NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND
GOING CONCERN
Business
Organization
Long
Island Iced Tea Corp, a Delaware corporation (“LIIT”), was formed on December 23, 2014. LIIT was formed in order to
allow for the completion of mergers between Cullen Agricultural Holding Corp. (“Cullen”) and Long Island Brand Beverages
LLC (“LIBB”). On December 31, 2014, LIIT entered into a merger agreement, as amended as of April 23, 2015, with Cullen,
a public company, Cullen Merger Sub, Inc. (“Cullen Merger Sub”), LIBB Acquisition Sub, LLC (“LIBB Merger Sub”),
LIBB and the founders of LIBB (“Founders”). Pursuant to the merger agreement, (a) Cullen Merger Sub was merged with
and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary of LIIT and (b) LIBB Merger Sub was merged with
and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of LIIT (the “Mergers”). As a result of
the Mergers which were consummated on May 27, 2015, LIIT consisted of its wholly owned subsidiaries, LIBB (its operating subsidiary)
and Cullen and Cullen’s wholly owned subsidiaries (collectively the “Company”).
Under
the merger agreement, upon consummation of the Mergers, the former holders of the LIBB membership interests (the “LIBB members”)
received 2,633,334 shares of common stock of LIIT (or approximately 63%).
For
accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former
LIBB members held a large percentage of LIIT’s shares and exercised significant influence over the operating and financial
policies of the consolidated entity and Cullen was a public shell company at the time of the transaction. Pursuant to Accounting
Standards Codification (“ASC”) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company
into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business
combination. As a result, the condensed consolidated balance sheets, statements of operations, and statements of cash flows of
LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical condensed consolidated financial
statements of LIBB are now reflected as those of the Company.
Overview
The
Company is a holding company operating through its wholly-owned subsidiary, LIBB. The Company is engaged in the production and
distribution of premium Non-Alcoholic ready-to-drink (“NARTD”) iced tea in the beverage industry. The Company is currently
organized under its flagship brand, Long Island Iced Tea, a premium NARTD tea made from a proprietary recipe and with quality
components. The Company’s mission is to provide consumers with premium iced tea offered at an affordable price.
The
Company aspires to be a market leader in the development of iced tea beverages that are convenient and appealing to consumers.
There are two major target markets for Long Island Iced Tea: “consumers on the go” and “health conscious consumers.”
“Consumers on the go” are families, employees, students and other consumers who lead a busy lifestyle. With increasingly
hectic and demanding schedules, there is a need for products that are accessible and readily available. “Health conscious
consumers” are individuals who are becoming more interested and better educated on what is included in their diets, causing
them to shift away from the less healthy options, such as carbonated soft drinks, towards alternative beverages such as iced tea.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
Overview,
continued
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, sweet tea, mango and unsweetened. In addition, in order to service certain vending contracts, the Company sells snacks
and other beverage products on a limited basis.
The
Company distributes an aloe vera derived juice beverage (“ALO Juice”) in 500ml and 1.5 liter bottles.
ALO Juice is offered in six flavors including original, pomegranate, mango, raspberry, pineapple and coconut.
During April
2017, the Company expanded its brand to include lemonade. Lemonade is offered in nine flavors including traditional, lime, pink
lemonade, kiwi & strawberry, cherry, peach, watermelon, wild berries and strawberry and is offered at retail in 18oz bottles.
The
Company sells its products to regional retail chains and to a mix of independent mid-to-large range distributors who in turn sell
to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels, principally in
the New York, New Jersey, Connecticut and Pennsylvania markets, with expanding distribution in Florida, Virginia, Massachusetts,
New Hampshire, Nevada, Rhode Island and parts of the Midwest. As of June 30, 2017, the Company’s products are available
in 27 states and in Canada and Latin America.
The
ALO Juice Business
Asset
Purchase Agreement
On
December 8, 2016, the Company entered into an asset purchase agreement with The Wilnah International, LLC (“Wilnah”).
Pursuant to the agreement, the Company intended to acquire the intellectual property (“IP”) (trade names, formulas,
recipes) for ALO Juice. The Company has not yet closed the asset purchase and is currently working with Wilnah to modify the agreement
to a licensing arrangement.
Seba
Personal Guarantee
On
March 14, 2017, Mr. Ponce, former majority owner of Seba Distribution LLC (“Seba”),
issued to the Company a personal guarantee in the amount of $467,444 in support of certain obligations of Seba that are owed to
the Company.
Liquidity
and
Going Concern
The
Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network
of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of
debt and equity, and through utilizing trade credit with its vendors.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BUSINESS ORGANIZATION, LIQUIDITY AND GOING CONCERN (CONTINUED)
Liquidity
and Going Concern, continued
As
of June 30, 2017, the Company had cash of $241,361. As of June 30, 2017, the Company had working capital of $1,145,366. The Company
incurred net losses of $4,225,195 and $7,679,717 for the three and six months ended June 30, 2017 respectively. As of June 30,
2017, the Company’s stockholders’ equity was $1,953,410.
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.
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, upon the purchase of $500,000 or more in shares, 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 are fully vested upon issuance. The sale of
common stock generated gross proceeds of $2,240,800 and net proceeds of approximately $2,129,212 after deducting commissions and
other offering expenses.
Pursuant
to a Credit and Security Agreement (the “Credit Agreement”), the Company has a revolving credit facility in an amount
up to $3,500,000, subject to approval by the lender (See Note 5).
Historically, the Company has financed
its operations through the raising of equity capital and through trade credit with its vendors. The Company’s ability to
continue its operations and to pay its obligations when they become due is contingent upon the Company obtaining additional financing.
Management’s plans include raising additional funds through equity offerings, debt financings, or other means.
