UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission File Number 001-37808
LONG ISLAND ICED TEA CORP.
(Exact Name of Issuer as Specified in Its Charter)
| Delaware | 47-2624098 | |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
116 Charlotte Avenue, Hicksville, NY 11801
(Address of Principal Executive Office)
(855) 542-2832
(Issuer’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of August 12, 2016, 7,168,621 shares of common stock, par value $.0001 per share, were issued and outstanding.
LONG ISLAND ICED TEA CORP.
FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2016 | December 31, 2015 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 26,666 | $ | 207,192 | ||||
| Accounts receivable, net (including amounts due from related parties of $58,585 and $67,992, respectively) | 1,157,787 | 363,096 | ||||||
| Inventories, net | 639,030 | 712,558 | ||||||
| Restricted cash | - | 127,580 | ||||||
| Prepaid expenses and other current assets | 56,252 | 48,237 | ||||||
| Total current assets | 1,879,735 | 1,458,663 | ||||||
| Property and equipment, net | 295,473 | 360,920 | ||||||
| Intangible assets | 24,992 | 27,494 | ||||||
| Other assets | 62,167 | 67,438 | ||||||
| Deferred offering costs | 235,541 | - | ||||||
| Deferred financing costs | 1,520,769 | 1,838,082 | ||||||
| Total assets | $ | 4,018,677 | $ | 3,752,597 | ||||
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,677,128 | $ | 601,681 | ||||
| Accrued expenses | 934,227 | 458,938 | ||||||
| Current portion of automobile loans | 18,408 | 19,231 | ||||||
| Current portion of equipment loan | 38,037 | 36,627 | ||||||
| Total current liabilities | 2,667,800 | 1,116,477 | ||||||
| Line of credit | 1,669,376 | 1,091,571 | ||||||
| Other liabilities | 30,000 | 30,000 | ||||||
| Deferred rent | 3,613 | 4,648 | ||||||
| Long term portion of automobile loans | 28,242 | 36,864 | ||||||
| Long term portion of equipment loan | 56,987 | 76,477 | ||||||
| Total liabilities | 4,456,018 | 2,356,037 | ||||||
| Commitments and contingencies, Note 7 | ||||||||
| Stockholders’ (Deficit) Equity | ||||||||
| Preferred stock, par value $0.0001; authorized 1,000,000 shares;no shares issued and outstanding | - | - | ||||||
| Common stock, par value $0.0001; authorized 35,000,000 shares;4,973,715 and 4,635,783 shares issued and outstanding,as of June 30, 2016 and December 31, 2015, respectively | 497 | 463 | ||||||
| Additional paid-in capital | 5,591,375 | 3,926,074 | ||||||
| Accumulated deficit | (6,029,213 | ) | (2,529,977 | ) | ||||
| Total stockholders’ (deficit) equity | (437,341 | ) | 1,396,560 | |||||
| Total liabilities and stockholders’ (deficit) equity | $ | 4,018,677 | $ | 3,752,597 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net sales | $ | 1,603,667 | $ | 675,735 | $ | 2,111,836 | $ | 940,457 | ||||||||
| Cost of goods sold | 1,588,870 | 518,808 | 2,056,488 | 712,117 | ||||||||||||
| Gross profit | 14,797 | 156,927 | 55,348 | 228,340 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 1,009,576 | 398,225 | 1,787,241 | 617,648 | ||||||||||||
| Selling and marketing expenses | 884,083 | 415,552 | 1,370,626 | 623,333 | ||||||||||||
| Total operating expenses | 1,893,659 | 813,777 | 3,157,867 | 1,240,981 | ||||||||||||
| Operating Loss | (1,878,862 | ) | (656,850 | ) | (3,102,519 | ) | (1,012,641 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Other expense | - | (3,327 | ) | - | (3,327 | ) | ||||||||||
| Interest expense | (203,304 | ) | (23,309 | ) | (396,717 | ) | (46,184 | ) | ||||||||
| Net loss | $ | (2,082,166 | ) | $ | (683,486 | ) | $ | (3,499,236 | ) | $ | (1,062,152 | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | 4,973,715 | 3,227,713 | 4,847,322 | 2,932,166 | ||||||||||||
| Basic and diluted net loss per share | $ | (0.42 | ) | $ | (0.21 | ) | $ | (0.72 | ) | $ | (0.36 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2016
(UNAUDITED)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance at January 1, 2016 | 4,635,783 | $ | 463 | $ | 3,926,074 | $ | (2,529,977 | ) | $ | 1,396,560 | ||||||||||
| Issuance of common stock to consultants, vendors, and customers | 34,133 | 3 | 136,529 | - | 136,532 | |||||||||||||||
| Issuance of common stock and warrants, net of costs | 230,475 | 23 | 861,767 | - | 861,790 | |||||||||||||||
| Issuance of warrants to placement agent | - | - | 38,056 | - | 38,056 | |||||||||||||||
| Issuance of common stock to the Advisory Board and Board of Directors | 65,824 | 7 | 239,993 | - | 240,000 | |||||||||||||||
| Stock based compensation | 7,500 | 1 | 332,706 | - | 332,707 | |||||||||||||||
| Disgorgement on short swing profit | - | - | 56,250 | - | 56,250 | |||||||||||||||
| Net loss | - | - | - | (3,499,236 | ) | (3,499,236 | ) | |||||||||||||
| Balance at June 30, 2016 | 4,973,715 | $ | 497 | $ | 5,591,375 | $ | (6,029,213 | ) | $ | (437,341 | ) | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (3,499,236 | ) | $ | (1,062,152 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Bad debt expense | 19,839 | 8,843 | ||||||
| Inventory reserve | - | 19,196 | ||||||
| Depreciation and amortization expense | 80,200 | 52,037 | ||||||
| Deferred rent | (1,035 | ) | (284 | ) | ||||
| Stock based compensation | 610,763 | 56,595 | ||||||
| Loss on disposal of property and equipment | - | 3,327 | ||||||
| Amortization of deferred financing costs | 317,313 | - | ||||||
| Paid-in-kind interest | 77,805 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (814,530 | ) | (261,026 | ) | ||||
| Inventory | 73,528 | (418,493 | ) | |||||
| Restricted cash | 127,580 | - | ||||||
| Prepaid expenses and other current assets | (8,015 | ) | (12,559 | ) | ||||
| Other assets | 5,271 | (56,370 | ) | |||||
| Accounts payable | 1,019,821 | 160,008 | ||||||
| Accrued expenses | 475,289 | 157,043 | ||||||
| Other liabilities | - | (92,466 | ) | |||||
| Total adjustments | 1,983,829 | (384,149 | ) | |||||
| Net cash used in operating activities | (1,515,407 | ) | (1,446,301 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property and equipment | (12,251 | ) | (29,560 | ) | ||||
| Net cash used in investing activities | (12,251 | ) | (29,560 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Repayment of automobile loans | (9,445 | ) | (8,802 | ) | ||||
| Repayment of equipment loans | (18,080 | ) | - | |||||
| Proceeds from line of credit | 500,000 | - | ||||||
| Proceeds from the reverse merger with Cullen Agricultural Holding Corporation | - | 120,841 | ||||||
| Proceeds from the sale of common stock and warrants, net of costs | 861,790 | 468,469 | ||||||
| Proceeds from Bass Properties LLC loan | - | 150,000 | ||||||
| Proceeds from Cullen Agricultural Holding Corporation loan | - | 250,000 | ||||||
| Proceeds from Ivory Castle Limited loan | - | 400,000 | ||||||
| Proceeds from disgorgement of short swing profit | 56,250 | - | ||||||
| Payment of deferred offering costs | (43,383 | ) | - | |||||
| Net cash provided by financing activities | 1,347,132 | 1,380,508 | ||||||
| Net decrease in cash | (180,526 | ) | (95,353 | ) | ||||
| Cash, beginning of period | 207,192 | 398,164 | ||||||
| Cash, end of period | $ | 26,666 | $ | 302,811 | ||||
| Cash paid for interest | $ | 6,844 | $ | 2,081 | ||||
| Non-cash investing and financing activities: | ||||||||
| Issuance of common stock to consultants, vendors and customers | $ | 136,532 | $ | - | ||||
| Net assets acquired in reverse merger | $ | - | $ | 1,751,655 | ||||
| Conversion of loans payable and accrued interest to stockholders’ equity | $ | - | $ | 555,910 | ||||
| Purchase of a truck in exchange for accounts receivable | $ | - | $ | 9,500 | ||||
| Payment of accounts payable through the issuance of common stock | $ | - | $ | 134,270 | ||||
| Accrued deferred offering costs | $ | 192,158 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS
Business Organization
Long Island Iced Tea Corp, a Delaware C-Corporation (“LIIT”), was formed on December 23, 2014. LIIT was formed in order to allow for the completion of mergers between Cullen Agricultural Holding Corp. (“Cullen”) and Long Island Brand Beverages LLC (“LIBB”). On December 31, 2014, LIIT entered into a merger agreement, as amended as of April 23, 2015, with Cullen, a public company, Cullen Merger Sub, Inc. (“Cullen Merger Sub”), LIBB Acquisition Sub, LLC (“LIBB Merger Sub”), Long Island Brand Beverages LLC and the founders of LIBB (“Founders”). Pursuant to the merger agreement, (a) Cullen Merger Sub was to be merged with and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary of LIIT and (b) LIBB Merger Sub was to be merged with and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of LIIT (the “Mergers”). As a result of the merger which was consummated on May 27, 2015, LIIT consisted of its wholly owned subsidiaries, LIBB (its operating subsidiary) and Cullen and Cullen’s wholly owned subsidiaries, Cullen Agricultural Technologies, Inc. and Natural Dairy, Inc. (collectively the “Company”).
For accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percent of the LIIT’s shares and will exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a public shell company at the time of the transaction. Pursuant to Accounting Standards Codification (“ASC”) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated 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 produces and distributes premium ready-to-drink iced tea, with a proprietary recipe and quality components. The Company produces a 100% brewed tea, using black tea leaves, purified water and natural cane sugar or sucralose. The Company’s product, Long Island Iced Tea, is targeted for sale to health conscious consumers on the go. Flavors change from time to time, and have included lemon, peach, raspberry, guava, mango, diet lemon, diet peach, sweet tea, green tea and honey and half tea and half lemonade. The Company also offers lower calorie iced tea in twelve (12) ounce bottles. The lower calorie flavor options include mango, raspberry, and peach. The Company has also introduced five of its flavors in gallon bottles in 2015. The flavors packaged in gallon bottles include lemon, peach, sweet tea, green tea and honey, and mango. In addition, the Company, in order to service certain vending contracts, sold snacks and other beverage products on a limited basis in 2015. During the first quarter of 2016, the Company explored opportunities with other products, such as juices. During the second quarter of 2016, the Company began selling aloe juices and commenced selling a private label version of its product.
The Company sells its products to a mix of independent mid-to-large range distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the New York, New Jersey, Connecticut and Pennsylvania markets. During 2016, the Company has also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. The Company’s products are currently available in twelve states that have a cumulative population of 100 million people.
Liquidity and Management’s Plan
The Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of debt, equity, and through utilizing trade credit with its vendors.
As of June 30, 2016, the Company’s cash on hand was $26,666. The Company incurred net losses of $2,082,166 and $3,499,236 for the three and six months ended June 30, 2016, respectively. At June 30, 2016, the Company’s stockholders’ deficit was $437,341. As of June 30, 2016, the Company had a deficit in working capital of $788,065.
During the six months ended June 30, 2016, the Company raised net proceeds of $861,790 through the sale of 230,475 shares of common stock and 230,475 warrants to purchase common stock.
| 5 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS, continued
Liquidity and Management’s Plan, continued
On November 23, 2015, LIIT and LIBB entered into a Credit and Security Agreement (the “Credit Agreement”), by and among LIBB, as the borrower, LIIT and Brentwood LIIT Inc., as the lender. Brentwood LIIT Inc.’s interest in the Credit Agreement and the related agreements and instruments thereunder was subsequently transferred to Brentwood LIIT (NZ) Ltd. (the “Lender”). Brentwood LIIT Inc. and the Lender are controlled by a related party, Eric Watson, who beneficially owned approximately 16% of the Company on November 23, 2015 and 28.8% as of June 30, 2016. The Credit Agreement provides for a revolving credit facility in an initial amount of up to $1,000,000, subject to increases at the Lender’s discretion as provided in the Credit Agreement (the “Available Amount”), up to a maximum amount of $5,000,000 (which was subsequently reduced to $3,500,000 in connection with the closing of the Offering, as defined below) (the ” Facility Amount”). The Available Amount may be increased, in increments of $500,000, up to the Facility Amount, and LIBB may obtain further advances, subject to the approval of the Lender. On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result of which the Available Amount was borrowed in full.
