise and reputation,
our development efforts and future prospects would be substantially impaired.
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.
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 Our Businesses
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. 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.
Risks
Related an Investment in Our Common Stock
The
Spinoff may have negative consequences.
As
indicated herein, our board of directors approved management’s intentions to effectuate the Spinoff of LIBB. The Spinoff
is intended to allow us to focus exclusively on our move into the Blockchain technology industry. However, the Spinoff may
have negative consequences to it. For instance, the actions required to separate LIBB from our company could disrupt both
company’s operations. Further, we will incur costs in connection with the Spinoff that would not be incurred if LIBB
were to continue as a subsidiary of ours.
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.
Effective
April 12, 2018, our common stock is traded and quoted on the Pink Current Information tier operated by the OTC. We are unable
to predict whether an active trading market for our common stock will develop or will be sustained. Because our common stock is
not listed on a national securities exchange, we may be subject to the following significant material adverse consequences, including:
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a
limited availability of market quotations for our securities;
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reduced
liquidity with respect to our securities;
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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;
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a
limited amount of news and analyst coverage for our company; and
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a
decreased ability to issue additional securities or obtain additional financing in the future.
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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 $1.70 to a
high of $12.55 since January 1, 2016, and the current stock price is $1.96 as of April 9, 2018. Some of the factors
that could cause fluctuations in the stock price or trading volume of our common stock include:
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general
market and economic conditions and market trends, including in the beverage industry and the financial markets generally;
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the
political, economic and social situation in the U.S.;
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actual
or expected variations in operating results;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, or other
business developments;
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adoption
of new accounting standards affecting the industry in which we operate;
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operations
and stock performance of competitors;
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litigation
or governmental action involving or affecting us or our subsidiaries;
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recruitment
or departure of key personnel;
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purchase
or sales of blocks of our common stock; and
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operating
and stock performance of the companies that investors may consider to be comparable.
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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 500,034 shares of common stock at exercise prices of between $3.23 and
$5.00 per share held by certain of our executive officers, directors and employees and (ii) warrants to purchase up to 1,369,320
shares of common stock at exercise prices of between $2.40 and $6.875 per share. 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. We have 19,243,900 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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
principal office is located at 12-1 Dubon Court, Farmingdale, NY 11735. On July 14, 2017, the Company entered into a lease agreement
for additional warehouse and office 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. Future minimum payments under this lease
are $501,859. We believe that our facilities are adequate for our current and reasonably foreseeable future needs and that they
are in good condition and suitable to conduct our business.
ITEM
3. LEGAL PROCEEDINGS
We
are involved in various claims and legal actions arising from time to time in the ordinary course of business. In the opinion
of our management, the ultimate disposition of these matters in the ordinary course of business will not have a material adverse
effect on our financial position, results of operations or cash flows.
In
addition, we are involved in the following legal action:
Revolution
Marketing, LLC
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 our complaint. We 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,
we filed a Note of Issue and Certificate of Readiness. The case was been certified by the court as ready for trial. On November
15, 2017, we, along with Ascent and Revolution, entered into a mutual release and settlement agreement in which all claims and
counterclaims were dismissed, with no party having to make any payment to any other party.
Julian
Davidson
On
March 12, 2018, an action was filed by Mr. Julian Davidson, our former Executive Chairman of the Board, in the District Court
for the Southern District of New York entitled Julian Davidson v. Long Blockchain Corp. Mr. Davidson is seeking to enforce a separation
agreement that was purportedly reached in relation to his resignation from the Company on December 31, 2017. Mr. Davidson is also
seeking compensation, expense reimbursements, and cash bonus, severance, stock and accelerated vesting of stock options which
he claims were agreed to by us. Our management and legal counsel believe it is too early to determine the probable outcome of
this matter.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN
Business
Organization
Long
Blockchain Corp., (formerly known as Long Island Iced Tea Corp.) a Delaware corporation (“LBCC”), was formed on December
23, 2014. LBCC is the parent of Long Island Brand Beverages LLC (“LIBB”) (its operating subsidiary) and Cullen Agricultural
Holding Corp. (“Cullen”) (collectively the “Company”).
Overview
Since
May 27, 2015, the Company’s operations have consisted principally of a beverage business, focused on serving the ready-to-drink
segment of the market. On December 21, 2017, the Company announced that it was expanding its attention to include
the exploration of, and investment in, opportunities that leverage the benefits of blockchain technology. The Company changed
its name from “Long Island Iced Tea Corp.” to “Long Blockchain Corp.” and reserved the web domain www.longblockchain.com.
The Company also changed its trading symbol from “LTEA” to “LBCC” in connection with this name change.
At such time, the Company announced that it would continue to operate the beverage business.
On
February 20, 2018, in connection with the pivot of the Company’s operation toward Blockchain, Mr. Philip Thomas, the Company’s
President and Chief Executive Officer (“CEO”) resigned and simultaneously, the Company’s board of directors
appointed Mr. Shamyl Malik, who was appointed to the Company’s Board of Directors during December 2017, as CEO. The Company
announced that it would seek to spin out the beverage business to the Company’s shareholders (“Beverage Spin Out”).
On February 12, 2018, in connection with the Beverage Spin Out, the Company formed Long Island Iced Tea Corp., a Delaware corporation.
Further, the board of directors appointed three members of its board to provide oversight of the beverage operations (“Beverage
Committee”). From this date until the consummation of the Beverage Spin Out, Mr. Thomas, under the direction of the Beverage
Committee, shall provide day to day operational control and management of the beverage business.
The
Blockchain Business
On
December 21, 2017, the Company announced that it was expanding its attention to include the exploration of, and investment
in, opportunities that leverage the benefits of blockchain technology.
The
Company’s management has been pursuing and evaluating investments, ventures, alliances and other strategic relationships
in the blockchain space. On March 15, 2018, LBCC entered into an agreement to acquire the outstanding shares of Hashcove Limited,
an early stage UK-based technology company focused on developing and deploying globally scalable distributed ledger technology
solutions. The Company is conducting further diligence and is targeting to consummate the acquisition within the third quarter
of 2018. During January 2018, the Company had entered into an agreement to purchase equipment for a crypto currency mining operation,
however, the Company was not able to raise the capital to consummate this transaction. On March 19, 2018 and March 22, 2018 the
company closed on the purchase of non-controlling interest of Stater Blockchain Limited and TSLC PTE Ltd., respectively (See Note
16).