The Company believes that it will be able
to raise sufficient additional capital to finance the Company’s planned operating activities. There are no assurances that
the Company will be able to raise such capital on terms acceptable to the Company or at all. If the Company is unable to obtain
sufficient amounts of additional capital, it may be required to reduce the scope of its planned market development activities,
and/or consider reductions in personnel costs or other operating costs. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2017. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2016 and related notes thereto included
in the Company’s Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March
30, 2017.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
effect on the previously reported net loss.
Principles
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company
balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial
statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those
which result from using such estimates. Management utilizes various other estimates, including but not limited to, assessing the
collectability of accounts receivable, accrual of rebates to customers, the valuation of securities, the valuation of inventory,
determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants
issued, the fair value of stock options, the recognition of revenue, and other legal claims and contingencies. The results
of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident.
Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined
to be necessary.
Revenue
Recognition
Revenue
is stated net of sales discounts and rebates paid to customers (See Customer Marketing Programs and Sales Incentives, below).
Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determinable; (2) evidence of
a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance
required; and (4) amounts are collectible under normal payment terms.
These
conditions typically occur when the products are delivered to or picked up by the Company’s customers. For sales where certain
revenue recognition criteria have not been met at the date of delivery, the Company defers recognition of such revenue and accounts
receivable until such recognition criteria are met.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer
Marketing Programs, including Sign On and Sales Incentives
The
Company participates in various programs and arrangements with customers designed to incent new distribution, incent the introduction
of a new product line, or to increase the sale of its products. Among these programs are arrangements under which allowances can
be earned by customers for introducing a product (sign on incentives, for example), for various discounts to the end retailers
or for participating in specific marketing programs. The Company believes that its participation in these programs is essential
to ensuring volume and revenue growth in a competitive marketplace. Depending upon the program, those incentives are paid in either
cash or the issuance of equity instruments. During the three months ended June 30, 2017 and 2016, these allowances resulted in
reductions in net sales of $410,326 and $0, respectively. During the six months ended June 30, 2017 and 2016, these allowances
resulted in reductions in net sales of $401,182 and $45,165, respectively. During the three months ended March 31, 2017, allowances
resulted in a net increase to net sales, on account of a reversal of a customer’s allowance. Included in these amounts for
the three and six months ended June 30, 2017, is a non-cash sign on incentive of $257,022 and $257,022, respectively, related
principally to the cost of warrants issued in connection with the signing of a distribution agreement and the first order with
Big Geyser Inc. (“Big Geyser”) (See Notes 7 and 8).
Shipping
and Handling Costs
Shipping
and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are
included in selling and marketing expenses within the condensed consolidated statements of operations and totaled $171,438 and
$161,518, for the three months ended June 30, 2017 and 2016, respectively and $196,728 and $201,670 for the six months ended June
30, 2017 and 2016, respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs are included in selling and marketing expenses within the condensed
consolidated statements of operations and totaled $265,122 and $20,916 for the three months ended June 30, 2017 and 2016, respectively,
and $316,764 and $30,547, for the six months ended June 30, 2017 and 2016, respectively.
Research
and Development
Costs
related to new product initiatives incurred were included in selling and marketing expenses within the condensed consolidated
statements of operations and totaled $127,864 and $119,187 for the three months ended June 30, 2017 and 2016, respectively, and
$304,726 and $119,587 for the six months ended June 30, 2017 and 2016, respectively. Other research and development costs were
included in general and administrative expenses within the condensed consolidated statements of operations and totaled $0 and
$0 for the three months ended June 30, 2017 and 2016, respectively and $829 and $46,667 for the six months ended June 30, 2017
and 2016, respectively. The other research and development expenses incurred during the three and six months ended June 30, 2016
were incurred pursuant to a product development agreement which will require the Company to pay $40,000 in cash and $40,000 in
common stock upon the completion of the arrangement. As of June 30, 2017, $50,000 was included in accrued expenses in the condensed
consolidated balance sheet related to the 2016 arrangement.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Short-term
Investments
The
Company accounts for securities in accordance with accounting standards for investments in debt and equity securities. Accounting
standards require investments in debt and equity securities to be classified as either “held to maturity”, “trading”,
or “available-for-sale.”
The
Company holds investments in marketable securities, consisting of U.S. government securities and mutual funds. The Company’s
available-for-sale securities are carried at estimated fair value with any unrealized gains and losses, net of taxes, included
in accumulated other comprehensive (loss) income in stockholders’ equity when applicable. During the three months ended
June 30, 2017 and 2016, the unrealized gain was $18,049 and $0, respectively, and during the six months ended June 30, 2017 and
2016, the unrealized gain was $30,246 and $0, respectively. Unrealized losses are charged against interest and other income/(expense),
net, when a decline in fair value is determined to be other-than-temporary. The Company has not recorded any such impairment charge
in the periods presented. The Company determines realized gains or losses on sale of marketable securities on a specific identification
method, and records such gains or losses as interest and other income/(expense), net.