On July 28 and 29, 2016, the Company sold 1,270,156 shares (the “Shares”) of common stock, in its public offering (the “Offering”) at an offering price of $5.50 per share, pursuant to the Company’s registration statement on Form S-1 (File No. 333-210669). The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $6,084,831 after deducting commissions and other offering expenses. In connection with sale of the Shares, the Company’s common stock was approved for listing on the NASDAQ Capital Market under its current symbol, “LTEA.” The Offering was terminated on August 4, 2016. No further sales of shares were made in the Offering.
In connection with the sale of the Shares, the Company completed a recapitalization transaction (the “Recapitalization”) with the Lender. Pursuant to the Recapitalization, Brentwood converted all of the outstanding principal and interest under the Credit Agreement into 421,972 shares of common stock and exchanged its warrant for 486,111 shares of common stock.
In connection with the consummation of the Offering, on July 29, 2016, the selling agents were issued warrants to purchase an aggregate of 31,754 shares of common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock issuable upon exercise of the warrants are subject to adjustment for stock splits and similar adjustments. The warrants contain provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights at the Company’s expense until July 28, 2021.
The Company believes that as a result of the closing of its offering in July 2016 that its cash resources will be sufficient to fund the Company’s net cash requirements for the next twelve months from the date these condensed consolidated financial statements are issued. However, in order to execute the Company’s long-term growth strategy, the Company may need to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that the Company will be able to raise such funds on terms that would be acceptable to the Company.
| 6 |
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, 2016 are not necessarily indicative of the result that may be expected for the year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes thereto included in the Company’s Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 22, 2016.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.
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 inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
Revenue Recognition
Revenue is stated net of sales discounts and rebates paid to customers (see “Customer Marketing Programs and Sales Incentives,” below). Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determinable; (2) evidence of a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance required; and (4) amounts are collectible under normal payment terms. These conditions typically occur when the products are delivered to or picked up by the Company’s customers.
Customer Marketing Programs and Sales Incentives
The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for various discounts to the end retailers or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace.
In addition, during the three and six months ended June 30, 2016, the Company issued shares of common stock in the amounts of 0 and 3,400, respectively, at a fair value of $4.00 per share, to customers and the owners of customers. Included in the costs of these programs were costs associated with the fair value of shares issued, which totaled $0 and $18,338 for the three months June 30, 2016 and 2015, respectively and $45,165 and $28,698 for the six months ended June 30, 2016 and 2015, respectively.
| 7 |
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 and Sales Incentives, continued
Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In some cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the store of the customer. The Placement Fees are recorded as a reduction of revenue. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative revenue with that particular customer, such negative revenue is reclassified and recorded as a part of selling and marketing expense. For the three and six months ended June 30, 2016, the Company recorded $11,087 and $11,087, respectively, of Placement Fees to selling and marketing expense. No such Placement Fees were recorded in selling and marketing expense for the three and six months ended June 30, 2015.
Shipping and Handling Costs
Shipping and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are included in selling and marketing expenses on the condensed consolidated statements of operations and totaled $161,518 and $33,136 for the three months ended June 30, 2016 and 2015, respectively and $201,670 and $44,250 for the six months ended June 30, 2016 and 2015, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense totaled $20,916 and $116,840, respectively for the three months ended June 30, 2016 and 2015 and $30,547 and $126,493, respectively for the six months ended June 30, 2016 and 2015.
Research and Development
The Company expenses the costs of research and development as incurred. For the three and six months ended June 30, 2016, research and development expense related to new product initiatives were $0 and $46,667, respectively. These expenses were incurred pursuant to a product development agreement, which will require the Company to pay $40,000 in cash and $40,000 in common stock upon the completion of the arrangement. There were no research and development expenses incurred during the three and six months ended June 30, 2015. Research and development expenses are included within general and administrative expenses within the condensed consolidated statement of operations. As of June 30, 2016, $50,000 was included in accrued expenses in the condensed consolidated balance sheet related to this arrangement.
Operating Leases
The Company records rent related to its operating leases on a straight line basis over the lease term.
Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
Restricted cash
Pursuant to the terms of the Credit Agreement with Lender, the Company is required to utilize $150,000 of the $1,000,000 proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Company’s cash on hand was restricted for the use in the development of the alcohol business. On March 17, 2016, the LIBB entered into an agreement with Lender whereby such restriction was lifted.
| 8 |
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. Typically, accounts receivable have terms of net 30 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the Company’s efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
Accounts receivable, net, is as follows:
| As of | ||||||||
| June 30, 2016 | December 31, 2015 | |||||||
| Accounts receivable, gross | $ | 1,217,787 | $ | 405,096 | ||||
| Allowance for doubtful accounts | (60,000 | ) | (42,000 | ) | ||||
| Accounts receivable, net | $ | 1,157,787 | $ | 363,096 | ||||
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions and accounts receivable. At times, the Company’s cash in banks is in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The Company has not experienced any loss as a result of these deposits. These cash balances are maintained with one bank. As of June 30, 2016, three customers accounted for 16%, 12% and 11% of the Company’s trade receivables, respectively. As of December 31, 2015, two customers accounted for 14% and 30% of the Company’s trade receivables. The Company does not generally require collateral or other security to support customer receivables. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
Inventories
The Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists primarily of bottled iced tea.
The Company values its inventories at the lower of cost or net realizable value, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. During the three months ended June 30, 2016 and 2015, the Company recorded charges of $107,062 and $0, respectively, and during the six months ended June 30, 2016 and 2015, the Company recorded charges of $121,412 and $0, 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, 2016 | December 31, 2015 | |||||||
| Finished goods | $ | 450,514 | $ | 565,624 | ||||
| Raw materials and supplies | 188,516 | 146,934 | ||||||
| Total inventories | $ | 639,030 | $ | 712,558 | ||||
| 9 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Property and Equipment
Property and equipment is recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Depreciation is recorded using the straight-line method over the respective estimated useful lives of the Company’s assets. The estimated useful lives typically are 3 years for cold-drink containers, such as reusable fridges, wood racks, vending machines, barrels, and coolers, and are depreciated using the straight-line method over the estimated useful life of each group of equipment, as determined using the group-life method. Under this method, the Company does not recognize gains or losses on the disposal of individual units of equipment when the disposal occurs in the normal course of business. The Company capitalizes the costs of refurbishing its cold-drink containers and depreciates those costs over the estimated period until the next scheduled refurbishment or until the equipment is retired. The estimated useful lives are typically 3 to 5 years for office furniture and equipment and are depreciated on a straight-line basis. The estimated useful lives for trucks and automobiles are typically 3 to 5 years and are depreciated on a straight line basis. For the three months ended June 30, 2016 and 2015, depreciation expense was $39,004 and $25,116, respectively. For the six months ended June 30, 2016 and 2015, depreciation expense was $77,698 and $49,535, respectively.
Intangible Assets
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or when circumstances indicate that there could be an impairment. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Intangibles assets with indefinite useful lives consist of the cost to purchase an internet domain name for $20,000. The domain name is considered to have a perpetual life and as such, is not amortized. Insignificant costs incurred associated with renewing this asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include website development costs of $4,992 and $7,494 as of June 30, 2016 and December 31, 2015, respectively. The estimated useful life of the capitalized costs of the Company’s website is 3 years and is depreciated on a straight line basis. As of June 30, 2016, the cost of the website development was $15,000 and the accumulated amortization was $10,008. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. Amortization expense was $1,251 and $1,251 for the three months ended 2016 and 2015, respectively and $2,502 and $2,502 for the six months ended 2016 and 2015, respectively.
Deferred Offering Costs
The Company capitalizes the costs related to proposed offerings of its equity instruments as deferred offering costs and records the deferred offering costs as an offset to additional paid in capital upon the completion of the associated capital raising activity.
Income Taxes
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.
| 10 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Income Taxes, continued
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company accounts for uncertain tax positions in accordance with ASC 740 —“Income Taxes”. No uncertain tax provisions have been identified. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying condensed consolidated statements of operations. Our primary tax jurisdictions are our federal, various state, and local taxes. Generally, Federal, State and Local authorities may examine the Company’s tax returns for three years from the date of filing.
In accordance with ASC 740, the Company evaluates whether a valuation allowance should be established against the net deferred tax assets based upon the consideration of all available evidence and using a “more likely than not” standard. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance. In conducting the analysis, the Company utilizes an approach, which considers the current year loss, including an assessment of the degree to which any losses are driven by items that are unusual in nature and incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period, which may impact its future operating results.
Earnings per share
Basic net earnings 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 exercise of stock options and warrants. The computation of diluted earnings per share excludes those dilutive securities 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 in periods where the exercise of such options would be antidilutive.
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
| For the Three and Six Months Ended June 30, | ||||||||
| 2016 | 2015 | |||||||
| Options to purchase common stock | 194,667 | 194,667 | ||||||
| Warrants to purchase common stock | 1,550,159 | - | ||||||
| Shares issuable upon conversion of convertible debt | 421,972 | - | ||||||
| Total potentially dilutive securities | 2,166,798 | 194,667 | ||||||
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accrued expenses and notes payable 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.
Seasonality
The Company’s business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales.
| 11 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent Accounting Pronouncements
In January 2016, the 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 of adopting this standard.
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 of the new guidance on the condensed consolidated financial statements.
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. This update requires that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income tax expense or benefit on the income statement. The amendment also states that excess tax benefits should be classified along with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606)”, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In May 2016, the FASB issued Accounting Standards Update ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
| 12 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the review, other than as described in Note 1, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.
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. The Company may terminate the agreement and all obligations to make future payments on ten days’ written notice to Magnum. As of June 30, 2016 and December 31, 2015, the outstanding balance on the equipment loan was $95,024 and $113,104, respectively.
NOTE 4 – LINE OF CREDIT
On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result of which the Available Amount was borrowed in full.
As of June 30, 2016 and December 31, 2015, the outstanding balance on the line of credit was $1,669,376 and $1,091,571, respectively.
The credit facility bears interest at a rate equal to the prime rate (3.5% at December 31, 2015 and June 30, 2016) plus 7.5%, compounded monthly, and matures on November 23, 2018. Effective January 10, 2016, the Credit Agreement was amended such that interest was compounded on a quarterly basis. Upon the occurrence of an event of default, the Credit Agreement provides for an additional 8% interest pursuant to the terms of the agreement. The outstanding principal and interest under the credit facility are payable in cash on the maturity date. The Company also paid the Lender a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount of the loan, and will pay the Lender $30,000 for its expenses at the maturity date. The compounded interest and capitalized fees are excluded when determining whether the Available Amount has been exceeded. The credit facility is secured by a first priority security interest in all of the assets of LIIT and LIBB, including the membership interests in LIBB held by LIIT. LIIT also has guaranteed the repayment of LIBB’s obligations under the credit facility. In addition, the credit facility will be guaranteed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, in certain limited circumstances up to a maximum amount of $200,000.
In connection with the establishment of the credit facility, the Company issued a warrant to the Lender. The warrant entitled the holder to purchase 1,111,111 shares of the Company’s common stock at an exercise price of $4.50 and included a cashless exercise provision. Upon the closing of the Offering, as part of the Recapitalization, the warrant was exchanged for 486,111 shares of the Company’s common stock (See below and Note 1 – Business Organization, Liquidity and Management’s Plans).
The Lender will have certain “piggyback” registration rights, on customary terms, with respect to the shares of the Company’s common stock issued or issuable upon conversion of the credit facility and upon exchange of the warrant.
The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.
The Lender may accelerate the credit facility upon the occurrence of certain events of default, including a failure to make a payment under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing of a bankruptcy petition or a similar event with respect to LIBB or the Company or the occurrence of an event of default under other material indebtedness of LIBB or the Company. The Company and LIBB also made certain customary representations, warranties and covenants, including negative covenants with respect to the incurrence of indebtedness. As of June 30, 2016, the Company was in compliance with these covenants.
| 13 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 – LINE OF CREDIT, continued
Deferred financing costs related to the Credit Agreement, which are included in the accompanying condensed consolidated balance sheet, are amortized over the three year term of the line of credit agreement. As of June 30, 2016, the gross carrying amount of deferred financing costs was $1,903,879 with accumulated amortization of $383,110. As of December 31, 2015, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $65,797.
During April 2016, the Company entered into amendment to the agreement with the Lender, which provided for the Recapitalization. Upon a capital raise of at least $5,000,000, the Lender agreed to convert all of the outstanding principal and interest under the Credit Facility into 421,972 shares of common stock (assuming all approved advances are completed and there are no further advances by the Lender) at the closing of the offering. In addition, the Lender agreed to exchange its 1,111,111 warrants for 486,111 shares of common stock at such time. The Credit Facility would remain outstanding except that the Facility Amount would be reduced to $3,500,000. Any amounts drawn from the Facility Amount require lender approval. The Recapitalization was effectuated upon the closing of the Offering.
Upon the closing of the Offering, as part of the Recapitalization, the outstanding principal and interest under the credit facility was converted into 421,972 shares of the Company’s common stock. The Lender may elect to convert any future outstanding principal and interest under the credit facility into shares of the Company’s common stock at a conversion price of $4.00 per share (See Note 1 – Business Organization, Liquidity and Management’s Plans).