The
Beverage Business
The
Company’s beverage business is engaged in the production and distribution of premium Non-Alcoholic ready-to-drink (“NARTD”)
beverages. The beverage business 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 mission of the beverage business is to provide consumers with premium
beverages offered at an affordable price.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
The
Beverage Business, continued
Through
its beverage business, the Company aspires to provide 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.
Through
its beverage business, 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.
During
April 2017, the Company through its beverage business 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 additional distribution in Florida, Virginia, Massachusetts,
New Hampshire, Rhode Island and parts of the Midwest. As of December 31, 2017, the Company’s products are available in approximately
21 states, the Caribbean and in Canada.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
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 and also the former owner of Seba Distribution
LLC (“Seba”), a former distributor of ALO Juice. 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.
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 certain accounts receivable amounts due
from Seba 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 (See Note 2 for a disclosure of impairment of this
intangible asset).
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
Liquidity
and Going Concern
From
inception, the Company has financed its operations through the issuance of debt and equity, and through utilizing trade credit
with its vendors. The Company will require additional capital to fund the operating losses of the existing beverage business,
as well as to fund the development of the blockchain business.
As
of December 31, 2017, the Company had cash of $370,947. As of December 31, 2017, the Company had a working capital deficit of
$712,310. The Company incurred a net loss of $15,215,659 for the year ended December 31, 2017. As of December 31, 2017, the Company’s
stockholders’ deficit was $292,982.
On
July 28 and 29, 2016, the Company sold 1,270,156 shares of the Company’s common stock in the July 2016 Offering. 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. On August 4, 2016, the July 2016 Offering was terminated. No further sales of shares were made in the July 2016 Offering.
On
December 27, 2016, the Company consummated the December 2016 Offering of 406,550 shares of its common stock, through Network 1
and Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016,
with 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.
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
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 net proceeds of $1,235,088 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.
Pursuant
to a bridge financing agreement (“Radium Agreement”) dated November 27, 2017, the Company received cash of $750,000,
less $7,500 of fees and expenses (See Note 6).
Pursuant
to a Loan and Option Agreement (the “Cavendish Loan Agreement”) dated December 20, 2017, the Company has a borrowing
facility of up to $4,000,000, subject to approval by the lender. During December 2017, the Company drew $750,000 under this arrangement,
and during January 2018, the Company drew $1,250,000 under this arrangement (See Note 6).
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 will require additional capital to fund the operating losses of the existing business, as well as to fund the development
of the blockchain business. 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 current operations, as well as defer, delay and/or curtail its effort to develop the blockchain business. These
steps may include reductions in personnel or other operating cost reductions. These conditions raise substantial doubt about the
Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements for the years ended December 31, 2017 and 2016 have been prepared in accordance
and in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and
applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding consolidated financial
information.
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.
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
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended December 31, 2017 and 2016, these allowances resulted in reductions
in net sales of $960,298 and $310,089, respectively. Included in these amounts for the years ended December 31, 2017 and 2016
are costs of $271,713 and $0, 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 9 and 11).
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 consolidated statements of operations and comprehensive loss and totaled
$815,266 and $420,389, for the years ended December 31, 2017 and 2016, respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs are included in selling and marketing expenses within the consolidated
statements of operations and comprehensive loss and totaled $687,245 and $151,438 for the years ended December 31, 2017 and 2016,
respectively.
Research
and Development
Costs
related to new product initiatives incurred were included in selling and marketing expenses within the consolidated statements
of operations and comprehensive loss and totaled $359,554 and $192,857 for the years ended December 31, 2017 and 2016, respectively.
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 may hold investments in marketable securities, consisting of U.S. government securities and mutual funds. The Company’s
available-for-sale securities were carried at estimated fair value with any unrealized gains and losses, net of deferred
taxes, included in accumulated other comprehensive income (loss) in stockholders’ (deficit) equity, when applicable. During
the years ended December 31, 2017 and 2016, respectively, the unrealized gain/(loss) was $30,246 and $(30,246), respectively.
Realized 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 year ended December 31, 2017.
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As
of
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December
31, 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
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Within
one year
|
|
$
|
-
|
|
|
$
|
94,967
|
|
Within
one to five years
|
|
|
-
|
|
|
|
100,407
|
|
|
|
$
|
-
|
|
|
$
|
195,374
|
|
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Restricted
Cash
As
of December 31, 2016, the Company had cash balances of $103,603 that were 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. 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
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Accounts
receivable, gross
|
|
$
|
1,286,786
|
|
|
$
|
1,859,474
|
|
Allowance
for doubtful accounts
|
|
|
(611,353
|
)
|
|
|
(232,416
|
)
|
Accounts
receivable, net
|
|
$
|
675,433
|
|
|
$
|
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 18% and 10%, or 28% in the aggregate,
as of December 31, 2017, and one customer who accounted for 46% of the Company’s trade receivables as of December 31, 2016.
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
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2017 and 2016, included in inventory was finished goods
inventory with a cost, net of inventory reserve, of approximately $201,000 and $320,000, respectively, which has been delivered
to one or more of the Company’s distributors 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 December 31, 2017 and 2016, the Company recorded inventory reserves, of $200,775 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
|
|
|
|
December
31, 2017
|
|
|
December
31, 2016
|
|
Finished
goods
|
|
$
|
934,087
|
|
|
$
|
905,642
|
|
Raw
materials and supplies
|
|
|
664,528
|
|
|
|
282,299
|
|
Total
inventories
|
|
$
|
1,598,615
|
|
|
$
|
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible
Assets
As
of December 31, 2017 and 2016, 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, 2017 and 2016.
During
September 2017, the Company recorded an indefinite lived intangible asset representing for the value of the ALO Juice intellectual
property. However, at December 31, 2017, the Company tested the fair value of the ALO intangible asset and determined that it
was fully impaired as of such date, because the Company has de-emphasized the sale of its ALO business in order to better manage
its liquidity. During the year ended December 31, 2017, the Company recorded a charge of $150,000 as an impairment of this intangible
asset.
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 December 31, 2017 and 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 December 31, 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 years ended December
31, 2017 and 2016, amortization expense was $2,500 and $4,994, respectively.
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.