The
following table sets forth the available-for-sale securities, which were fully liquidated during the three months ended June 30,
2017:
|
|
As
of
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
U.S.
government securities
|
|
$
|
-
|
|
|
$
|
195,374
|
|
Fixed
income mutual Funds
|
|
|
-
|
|
|
|
2,194,147
|
|
|
|
$
|
-
|
|
|
$
|
2,389,521
|
|
|
|
As
of December 31, 2016
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Losses
|
|
|
Fair
Value
|
|
U.S. government securities
|
|
$
|
195,570
|
|
|
$
|
(196
|
)
|
|
$
|
195,374
|
|
Fixed income
mutual funds
|
|
|
2,224,197
|
|
|
|
(30,050
|
)
|
|
|
2,194,147
|
|
Total
|
|
$
|
2,419,767
|
|
|
$
|
(30,246
|
)
|
|
$
|
2,389,521
|
|
The
following table classifies the US Government Securities by maturity:
|
|
As
of
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Within
one year
|
|
$
|
-
|
|
|
$
|
94,967
|
|
Within
one to five years
|
|
|
-
|
|
|
|
100,407
|
|
|
|
$
|
-
|
|
|
$
|
195,374
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
The
Company sells products to distributors and in certain cases directly to retailers, and extends credit, generally without requiring
collateral, based on its evaluation of the customer’s financial condition. While the Company has a concentration of credit
risk in the retail sector, it believes this risk is mitigated due to the diverse nature of the customers it serves, including,
but not limited to, its type, geographic location, size, and beverage channel. Potential losses on the Company’s receivables
are dependent on each individual customer’s financial condition and sales adjustments granted after the balance sheet date.
The Company carries its trade accounts receivable at net realizable value. Accounts receivable have terms of ranging from 30 to
75 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential
losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its
history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the
Company’s efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management
expects to collect.
Accounts
receivable, net, is as follows:
|
|
As
of
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Accounts receivable,
gross
|
|
$
|
2,409,503
|
|
|
$
|
1,859,474
|
|
Allowance
for doubtful accounts
|
|
|
(523,776
|
)
|
|
|
(232,416
|
)
|
Accounts receivable,
net
|
|
$
|
1,885,727
|
|
|
$
|
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 two
banks. The Company is exposed to credit risk with regard to two customers who accounted for 36% and 14%, or 50% in the aggregate,
and 46% of the Company’s trade receivables as of June 30, 2017 and December 31, 2016, respectively. The Company does not
generally require collateral or other security to support customer receivables.
The
Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
The
Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory
consists of bottled iced tea, lemonade and ALO Juice. As of June 30, 2017 and December 31, 2016, included in inventory was finished
goods inventory with a cost of approximately $186,000 and $320,000, respectively, which was delivered to a distributor,
and is held in inventory until certain revenue recognition criteria are met.
The
Company values its inventories at the lower of cost or market, net of reserves. Cost is determined using the first-in, first-out
(FIFO) method. As of June 30, 2017 and December 31, 2016, the Company recorded reserves of $65,196 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
|
|
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Finished goods
|
|
$
|
1,500,257
|
|
|
$
|
905,642
|
|
Raw materials
and supplies
|
|
|
664,146
|
|
|
|
282,299
|
|
Total inventories
|
|
$
|
2,164,403
|
|
|
$
|
1,187,941
|
|
Property
and Equipment
Property
and equipment is recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance
and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Depreciation is
recorded using the straight-line method over the respective estimated useful lives of the Company’s assets.
The
estimated useful lives typically are 3 years for cold-drink containers, such as reusable fridges, wood racks, vending machines,
barrels, and coolers, and are depreciated using the straight-line method over the estimated useful life of each group of equipment,
as determined using the group-life method. Under this method, the Company does not recognize gains or losses on the disposal of
individual units of equipment when the disposal occurs in the normal course of business. The Company capitalizes the costs of
refurbishing its cold-drink containers and depreciates those costs over the estimated period until the next scheduled refurbishment
or until the equipment is retired. The estimated useful lives are typically 3 to 5 years for office furniture and equipment and
are depreciated on a straight-line basis. The estimated useful lives for trucks and automobiles are typically 3 to 5 years and
are depreciated on a straight line basis. For the three months ended June 30, 2017 and 2016, depreciation expense was $35,337
and $39,004, respectively. For the six months ended June 30, 2017 and 2016, depreciation expense was $76,706 and $77,698, respectively.
Intangible
Assets
Intangible
assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested
for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include
website development costs with a net book value of $0 and $2,500 as of June 30, 2017 and December 31, 2016, respectively. The
estimated useful life of the capitalized costs of the Company’s website was 3 years and was depreciated on a straight line
basis. As of June 30, 2017, the cost of the website development was $15,000 and the accumulated amortization was $15,000. As of
December 31, 2016, the cost of the website development was $15,000 and the accumulated amortization was $12,500. For the three
months ended June 30, 2017 and 2016, amortization expense was $1,250 and $1,251, respectively, and $2,500 and $2,502 for the six
months ended June 30, 2017 and 2016, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
The
Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between
the financial statement, and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit
based on expected profitability by tax jurisdiction.
In
its interim financial statements, the Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income
Taxes”, whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for
the interim periods. That rate differs from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s
net operating loss carryforward as a result of the historical losses of the Company.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon
an audit and cause changes to previous estimates of tax liabilities. In management’s
opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals
of reserves may be necessary. The Company accounts for uncertain tax positions in accordance
with ASC 740 —“Income Taxes”. No uncertain tax provisions have been
identified. The Company accrues interest and penalties, if incurred, on unrecognized
tax benefits as components of the income tax provision in the accompanying condensed
consolidated statements of operations. Our primary tax jurisdictions are our federal,
various state, and local taxes.
Generally,
Federal, State and Local authorities may examine the Company’s tax returns for three years from the date of filing.
In
accordance with ASC 740, the Company evaluates whether a valuation allowance should be established against the net deferred tax
assets based upon the consideration of all available evidence and using a “more likely than not” standard. Significant
weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the
recent history of cumulative losses and current operating performance. In conducting the analysis, the Company utilizes an approach,
which considers the current year loss, including an assessment of the degree to which any losses are driven by items that are
unusual in nature and incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions
and any other factors arising during the period, which may impact its future operating results.