In addition, the Company and LIBB entered into an Amendment No. 1 (the “Registration Rights Amendment”) to the Registration Rights Agreement (the “Registration Rights Agreement”), dated as of December 3, 2015, by and among LIBB, the Company and the Lender. The Registration Rights Amendment amended the Registration Rights Agreement, effective as of the closing of a Qualified Public Offering, so that the “piggyback” registration rights granted to the Lender thereunder will apply to the shares issuable in the Recapitalization.
NOTE 5 – STOCKHOLDERS’ EQUITY
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 by our Company to the Placement Agent. In addition, the Placement Agent received warrants to purchase a number of shares of common stock equal to 10% of the total shares of common stock included in the Units sold in the Second Offering to the Covered Investors, with an exercise price of $4.50 per share.
| 14 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – STOCKHOLDERS’ EQUITY, continued
Each warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on November 30, 2018. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
During the year ended December 31, 2015 and through March 14, 2016, the Company sold 345,725 units through the Placement Agent. As a result, on March 29, 2016, 34,573 warrants were issued to the Placement Agent. The warrants have an exercise price of $4.50 per share and expire on October 30, 2020.
On March 29, 2016 and March 31, 2016, the Company entered into subscription agreements for the sale of 58,750 units for gross proceeds of $235,000 at $4.00 per unit, including 2,500 units sold to family members of Philip Thomas, CEO and a member of the Board of Directors and 2,500 to a relative of Thomas Panza, a greater than 10% owner of the Company (the “March Sales”). Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Such subscriptions were closed and funded during April 2016.
Each warrant issued in the March Sales entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on March 29, 2019. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
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 at $4.00 per share to customers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $13,600 as a reduction to net sales in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 1,200 shares of common stock at $4.00 per share to suppliers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $4,800 in cost of goods sold in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 2,000 shares of common stock at $4.00 per share to brokers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $8,000 in selling and marketing expenses in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 6,700 shares of common stock at $4.00 per share to consultants of the Company. For the three and six months ended June 30, 2016, the Company recorded $0 and $26,800, respectively, in general and administrative expenses in the condensed consolidated statements of operations.
| 15 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – STOCKHOLDERS’ EQUITY, continued
On March 31, 2016, the Company issued 5,000 shares of common stock at $4.00 per share 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 three and six months ended June 30, 2016, the Company recorded $0 and $5,455 of market research expense (reflected in selling and marketing expenses in the Condensed Consolidated Statement of Operations) and as a result, $14,545 was included in prepaid expenses in the accompanying balance sheet as of June 30, 2016.
On March 31, 2016, the Company issued 15,833 shares of common stock at $4.00 per share 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 three and six months ended June 30, 2016, the Company recorded $0 and $63,332 of market research expense and as a result, $0, was included in prepaid expenses in the accompanying balance sheet as of June 30, 2016. In addition, pursuant to the terms of the consulting agreement, the Company was required to make an advance payment of $20,000 which was made during April 2016. In addition the consultant will be paid an additional $30,000 in cash upon completion of the consultant’s services.
On March 31, 2016, the Company issued 7,500 shares of common stock to an employee of the Company at $4.00 per share. During the three and six months ended June 30, 2016, $0 and $30,000 was included in selling and marketing expenses in the accompanying condensed consolidated statements of operations related to this issuance.
On April 6, 2016, $56,250 of proceeds was received from a shareholder who had purchased shares in September 2015 representing the disgorgement of a short swing profit on the shareholder’s September 2015 sale of the Company’s stock.
NOTE 6 – STOCK BASED COMPENSATION
Stock Options
On May 27, 2015, the Company’s board of directors adopted the 2015 Long-Term Incentive Equity Plan (“2015 Stock Option Plan”). The 2015 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. The total number of shares of common stock reserved under the Plan are 466,667.
On May 27, 2015, as part of their employment agreements but not under the 2015 Stock Option Plan, the Company granted the officers of the Company and Mr. Panza, options to purchase 194,667 shares at an exercise price of $3.75 which are exercisable until May 26, 2020. These options vest on a quarterly basis over the two year period from the date of issuance.
The following table summarizes the stock option activity of the Company:
| Shares | Weighted Average Exercise Price | Weighted Average Grant Date Fair Value | Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||
| Outstanding at January 1, 2016 | 194,667 | $ | 3.75 | $ | 6.22 | |||||||||||||||
| Granted | — | $ | — | $ | — | |||||||||||||||
| Exercised | — | $ | — | $ | — | |||||||||||||||
| Expired, forfeited or cancelled | — | $ | — | $ | — | |||||||||||||||
| Outstanding at June 30, 2016 | 194,667 | $ | 3.75 | $ | 6.22 | 3.9 | $ | 48,667 | ||||||||||||
| Exercisable at June 30, 2016 | 97,334 | $ | 3.75 | $ | 6.22 | 3.9 | $ | 24,333 | ||||||||||||
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 on June 30, 2016.
| 16 |
LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6 – STOCK BASED COMPENSATION, continued
As of June 30, 2016, there was a total of $548,453 of unrecognized compensation expense related to stock options. The cost is expected to be recognized through 2017 over a weighted average period of 0.90 years.
Stock Warrants
The following table summarizes the stock warrant activity of the Company:
| Number of shares | Weighted average exercise price | Weighted average contractual life (years) | ||||||||||
| Outstanding - January 1, 2016 | 1,285,111 | $ | 4.70 | - | ||||||||
| Issued | 265,048 | $ | 5.80 | - | ||||||||
| Expired | - | $ | - | - | ||||||||
| Forfeited | - | $ | - | - | ||||||||
| Outstanding June 30, 2016 | 1,550,159 | $ | 4.89 | 2.44 | ||||||||
Stock-Based Compensation Expense
The following tables summarize total stock-based compensation costs recognized for the three and six months ended June 30, 2016 and 2015:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Stock options | $ | 151,352 | $ | 56,595 | $ | 302,706 | $ | 56,595 | ||||||||
| Warrants | - | - | 30,000 | - | ||||||||||||
| Total | $ | 151,352 | $ | 56,595 | $ | 332,706 | $ | 56,595 | ||||||||
The total amount of stock-based compensation was reflected within the statements of operations as:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| General and administrative | $ | 105,739 | 39,539 | $ | 211,479 | $ | 39,539 | |||||||||
| Sales and marketing | 45,613 | 17,056 | 121,227 | 17,056 | ||||||||||||
| Total | $ | 151,352 | $ | 56,595 | $ | 332,706 | $ | 56,595 | ||||||||
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LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 – 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 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 to the motion to dismiss. 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, denying the motion to dismiss with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution seeking to amend its answer to include cross claims against Ascent. The Company’s management and legal counsel believe it is too early to determine the probable outcome of this matter.
On October 3, 2014, an action was filed by Madwell LLC in the Supreme Court of New York entitled Madwell LLC v. Long Island Brand Beverages LLC, Philip Thomas, its Chief Executive Officer, and Paul Vassilakos, Cullen’s former Chief Executive Officer and one of the Company’s directors. Madwell was seeking $940,000, which included $440,000 for breach of contract and payment of services as well as punitive damages of $500,000. On July 31, 2015, the Company entered into a settlement agreement with Madwell. Pursuant to the settlement agreement, the Company agreed to pay Madwell $440,000 in six installments with the last installment due no later than December 31, 2015. In addition, Madwell agreed to discontinue its lawsuit and the parties agreed to mutual releases of liability related to fees for advertising, marketing and design services or any matter relating to the lawsuit. As of the date of this filing, the full amount has been paid to Madwell. In addition, the Company indemnified Mr. Vassilakos for a de minimis amount of expenses incurred by him in connection with this litigation. During January 2016, the Company made the final installment payment of $80,000 in settlement of the matter.
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LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 – 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 currently range from 2-5% of sales. In addition, the Company sells its products through alternative vending channels. Commissions resulting from sales through these channels are currently 42%.
Employment Agreements
On February 1, 2016, the Company entered into an agreement with an employee. The employee is to be paid a base salary of $120,000 per annum through December 31, 2018. In addition, the employee was awarded 7,500 shares of common stock at the inception of the agreement (See Note 5). In addition, at December 31, 2016, the employee will be paid a bonus between 20% and 40% of the employee’s base salary, with the amount above 20% to be determined at the discretion of the Board of Directors.
On June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial Officer. The agreement has a term of three years, and automatically renews for one year periods thereafter unless either party provides notice of its decision not to renew. Mr. Allen will receive a base salary of $170,000 and an incentive bonus of up to 50% of his base salary at the discretion of the Board of Directors. Furthermore, the Company will grant Mr. Allen 8,333 shares of its common stock on May 31, 2017 and the number of shares of the Company’s common stock having a fair market value equal to $50,000 on each of May 31, 2018 and 2019.
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 amended, the Company will (a) pay to Mr. Davidson $10,000 per month, and (b) grant to Mr. Davidson 1,667 shares of common stock per month. The consulting agreement contains provisions for protection of the Company’s intellectual property and confidentiality and non-competition restrictions for Mr. Davidson (generally imposing restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).
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LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 – MAJOR CUSTOMERS AND VENDORS
For the three months ended June 30, 2016, two customers accounted for 15% and 12% of net sales. For the three months ended June 30, 2015, two customer accounted for 11% and 10% of net sales, respectively.
For the six months ended June 30, 2016, one customer accounted for 12% of net sales. For the six months ended June 30, 2015, no customers accounted for more than 10% of net sales.
For the three months ended June 30, 2016 and June 30, 2015, the largest vendors represented approximately 68% (four vendors) and 86% (four vendors) of purchases, respectively. For the six months ended June 30, 2016 and June 30, 2015, the largest vendors represented approximately 70% (four vendors) and 69% (four vendors) of purchases, respectively. As of June 30, 2016 two suppliers accounted for 20% and 10% of accounts payable, respectively.
NOTE 9 - RELATED PARTIES
During the year ended December 31, 2015, the Company entered into the Credit Agreement with the Lender, a related party (see Note 4).
The Company recorded revenue related to sales to two entities, whose owners became employees of the Company during 2014. For the three months ended June 30, 2016 and 2015, sales to these related parties were $150 and $23,236, respectively and $114 and $31,195, respectively for the six months ended June 30, 2016 and 2015. As of June 30, 2016, accounts receivable from these customers were $9,573. As of December 31, 2015, accounts receivable from these customers were $15,513.
The Company recorded revenue related to sales to an entity, CFG Distributors LLC, whose owner became an employee of the Company during 2015. For the three months ended June 30, 2016 and June 30, 2015, sales to this related party were $33 and $216, respectively. For the six months ended June 30, 2016 and June 30, 2015, sales to this related party were $438 and $10,974, respectively. As of June 30, 2016, the amount due from this customer was $47,681. As of December 31, 2015, accounts receivable from this customer were $51,961, which was included in accounts receivable.
In addition, the Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, CEO, stockholder, and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the three months ended June 30, 2016 and 2015, sales to this related party were $1,479 and $1,363, respectively. For the six months ended June 30, 2016 and 2015, sales to this related party were $2,637 and $2,861, respectively. As of June 30, 2016 and December 31, 2015, there was $1,331 and $518, respectively, due from this related party which was included in accounts receivable in the condensed consolidated balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the three and six months ended June 30, 2016, the Company purchased $9,255 and $17,514, respectively, of product from this vendor. As of June 30, 2016, the outstanding balance due to this entity included in accounts payable was $1,197. As of December 31, 2015, the outstanding balance due to this entity included in accounts payable was $3,242.
During the three and six months ended June 30, 2016, the Company accrued $90,000 and $155,000, respectively, in expenses related to fees payable to the Company’s Board of Directors which were included in general and administrative expenses in the condensed consolidated statements of operations. The non-employee members of the Board of Directors will receive $35,000 worth of stock for their services and $30,000 in cash for their services through 2016.
A stockholder and a company owned by member of the Board of Directors of the Company has paid certain expenses on behalf of the Company. As of June 30, 2016, the accounts payable and accrued expenses due to these parties were $296,023. As of December 31, 2015 accounts payable and accrued expenses to these parties were $87,258.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this quarterly report to “we,” “us”, or “our” or to “our company” or “the Company” refer to Long Island Iced Tea Corp., a holding company, and its wholly owned subsidiaries, including Long Island Brand Beverages LLC (“LIBB”) and Cullen Agricultural Holding Corp. (“Cullen”).
The information disclosed in this quarterly report, and the information incorporated by reference herein, include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained or incorporated by reference in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of such statement. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in this Item 2 of Part I of this quarterly report and in Item 1A of Part II of this quarterly report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
The following discussion should be read in conjunction with our condensed consolidated interim financial statements and footnotes thereto contained in this quarterly report.