Income
Taxes
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes, continued
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 2017 and 2016 tax years. 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, 2017 and December
31, 2016. 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.
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act
(the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that potentially will affect the
Company’s fiscal year ending December 31, 2018.
The
changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act are difficult to assess, due
to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because
of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or
any updates or changes to estimates the company has utilized to calculate the transition impact. The SEC has issued rules that
would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the
related tax impacts (See Note 10).
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 the Company 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.
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock
Based Compensation, continued
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 December
31, 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.
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 December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Options
to purchase common stock
|
|
|
550,534
|
|
|
|
425,411
|
|
Warrants
to purchase common stock
|
|
|
1,534,320
|
|
|
|
470,570
|
|
Total
potentially dilutive securities
|
|
|
2,084,854
|
|
|
|
895,981
|
|
Fair
Value of Financial Instruments
The
carrying amounts of cash, short term investments, accounts receivable, automobile and equipment loans 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).
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments, continued
Fair
value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined
based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is
used to prioritize the inputs in measuring fair value as follows:
Level
1 Quoted prices in active markets for identical assets or liabilities.
Level
2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level
3 Significant unobservable inputs that cannot be corroborated by market data.
Fair
values for short-term money market investments are determined from quoted prices in active markets for these money market funds,
and are considered to be Level 1.
The
carrying value of financial instruments in the Company’s 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 December 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments at December 31, 2016
|
|
$
|
2,389,521
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Recent
Accounting Standards
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 expects that the adoption of the ASU will not have a material impact upon the Company
consolidated financial statements.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards, 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 consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) which has subsequently been amended
by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2017-13. These ASUs outline a single comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. The guidance includes a five-step framework that requires an entity to: (i) identify the
contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price,
(iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when the entity
satisfies a performance obligation. In July 2015, the FASB deferred the effective date of ASU 2014-09 to annual reporting periods
beginning after December 15, 2017. Early adoption will be permitted as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within those annual periods. A full retrospective or modified retrospective approach
is required. In addition, the new guidance will require enhanced disclosures, including revenue recognition policies to identify
performance obligations to customers and significant judgments in measurement and recognition.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the consolidated
financial statements. Accordingly, the new revenue standard will be applied prospectively in our consolidated financial statements
from January 1, 2018 forward and reported financial information for historical comparable periods will not be revised and will
continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
anticipates that its current methods of recognizing revenues will not be significantly impacted by the new guidance.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Standards, continued
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 believes that the adoption of the ASU may have an impact on the Company as it pursues its strategy to develop the blockchain
business.
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 of 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 expects that the adoption of the ASU will not have
a material impact upon the Company’s 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 11 – Commitments
and Contingencies and Note 14 – Subsequent Events, the Company did not identify any other recognized or non-recognized subsequent
events that would have required adjustment or disclosure in the financial statements.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment are as follows:
|
|
As
of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Displays
- racks
|
|
$
|
220,077
|
|
|
$
|
201,849
|
|
Trucks
and automobiles
|
|
|
119,774
|
|
|
|
113,763
|
|
Vending
machines
|
|
|
166,271
|
|
|
|
166,271
|
|
Cold
drink store fixtures and equipment
|
|
|
106,336
|
|
|
|
81,951
|
|
Furniture
and equipment
|
|
|
29,788
|
|
|
|
18,993
|
|
|
|
|
642,246
|
|
|
|
582,827
|
|
Less
– accumulated depreciation
|
|
|
(505,175
|
)
|
|
|
(364,791
|
)
|
Total,
net
|
|
$
|
137,071
|
|
|
$
|
218,036
|
|
For
the years ended December 31, 2017 and 2016, depreciation expense was $140,384 and $157,507, 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, 2017
and 2016.
NOTE
4 – AUTOMOBILE LOANS
The
Company has incurred auto loans to finance its vehicles. Loans are typically financed over 60-72 months and have interest rates
ranging from 3.64% to 4.99% per annum.
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 former 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 13). The Company may terminate the agreement and all obligations to make
future payments on ten days’ written notice to Magnum. As of December 31, 2017 and December 31, 2016, the outstanding balance
on the equipment loan was $36,495 and $76,474, respectively.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – CREDIT LINES
UBS
On
October 27, 2016, the Company entered into a credit line with UBS (The “UBS Credit Line”). The UBS Credit Line had
a borrowing capacity determined by the level of the collateral pledged and bore interest at a floating rate, depending on the
time requested for the borrowing. As of July 21, 2017, the credit line was closed. As of December 31, 2017 and December 31, 2016,
the outstanding balance on the line of credit was $0 and $1,280,275, respectively.
Radium2
Capital Inc
.
On
November 27, 2017, the Company completed the Radium Agreement with Radium2 Capital Inc. (“Radium”). Pursuant to the
Radium Agreement, the Company received cash of $750,000, less $7,500 of fees and expenses. The Radium borrowing is repaid at a
minimum amount per week, based upon 15% of the Company’s gross sales, until the Company has repaid a total of $986,250.
The Agreement further provides for a discount on the repayment amount, provided such prepay obligation of $838,313 is paid within
126 business days from the date of funding. The Radium Agreement was accounted for as a borrowing, with the difference between
the repayment obligation and the net amount funded being recorded as an original issue discount, amortized using the interest
method over the expected term of the arrangement. As of December 31, 2017, the balance of the obligation, net of the discount
was $688,038, and was presented as note payable, current, within the consolidated financial statements. Since the repayment terms
are based upon the Company’s actual future sales, which are not fixed, the Company classified the obligation as a current
liability. During the year ended December 31, 2017, accreted discount amortization was $47,437, and was reflected as interest
expense within the consolidated statements of operations and comprehensive loss.
Court
Cavendish Ltd.