Internal
Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers (“NOLs”) when the stock ownership
of one or more 5% shareholders (shareholders owning 5% or more of the Company’s outstanding capital stock) has increased
on a cumulative basis by more than 50 percentage points. The Company’s preliminary analysis indicated that such shares have
increased by more than 50% since the last Section 382 limitation on May 27, 2015. The Company is currently evaluating the impact
of the new Section 382 limitation.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options to purchase common
stock
|
|
|
1,148,964
|
|
|
|
194,667
|
|
Warrants to purchase common stock
|
|
|
980,570
|
|
|
|
1,550,159
|
|
Shares issuable
upon conversion of convertible debt
|
|
|
-
|
|
|
|
421,972
|
|
Total potentially
dilutive securities
|
|
|
2,129,534
|
|
|
|
2,166,798
|
|
Fair
Value of Financial Instruments
The
carrying amounts of cash, short term investments, accounts receivable, automobile and equipment loans and the UBS Credit Line
(See Note 4 below) approximate fair value due to the short-term nature of these instruments. In addition, for notes payable, the
Company believes that interest rates approximate prevailing rates.
ASC
820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3 measurements).
Fair
value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer
a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined
based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is
used to prioritize the inputs in measuring fair value as follows:
Level
1 Quoted prices in active markets for identical assets or liabilities.
Level
2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable, either directly or indirectly.
Level
3 Significant unobservable inputs that cannot be corroborated by market data.
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments, continued
The
carrying value of financial instruments in the Company’s condensed consolidated financial statements are as follows:
|
|
Quoted
Prices in Active Markets for Identical Assets or Liabilities (Level 1)
|
|
|
Quoted
Prices for Similar Assets or Liabilities in Active Markets (Level 2)
|
|
|
Significant
Unobservable Inputs (Level 3)
|
|
Short-term investments
at June 30, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments at December
31, 2016
|
|
$
|
2,389,521
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Stock-based
Compensation
The
Company accounts for stock options granted to consultants pursuant to the accounting guidance included in ASC 505-50 “Equity-Based
Payments to Non-Employees” (“ASC 505-50”). Stock-based compensation cost is measured at the grant date and at
the end of each reporting period for unvested awards, based on the fair value of the award, and is recognized as expense over
the consultant’s requisite service period (generally the vesting period of the equity grant). The fair value of the Company’s
stock options granted to consultants are estimated using the Black Scholes option-pricing model with the following assumptions:
expected volatility, dividend rate, risk free interest rate and the expected life.
In
accordance with ASC 505-50, the Company recorded adjustments at the end of each reporting
period to reflect the mark-to-market adjustment of the fair value of unvested awards
granted to consultants. In connection with the mark-to-market adjustments at June 30,
2017, the Company utilized the closing price of the Company’s common stock, as
quoted on the NASDAQ Stock Market LLC (“Nasdaq”), as an input to the Black
Scholes option-pricing model for the fair value of its common stock.
Recent
Accounting Pronouncements
In
January 2016, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”)
2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities,” which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement
of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities
under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU
clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized
losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after
December 15, 2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the
first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact the adoption of this standard will have on its condensed
consolidated financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements, continued
In
February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencement
date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising
from a lease, measured on a discounted basis; and a right-of use asset, which is an asset that represents the lessee’s right
to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term
of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is
permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any
transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply
a full retrospective transition approach. The Company is currently evaluating the impact the adoption of this standard will have
on its condensed consolidated financial statements.
On
March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. This update
requires that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income
tax expense or benefit on the income statement. The amendment also states that excess tax benefits should be classified along
with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting policy election
to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions of this update
are effective for annual and interim periods beginning after December 15, 2016. The Company adopted this standard effective December
31, 2016. The adoption did not have a material effect on the Company’s condensed consolidated financial statements.
In
April 2016, the FASB issued ASU No. 2016-10 “Revenue from Contracts with Customers
(Topic 606)”, “Identifying Performance Obligations and Licensing” (“ASU
2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying
performance obligations and the licensing implementation guidance, while retaining the
related principles for those areas. The provisions of this update are effective for annual
and interim periods beginning after December 15, 2017, with early application permitted.
The Company is continuing to evaluate the expected impact of this new revenue guidance.
The Company is currently preparing its assessment of the full financial impact of the
new revenue recognition guidance, including the method of adoption, and intends to adopt
the guidance when it becomes effective for the Company on January 1, 2018.
In
May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope
Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition
of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual
and interim periods beginning after December 15, 2017, with early application permitted. The Company is continuing to evaluate
the expected impact of this new revenue guidance. The Company is currently preparing its assessment of the full financial impact
of the new revenue recognition guidance, including the method of adoption, and intends to adopt the guidance when it becomes effective
for the Company on January 1, 2018.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent
Accounting Pronouncements, continued
In
August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230)”, “Classification of Certain
Cash Receipts and Cash Payments” (“ASU 2016-15”). The amendments for this update provide guidance on the eight
specific cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration
payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of
corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization
transactions, and separately identifiable cash flows and application of the predominance principle. The provisions of this update
are effective for annual and interim periods beginning after December 15, 2016, with early application permitted. The Company
adopted this standard effective December 31, 2016. The adoption did not have a material effect on the Company’s condensed
consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business” (“ASU 2017-01”),
which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 requires entities to use a screen test to determine when an integrated set of assets and
activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework.
ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The
Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09 “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting”
(“ASU 2017-09”). The amendments in this update provide guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the
effects of a modification unless all of the following are met: The fair value of the modified award is the same as the fair value
of the original award immediately before the original award is modified, the vesting conditions of the modified award are the
same as the vesting conditions of the original award immediately before the original award is modified and the classification
of the modified award an equity instrument or a liability instrument is the same as the classification of the original award immediately
before the original award is modified. The provisions of this update are effective for annual and interim periods beginning after
December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard
will have on its condensed consolidated financial statements.