Overview
We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium ready-to-drink (“RTD”) iced tea in the beverage industry. We are currently organized around our flagship brand Long Island Iced Tea, a premium RTD tea made from a proprietary recipe and with quality components sold primarily on the East Coast of the United States through a network of national and regional retail chains and distributors. Our mission is to provide consumers with premium iced tea offered at an affordable price.
We aspire 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 towards alternative beverages such as iced tea.
We were incorporated on December 23, 2014 in the State of Delaware. Our corporate offices are located at 116 Charlotte Avenue, Hicksville, NY 11801 and our telephone number at that location is (855) 542-2832.
Recent Developments
Public Offering
On July 28 and 29, 2016, we sold 1,270,156 shares (the “Shares”) of common stock, in our public offering of up to 1,818,182 shares of common stock at an offering price of $5.50 per share, through Network 1 Financial Services, Inc., acting as selling agent on a “best efforts” basis, pursuant to the Company’s registration statement on Form S-1 (File No. 333-210669) (the “Offering”). The sale of the shares generated gross proceeds of $6,985,858 and net proceeds of $6,084,831 after deducting commissions and other offering expenses. In connection with sale of the shares, the common stock was approved for listing on the NASDAQ Capital Market under its current symbol, “LTEA.” On August 4, 2016, the Offering was terminated. No further sales of shares were made in the Offering.
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As part of our selling agent’s compensation for the sale of the Shares, the Company will issue to them warrants to purchase an aggregate of 31,754 shares of common stock. The warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split or the Company’s recapitalization, reorganization, merger or consolidation. The warrants contain provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights at the Company’s expense until July 28, 2021.
Line of Credit
We are party to a Credit and Security Agreement (the “Credit Agreement”) with LIBB, our wholly owned subsidiary, as the borrower, and Brentwood LIIT (NZ) Ltd. (as successor in interest to Brentwood LIIT Inc.), as the lender (the “Lender” or “Brentwood”). The Credit Agreement provides for a revolving credit facility (the “Credit Facility”). The loans made by Brentwood under the credit facility are evidenced by a secured convertible promissory note (the “Lender Note”). In addition, in connection with the establishment of the credit facility, the Company issued to Brentwood a warrant (the “Lender Warrant”) to purchase 1,111,111 shares of common stock, at an exercise price of $4.50 per share, expiring on November 23, 2018. The amount available to be advanced under the Credit Facility (the “Available Amount”) may be increased from time to time, in increments of $500,000, up to a specified maximum (the “Facility Amount”), and we may obtain advances under the Credit Facility, subject to the approval of Brentwood. As of immediately prior to the closing of the Offering, the principal amount of loans outstanding, including capitalized interest and fees (both of which are excluded when determining whether the Available Amount has been reached), was $1,669,376.
Upon the closing of the Offering, the Company completed a recapitalization transaction (the “Recapitalization”) with the Lender. Pursuant to the Recapitalization, all of the outstanding principal and interest under the Lender Note was converted into 421,972 shares of common stock and the Lender Warrant was exchanged for 486,111 shares of common stock. The Company may continue to request advances under the credit facility subject to the terms and conditions of the Credit Agreement, except that the Facility Amount was reduced from $5,000,000 to $3,500,000. Brentwood is owned by Eric Watson, who as of August 10, 2016 beneficially owned approximately 18.5% of our outstanding common stock, and KA#2 Ltd., which as of August 10, 2016 beneficially owned approximately 4.8% of our outstanding common stock.
Private Issuances
Simultaneously with the closing of the Offering, the Company issued 1,667 shares to Julian Davidson, the Company’s Executive Chairman, 10,000 shares to Richard Allen, the Company’s Chief Financial Officer, and 5,000 shares to John Carson, a member of the Company’s advisory board, as compensation for services to the Company.
Intellectual Property
On April 19, 2016, the United States Patent and Trademark Office (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.
Board of Directors and Strategic Advisory Board
The Company has established a Strategic Advisory Board of business and industry professionals to help guide the Company’s business and market development. On March 31, 2016, the Company added Bert Moore to its Advisory Board.
On April 1, 2016, the board of directors (the “Board”) of Long Island Iced Tea Corp. (the “Company”) adopted a resolution expanding the size of the Board from five to six directors and appointed Tom Cardella as a Class 2 director (with a term expiring in 2017) to fill the newly created directorship.
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Highlights
We generate income through the sale of our iced teas. The following are highlights of our operating results for the three and six months ended June 30, 2016:
| ● | Net sales. During the three months ended June 30, 2016, we had net sales of $1,603,667, an increase of $927,932 over the three months ended June 30, 2015. During the six months ended June 30, 2016, we had net sales of $2,111,836, an increase of $1,171,379 over the six months ended June 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution, including $307,502 in sales of our new aloe products. The increase was also bolstered by an increase of $571,638 in the sale of the Company’s product line in gallon containers. | |
| ● | Margin. Our margin decreased by 22% for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. Our margin decreased by 22% for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The decrease was on account of a credit the Company received during the three months ended June 30, 2015 of $120,000 from one of the Company’s vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive net impact of $28,477 (4% of net sales for the three months ended June 30, 2015) on our gross profit in the three months ended June 30, 2015. Furthermore, from May 2015 through January 2016, we introduced five of our flavors in gallon containers. Sales of our gallon containers have and continue to be sold below their costs. As a result, our margins during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015 were negatively impacted by $195,527 (approximately 12% of net sales) by the inclusion of gallon container sales into our sales mix. In addition, during the three months ended June 30, 2016, the Company recorded an adjustment of $107,062 to reduce the cost of certain products to estimated net realizable value. These negative factors were partially offset by sales through vending machines which typically carry higher margins. | |
| ● | Operating expenses. During the six months ended June 30, 2016, our operating expenses were $3,157,867, an increase of $1,916,886 as compared to six months ended June 30, 2015. During the three months ended June 30, 2016, our operating expenses were $1,893,659, an increase of $1,079,882 as compared to three months ended June 30, 2015. The increase in operating expenses for the three and six months ended June 30, 2016 related primarily to increased payroll (including stock based compensation), increases in Advisory Board and Board of Directors fees, increases in legal and consulting expenses and an increase in printing and filing fees due to being a public company. |
Historically, our cash generated from operations has not been sufficient to meet our expenses. Accordingly, we have historically financed our business through the sale of equity interests or through the issuance of promissory notes. During the six months ended June 30, 2016, our cash flows used in operations were $1,515,407 and our net cash provided by financing activities was $1,347,132. We had a working capital deficit of $788,065 as of June 30, 2016.
In order to execute our long-term growth strategy, we may need to continue to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that we will be able to raise such funds on acceptable terms or at all.
Uncertainties and Trends in Our Business
We believe that the key uncertainties and trends in our business are as follows:
| ● | We believe that using various marketing tools, which may include significant advertising expenses, will be necessary in order to increase product awareness in order to compete with our competitors, including large and well established brands with access to significant capital resources. | |
| ● | Customer trends and tastes can change for a variety of reasons including health consciousness, government regulations and variation in demographics. We will need to be able to adapt to changing preferences in the future. | |
| ● | Our sales growth is dependent upon maintaining our relationships with existing and future customers who may generate substantial portions of our revenue, which includes sales to retailers where there may be concentrations. | |
| ● | Our sales are subject to seasonality. Our sales are typically the strongest in the summer months in the northeastern United States. | |
| ● | We are currently involved in litigation. Please refer to Item 1 of Part II of this quarterly report. There are no assurances that there will be successful outcomes to these matters. | |
| ● | We developed a gallon product line featuring five of our existing flavors. The Company’s gross margins are minimal on this product. There are no assurances we will be successful in increasing the margins on this product line. |
Please refer to risks factors described in this Item 2 of Part I of this quarterly report and in Item 1A of Part II of this quarterly report.
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Accounting Policies
The preparation of the financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in these consolidated financial statements. We believe that, of our significant accounting policies (see Note 2 of the condensed consolidated financial statements included in this quarterly report), the following policies are the most critical.
Revenue Recognition
Revenue is stated net of sales discounts and rebates paid to customers. Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determined; (2) evidence of a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance required; and (4) amounts are collectible under normal payment terms. These conditions typically occur when the products are delivered to or picked up by the Company’s customers.
Customer Marketing Programs and Sales Incentives
The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for attaining agreed upon sales levels or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace. The costs of all these various programs are recorded as a reduction of sales in the financial statements.
Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In most cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the customers’ stores. The Placement Fees are recorded as a reduction of sales. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative sales with that particular customer, such negative sales are reclassified and recorded as a part of selling and marketing expense.
Results of Operations
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Net sales | $ | 1,603,667 | $ | 675,735 | $ | 2,111,836 | $ | 940,457 | ||||||||
| Cost of goods sold | 1,588,870 | 518,808 | 2,056,488 | 712,117 | ||||||||||||
| Gross profit | 14,797 | 156,927 | 55,348 | 228,340 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative expenses | 1,009,576 | 398,225 | 1,787,241 | 617,648 | ||||||||||||
| Selling and marketing expenses | 884,083 | 415,552 | 1,370,626 | 623,333 | ||||||||||||
| Total operating expenses | 1,893,659 | 813,777 | 3,157,867 | 1,240,981 | ||||||||||||
| Operating Loss | (1,878,862 | ) | (656,850 | ) | (3,102,519 | ) | (1,012,641 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Other expense | - | (3,327 | ) | - | (3,327 | ) | ||||||||||
| Interest expense | (203,304 | ) | (23,309 | ) | (396,717 | ) | (46,184 | ) | ||||||||
| Net loss | $ | (2,082,166 | ) | $ | (683,486 | ) | $ | (3,499,236 | ) | $ | (1,062,152 | ) | ||||
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Comparison of the Three Months Ended June 30, 2016 and June 30, 2015
Net Sales and Gross Profit
Net sales for the three months ended June 30, 2016 increased by $927,932, or 137%, to $1,603,667 as compared to $675,735 for the three months ended June 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution. The increase was also bolstered by the sale of the Company’s product line in gallon containers. Net sales of our product in gallons during the three months ended June 30, 2016 were approximately $439,979 as compared to $69,938 for the three months ended June 30, 2015. In addition, the Company purchased vending machines in the fourth quarter of 2015. Sales of our iced tea products as well as other products purchased from vendors were approximately $71,353 during the three months ended June 30, 2016 as compared to $0 for the three months ended June 30, 2015. We also began selling certain juice products in the first quarter of 2016. Sales of these products were approximately $358,000 during the three months ended June 30, 2016. The remainder of the increase was due to increased distribution, including in the Midwest of the United States.
Gross profit for the three months ended June 30, 2016 decreased by $142,130, or 91%, to $14,797 as compared to $156,927 for the three months ended June 30, 2015. Gross profit percentage decreased by 22% from 23% for the three months ended June 30, 2015 to 1% for the three months ended June 30, 2016. The decrease was on account of credit the Company received during the three months ended June 30, 2015 of $120,000 from one of the Company’s vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive net impact of $28,477 (4% of net sales for the three months ended June 30, 2015) on our gross profit in the three months ended June 30, 2015. The decrease in our margins for the three months ended June 30, 2016 was further due to a charge of $107,032 (7% of revenue for the three months ended June 30, 2016) we took for an adjustment to write down our gallon size product inventory on hand to net realizable value.
General and administrative expenses
General and administrative expenses for the three months ended June 30, 2016 increased by $611,351, or 154%, to $1,009,576 as compared to $398,225 for the three months ended June 30, 2015. During the three months ended June 30, 2016, the Company’s general and administrative salaries increased by $80,801 as compared to the three months ended June 30, 2015. In addition, the Company incurred $105,740 in stock based compensation expense that was allocated to general and administrative expenses during the three months ended June 30, 2016. This was primarily the result of officers’ salaries including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer of the Company. The remaining increase in general and administrative expenses was caused primarily by increases in rent, insurance, and other administrative costs.
Selling and marketing expenses
Selling and marketing expenses for the three months ended June 30, 2016 increased by $468,531, or 113%, to $884,083 as compared to $415,552 for the three months ended June 30, 2015. Selling and marketing expenses increased largely due to an increase in costs of $118,787 due to a market study to explore the market potential of expanding into alcoholic beverages. There was also an increase in selling salaries of $109,787 during the three months ended June 30, 2016 as compared to the three month ended June 30, 2015. The Company also paid $11,087 in placement fees for the three months ended June 30, 2016 to a retailer to reserve shelf space ahead of actual sales of product to the retailer.
Interest expense
Interest expense for the three months ended June 30, 2016 increased by $179,995, or 772%, to $203,304 as compared to $23,309 for the three months ended June 30, 2015. The increase was primarily the result of the Credit Facility with Brentwood and the related amortization of deferred financing costs associated with the agreement.