On
December 20, 2017, the Company entered into the Cavendish Loan Agreement with Court Cavendish Ltd (“Cavendish”). The
Cavendish Loan Agreement provides for the availability of an initial $2,000,000 (“Initial Facility Amount”). Cavendish
also agreed to allow for two extensions of $1,000,000 each (“Extended Facility Amount”, and together with the Initial
Facility Amount, the “Facilities”), as long as the Company continued moving towards specific ventures related to the
blockchain technology, to increase the Facilities to $4,000,000 subject to Cavendish’s approval. Interest on the Facilities
shall accrue monthly, at a rate of 12.5% per annum, on the unpaid principal balance commencing on the date of the first drawdown
and shall be due and payable, without demand or notice, at the Company’s election quarterly in cash or in shares of the
Company valued at the lower of $3.00 or the closing price per share on the preceding date the interest payment is due. All principal
and accrued interest under the Facilities is due and payable on December 21, 2018. On such date, at Cavendish’s election,
the Company shall repay the outstanding amount together with accrued interest either in cash or in shares of the Company at the
lower of $3.00 or the closing price per share on such date, but not lower than $2.00 per share. In connection with the Cavendish
Loan Agreement, a facility fee of 5% (“Original Issue Discount” or “OID”) of each of the Initial Facility
Amount and the Extended Facility Amount is payable on the date of the first drawdown under each such facility and payable in either
cash or stock. The facility fee on the Initial Facility Amount of $100,000 was withheld from the proceeds of the initial $750,000
funding under the Cavendish Loan Agreement.
In
connection with the Initial Facility Amount, the Company issued to Cavendish a warrant to purchase 100,000 shares of the Company’s
common stock with a three year life and an exercise price of $3.00 per share. This warrant had a gross fair value of $165,645,
using the Black-Scholes option pricing model. Upon the first draw under the Extended Facility Amount, the Company shall issue
a warrant to purchase an additional 50,000 shares of the Company’s common stock, with the same terms, for each of the $1,000,000
extensions that are made available under the Extended Facility Amount.
The
$100,000 fee and the warrant to issue 100,000 shares of the Company’s common stock were considered costs of the Initial
Facility Amount.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – CREDIT LINES (CONTINUED)
Court
Cavendish Ltd., continued
For
the Initial Facility Amount, the $100,000 fee was charged in full as a cost of the facility and the warrant was charged on a relative
fair value basis, or in the amount of $152,363. These costs were initially charged to deferred financing costs, since these costs
were associated with the Initial Facility Amount and not to a single funding. Thereafter, these deferred costs shall be charged
on a pro rata basis as a direct offset against the fundings as they occur, and such costs would be amortized using the interest
method over the term of each funding loan.
On
December 21, 2017, the Company requested a funding of $750,000 under the Initial Financing Facility, which was received by the
Company on December 22, 2017. OID costs of $37,500 and warrant costs of $57,136, were from deferred financing costs were directly
offset against this funding.
The
Company then evaluated the funding transaction to determine whether or not there was a beneficial conversion feature. Accordingly,
the Company determined that after the effect of the OID and the warrant, that the effective conversion price was $2.13 per share.
With a market price of the Company’s common stock on December 20, 2017, of $2.44, the Company determined that there was
a beneficial conversion with a value of $94,636. The beneficial conversion feature was accounted for as a credit to additional
paid in capital and a direct offset to the funded loan amount, with such costs amortized using the interest method over the term
of each funding loan.
On
December 26, 2017, Cavendish converted the principal of $750,000 and accrued interest and thereupon was issued 250,233 shares,
based upon an exercise price of $3.00 per share. Accordingly, in recording the conversion, the Company recognized $189,272 in
interest expense for the unamortized debt discount and then the principal value of the note of $750,000 was credited to additional
paid in capital and common stock.
The
Company received an additional drawdown of $750,000 of the Initial Facility Amount on January 15, 2018. The Company received the
final drawdown of $500,000 of the Initial Facility Amount on January 30, 2018. Since the Company is no longer listed on NASDAQ
(See Note 11), the remaining amount under the Extended Facility Amount will not be available to the Company unless Cavendish were
to waive this requirement.
NOTE
7 – 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 14.5% of the Company as of December 31, 2017. The Credit Agreement, which expires November
23, 2018, provided for a revolving credit facility in an amount of up to $3,500,000 (“Facility Amount”), 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. In December 2017, the Company determined that it was probable
that further advances would not be available from the Lender under this Credit Agreement. Accordingly, the Company charged to
interest expense a total of $396,214 in deferred financing costs. As of December 31, 2017 and 2016, the Company had an outstanding
balance of $0 and $0, respectively, under the Credit Agreement.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – STOCKHOLDERS’ (DEFICIT) EQUITY
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.
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 to our Company by 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, former 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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – STOCKHOLDERS’ (DEFICIT) EQUITY (CONTINUED)
2016
Issuances, continued
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.
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 and
comprehensive loss.
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 and comprehensive
loss.
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
and comprehensive loss.
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 and comprehensive loss.
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 Comprehensive Loss) 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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – STOCKHOLDERS’ (DEFICIT) EQUITY (CONTINUED)
2016
Issuances, continued
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 and
comprehensive loss 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.
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 and comprehensive loss 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 and comprehensive loss 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 and comprehensive loss 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.
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.
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – STOCKHOLDERS’ (DEFICIT) EQUITY (CONTINUED)
2017
Issuances, continued
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.
On
November 28, 2017, the Company issued 21,015 and 22,004 shares of the Company’s common stock to Richard Allen and Virginia
Morris, per their respective severance agreements (See Note 11). The fair value of these shares was $97,375.
On
November 28, 2017, the Company issued 66,092 shares of the Company’s common stock to consultants of the Company in consideration
for services provided. The fair value of these shares was $155,403.
On
November 28, 2017, the Company issued 21,084 shares of the Company’s common stock to directors of the Company in consideration
of services provided. The fair value of these shares was $52,500.
On
November 28, 2017, the Company issued 48,000 shares of the Company’s common stock to Julian Davidson in lieu of a cash bonus
(See Note 11). The fair value of these shares was $135,768.
NOTE
9 – 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 authorized under the 2017 Stock Option Plan is
850,000.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – 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 Former Executive Chairman, was granted
an option to purchase 71,686 shares of the Company’s common stock. 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 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.
On
December 24, 2017, a former director exercised an option to purchase 23,333 shares of the Company’s common stock on a cashless
basis. To exercise on a cashless basis, the former director forfeited 17,471 previously owned shares, resulting in net shares
issued of 5,862.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – 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 Year Ended
December 31, 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
|
|
|
(23,333
|
)
|
|
|
4.50
|
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
Expired,
forfeited or cancelled
|
|
|
(659,744
|
)
|
|
|
4.97
|
|
|
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2017
|
|
|
550,534
|
|
|
$
|
4.34
|
|
|
$
|
2.72
|
|
|
|
2.5
|
|
|
$
|
417,407
|
|
Exercisable
at December 31, 2017
|
|
|
408,651
|
|
|
$
|
4.25
|
|
|
$
|
3.09
|
|
|
|
1.9
|
|
|
$
|
348,699
|
|
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Options, continued
As
of December 31, 2017, there was a total of $162,505 of unrecognized compensation expense related to unvested stock options. This
cost is expected to be recognized through 2019 with a weighted average remaining life of 0.49 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.