Management’s
Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the review, other than described in Note 1 –Business Organization, Liquidity, and Management’s Plans, Note 8
– Commitments and Contingencies and Note 11 – Subsequent Events, the Company did not identify any recognized or non-recognized
subsequent events that would have required adjustment or disclosure in the financial statements.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
3 – EQUIPMENT LOAN
On
November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp. (“Magnum”), an entity
managed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, and certain of his family
members. In exchange for the exclusive right to stock vending machines owned by Magnum, the Company agreed to reimburse Magnum
for the cost of products to stock the machines and the costs that Magnum incurred to acquire the machines including machines which
were purchased with an equipment loan. The total principal amount of the payments underlying the agreement upon inception was
$117,917. The reimbursements will be made in 35 monthly payments of principal and interest in the amount of $3,819 with an interest
rate of 10%. Upon completion of these payments in October 2018, Magnum will transfer ownership of the vending machines to the
Company. In addition, in exchange for the right to stock certain other vending machines that the Company has the right to use,
the Company agreed to purchase the products required to be displayed in those vending machines from Magnum, at a price equal to
Magnum’s cost for such products (See Note 10). The Company may terminate the agreement and all obligations to make future
payments on ten days’ written notice to Magnum. As of June 30, 2017 and December 31, 2016, the outstanding balance on the
equipment loan was $60,056 and $76,474, respectively.
NOTE
4 – UBS CREDIT LINE
On
October 27, 2016, the Company entered into a credit line with UBS (The “UBS Credit Line”). The UBS Credit Line has
a borrowing capacity determined by the level of the collateral pledged and bears interest at a floating rate, depending on the
time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of June
30, 2017, the interest rate on the UBS Credit Line was 3.732 %. The UBS Credit Line, when drawn, is collateralized by certain
of the Company’s short-term investments. As of June 30, 2017 and December 31, 2016, the outstanding balance on the line
of credit was $0 and $1,280,275, respectively. As of June 30, 2017 and December 31, 2016, the Company’s borrowing capacity
under the UBS Credit line was $0 and $19,725, respectively. As of July 21, 2017, the credit line has been closed.
NOTE
5 – LINE OF CREDIT – RELATED PARTIES
Brentwood
LIIT Corp.
On
November 23, 2015, LIIT and LIBB entered into a Credit and Security Agreement (the “Credit Agreement”), by and among
LIBB, as the borrower, LIIT and LIIT (NZ) Ltd. (the “Lender”). The Lender is controlled by a related party, Eric Watson,
who beneficially owned approximately 17.0% of the Company as of June 30, 2017. The Credit Agreement provides for a revolving credit
facility in an amount of up to $3,500,000, subject to approval by the lender. The Available Amount may be increased, in increments
of $500,000, up to the Facility Amount, and LIBB may obtain further advances, subject to the approval of the Lender.
NOTE
6 – STOCKHOLDERS’ EQUITY
2017
Issuances
On
January 3, 2017, the Company issued 1,790 shares to a product broker. The shares had a fair value of $7,500.
On
January 17, 2017, the Company issued 41,965 shares of common stock to directors of the Company. The shares were issued in satisfaction
of accrued director fees and had a fair value of $175,000.
On
January 30, 2017, the Company issued 61,208 shares of the Company’s common stock to consultants of the Company in satisfaction
of accrued obligations and as a retainer for services to be provided. The shares were valued based upon the value of such
services. The fair value was $213,550. As of June 30, 2017, $75,351 is included within prepaid expenses and other current assets
in the condensed consolidated balance sheets.
On
March 27, 2017, the Company’s Board of Directors approved the issuance of 5,000 and 25,000 shares of the Company’s
common stock to directors and consultants, respectively, in consideration of services provided. The fair value of these shares
was $112,853.
On
March 27, 2017, the Company’s Board of Directors approved the issuance of 111,457 shares of the Company’s common stock
to consultants of the Company in consideration of services provided. The fair value of these shares was $437,598.
On
April 17, 2017, the Company issued 25,000 shares of the Company’s common stock, valued at $100,751, to an employee
of the Company in consideration for services provided prior to their being employed by the Company.
NOTE
7 – STOCK-BASED COMPENSATION
Long-Term
Equity Incentive Plans
On
May 27, 2015, the Company’s board of directors adopted the 2015 Long-Term Incentive Equity Plan (“2015 Stock Option
Plan”). The 2015 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock
and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. During January
2017, the 2015 Stock Option Plan was amended to increase the aggregate number of shares authorized for issuance by 283,333 shares
to 750,000 shares.
On
April 14, 2017, the Company’s board of directors adopted the 2017 Long-Term Incentive Equity Plan (“2017 Stock Option
Plan”), which was approved by the Company’s stockholders on August 9, 2017. The 2017 Stock Option Plan provides for
the grant of stock options, stock appreciation rights, restricted stock and other stock-based awards to, among others, the officers,
directors, employees and consultants of the Company. The total number of shares reserved under the 2017 Stock Option Plan is 850,000.
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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Options, continued
On
January 30, 2017, pursuant to his consulting agreement, Mr. Davidson, the Company’s Executive Chairman, was granted an option
to purchase 71,686 shares of the Company’s common stock (See Note 8). The option expires four and a half years from the
date of grant, has an exercise price of $4.09, and vests in three equal installments on January 30, 2017, July 28, 2017, and July
28, 2018. The option has a fair value of $131,240.
On
March 10, 2017, in connection with his amended and restated employment agreement, Mr. Thomas, the Company’s Chief Executive
Officer (“CEO”), was granted an option to purchase 75,000 shares of the Company’s common stock, under the 2015
Stock Option Plan. The option expires five years from the date of grant and has an exercise price of $4.50 per share. The option
will vest in three annual installments beginning on the date of grant. The option has a fair value of $128,062.