Comparison of the Six Months Ended June 30, 2016 and June 30, 2015
Net Sales and Gross Profit
Net sales for the six months ended June 30, 2016 increased by $1,171,379, or 125%, to $2,111,836 as compared to $940,457 for the six months ended June 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution. The increase was also bolstered by the sale of the Company’s product line in gallon containers. Net sales of our product in gallons during the six months ended June 30, 2016 were approximately $589,233 as compared to $69,938 for the six months ended June 30, 2015. In addition, the Company purchased vending machines in the fourth quarter of 2015. Sales of our iced tea products as well as other products purchased from vendors were approximately $135,311 during the six months ended June 30, 2016 as compared to $0 for the six months ended June 30, 2015. We also began selling certain juice products in the first quarter of 2016. Sales of these products were approximately $382,000 during the six months ended June 30, 2016. The remainder of the increase was due to increased distribution, including in the Midwest of the United States.
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Gross profit decreased by $172,992, or 76%, to $55,348 for the six months ended June 30, 2016 from $228,340 for the six months ended June 30, 2015. Our gross profit percentage decreased by 22% for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The decrease was on account of a credit the Company received during the six months ended June 30, 2015 of $120,000 from one of the Company’s vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive net impact of $28,477 (4% of net sales for the three months ended June 30, 2015) on our gross profit in the six months ended June 30, 2015. Furthermore, during May 2015 and January 2016, we introduced five of our flavors in gallon containers. Sales of our gallon containers were sold at introductory pricing, some of which was below cost. As a result, our margins during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 were negatively impacted by the inclusion of gallon container sales into our sales mix. In addition, during the six months ended June 30, 2016, the Company recorded an adjustment of $121,412 to reduce the cost of gallon product inventory on hand to estimated net realizable value. These negative factors were partially offset by sales through vending machines which typically carry higher margins.
General and administrative expenses
General and administrative expenses for the six months ended June 30, 2016 increased by $1,169,593, or 189%, to $1,787,241 as compared to $617,648 for the six months ended June 30, 2015. During the six months ended June 30, 2016, the Company’s general and administrative salaries and stock based compensation increased by $281,442 as compared to the six months ended June 30, 2015. This was primarily the result of the increase in the Chief Executive Officer’s salary, which took place on May 27, 2015 in connection with the consummation of the business combination between us, LIBB and Cullen. Legal and professional fees increased by $161,770 which included increased accounting and legal costs related to our SEC report filings. Additionally, during the six months ended June 30, 2016, the Company incurred $46,667 related to the costs of its alcohol development contract. The remainder of the cost increases primarily related to rent and storage fees, insurance costs, website and internet costs, press release costs and filing fees related to becoming a public company on May 27, 2015, and increases in depreciation expense related to the purchase of vending machines in the fourth quarter of 2015.
Selling and marketing expenses
Selling and marketing expenses for the six months ended June 30, 2016 increased by $747,293, or 120%, to $1,370,626 as compared to $623,333 for the six months ended June 30, 2015. Selling and marketing expenses increased largely due to increased selling salaries of approximately $269,000 primarily related to the hiring of new employees, including a national vice president. Included in this amount was $30,000 of stock based compensation to this employee. In addition, stock based compensation allocated to selling and marketing expenses related to stock options increased by $74,171. Additionally sales commissions paid to brokers increased by approximately $55,610 due to the increase in commissions related to our sales through vending machines. Freight out increased by $156,157 during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015 due to increased volume as well as increased freight rates resulting from shipments from a storage facility located in Georgia. The remainder of the increase was caused by various other marketing expenses.
Interest expense
Interest expense for the six months ended June 30, 2016 increased by $350,533, or 759%, to $396,717 as compared to $46,184 for the six months ended June 30, 2015. The increase was primarily the result of the Credit Facility with Brentwood and the related amortization of deferred financing costs associated with the agreement.
Liquidity and Capital Resources
Sources of Liquidity
The Company has historically been financed by debt from its stockholders and unrelated third parties. In addition, the Company has also been financed by the sale of equity interests. We had working capital deficit of $788,065 as of June 30, 2016. We believe that as a result of our July 2016 Public Offering and our working capital as of June 30, 2016 that our cash resources will be sufficient to fund our net cash requirements through August 14, 2017.
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The following is an overview of our borrowings as of June 30, 2016:
| Description of Debt | Holder | Interest Rate | Balance at June 30, 2016 | |||||||
| Automobile Loans | Various | 3.59% to 10.74 | % | $ | 46,650 | |||||
| Equipment Loans | Magnum Vending Corp. | 10 | % | $ | 95,024 | |||||
| Line of Credit | Brentwood LIIT Inc. | Prime plus 7.5 | % | $ | 1,669,376 | * | ||||
| * | All outstanding principal and interest under the line of credit was converted into 421,972 shares of common stock upon the closing of the Offering. |
Below is a summary of our financing activities during the six months ended June 30, 2016. In order to execute our long-term growth strategy, which could include the expansion of the business to include alcoholic beverages, we may need to continue to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that we will be able to raise such funds on acceptable terms or at all.
2016 Financing Activity
Commencing on November 24, 2015 and ending on March 14, 2016, we conducted a private placement of up to $3,000,000 of units (the “November Offering”) on a “best efforts” basis through a placement agent (the “Placement Agent”). From January 1, 2016 to March 14, 2016, we raised gross proceeds of $686,900, through the sale of 171,725 units at $4.00 per unit. In a separate private offering, we also raised gross proceeds of $235,000, through the sale of 58,750 units at $4.00 per units, during March 2016 (the “March Sales”). Each unit issued in the November Offering and in the March Sales consists of one share of common stock and one warrant to purchase one share of common stock. Included in the proceeds for the March Sales were subscriptions receivable of $120,000, which were collected during April 2016.
In March 2016, Brentwood approved an increase of $500,000 in the Available Amount under the Credit Agreement and approved advances in the same amount. Advances of $250,000 have been received by the Company, and an additional $250,000 was received during May 2016. As of June 30, 2016, the principal amount of loans outstanding, including capitalized interest and fees (both of which are excluded when determining whether the Available Amount has been reached), were $1,669,376. The terms of the Credit Agreement are described more fully below in “2015 Borrowing Activity.”
On July 28 and 29, 2016, we sold 1,270,156 Shares in the Offering. The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $6,084,831 after deducting commissions and other offering expenses. On August 4, 2016, the Offering was terminated. No further sales of shares were made in the Offering.
In connection with the closing of the Offering, we completed the Recapitalization with Brentwood. Pursuant to the Recapitalization, all of the outstanding principal and interest under the Lender Note was converted into 421,972 shares of common stock.
2015 Borrowing Activity
On November 23, 2015, we entered into the Credit Agreement. The Credit Agreement provides for a revolving Credit Facility. The Available Amount under the Credit Facility may be increased from time to time, in increments of $500,000, up to a maximum Facility Amount of $3,500,000, and we may obtain further advances, subject to the approval of Brentwood. The loans under the Credit Agreement are evidenced by the Lender Note. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. Brentwood had approved an Available Amount of $1,000,000 and had made advances to us in the same amount as of December 31, 2015. As of December 31, 2015, the outstanding balance of the loans under the Credit Facility, including capitalized interest and fees as described below (both of which are excluded when determining whether the Available Amount has been reached), was $1,091,571.
The Credit Facility bears interest at rate equal to the prime rate plus 7.5% (11% at June 30, 2016), compounded quarterly, and matures on November 23, 2018. The outstanding principal and interest under the Credit Facility are payable in cash on the maturity date. We also paid Brentwood a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount of the loan, and will pay Brentwood $30,000 for its expenses at the maturity date. The Credit Facility is secured by a first priority security interest in all of our property, including the membership interests in LIBB held by us. We also have guaranteed the repayment of LIBB’s obligations under the Credit Facility. In addition, LIBB’s obligations are guaranteed by Philip Thomas, our Chief Executive Officer, in certain limited circumstances, up to a maximum of $200,000.
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Brentwood may accelerate the amounts due under the Credit Facility upon the occurrence of certain events of default, including a failure to make a payment under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing of a bankruptcy petition or a similar event with respect to us or the occurrence of an event of default under other material indebtedness of ours. The Company and LIBB also made certain customary representations and warranties and covenants, including negative covenants with respect to the incurrence of indebtedness.
Brentwood may elect to convert the outstanding principal and interest under the Lender Note into shares of our common stock at a conversion price of $4.00 per share. The conversion price and the shares of common stock or other property issuable upon conversion of the principal and interest are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of our common stock, or in the event of a fundamental transaction.
In addition, in connection with the establishment of the Credit Facility, we issued the Lender Warrant to Brentwood. The Lender Warrant entitled the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision. Upon the closing of the Offering, the Lender Warrant was exchanged for 486,111 shares of common stock.
Brentwood will have certain “piggyback” registration rights, on customary terms, with respect to the shares of our common stock issued or issuable upon conversion of the Lender Note and upon exchange of the Brentwood Warrant.
On November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp., or “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 certain 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 the inception of the agreement 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 the vending machines to the Company. As of December 31, 2015, the total principal amount of the payments underlying the agreement was $117,917 and we had made principal and interest payments of $6,463 under the agreement.
On April 28, 2015, LIBB received $150,000 as proceeds from a loan from Bass Properties, LLC, or “Bass Properties,” which was at the time a stockholder of Cullen and member of LIBB. On May 4, 2015, LIBB received $400,000 as proceeds from a loan with Ivory Castle Limited, or “Ivory Castle,” which was at the time a member of LIBB. These notes bore interest at 6% per annum and were to mature on July 31, 2016. On June 30, 2015, these loans, together with accrued interest, a total of $555,910 were converted into 138,979 shares of the Company’s common stock.
On March 26, 2015, LIBB received $250,000 as proceeds from an additional loan from Cullen, bearing interest at 6% per annum with principal and interest due and payable on March 15, 2016. This loan was eliminated when consolidating the financial statements.
2015 Private Placements
On June 30, 2015, we received net proceeds of $468,468 through the issuance of 117,636 shares of common stock at an average price of approximately $4.00 per share.
On July 8, 2015, we received proceeds of $100,000 through the issuance of 25,000 shares of common stock at a price of $4.00 per share.
Commencing on August 10, 2015 and ending on October 30, 2015, we conducted a private placement of up to $3,000,000 of units (the “August Offering”), at a price of $4.00 per unit, through a placement agent. During the private placement, we sold an aggregate of 155,750 units for total gross proceeds of $623,000. The units consisted of one share of common stock (or an aggregate of 155,750 shares) and one warrant (or an aggregate of 155,750 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on September 17, 2018.
On November 24, 2015, we commenced the November Offering of up to $3,000,000 of units, at a price of $4.00 per unit, through a placement agent. As of December 31, 2015, we had sold an aggregate of 18,250 units for total gross proceeds of $73,000 in the private placement. The units consisted of one share of common stock (for an aggregate of 18,250 shares) and one warrant (for an aggregate of 18,250 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on November 30, 2018. We made additional sales in the November Offering after December 31, 2015, as described above under “2016 Financing Activity”.
Net proceeds after all direct costs related to the August Offering and the November Offering, including the value of warrants issued to the placement agent in the offerings, were $540,946 for the year ended December 31, 2015.
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2015 Business Combination
On May 27, 2015, we completed the business combination contemplated by the Agreement and Plan of Reorganization, dated as of December 31, 2014, as amended, by and among us, Cullen, Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, LIBB, and Phil Thomas and Thomas Panza. Prior to the closing of the business combination, we were a wholly-owned subsidiary of Cullen formed solely for the purpose of consummating the business combination, LIBB was a private operating company and Cullen was a public company seeking alternative strategic opportunities in all industries and regions in an effort to maximize stockholder value. Upon the closing of the business combination, we became the new public company and Cullen and LIBB became wholly-owned subsidiaries of ours. As a result of the consummation of the business combination, we gained access to the cash held by Cullen of $120,841. Under the agreement, upon consummation of the business combination, the holders of the LIBB membership interests received 2,633,334 shares of our common stock, subject to adjustment based on LIBB’s and Cullen’s net working capital at the closing. On July 16, 2015, the payment of the net working capital adjustment under the agreement was waived by the parties.
Cash flows
Net cash used in operating activities
Net cash used in operating activities was $1,515,407 for the six months ended June 30, 2016 as compared to net cash used in operating activities of $1,446,301 for the six months ended June 30, 2015. Cash used in operating activities for the six months ended June 30, 2016 was primarily the result of the net loss of $3,499,236 offset by non-cash charges of $1,104,885. Cash used in operating activities for the six months ended June 30, 2015 was primarily the result of the net loss of $1,062,152. In addition to the effect of our net losses, increases in our inventory and accounts receivable, which were partially offset by increases in our accounts payable and accrued expenses resulted in further cash flows used in operating activities.
Net cash used in investing activities
Net cash used in investing activities was $12,251 and $29,560 for the six months ended June 30, 2016 and 2015, respectively.