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 11), 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 year ended December 31, 2017, the Company
recognized expense of $18,975 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 year ended December 31, 2017, the Company recorded expense
$252,738 related to this warrant.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
9 – 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
|
|
|
1,063,750
|
|
|
$
|
3.58
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding
December 31, 2017
|
|
|
1,534,320
|
|
|
$
|
4.19
|
|
|
|
2.0
|
|
Exercisable
at December 31, 2017
|
|
|
1,194,320
|
|
|
$
|
4.41
|
|
|
|
1.4
|
|
Stock-Based
Compensation Expense
The
following tables summarize total stock-based compensation costs recognized for the years ended December 31, 2017 and 2016:
|
|
For
the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
$
|
1,062,266
|
|
|
$
|
905,672
|
|
Warrants
|
|
|
194,565
|
|
|
|
-
|
|
Common
Stock
|
|
|
217,568
|
|
|
|
270,000
|
|
Total
|
|
$
|
1,474,399
|
|
|
$
|
1,175,672
|
|
|
|
|
|
|
|
|
|
|
The
total amount of stock-based compensation was reflected within the statements of operations and comprehensive loss as:
|
|
For
the Years Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
General
and administrative expenses
|
|
$
|
930,844
|
|
|
$
|
963,218
|
|
Sales
and marketing expenses
|
|
|
543,555
|
|
|
|
212,454
|
|
Total
|
|
$
|
1,474,399
|
|
|
$
|
1,175,672
|
|
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – INCOME TAXES
Deferred
income taxes 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,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
2,451,031
|
|
|
$
|
3,093,358
|
|
Allowance
for uncollectible accounts
|
|
|
164,013
|
|
|
|
90,177
|
|
Stock-based
compensation
|
|
|
376,226
|
|
|
|
405,616
|
|
Accounts
payable
|
|
|
169,717
|
|
|
|
53,170
|
|
Other
accruals
|
|
|
111,247
|
|
|
|
293,601
|
|
Compensation
costs
|
|
|
-
|
|
|
|
11,058
|
|
Valuation
allowance
|
|
|
(3,278,188
|
)
|
|
|
(3,955,042
|
)
|
Charitable
Contributions
|
|
|
5,954
|
|
|
|
8,062
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Statutory
federal tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State,
taxes, net of federal benefit
|
|
|
(4.8
|
)%
|
|
|
(4.8
|
)%
|
Permanent
differences:
|
|
|
|
|
|
|
|
|
Financing
costs- warrant amortization
|
|
|
1.9
|
%
|
|
|
3.4
|
%
|
Stock
options
|
|
|
2.2
|
%
|
|
|
-
|
%
|
Other
|
|
|
0.3
|
%
|
|
|
1.1
|
%
|
Loss
on inducement
|
|
|
-
|
%
|
|
|
5.9
|
%
|
Valuation
allowance
|
|
|
34.4
|
%
|
|
|
28.4
|
%
|
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
March 28, 2017, the stock ownership of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding
capital stock) had increased on a cumulative basis by more than 50 percentage points, triggering a limitation under Section 382.
Provided that certain requirements for business continuity are met, upon a change of ownership under Section 382, the cumulative
net operating losses would be subject to an annual limitation based upon the fair value of the Company multiplied by the long-term
tax exempt bond rate. The Company determined that this annual limitation was de minimis. Accordingly, the Company’s NOLs
in the aggregate gross amount of $11,427,095 were not eligible to be carried forward past the date of the Section 382. This resulted
in an impairment of the NOL carryover amount.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
10 – INCOME TAXES (CONTINUED)
Based
on a history of cumulative losses at the Company and the results of operations for the years ended December 31, 2017
and 2016, 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. The Company recognized a deferred tax expense of $1,467,847 to reflect the reduced U.S. tax rate of the Tax Act
and a corresponding deferred tax benefit to reflect the reduction of the valuation allowance. As of December 31, 2017, the
Company has recorded a valuation allowance of $3,278,188.
As
of December 31, 2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately
$9,145,639 and $9,145,639, respectively.
The
Company remains subject to examination by tax authorities for tax years 2014 through 2016. The Company files income tax returns
in the U.S. federal jurisdiction and approximately 11 states.
As
of December 31, 2017, 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
11 – 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.
Revolution
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 was been certified by the court as ready for trial.
On November 15, 2017, the Company, Ascent and Revolution entered into a mutual release and settlement agreement in which all claims
and counterclaims were dismissed, with no party having to make any payment to any other party.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal
Proceedings, continued
Julian
Davidson
On
February 20, 2018, Mr. Davidson, informed the Company that he was seeking compensation as part of his December 2017 separation
from the Company. The Company does not believe that any outstanding compensation is due to Mr. Davidson and has informed him accordingly.
On
March 12, 2018, an action was filed by Mr. Davidson in the District Court for the Southern District of New York entitled Julian
Davidson v. Long Blockchain Corp. Mr. Davidson is seeking to enforce a separation agreement that was purportedly reached in relation
to his resignation from the Company on December 31, 2017. Mr. Davidson is also seeking compensation, expense reimbursements, and
cash bonus, severance, stock and accelerated vesting of stock options which he claims was agreed to by the Company. The Company’s
management and legal counsel believe it is too early to determine the probable outcome of this matter.
NASDAQ
Notices
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.
On
February 15, 2018, Long Blockchain Corp. received a notice from the Listing Qualifications Department of NASDAQ stating that NASDAQ
had determined to delist the Company’s securities under the discretionary authority granted to NASDAQ pursuant to NASDAQ
Rule 5101. The notification letter stated that NASDAQ believed that the Company made a series of public statements designed to
mislead investors and to take advantage of public interest in bitcoin and blockchain technology, thereby raising concerns about
the Company’s suitability for exchange listing. The notification letter also stated that NASDAQ was revoking its prior notification
to the Company that it had regained compliance with the market value of listed securities requirement of Rule 5550(b)(2) (the
“MVLS Rule”).