On
March 27, 2017, as compensation, the Company issued to a director an option to purchase 70,000 shares of the Company’s common
stock. The option will expire five years from the date of grant, has an exercise price of $4.50 per share, and vests in three
annual installments beginning on the date of grant. The option has a fair value of $130,266.
On
April 17, 2017, the Company issued to various officers, directors, and employees options to purchase an aggregate of 127,500 shares
of the Company’s common stock under the 2015 Stock Option Plan and 187,647 shares of the Company’s common stock under
the 2017 Stock Option Plan. The options will expire five years from the date of grant, have an exercise price of $4.50 per share,
and vest in three annual installments beginning on the date of grant. The options have a fair value of $404,600.
During
May 2017, options for the purchase of 29,147 shares were forfeited.
The
Company determined the fair value of stock options granted based upon the assumptions as provided below.
|
|
For
the Six Months Ended June 30, 2017
|
|
Stock price
|
|
|
$
3.73-$4.32
|
|
Exercise price
|
|
|
$
4.09-$5.00
|
|
Dividend yield
|
|
|
0%
|
|
Expected volatility
|
|
|
57-75%
|
|
Risk-Free interest rate, per annum
|
|
|
1.35%
– 1.57%
|
|
Expected life (in years)
|
|
|
2.58
- 3.06
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Options, continued
The
following table summarizes the stock option activity of the Company:
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Average
Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at January 1, 2017
|
|
|
425,411
|
|
|
$
|
4.93
|
|
|
$
|
3.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
752,700
|
|
|
|
4.61
|
|
|
|
1.64
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired, forfeited or cancelled
|
|
|
(29,147
|
)
|
|
|
4.74
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
1,148,964
|
|
|
$
|
4.72
|
|
|
$
|
2.46
|
|
|
|
4.3
|
|
|
$
|
805,956
|
|
Exercisable at June 30, 2017
|
|
|
432,335
|
|
|
$
|
4.49
|
|
|
|
3.31
|
|
|
|
3.9
|
|
|
$
|
403,947
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair
value of the Company’s common stock.
As
of June 30, 2017, there was a total of $1,027,951 of unrecognized compensation expense related to unvested stock options. This
cost is expected to be recognized through 2019 over a weighted average period of 1.27 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.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock
Warrants, continued
On
April 24, 2017, in connection with a distribution agreement with Big Geyser (the “Big Geyser Distribution Agreement”)
(see Note 8), the Company issued a warrant to purchase 85,000 shares of the Company’s common stock at an exercise price
of $4.50 per share. The warrant vests depending on certain sales levels achieved by that distributor. The warrant has an
expiration date of April 23, 2022. The warrant had a grant date fair value of $226,134. For the three and six months ended June
30, 2017, the Company recognized expense of $4,284 and $4,284, respectively, related to this warrant.
On
April 24, 2017, in connection with the same distribution agreement, the Company issued a second warrant to purchase 95,000 shares
of the Company’s common stock at an exercise price that will be equal to the average of the closing prices of the common
stock for the thirty consecutive trading days ending on April 23, 2018 (or the 30 days preceding the beginning of the measurement
period for this warrant). The warrant vests depending on certain sales levels achieved by that distributor during the period April
24, 2018 through April 23, 2019. The warrant has an expiration date of April 23, 2022. The initial valuation of this warrant will
not occur until the measurement period begins on April 24, 2018.
On
April 24, 2017, in connection with the same distribution agreement, the Company issued a warrant to purchase 145,000 shares of
the Company’s common stock at an exercise price of $4.50 per share. The warrant vests as follows for certain milestones
being achieved: 95,000 shares upon the receipt of the first purchase order of the Company’s iced tea products, 25,000 shares
upon the receipt of the first purchase order of the Company’s lemonade products, and 25,000 shares upon the receipt of the
first purchase order for half-gallon containers of the Company’s products. The warrant has an expiration date of April 23,
2022. The warrant had a grant date fair value of $385,758. For the three and six months ended June 30, 2017, the Company recorded
expense of $252,738 and $252,738, respectively, related to this warrant.
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
|
|
|
510,000
|
|
|
$
|
4.39
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding June 30, 2017
|
|
|
980,570
|
|
|
$
|
5.22
|
|
|
|
2.6
|
|
Exercisable at June 30, 2017
|
|
|
750,570
|
|
|
$
|
5.35
|
|
|
|
1.9
|
|
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
7 – STOCK-BASED COMPENSATION (CONTINUED)
Stock-Based
Compensation Expense
The
following tables summarize total stock-based compensation costs recognized for the three and six months ended June 30, 2017 and
2016:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock
options
|
|
$
|
388,640
|
|
|
$
|
151,352
|
|
|
$
|
764,544
|
|
|
$
|
302,706
|
|
Warrants
|
|
|
22,039
|
|
|
|
-
|
|
|
|
194,565
|
|
|
|
30,000
|
|
Common
Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
81,800
|
|
|
|
-
|
|
Total
|
|
$
|
410,679
|
|
|
$
|
151,352
|
|
|
$
|
1,040,909
|
|
|
$
|
332,706
|
|
The
total amount of stock-based compensation was reflected within the statements of operations and comprehensive loss as:
|
|
For
the Three Months Ended June 30,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
General and administrative
|
|
$
|
285,428
|
|
|
$
|
105,739
|
|
|
$
|
707,245
|
|
|
$
|
211,479
|
|
Sales and
marketing
|
|
|
125,251
|
|
|
|
45,613
|
|
|
|
333,664
|
|
|
|
121,227
|
|
Total
|
|
$
|
410,679
|
|
|
$
|
151,352
|
|
|
$
|
1,040,909
|
|
|
$
|
332,706
|
|
NOTE
8 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
The
Company is involved in various claims and legal actions arising from time to time in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters in the ordinary course of business will not have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows. Legal costs related to these
matters are expensed as they are incurred.