Net cash provided by financing activities
Net cash provided by financing activities was $1,347,132 for the six months ended June 30, 2016 as compared to net cash provided by financing activities of $1,380,508 for the six months ended June 30, 2015. Cash flows from financing activities were primarily the result of $500,000 in proceeds under the Credit Agreement with Brentwood and $861,790 from the sale of common stock and warrants, net of costs. These proceeds were offset by payments of deferred offering costs of $43,383, repayments of automobile loans of $9,445, and repayments of equipment loans of $18,080. During the six months ended June 30, 2015, and prior to the Business Combination, we received additional proceeds of $250,000 from a loan from Cullen. Upon the consummation of the Business Combination, we received $120,841 in cash from Cullen. In addition, LIBB received loans totaling $550,000 from two of our stockholders, Bass Properties LLC and Ivory Castle Limited. These loans, together with accrued interest, were converted into 138,979 shares of Company common stock. In addition, the Company received net proceeds of $468,469 through the issuance of 117,636 shares of common stock. These proceeds were offset by repayments of the Company’s automobile loans of $8,802.
Off-balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
Contractual Obligations
During the six months ended June 30, 2016, the following material changes occurred in the Company’s contractual obligations:
As a result of additional proceeds received under the Credit Facility and the capitalization of accrued interest, as of June 30, 2016, $1,669,376 was outstanding under Credit Agreement with Brentwood LIIT Corp.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and our Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosures. As required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer (our principal executive), Chief Financial Officer (our principal financial officer and principal accounting officer and Chief Accounting Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Based on this evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as of June 30, 2016 due to a material weakness in our internal control over financial reporting as described below
A material weakness is defined within the Public Company Accounting Oversight Board’s Auditing Standard No. 5, as a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We determined that our internal control of financial reporting had the following material weakness:
| ● | Due to the small size of the Company, the Company does not maintain sufficient segregation of duties to ensure the processing, review and authorization of all transactions including non-routine transactions. |
Because disclosure controls and procedures include those components of internal control over financial reporting that provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, management determined that its disclosure controls and procedures were not effective as a result of the foregoing material weakness in its internal control over financial reporting. The Company is evaluating this weakness to determine the appropriate remedy.
Changes in Internal Control over Financial Reporting
Other than the hiring of the Company’s Chief Financial Officer on June 6, 2016, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the current fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 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 to the motion to dismiss. 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, denying the motion to dismiss with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution seeking to amend its answer to include cross claims against Ascent. Our management and legal counsel believes it is too early to determine the probable outcome of this matter. |
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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(a) Exhibits:
Exhibit No. |
Description | |
| 2.1 | Agreement and Plan of Reorganization, dated as of December 31, 2014, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Phil Thomas and Thomas Panza (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on January 6, 2015). | |
| 2.2 | Amendment No. 1 to Agreement and Plan of Reorganization, dated as of April 23, 2015, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Philip Thomas and Thomas Panza, and Philip Thomas, in his capacity as the “LIBB Representative” under the Merger Agreement on behalf of the other members of LIBB party to the Merger Agreement (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on April 24, 2015). | |
| 10.1 | Second Amendment to Credit and Security Agreement, effective as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp., and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 8, 2016). | |
| 10.2 | Amendment No. 1 to Registration Rights Agreement, dated as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp. and Brentwood LIIT Inc. (incorporated from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 8, 2016). | |
| 10.3 | Form of Placement Agent Warrant (incorporated from Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A filed on June 9, 2016). | |
| 10.4 | Amendment No. 1 to Consulting Agreement, dated as of June 6, 2016, by and between Long Island Iced Tea Corp. and Julian Davidson (incorporated from Exhibit 10.24 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 10.5 | Form of Employment Agreement by and between Long Island Iced Tea Corp. and Julian Davidson (incorporated from Exhibit 10.25 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 10.6 | Employment Agreement, dated as of June 1, 2016, by and between Long Island Iced Tea Corp. and Richard B. Allen (incorporated from Exhibit 10.26 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 31.1 | Section 302 Certification by Chief Executive Officer. | |
| 31.2 | Section 302 Certification by Chief Accounting Officer. | |
| 32 | Section 906 Certification by Chief Executive Officer and Chief Accounting Officer. | |
| 101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail. | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 32 |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 15, 2016
| LONG ISLAND ICED TEA CORP. | ||
| By: | /s/ Richard Allen | |
| Name: | Richard Allen | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
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EXHIBIT INDEX
Exhibit No. |
Description | |
| 2.1 | Agreement and Plan of Reorganization, dated as of December 31, 2014, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Phil Thomas and Thomas Panza (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on January 6, 2015). | |
| 2.2 | Amendment No. 1 to Agreement and Plan of Reorganization, dated as of April 23, 2015, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Philip Thomas and Thomas Panza, and Philip Thomas, in his capacity as the “LIBB Representative” under the Merger Agreement on behalf of the other members of LIBB party to the Merger Agreement (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on April 24, 2015). | |
| 10.1 | Second Amendment to Credit and Security Agreement, effective as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp., and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 8, 2016). | |
| 10.2 | Amendment No. 1 to Registration Rights Agreement, dated as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp. and Brentwood LIIT Inc. (incorporated from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 8, 2016). | |
| 10.3 | Form of Placement Agent Warrant (incorporated from Exhibit 4.2 to the Company’s Registration Statement on Form S-1/A filed on June 9, 2016). | |
| 10.4 | Amendment No. 1 to Consulting Agreement, dated as of June 6, 2016, by and between Long Island Iced Tea Corp. and Julian Davidson (incorporated from Exhibit 10.24 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 10.5 | Form of Employment Agreement by and between Long Island Iced Tea Corp. and Julian Davidson (incorporated from Exhibit 10.25 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 10.6 | Employment Agreement, dated as of June 1, 2016, by and between Long Island Iced Tea Corp. and Richard B. Allen (incorporated from Exhibit 10.26 to the Company’s Registration Statement on Form S-1/A filed on June 16, 2016). | |
| 31.1 | Section 302 Certification by Chief Executive Officer. | |
| 31.2 | Section 302 Certification by Chief Accounting Officer. | |
| 32 | Section 906 Certification by Chief Executive Officer and Chief Accounting Officer. | |
| 101 | Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail. | |
| 101.INS | XBRL Instance Document. | |
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
| 34 |
Exhibit 31.1
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Philip Thomas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Long Island Iced Tea Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited condensed consolidated interim financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 15, 2016
| /s/ Philip Thomas | ||
| Name: | Philip Thomas | |
| Title: | Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
PURSUANT TO RULE 13a-14 AND 15d-14
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Richard Allen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Long Island Iced Tea Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited condensed consolidated interim financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 15, 2016
| /s/ Richard Allen | ||
| Name: | Richard Allen | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Long Island Iced Tea Corp. on Form 10-Q for the quarterly period ended June 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. |
Dated: August 15, 2016
| /s/ Philip Thomas | ||
| Name: | Philip Thomas | |
| Title: | Chief Executive Officer (Principal Executive Officer) |
Dated: August 15, 2016
| /s/ Richard Allen | ||
| Name: | Richard Allen | |
| Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Document And Entity Information - shares |
6 Months Ended | |
|---|---|---|
Jun. 30, 2016 |
Aug. 12, 2016 |
|
| Document And Entity Information [Abstract] | ||
| Entity Registrant Name | Long Island Iced Tea Corp. | |
| Entity Central Index Key | 0001629261 | |
| Document Type | 10-Q | |
| Document Period End Date | Jun. 30, 2016 | |
| Amendment Flag | false | |
| Current Fiscal Year End Date | --12-31 | |
| Entity Filer Category | Smaller Reporting Company | |
| Entity Common Stock, Shares Outstanding | 7,168,621 | |
| Document Fiscal Period Focus | Q2 | |
| Document Fiscal Year Focus | 2016 |
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) |
Jun. 30, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Accounts receivable, related parties | $ 58,585 | $ 67,992 |
| Preferred stock, par value | $ 0.0001 | $ 0.0001 |
| Preferred stock, shares authorized | 1,000,000 | 1,000,000 |
| Preferred stock, shares issued | 0 | 0 |
| Preferred stock, shares outstanding | 0 | 0 |
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, shares authorized | 35,000,000 | 35,000,000 |
| Common stock, shares, issued | 4,973,715 | 4,635,783 |
| Common stock, shares, outstanding | 4,973,715 | 4,635,783 |
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
|
| Income Statement [Abstract] | ||||
| Net sales | $ 1,603,667 | $ 675,735 | $ 2,111,836 | $ 940,457 |
| Cost of goods sold | 1,588,870 | 518,808 | 2,056,488 | 712,117 |
| Gross profit | 14,797 | 156,927 | 55,348 | 228,340 |
| Operating expenses: | ||||
| General and administrative expenses | 1,009,576 | 398,225 | 1,787,241 | 617,648 |
| Selling and marketing expenses | 884,083 | 415,552 | 1,370,626 | 623,333 |
| Total operating expenses | 1,893,659 | 813,777 | 3,157,867 | 1,240,981 |
| Operating Loss | (1,878,862) | (656,850) | (3,102,519) | (1,012,641) |
| Other expenses: | ||||
| Other expense | (3,327) | (3,327) | ||
| Interest expense | (203,304) | (23,309) | (396,717) | (46,184) |
| Net loss | $ (2,082,166) | $ (683,486) | $ (3,499,236) | $ (1,062,152) |
| Weighted average number of common shares Outstanding – basic and diluted | 4,973,715 | 3,227,713 | 4,847,322 | 2,932,166 |
| Basic and diluted net loss per share | $ (0.42) | $ (0.21) | $ (0.72) | $ (0.36) |
Business Organization, Liquidity and Management's Plans |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| Business Organization, Liquidity and Management's Plans |
NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS
Business Organization
Long Island Iced Tea Corp, a Delaware C-Corporation (“LIIT”), was formed on December 23, 2014. LIIT was formed in order to allow for the completion of mergers between Cullen Agricultural Holding Corp. (“Cullen”) and Long Island Brand Beverages LLC (“LIBB”). On December 31, 2014, LIIT entered into a merger agreement, as amended as of April 23, 2015, with Cullen, a public company, Cullen Merger Sub, Inc. (“Cullen Merger Sub”), LIBB Acquisition Sub, LLC (“LIBB Merger Sub”), Long Island Brand Beverages LLC and the founders of LIBB (“Founders”). Pursuant to the merger agreement, (a) Cullen Merger Sub was to be merged with and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary of LIIT and (b) LIBB Merger Sub was to be merged with and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of LIIT (the “Mergers”). As a result of the merger which was consummated on May 27, 2015, LIIT consisted of its wholly owned subsidiaries, LIBB (its operating subsidiary) and Cullen and Cullen’s wholly owned subsidiaries, Cullen Agricultural Technologies, Inc. and Natural Dairy, Inc. (collectively the “Company”).
For accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percent of the LIIT’s shares and will exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a public shell company at the time of the transaction. Pursuant to Accounting Standards Codification (“ASC”) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated 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 produces and distributes premium ready-to-drink iced tea, with a proprietary recipe and quality components. The Company produces a 100% brewed tea, using black tea leaves, purified water and natural cane sugar or sucralose. The Company’s product, Long Island Iced Tea, is targeted for sale to health conscious consumers on the go. Flavors change from time to time, and have included lemon, peach, raspberry, guava, mango, diet lemon, diet peach, sweet tea, green tea and honey and half tea and half lemonade. The Company also offers lower calorie iced tea in twelve (12) ounce bottles. The lower calorie flavor options include mango, raspberry, and peach. The Company has also introduced five of its flavors in gallon bottles in 2015. The flavors packaged in gallon bottles include lemon, peach, sweet tea, green tea and honey, and mango. In addition, the Company, in order to service certain vending contracts, sold snacks and other beverage products on a limited basis in 2015. During the first quarter of 2016, the Company explored opportunities with other products, such as juices. During the second quarter of 2016, the Company began selling aloe juices and commenced selling a private label version of its product.
The Company sells its products to a mix of independent mid-to-large range distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the New York, New Jersey, Connecticut and Pennsylvania markets. During 2016, the Company has also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. The Company’s products are currently available in twelve states that have a cumulative population of 100 million people.
Liquidity and Management’s Plan
The Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of debt, equity, and through utilizing trade credit with its vendors.
As of June 30, 2016, the Company’s cash on hand was $26,666. The Company incurred net losses of $2,082,166 and $3,499,236 for the three and six months ended June 30, 2016, respectively. At June 30, 2016, the Company’s stockholders’ deficit was $437,341. As of June 30, 2016, the Company had a deficit in working capital of $788,065.
During the six months ended June 30, 2016, the Company raised net proceeds of $861,790 through the sale of 230,475 shares of common stock and 230,475 warrants to purchase common stock.