We
appealed the foregoing delisting to a NASDAQ Hearings Panel, which appeal hearing was held on March 22, 2018. On April 10,
2018, the Company was notified that the NASDAQ Hearings Panel determined to affirm the delisting of our shares from NASDAQ, and
suspended trading effective at the open of business on April 12, 2018. The Company intends to apply for its common stock to be
quoted on the OTCQB Market. Effective April 12, 2018, the Company’s common stock will be eligible for trading and quotation
on the Pink Current Information tier by the OTC Markets Group Inc. (the “OTC”). The Company’s trading symbol
will remain LBCC.
Brokerage
Arrangements
The
Company maintains arrangements with sales brokers who help with bringing new distributors and retail outlets to the Company and
who manage certain customer accounts for the Company. These sales brokers receive a commission for these services. Commissions
to these brokers ranged from 1-5% of collected sales. In addition, the Company sells its products through alternative vending
channels. Commissions resulting from sales through these channels were $47,802 and $81,254 for the years ended December 31, 2017
and 2016, respectively.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment
Agreements
On
March 10, 2017, the Company entered into an amended and restated employment agreement with Mr. Thomas, the former CEO.
The amended employment agreement had a term that ran until December 31, 2019. Mr. Thomas would receive a base annual salary of
$250,000, and was paid $83,000 upon the signing of the agreement, and would have been 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 9). On February 20, 2018, Mr. Thomas terminated his employment agreement with the Company (See Note
14).
On
April 18, 2017, the Company entered into an employment agreement with Virginia Morris to serve as the Company’s Chief
Sales & Marketing Officer. 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 would have vested
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 9).
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 satisfaction of the severance obligation, Ms. Morris
was issued 22,004 shares of the Company’s common stock. 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 be forfeited 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 former Chief Financial
Officer. Pursuant to the separation agreement, Mr. Allen continued as the Company’s Chief Financial Officer until August
15, 2017. Pursuant to the separation agreement, the Company paid to Mr. Allen on August 8, 2017, $30,834 in cash and on November
28, 2017, issued to Mr. Allen 21,015 shares of the Company’s common stock. In addition, 50% of Mr. Allen’s unvested
stock options vested immediately and together with previously vested 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.
Consulting
Agreements
Julian
Davidson
On
June 6, 2016, the Company entered into an amendment to the consulting agreement with Julian Davidson which provided for him to
serve as the Company’s Executive Chairman. 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, contained 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).
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements, continued
Julian
Davidson, continued
On
August 18, 2016, the Company entered into a second amendment to the consulting agreement with Julian Davidson. Pursuant to 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 was eliminated and Mr. Davidson received
a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock. Further, 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 provided 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, valued at $135,768, which were issued
in November 2017 and (ii) a deferred cash payment of $65,000 of which $30,000 was paid in December 2017 and $35,000 was included
in accreted expense at December 31, 2017. The shares of the Company’s common stock were granted under the Company’s
2017 Long-Term Incentive Equity Plan.
On
December 19, 2017, Mr. Davidson resigned from the Board of Directors and all other positions within the Company, effective December
31, 2017. Upon Mr. Davidson’s resignation, all outstanding stock options were forfeited.
Investor
Relations
On
March 1, 2017, the Company entered into a consulting agreement with an investor relations and communications firm, which commenced
on March 1, 2017, and was terminated on November 22, 2017. Pursuant to the agreement, during the year ended December 31, 2017,
this firm was paid $1,080,000 in cash and was issued 20,000 shares of the Company’s common stock, valued at $78,200. As
of December 31, 2017, the Company had $183,300, for the issuance of 40,000 shares of the Company’s common stock, in accrued
expenses within the consolidated balance sheets due to this firm.
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.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
On
June 6, 2014, the Company entered into a lease agreement for its former principal office and warehouse space in Hicksville, NY.
The lease commenced on July 1, 2014 and 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. Pursuant to the lease agreement, the first months rent is $8,250 per month, with rent for the
first month at no cost. The Company is obligated for taxes and an annual escalation of 3 %. Rent expense is accounted to on
a straight line basis based upon the total expected rent over the lease term.
Rent
expense for the years ended December 31, 2017 and 2016 was $75,989 and $47,655, respectively.
Total
future minimum payments required under the Farmingdale lease are as follows:
Year
Ended December 31,
|
|
|
|
2018
|
|
$
|
99,984
|
|
2019
|
|
|
102,983
|
|
2020
|
|
|
106,073
|
|
2021
|
|
|
109,255
|
|
2022
|
|
|
83,564
|
|
Total
|
|
$
|
501,859
|
|
In
addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the years ended December 31,
2017 and 2016 was $49,836 and $86,290, respectively.
NOTE
12 – MAJOR CUSTOMERS AND VENDORS
For
the years ended December 31, 2017 and 2016, two customers accounted for 25% and 14%, or 39% in the aggregate, and two customers
accounted for 20%, and 11%, or 31% in the aggregate, of the Company’s net sales, respectively.
For
the years ended December 31, 2017 and 2016, two vendors accounted for 34%, and 22%, or 56% in the aggregate, and four vendors
accounted for 23%, 17%, 15%, and 13%, or 69% in the aggregate, of purchases, respectively.
NOTE
13 - RELATED PARTIES
The
Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, former CEO, stockholder,
and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the years ended December 31, 2017 and
2016, sales to this related party were $879 and $3,451, respectively. As of December 31, 2017 and 2016, there was $879 and $0,
respectively, due from this related party which was included in accounts receivable in the consolidated balance sheets. The Company
also purchases product at cost, from this entity to supplement certain vending sales. For the years ended December 31, 2017 and
2016, the Company purchased $30,084 and $27,557, respectively, of product from this entity. As of December 31, 2017 and 2016,
the outstanding balance due to this entity included in accounts payable was $16,469 and $10,043, respectively.
As
of December 31, 2017 and 2016, the Company is indebted to Mr. Thomas in the amounts of $70,000 and $0, respectively, for an interest-free
short-term loan to the Company. This loan is included in other current liabilities within the consolidated balance sheets.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - RELATED PARTIES (CONTINUED)
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 administrative services provided to the Company
beyond the Board of Director duties of this Director. As of December 31, 2017 and 2016 accounts payable and accrued expenses to
a company wholly owned by this former director were $0 and $4,032, respectively.