On
August 1, 2014, an action was filed by LIBB in the Supreme Court in the State of New York entitled Long Island Brand Beverages
LLC v. Revolution Marketing, LLC (“Revolution”) and Ascent Talent, Model Promotion Ltd. LIBB is seeking damages of
$10,000,000 for several claims including breach of contract and fraud occurring during 2014. Revolution has filed a counterclaim
for breach of contract and related causes of action, claiming damages in the sum of $310,880, and seeking punitive damages of
$5,000,000. Ascent has filed a pre-answer motion to dismiss LIBB’s complaint. LIBB filed papers in opposition and the motion
was submitted by March 9, 2015. In addition, Revolution has filed a motion to amend its answer to include cross-claims against
Ascent which were not asserted in its original answer of record. On February 5, 2016, the Court rendered a decision. The motion
to dismiss was denied with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate
motion filed by Revolution to amend its answer to include cross-claims against Ascent. On June 23, 2017, both defendants filed
motions to dismiss based upon delays in producing documents, which were fully submitted. On August 7, 2017, oral arguments
were held. The Company’s management and legal counsel
are awaiting a decision from the judge.
NOTE
8 – COMMITMENTS AND CONTINGENCIES (Continued
)
Brokerage
Arrangements
The
Company maintains arrangements with sales brokers who help with bringing new distributors and retail outlets to the Company. These
sales brokers receive a commission for these services. Commissions to these brokers ranged from 1-5% of sales. In addition, the
Company sells its products through alternative vending channels. Commissions resulting from sales through these channels were
$17,291 and $30,884 for the three months ended June 30, 2017 and 2016, respectively, and $31,497 and $55,610 for the six months
ended June 30, 2017 and 2016, respectively.
Employment
Agreements
On
December 9, 2016, the Company entered into an employment agreement with Julio X. Ponce to serve as Vice President of Southeast
and Latin American Sales of the Company. Until December 31, 2016, Mr. Ponce was an owner of one of the Company’s distributors.
Mr. Ponce’s primary duties shall be to advance the sales of ALO Juice. The term of employment agreement is from January
1, 2017 to December 31, 2017 and can be extended by written mutual agreement of the parties. Mr. Ponce will receive a base salary
of $90,000 and an incentive bonus of up to 62,500 shares of the Company’s common stock-based on the introduction or procurement
of sales and/or distributors of the Company’s products outside of the Southeast United States and an additional performance
bonus of up to 905,769 shares of the Company’s common stock-based on sales of the Company’s iced tea and ALO Juice
product by Mr. Ponce to approved customers reaching target thresholds in 2017. The target thresholds are between $2.5 million
and $5.5 million for ALO Juice and between $2.0 million and $4.0 million for the Company’s iced tea products. Notwithstanding
the foregoing, if such sales in 2018 do not reach at least 60% of their 2017 levels, the performance bonus will not be payable.
The Company is in negotiations with Mr. Ponce, that if consummated, would result in the termination of the employment agreement
with Mr. Ponce and Mr. Ponce becoming an independent commissioned sales broker to the Company.
On
March 10, 2017, the Company entered into an amended and restated employment agreement with Mr. Thomas. The amended employment
agreement has a term that runs until December 31, 2019. Mr. Thomas will receive a base salary of $250,000, was paid $83,000 upon
the signing of the agreement, and is eligible for paid incentive bonuses from the Company. Pursuant to the agreement, Mr. Thomas
was also granted an option to purchase 75,000 shares of the Company’s common stock (See Note 7).
On
April 18, 2017, the Company entered into an employment agreement with Virginia Morris to serve as the Company’s Chief Sales
& Marketing Officer. Ms. Morris’s primary responsibilities will be driving the growth agenda for the Company’s
entire portfolio of brands and overseeing key sales and marketing functions including brand management, channel strategy development
and execution, and product innovation. Pursuant to the employment agreement, Ms. Morris was awarded an option to purchase 27,500
shares of the Company’s common stock under the 2015 Stock Option Plan, and an additional option to purchase 42,500 shares
of the Company’s common stock under the 2017 Stock Option Plan. The options have an exercise price of $4.50 and vest annually
in three equal installments beginning on the date of grant. Ms. Morris was also awarded 25,000 shares of the Company’s common
stock prior to the execution of her employment agreement for services provided to the Company. (See Note 7).
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting
Agreements
On
June 6, 2016, the Company entered into an amendment to the consulting agreement with Julian Davidson which provides for him to
serve as the Company’s Executive Chairman. Either Mr. Davidson or the Company may terminate the consulting agreement with
30 days’ prior written notice. Pursuant to the consulting agreement, as in effect prior to its amendment and restatement
as described below, the Company (a) paid to Mr. Davidson $10,000 per month, and (b) granted to Mr. Davidson 1,667 shares of common
stock per month (an aggregate of 4,302 shares). The consulting agreement, as amended, contains provisions for protection of the
Company’s intellectual property and confidentiality and non-competition restrictions for Mr. Davidson (generally imposing
restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with,
competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s
customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such
entity).
On
August 18, 2016, the Company entered into a second amendment to the consulting agreement with Julian Davidson. The amendment modified
the condition that was required to be satisfied for certain changes in the compensation payable to Mr. Davidson under the consulting
agreement to take effect. After the amendment, upon the Company completing an equity raise with gross proceeds of at least $6,900,000,
the monthly cash fee to Mr. Davidson increases to $20,000 per month, the monthly stock grant to Mr. Davidson is eliminated and
Mr. Davidson receives a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock.