On November 23, 2015, LIIT and LIBB entered into a Credit and Security Agreement (the “Credit Agreement”), by and among LIBB, as the borrower, LIIT and Brentwood LIIT Inc., as the lender. Brentwood LIIT Inc.’s interest in the Credit Agreement and the related agreements and instruments thereunder was subsequently transferred to Brentwood LIIT (NZ) Ltd. (the “Lender”). Brentwood LIIT Inc. and the Lender are controlled by a related party, Eric Watson, who beneficially owned approximately 16% of the Company on November 23, 2015 and 28.8% as of June 30, 2016. The Credit Agreement provides for a revolving credit facility in an initial amount of up to $1,000,000, subject to increases at the Lender’s discretion as provided in the Credit Agreement (the “Available Amount”), up to a maximum amount of $5,000,000 (which was subsequently reduced to $3,500,000 in connection with the closing of the Offering, as defined below) (the ” Facility Amount”). The Available Amount may be increased, in increments of $500,000, up to the Facility Amount, and LIBB may obtain further advances, subject to the approval of the Lender. On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result of which the Available Amount was borrowed in full.
On July 28 and 29, 2016, the Company sold 1,270,156 shares (the “Shares”) of common stock, in its public offering (the “Offering”) at an offering price of $5.50 per share, pursuant to the Company’s registration statement on Form S-1 (File No. 333-210669). The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $6,084,831 after deducting commissions and other offering expenses. In connection with sale of the Shares, the Company’s common stock was approved for listing on the NASDAQ Capital Market under its current symbol, “LTEA.” The Offering was terminated on August 4, 2016. No further sales of shares were made in the Offering.
In connection with the sale of the Shares, the Company completed a recapitalization transaction (the “Recapitalization”) with the Lender. Pursuant to the Recapitalization, Brentwood converted all of the outstanding principal and interest under the Credit Agreement into 421,972 shares of common stock and exchanged its warrant for 486,111 shares of common stock.
In connection with the consummation of the Offering, on July 29, 2016, the selling agents were issued warrants to purchase an aggregate of 31,754 shares of common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock issuable upon exercise of the warrants are subject to adjustment for stock splits and similar adjustments. The warrants contain provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights at the Company’s expense until July 28, 2021.
The Company believes that as a result of the closing of its offering in July 2016 that its cash resources will be sufficient to fund the Company’s net cash requirements for the next twelve months from the date these condensed consolidated financial statements are issued. However, in order to execute the Company’s long-term growth strategy, the Company may need to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that the Company will be able to raise such funds on terms that would be acceptable to the Company. |
Summary of Significant Accounting Policies |
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| Summary of Significant Accounting Policies |
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, 2016 are not necessarily indicative of the result that may be expected for the year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes thereto included in the Company’s Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 22, 2016.
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.
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 inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
Revenue Recognition
Revenue is stated net of sales discounts and rebates paid to customers (see “Customer Marketing Programs and Sales Incentives,” below). Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determinable; (2) evidence of a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance required; and (4) amounts are collectible under normal payment terms. These conditions typically occur when the products are delivered to or picked up by the Company’s customers.
Customer Marketing Programs and Sales Incentives
The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for various discounts to the end retailers or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace.
In addition, during the three and six months ended June 30, 2016, the Company issued shares of common stock in the amounts of 0 and 3,400, respectively, at a fair value of $4.00 per share, to customers and the owners of customers. Included in the costs of these programs were costs associated with the fair value of shares issued, which totaled $0 and $18,338 for the three months June 30, 2016 and 2015, respectively and $45,165 and $28,698 for the six months ended June 30, 2016 and 2015, respectively.
Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In some cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the store of the customer. The Placement Fees are recorded as a reduction of revenue. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative revenue with that particular customer, such negative revenue is reclassified and recorded as a part of selling and marketing expense. For the three and six months ended June 30, 2016, the Company recorded $11,087 and $11,087, respectively, of Placement Fees to selling and marketing expense. No such Placement Fees were recorded in selling and marketing expense for the three and six months ended June 30, 2015.
Shipping and Handling Costs
Shipping and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are included in selling and marketing expenses on the condensed consolidated statements of operations and totaled $161,518 and $33,136 for the three months ended June 30, 2016 and 2015, respectively and $201,670 and $44,250 for the six months ended June 30, 2016 and 2015, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense totaled $20,916 and $116,840, respectively for the three months ended June 30, 2016 and 2015 and $30,547 and $126,493, respectively for the six months ended June 30, 2016 and 2015.
Research and Development
The Company expenses the costs of research and development as incurred. For the three and six months ended June 30, 2016, research and development expense related to new product initiatives were $0 and $46,667, respectively. These expenses were incurred pursuant to a product development agreement, which will require the Company to pay $40,000 in cash and $40,000 in common stock upon the completion of the arrangement. There were no research and development expenses incurred during the three and six months ended June 30, 2015. Research and development expenses are included within general and administrative expenses within the condensed consolidated statement of operations. As of June 30, 2016, $50,000 was included in accrued expenses in the condensed consolidated balance sheet related to this arrangement.
Operating Leases
The Company records rent related to its operating leases on a straight line basis over the lease term.
Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
Restricted cash
Pursuant to the terms of the Credit Agreement with Lender, the Company is required to utilize $150,000 of the $1,000,000 proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Company’s cash on hand was restricted for the use in the development of the alcohol business. On March 17, 2016, the LIBB entered into an agreement with Lender whereby such restriction was lifted.
Accounts Receivable
The Company sells products to distributors and in certain cases directly to retailers, and extends credit, generally without requiring collateral, based on its evaluation of the customer’s financial condition. While the Company has a concentration of credit risk in the retail sector, it believes this risk is mitigated due to the diverse nature of the customers it serves, including, but not limited to, its type, geographic location, size, and beverage channel. Potential losses on the Company’s receivables are dependent on each individual customer’s financial condition and sales adjustments granted after the balance sheet date. The Company carries its trade accounts receivable at net realizable value. Typically, accounts receivable have terms of net 30 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the Company’s efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
Accounts receivable, net, is as follows:
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 Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The Company has not experienced any loss as a result of these deposits. These cash balances are maintained with one bank. As of June 30, 2016, three customers accounted for 16%, 12% and 11% of the Company’s trade receivables, respectively. As of December 31, 2015, two customers accounted for 14% and 30% of the Company’s trade receivables. The Company does not generally require collateral or other security to support customer receivables. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.
Inventories
The Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists primarily of bottled iced tea.
The Company values its inventories at the lower of cost or net realizable value, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. During the three months ended June 30, 2016 and 2015, the Company recorded charges of $107,062 and $0, respectively, and during the six months ended June 30, 2016 and 2015, the Company recorded charges of $121,412 and $0, respectively, to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the dates presented:
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, 2016 and 2015, depreciation expense was $39,004 and $25,116, respectively. For the six months ended June 30, 2016 and 2015, depreciation expense was $77,698 and $49,535, respectively.
Intangible Assets
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or when circumstances indicate that there could be an impairment. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Intangibles assets with indefinite useful lives consist of the cost to purchase an internet domain name for $20,000. The domain name is considered to have a perpetual life and as such, is not amortized. Insignificant costs incurred associated with renewing this asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include website development costs of $4,992 and $7,494 as of June 30, 2016 and December 31, 2015, respectively. The estimated useful life of the capitalized costs of the Company’s website is 3 years and is depreciated on a straight line basis. As of June 30, 2016, the cost of the website development was $15,000 and the accumulated amortization was $10,008. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. Amortization expense was $1,251 and $1,251 for the three months ended 2016 and 2015, respectively and $2,502 and $2,502 for the six months ended 2016 and 2015, respectively.
Deferred Offering Costs
The Company capitalizes the costs related to proposed offerings of its equity instruments as deferred offering costs and records the deferred offering costs as an offset to additional paid in capital upon the completion of the associated capital raising activity.
Income Taxes
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.
Earnings per share
Basic net earnings 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 exercise of stock options and warrants. The computation of diluted earnings per share excludes those dilutive securities 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 in periods where the exercise of such options would be antidilutive.
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accrued expenses and notes payable 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.
Seasonality
The Company’s business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales.
Recent Accounting Pronouncements
In 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 of adopting this standard.
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 of the new guidance on the condensed consolidated financial statements.
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. This update requires that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income tax expense or benefit on the income statement. The amendment also states that excess tax benefits should be classified along with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606)”, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In May 2016, the FASB issued Accounting Standards Update ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the review, other than as described in Note 1, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements. |
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Equipment Loan |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Equipment Loan [Abstract] | |
| Equipment Loan |
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. The Company may terminate the agreement and all obligations to make future payments on ten days’ written notice to Magnum. As of June 30, 2016 and December 31, 2015, the outstanding balance on the equipment loan was $95,024 and $113,104, respectively. |
Line of Credit |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Line of Credit Facility [Abstract] | |
| Line of Credit |
NOTE 4 – LINE OF CREDIT
On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result of which the Available Amount was borrowed in full.
As of June 30, 2016 and December 31, 2015, the outstanding balance on the line of credit was $1,669,376 and $1,091,571, respectively.
The credit facility bears interest at a rate equal to the prime rate (3.5% at December 31, 2015 and June 30, 2016) plus 7.5%, compounded monthly, and matures on November 23, 2018. Effective January 10, 2016, the Credit Agreement was amended such that interest was compounded on a quarterly basis. Upon the occurrence of an event of default, the Credit Agreement provides for an additional 8% interest pursuant to the terms of the agreement. The outstanding principal and interest under the credit facility are payable in cash on the maturity date. The Company also paid the Lender a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount of the loan, and will pay the Lender $30,000 for its expenses at the maturity date. The compounded interest and capitalized fees are excluded when determining whether the Available Amount has been exceeded. The credit facility is secured by a first priority security interest in all of the assets of LIIT and LIBB, including the membership interests in LIBB held by LIIT. LIIT also has guaranteed the repayment of LIBB’s obligations under the credit facility. In addition, the credit facility will be guaranteed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, in certain limited circumstances up to a maximum amount of $200,000.
In connection with the establishment of the credit facility, the Company issued a warrant to the Lender. The warrant entitled the holder to purchase 1,111,111 shares of the Company’s common stock at an exercise price of $4.50 and included a cashless exercise provision. Upon the closing of the Offering, as part of the Recapitalization, the warrant was exchanged for 486,111 shares of the Company’s common stock (See below and Note 1 – Business Organization, Liquidity and Management’s Plans).
The Lender will have certain “piggyback” registration rights, on customary terms, with respect to the shares of the Company’s common stock issued or issuable upon conversion of the credit facility and upon exchange of the warrant.
The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.
The Lender may accelerate the credit facility upon the occurrence of certain events of default, including a failure to make a payment under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing of a bankruptcy petition or a similar event with respect to LIBB or the Company or the occurrence of an event of default under other material indebtedness of LIBB or the Company. The Company and LIBB also made certain customary representations, warranties and covenants, including negative covenants with respect to the incurrence of indebtedness. As of June 30, 2016, the Company was in compliance with these covenants.
Deferred financing costs related to the Credit Agreement, which are included in the accompanying condensed consolidated balance sheet, are amortized over the three year term of the line of credit agreement. As of June 30, 2016, the gross carrying amount of deferred financing costs was $1,903,879 with accumulated amortization of $383,110. As of December 31, 2015, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $65,797.
During April 2016, the Company entered into amendment to the agreement with the Lender, which provided for the Recapitalization. Upon a capital raise of at least $5,000,000, the Lender agreed to convert all of the outstanding principal and interest under the Credit Facility into 421,972 shares of common stock (assuming all approved advances are completed and there are no further advances by the Lender) at the closing of the offering. In addition, the Lender agreed to exchange its 1,111,111 warrants for 486,111 shares of common stock at such time. The Credit Facility would remain outstanding except that the Facility Amount would be reduced to $3,500,000. Any amounts drawn from the Facility Amount require lender approval. The Recapitalization was effectuated upon the closing of the Offering.
Upon the closing of the Offering, as part of the Recapitalization, the outstanding principal and interest under the credit facility was converted into 421,972 shares of the Company’s common stock. The Lender may elect to convert any future outstanding principal and interest under the credit facility into shares of the Company’s common stock at a conversion price of $4.00 per share (See Note 1 – Business Organization, Liquidity and Management’s Plans).
In addition, the Company and LIBB entered into an Amendment No. 1 (the “Registration Rights Amendment”) to the Registration Rights Agreement (the “Registration Rights Agreement”), dated as of December 3, 2015, by and among LIBB, the Company and the Lender. The Registration Rights Amendment amended the Registration Rights Agreement, effective as of the closing of a Qualified Public Offering, so that the “piggyback” registration rights granted to the Lender thereunder will apply to the shares issuable in the Recapitalization. |
Stockholders' Equity |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Stockholders' Equity Note [Abstract] | |
| Stockholders' Equity |
NOTE 5 – STOCKHOLDERS’ EQUITY
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 by our Company to the Placement Agent. In addition, the Placement Agent received warrants to purchase a number of shares of common stock equal to 10% of the total shares of common stock included in the Units sold in the Second Offering to the Covered Investors, with an exercise price of $4.50 per share.