For
the years ended December 31, 2017 and 2016, the Company incurred expenses of $45,000 and $0, respectively, related to an entity
whose majority shareholder is Eric Watson, who beneficially owned approximately 14.5% of the Company as of December 31, 2017.
As of December 31, 2017 and 2016, accounts payable due to this entity were $34,410 and $0.
NOTE
14 – SUBSEQUENT EVENTS
Employment
Agreement
Effective
February 20, 2018, the Company appointed Shamyl Malik as Chief Executive Officer of the Company. Mr. Malik will remain a member
of the Board of Directors. The Company and Mr. Malik entered into a one-year employment agreement, pursuant to which Mr. Malik
will receive a base annual salary of $250,000, and for the first six months of his employment, his salary will be paid in shares
of common stock of the Company. For the remaining six months, Mr. Malik’s salary will be payable in cash, shares of common
stock or a combination thereof, at the sole option of Mr. Malik. Additionally, if Mr. Malik is still employed by the Company on
January 1, 2019, he will be entitled to a guaranteed bonus of $250,000, half of which will be payable in shares of common stock
and half in cash, or in any combination thereof approved by Mr. Malik.
Termination
of Employment Agreement with Executive
On
February 20, 2018, Phillip Thomas terminated his employment agreement with the Company for “good reason” due to a
substantial and material adverse change in Mr. Thomas’ title, duties and responsibilities, and resigned as a director of
the Company. According to Mr. Thomas’ employment agreement, he is entitled to be paid nine months of his base salary, all
valid expense reimbursements and all accrued but unused vacation pay. Further, stock options granted to Mr. Thomas became fully
vested and may be exercised up to one year from the termination date.
Issuance
of Stock Options
On
February 19, 2018, the Company’s board of directors approved the issuance of stock options to various employees to purchase
22,500 shares of the Company’s common stock. The options expire five years from the date of grant, have an exercise price
of $3.23 per share, and vest one-third on date of grant and one-third in each of February 2019 and February 2020. These options
have a grant date fair value of $51,156.
Issuance
of Common Stock
On
March 9, 2018, the Company issued 87,546 shares of common stock to members of the advisory board and board of directors of the
Company.
On
March 9, 2018, the Company issued 56,158 shares of common stock to employees and consultants of the Company.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – SUBSEQUENT EVENTS (CONTINUED)
Hashcove
Merger
On
March 15, 2018, the Company entered into a sale and purchase agreement (the “Hashcove Agreement”), as amended, on
March 16, 2018, with the shareholders (collectively, the “Shareholders”) of Hashcove Limited (“Hashcove”).
Hashcove
is an early stage UK-based technology company focused on developing and deploying globally scalable distributed ledger technology
solutions. Among its planned product offerings, Hashcove is developing tokenized platforms, crypto-exchanges and wallets, smart
contracts for initial coin offerings (“ICO”), know-your-customer (“KYC”) and financial clearing technology
on blockchain, and other related blockchain applications. Upon closing, which the Company expects will occur by the third quarter
of 2018, Hashcove will become a wholly-owned subsidiary of the Company.
Pursuant
to the Hashcove Agreement, the Company is purchasing (the “Hashcove Purchase”) the entire issued share capital of
Hashcove from the Hashcove Shareholders. In exchange, the Company will issue 531,250 shares of common stock of the Company to
the Hashcove Shareholders. Additionally, the Shareholders may earn up to an aggregate of 1,533,750 of additional shares of common
stock of the Company (the ” Contingent Shares “) upon the achievement of the following milestones: (a) if (i) the
Company’s net revenue (as defined in the Agreement) equals or exceeds $10,000,000 during any 12-calendar month period beginning
six months after the closing (as defined below) and ending no later than 36 months after the closing; (ii) Hashcove’s net
revenue equals or exceeds $5,000,000 during any 12-calendar month period beginning six months after the closing and ending no
later than 36 months after the closing; or (iii) the closing sale price of the Company’s common stock equals or exceeds
$8.00 for a minimum of 30 consecutive trading days during the 36 months following the closing, the Shareholders shall receive
an aggregate of an additional 1,135,312 shares of common stock of the Company; and (b) if Hashcove completes the crypto exchange,
ICO smart contract solution, “clearing on blockchain” and “KYC on blockchain” products in accordance with
the Agreement during the 24 months following the closing, the Shareholders shall receive an aggregate of an additional 398,438
shares of common stock of the Company. The Contingent Shares will be placed in escrow at the Closing and will be released to the
Shareholders upon achievement of the applicable milestones.
Upon
the Closing, Kunal Nandwani, Hashcove’s Chief Executive Officer, will become an executive officer and director of the Company.
The
Shareholders have agreed to certain restrictions on transfer of the shares they receive under the Agreement.
The
Company has also agreed to file, as promptly as practicable in its reasonable discretion following the closing, a registration
statement with the SEC registering the resale of the shares of common stock of the Company to be issued to the Shareholders pursuant
to the Agreement and agreed to seek to have such registration statement declared effective by the SEC as promptly as practicable
thereafter.
Stater
Blockchain
On
March 19, 2018, the Company entered into a contribution and exchange agreement (the “Stater Agreement”), with Stater
Blockchain Limited (“SBL”), and simultaneously closed the transactions contemplated thereby.
SBL
is a New Zealand-based technology company focused on developing and deploying globally scalable blockchain technology solutions
in the financial markets. SBL is developing multiple blockchain and digital currency technology solutions, such as its “Smart
Settlements” and “Smart KYC” platforms, for the global financial markets where significant disintermediation
opportunities exist. SBL owns Stater Global Markets, a United Kingdom-based Financial Conduct Authority regulated prime-of-prime
brokerage, which facilitates market access across multiple instruments including foreign exchange, exchange traded futures and
contracts for difference.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – SUBSEQUENT EVENTS (CONTINUED)
Stater
Blockchain, continued
Pursuant
to the Stater Agreement, SBL issued to the Company 99 ordinary voting shares in SBL (“SBL Shares”) which, immediately
following completion of the transaction contemplated by the Stater Agreement, constituted 9.9% of the total SBL Shares then issued
and outstanding, in exchange for 1,135,435 shares of common stock of the Company, which constituted 9.9% of the total LBC Shares
then issued and outstanding (the “Exchange”).