The amendment also modified the compensation that will be payable to Mr. Davidson under his agreement. Mr. Davidson is entitled
to receive an option to purchase 4% of the fully diluted common stock outstanding immediately after the Offering, or 286,744 shares
of the Company’s common stock. On August 18, 2016, the Company granted to Mr. Davidson an option to purchase 286,744 shares
of common stock.
On
October 5, 2016, the Company entered into an amended and restated consulting agreement with Julian Davidson (“Davidson Amendment”),
effective as of September 29, 2016, which provides for him to continue to serve as the Company’s Executive Chairman.
On
March 1, 2017, the Company entered into a consulting agreement with an investor relations and communications firm. The agreement
commenced on March 1, 2017 for an initial term of two months. The agreement was renewed for the month of May 2017 and may be renewed
on a monthly basis by the Company. The agreement shall terminate in 180 days from the date of the agreement. In consideration
for services, the Company shall pay (a) $15,000 in cash on the signing of the contract and $15,000 on the 5
th
day of
each month thereafter, (b) up to $135,000 in ancillary budget (at the Company’s discretion) due each month for the balance
of the contract, (c) issue 10,000 shares of common stock upon the execution of the agreement and issue a 10,000 shares of common
stock on the 5
th
day of each month of the agreement until termination or renewal of this agreement, and (d) the reimbursements
of pre-approved travel or other expenses monthly.
Distribution
Agreements
On
March 14, 2017, the Company entered into the Big Geyser Distribution Agreement. Big Geyser became the exclusive distributor of
the Company’s iced tea products in certain regions. The agreement became effective on April 24, 2017 and covers retail locations
in the New York City metro region, including the five boroughs of New York City, Long Island, Westchester and Putnam County (See
Note 7).
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases
On
June 6, 2014, the Company entered into a lease agreement. The lease commenced on July 1, 2014 and extends through June 30, 2017
and includes a two year extension option. The lease was amended and extended to August 31, 2017.
Rent
expense for the three months ended June 30, 2017 and 2016 was $11,140 and $11,008, respectively, and for the six months ended
June 30, 2017 and 2016 was $22,598 and $21,082, respectively.
Future
minimum payments under this lease for the year ended December 31, 2017 are $9,106.
On
July 14, 2017, the Company entered into a lease agreement for additional warehouse and office space in Farmingdale, NY. The lease
commences 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 $525,573.
In
addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the three months ended June
30, 2017 and 2016 was $3,559 and $33,221, respectively, and for the six months ended June 30, 2017 and 2016 was $12,980 and $53,831,
respectively.
NOTE
9 – MAJOR CUSTOMERS AND VENDORS
For
the three months ended June 30, 2017 and 2016, four customers accounted for 30%, 21%, 16% and 12%, or 79% in the aggregate, and
two customers accounted for 15% and 12%, or 27% in the aggregate, of the Company’s net sales, respectively. For the six
months ended June 30, 2017 and 2016, three customers accounted for 16%, 16% and 14%, or 46% in the aggregate, and one customer
accounted for 12% of the Company’s net sales, respectively.
For
the three months ended June 30, 2017 and 2016, two vendors accounted for 45% and 15%, or 60% in the aggregate, and four vendors
accounted for 23%, 16%, 15% and 14%, or 68% in the aggregate, of purchases, respectively. For the six months ended June 30, 2017
and 2016, two vendors accounted for 39% and 19%, or 58% in the aggregate, and four vendors accounted for 23%, 16%, 16% and 15%,
or 70% in the aggregate, of purchases, respectively.
NOTE
10 - RELATED PARTIES
The
Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, CEO, stockholder,
and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the three months ended June 30, 2017
and 2016, sales to this related party were $610 and $1,479, respectively. For the six months ended June 30, 2017 and 2016, sales
to this related party were $879 and $2,637, respectively. As of June 30, 2017 and December 31, 2016, there was $879 and $0, respectively,
due from this related party which was included in accounts receivable in the condensed consolidated balance sheets. The Company
also purchases product at cost, from this entity to supplement certain vending sales. For the three months ended June 30, 2017
and 2016, the Company purchased $4,673 and $9,255, respectively, and for the six months ended June 30, 2017 and 2016, the Company
purchased $8,015 and $17,514, respectively, of product from this entity. As of June 30, 2017 and December 31, 2016, the
outstanding balance due to this entity included in accounts payable was $8,715 and $10,043, respectively.
LONG
ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
10 - 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 member of the
Board of Directors in connection with services provided to the Company beyond the Board of Director duties of this Director. As
of June 30, 2017 and December 31, 2016 accounts payable and accrued expenses to a company wholly owned by this director’s
company were $14,926 and $4,032, respectively.
In
the second quarter, the Company incurred expenses related to services rendered of approximately $12,000 by an entity whose majority
shareholder is Eric Watson, who beneficially owned approximately 17.0% of the Company as of June 30, 2017. As of June 30, 2017
and December 31, 2016, accrued expenses due to this entity were $12,000 and $0.
NOTE
11 – SUBSEQUENT EVENTS
Separation
Agreement
On
July 11, 2017, the Company entered into a separation agreement with Richard Allen, the Company’s Chief Financial Officer.
Pursuant to the separation agreement, Mr. Allen will continue as the Company’s Chief Financial Officer until August 15,
2017. Pursuant to the separation agreement, the Company will pay Mr. Allen $61,668 in two installments on or about July 18, 2017
and on or about August 22, 2017. In addition, 50% of his unvested stock options will vest immediately and together with previously
vested portions of such options will be exercisable until May 15, 2018. The separation agreement contains provisions for protection
of the Company’s confidential information and certain non-competition restrictions.