Upon
closing, Shamyl Malik, the Company’s Chief Executive Officer, was appointed as a director of SBL and Ramy Soliman, SBL’s
Chief Executive Officer, was appointed as a director of the Company.
Upon
closing, the Company, SBL and the majority shareholder of SBL entered into a shareholders’ agreement (the “Stater
Shareholders’ Agreement”), governing the management and ownership of SBL. The Stater Shareholders’ Agreement
includes the Company’s right to appoint one director of SBL, so long as the Company holds at least 9.9% of the SBL Shares
then on issue, certain restrictions on transfer and preemptive rights with respect to the issuance of new securities of SBL.
Upon
closing, the Company, SBL and Long Island Iced Tea Corp. (” SpinCo “) entered into a voting agreement (the “Voting
Agreement”), pursuant to which SBL agreed, if necessary, to vote its LBC Shares (i) in favor of the Company’s distributing
the shares of common stock of SpinCo held by it (the “SpinCo Shares “) to the Company’s stockholders by way
of a dividend (the “Spinoff”), and/or (ii) if requested by the Company against any agreement which would prevent the
Spinoff. Additionally, until the earlier of (i) one year from the consummation of the Spinoff or (ii) the date on which SpinCo
Shares become listed on a national securities exchange, in the event any vote of SpinCo’s stockholders is necessary to effectuate
any corporate action, SBL agreed to vote the SpinCo Shares it directly or indirectly receives upon consummation of the Spinoff
(i) in favor of any corporate action recommended by the then existing board of directors of SpinCo and/or (ii) against any action
or agreement which would impede, interfere with or prevent any SpinCo Action from being consummated. Pursuant to the Voting Agreement,
SBL also agreed to appoint the Company or SpinCo as the Stockholder’s proxy to vote SBL’s LBC Shares or SpinCo Shares,
as applicable, if so requested by the Company. The voting requirements set forth in the Voting Agreement shall expire if the Spinoff
is not consummated by November 13, 2018 or if prior to such date, the Company’s board of directors unanimously decides not
to proceed with the Spinout.
Agreement
with CASHe
On
March 22, 2018, the Company entered into and closed on a contribution and exchange agreement (the “CASHe Agreement”),
with TSLC PTE Ltd. (“TSLC”).
TSLC
is the parent company of CASHe, a leading provider of digital money and short-term financial products to young millennials across
India. TSLC also owns all of the intellectual property developed by CASHe and has the worldwide rights outside of India to the
application of its intellectual property for its lending and money transfer platform.
CASHe
provides short-term financial products using technology combined with analytics and proprietary algorithms to map young professionals
across the country based on their mobile, digital footprint and their social behaviour patterns to rate their credit worthiness.
CASHe has also implemented distributed ledger enabled digital tokens using smart contracts on its lending platform. The distributed
ledger technology allows the platform to record transactions in a secure and transparent manner by creating an audit trail.
Further, a smart contract-based distributed ledger records all lending transactions in an open and transparent manner.
LONG
BLOCKCHAIN CORP. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
14 – SUBSEQUENT EVENTS (CONTINUED)
Agreement
with CASHe, continued
Pursuant
to the CASHe Agreement, TSLC issued the Company 1,145,960 shares of its voting capital stock (the “TSLC Capital Stock”),
equal to 7.00% of the TSLC Capital Stock on a fully diluted basis, in exchange for (i) 1,949,736 shares of the Company’s
common stock, equal to 17.00% of the Company’s total common stock issued and outstanding as of the date of the CASHe Agreement,
and (ii) the right to receive, if a Material Adverse Effect (as defined in the CASHe Agreement) occurs with respect to the Company
within ninety (90) days of the date of the CASHe Agreement, an additional 332,602 shares of the company’s common stock,
equal to 2.90% of the Company’s total issued and outstanding common stock as of the date of the CASHe Agreement. As of
April 12, 2018, the Company was delisted from NASDAQ, which triggered the Material Adverse Effect under the CASHe Agreement, and
therefore the Company owes to TSLC an additional 332,602 shares of the Company’s common stock.
Pursuant
to the CASHe Agreement, one person from TSLC will be appointed to the Company’s board of directors. As of the date that
these financial statements were issued, no TSLC representative has been appointed to the Company’s board of directors.
Pursuant
to the CASHe Agreement, TSLC agreed to vote its Company common stock received pursuant to the CASHe Agreement (i) in favor of
the Company’s previously announced Spinoff of our beverage business, and/or (ii) if requested by us against any agreement
which would prevent the Spinoff. Additionally, until the earlier of (i) one year from the consummation of the Spinoff or (ii)
the date on which the shares of the spun off business (the “SpinCo Shares”) become listed on a national securities
exchange, in the event any vote of the stockholders of the spun off business is necessary to effectuate any corporate action,
TSLC agreed to vote the SpinCo Shares it directly or indirectly receives upon consummation of the Spinoff (i) in favor of any
corporate action recommended by the then existing board of directors of the spun off business (each a “SpinCo Action”)
and/or (ii) against any action or agreement which would impede, interfere with or prevent any SpinCo Action from being consummated.
Pursuant
to the CASHe Agreement, TSLC granted the Company the rights to develop the business of CASHe in the Latin American market, subject
to the parties entering into a mutually acceptable license agreement having terms customary for such agreements, including, without
limitation, those relating to payment of license fees and royalties by us to TSLC (which terms have not yet been negotiated).
The
Company agreed (a) to use our reasonabl
e best efforts to file a registration statement to register
the resale of the Company common stock issued pursuant to the CASHe Agreement as soon as practicable and have such registration
statement declared effective as soon as possible thereafter and, (b) file any necessary notices with the OTC Markets,
relating to the Company’s common stock as soon as reasonably possible to allow shares issued pursuant to the CASHe Agreement
to be traded on the OTC.
Advances
from Related Parties
As
of April 12, 2018, the Company is indebted to Mr. Thomas, the Company’s former CEO and a shareholder of the Company, in
the amount of $220,000.
As
of April 12, 2018, the Company is indebted to Mr. Eric Watson, a shareholder of the Company, in the amount of $57,000.