Each warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on November 30, 2018. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
During the year ended December 31, 2015 and through March 14, 2016, the Company sold 345,725 units through the Placement Agent. As a result, on March 29, 2016, 34,573 warrants were issued to the Placement Agent. The warrants have an exercise price of $4.50 per share and expire on October 30, 2020.
On March 29, 2016 and March 31, 2016, the Company entered into subscription agreements for the sale of 58,750 units for gross proceeds of $235,000 at $4.00 per unit, including 2,500 units sold to family members of Philip Thomas, CEO and a member of the Board of Directors and 2,500 to a relative of Thomas Panza, a greater than 10% owner of the Company (the “March Sales”). Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Such subscriptions were closed and funded during April 2016.
Each warrant issued in the March Sales entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on March 29, 2019. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
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 at $4.00 per share to customers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $13,600 as a reduction to net sales in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 1,200 shares of common stock at $4.00 per share to suppliers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $4,800 in cost of goods sold in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 2,000 shares of common stock at $4.00 per share to brokers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $8,000 in selling and marketing expenses in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 6,700 shares of common stock at $4.00 per share to consultants of the Company. For the three and six months ended June 30, 2016, the Company recorded $0 and $26,800, respectively, in general and administrative expenses in the condensed consolidated statements of operations.
On March 31, 2016, the Company issued 5,000 shares of common stock at $4.00 per share 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 three and six months ended June 30, 2016, the Company recorded $0 and $5,455 of market research expense (reflected in selling and marketing expenses in the Condensed Consolidated Statement of Operations) and as a result, $14,545 was included in prepaid expenses in the accompanying balance sheet as of June 30, 2016.
On March 31, 2016, the Company issued 15,833 shares of common stock at $4.00 per share 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 three and six months ended June 30, 2016, the Company recorded $0 and $63,332 of market research expense and as a result, $0, was included in prepaid expenses in the accompanying balance sheet as of June 30, 2016. In addition, pursuant to the terms of the consulting agreement, the Company was required to make an advance payment of $20,000 which was made during April 2016. In addition the consultant will be paid an additional $30,000 in cash upon completion of the consultant’s services.
On March 31, 2016, the Company issued 7,500 shares of common stock to an employee of the Company at $4.00 per share. During the three and six months ended June 30, 2016, $0 and $30,000 was included in selling and marketing expenses in the accompanying condensed consolidated statements of operations related to this issuance.
On April 6, 2016, $56,250 of proceeds was received from a shareholder who had purchased shares in September 2015 representing the disgorgement of a short swing profit on the shareholder’s September 2015 sale of the Company’s stock. |
Stock Based Compensation |
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock Based Compensation |
NOTE 6 – STOCK BASED COMPENSATION
Stock Options
On May 27, 2015, the Company’s board of directors adopted the 2015 Long-Term Incentive Equity Plan (“2015 Stock Option Plan”). The 2015 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. The total number of shares of common stock reserved under the Plan are 466,667.
On May 27, 2015, as part of their employment agreements but not under the 2015 Stock Option Plan, the Company granted the officers of the Company and Mr. Panza, options to purchase 194,667 shares at an exercise price of $3.75 which are exercisable until May 26, 2020. These options vest on a quarterly basis over the two year period from the date of issuance.
The following table summarizes the stock option activity of the Company:
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 on June 30, 2016.
As of June 30, 2016, there was a total of $548,453 of unrecognized compensation expense related to stock options. The cost is expected to be recognized through 2017 over a weighted average period of 0.90 years.
Stock Warrants
The following table summarizes the stock warrant activity of the Company:
Stock-Based Compensation Expense
The following tables summarize total stock-based compensation costs recognized for the three and six months ended June 30, 2016 and 2015:
The total amount of stock-based compensation was reflected within the statements of operations as:
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Commitments and Contingencies |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies |
NOTE 7 – 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 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 to the motion to dismiss. 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, denying the motion to dismiss with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution seeking to amend its answer to include cross claims against Ascent. The Company’s management and legal counsel believe it is too early to determine the probable outcome of this matter.
On October 3, 2014, an action was filed by Madwell LLC in the Supreme Court of New York entitled Madwell LLC v. Long Island Brand Beverages LLC, Philip Thomas, its Chief Executive Officer, and Paul Vassilakos, Cullen’s former Chief Executive Officer and one of the Company’s directors. Madwell was seeking $940,000, which included $440,000 for breach of contract and payment of services as well as punitive damages of $500,000. On July 31, 2015, the Company entered into a settlement agreement with Madwell. Pursuant to the settlement agreement, the Company agreed to pay Madwell $440,000 in six installments with the last installment due no later than December 31, 2015. In addition, Madwell agreed to discontinue its lawsuit and the parties agreed to mutual releases of liability related to fees for advertising, marketing and design services or any matter relating to the lawsuit. As of the date of this filing, the full amount has been paid to Madwell. In addition, the Company indemnified Mr. Vassilakos for a de minimis amount of expenses incurred by him in connection with this litigation. During January 2016, the Company made the final installment payment of $80,000 in settlement of the matter.
Brokerage Arrangements
The Company maintains arrangements with sales brokers who help with bringing new distributors and retail outlets to the Company. These sales brokers receive a commission for these services. Commissions to these brokers currently range from 2-5% of sales. In addition, the Company sells its products through alternative vending channels. Commissions resulting from sales through these channels are currently 42%.
Employment Agreements
On February 1, 2016, the Company entered into an agreement with an employee. The employee is to be paid a base salary of $120,000 per annum through December 31, 2018. In addition, the employee was awarded 7,500 shares of common stock at the inception of the agreement (See Note 5). In addition, at December 31, 2016, the employee will be paid a bonus between 20% and 40% of the employee’s base salary, with the amount above 20% to be determined at the discretion of the Board of Directors.
On June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial Officer. The agreement has a term of three years, and automatically renews for one year periods thereafter unless either party provides notice of its decision not to renew. Mr. Allen will receive a base salary of $170,000 and an incentive bonus of up to 50% of his base salary at the discretion of the Board of Directors. Furthermore, the Company will grant Mr. Allen 8,333 shares of its common stock on May 31, 2017 and the number of shares of the Company’s common stock having a fair market value equal to $50,000 on each of May 31, 2018 and 2019.
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 amended, the Company will (a) pay to Mr. Davidson $10,000 per month, and (b) grant to Mr. Davidson 1,667 shares of common stock per month. The consulting agreement contains provisions for protection of the Company’s intellectual property and confidentiality and non-competition restrictions for Mr. Davidson (generally imposing restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity). |
Major Customers and Vendors |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Risks and Uncertainties [Abstract] | |
| Major Customers and Vendors |
NOTE 8 – MAJOR CUSTOMERS AND VENDORS
For the three months ended June 30, 2016, two customers accounted for 15% and 12% of net sales. For the three months ended June 30, 2015, two customer accounted for 11% and 10% of net sales, respectively.
For the six months ended June 30, 2016, one customer accounted for 12% of net sales. For the six months ended June 30, 2015, no customers accounted for more than 10% of net sales.
For the three months ended June 30, 2016 and June 30, 2015, the largest vendors represented approximately 68% (four vendors) and 86% (four vendors) of purchases, respectively. For the six months ended June 30, 2016 and June 30, 2015, the largest vendors represented approximately 70% (four vendors) and 69% (four vendors) of purchases, respectively. As of June 30, 2016 two suppliers accounted for 20% and 10% of accounts payable, respectively. |
Related Parties |
6 Months Ended |
|---|---|
Jun. 30, 2016 | |
| Related Party Transactions [Abstract] | |
| Related Parties |
NOTE 9 - RELATED PARTIES
During the year ended December 31, 2015, the Company entered into the Credit Agreement with the Lender, a related party (see Note 4).
The Company recorded revenue related to sales to two entities, whose owners became employees of the Company during 2014. For the three months ended June 30, 2016 and 2015, sales to these related parties were $150 and $23,236, respectively and $114 and $31,195, respectively for the six months ended June 30, 2016 and 2015. As of June 30, 2016, accounts receivable from these customers were $9,573. As of December 31, 2015, accounts receivable from these customers were $15,513.
The Company recorded revenue related to sales to an entity, CFG Distributors LLC, whose owner became an employee of the Company during 2015. For the three months ended June 30, 2016 and June 30, 2015, sales to this related party were $33 and $216, respectively. For the six months ended June 30, 2016 and June 30, 2015, sales to this related party were $438 and $10,974, respectively. As of June 30, 2016, the amount due from this customer was $47,681. As of December 31, 2015, accounts receivable from this customer were $51,961, which was included in accounts receivable.
In addition, the Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, CEO, stockholder, and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the three months ended June 30, 2016 and 2015, sales to this related party were $1,479 and $1,363, respectively. For the six months ended June 30, 2016 and 2015, sales to this related party were $2,637 and $2,861, respectively. As of June 30, 2016 and December 31, 2015, there was $1,331 and $518, respectively, due from this related party which was included in accounts receivable in the condensed consolidated balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the three and six months ended June 30, 2016, the Company purchased $9,255 and $17,514, respectively, of product from this vendor. As of June 30, 2016, the outstanding balance due to this entity included in accounts payable was $1,197. As of December 31, 2015, the outstanding balance due to this entity included in accounts payable was $3,242.
During the three and six months ended June 30, 2016, the Company accrued $90,000 and $155,000, respectively, in expenses related to fees payable to the Company’s Board of Directors which were included in general and administrative expenses in the condensed consolidated statements of operations. The non-employee members of the Board of Directors will receive $35,000 worth of stock for their services and $30,000 in cash for their services through 2016.
A stockholder and a company owned by member of the Board of Directors of the Company has paid certain expenses on behalf of the Company. As of June 30, 2016, the accounts payable and accrued expenses due to these parties were $296,023. As of December 31, 2015 accounts payable and accrued expenses to these parties were $87,258. |
Summary of Significant Accounting Policies (Policies) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation |
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, 2016 are not necessarily indicative of the result that may be expected for the year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes thereto included in the Company’s Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 22, 2016. |
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| Principles of Consolidation |
Principles of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated. |
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| Use of Estimates |
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 inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary. |
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| Revenue Recognition |
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. |
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| Customer Marketing Programs and Sales Incentives |
Customer Marketing Programs and Sales Incentives
The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for various discounts to the end retailers or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace.
In addition, during the three and six months ended June 30, 2016, the Company issued shares of common stock in the amounts of 0 and 3,400, respectively, at a fair value of $4.00 per share, to customers and the owners of customers. Included in the costs of these programs were costs associated with the fair value of shares issued, which totaled $0 and $18,338 for the three months June 30, 2016 and 2015, respectively and $45,165 and $28,698 for the six months ended June 30, 2016 and 2015, respectively.
Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In some cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the store of the customer. The Placement Fees are recorded as a reduction of revenue. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative revenue with that particular customer, such negative revenue is reclassified and recorded as a part of selling and marketing expense. For the three and six months ended June 30, 2016, the Company recorded $11,087 and $11,087, respectively, of Placement Fees to selling and marketing expense. No such Placement Fees were recorded in selling and marketing expense for the three and six months ended June 30, 2015. |
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| Shipping and Handling Costs |
Shipping and Handling Costs
Shipping and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are included in selling and marketing expenses on the condensed consolidated statements of operations and totaled $161,518 and $33,136 for the three months ended June 30, 2016 and 2015, respectively and $201,670 and $44,250 for the six months ended June 30, 2016 and 2015, respectively. |
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| Advertising |
Advertising
The Company expenses advertising costs as incurred. Advertising expense totaled $20,916 and $116,840, respectively for the three months ended June 30, 2016 and 2015 and $30,547 and $126,493, respectively for the six months ended June 30, 2016 and 2015. |
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| Research and Development |
Research and Development
The Company expenses the costs of research and development as incurred. For the three and six months ended June 30, 2016, research and development expense related to new product initiatives were $0 and $46,667, respectively. These expenses were incurred pursuant to a product development agreement, which will require the Company to pay $40,000 in cash and $40,000 in common stock upon the completion of the arrangement. There were no research and development expenses incurred during the three and six months ended June 30, 2015. Research and development expenses are included within general and administrative expenses within the condensed consolidated statement of operations. As of June 30, 2016, $50,000 was included in accrued expenses in the condensed consolidated balance sheet related to this arrangement. |
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| Operating Leases |
Operating Leases
The Company records rent related to its operating leases on a straight line basis over the lease term. |
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| Cash and Cash Equivalents |
Cash and cash equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents. |
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| Restricted Cash |
Restricted cash
Pursuant to the terms of the Credit Agreement with Lender, the Company is required to utilize $150,000 of the $1,000,000 proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Company’s cash on hand was restricted for the use in the development of the alcohol business. On March 17, 2016, the LIBB entered into an agreement with Lender whereby such restriction was lifted. |
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| Accounts Receivable |
Accounts Receivable
The Company sells products to distributors and in certain cases directly to retailers, and extends credit, generally without requiring collateral, based on its evaluation of the customer’s financial condition. While the Company has a concentration of credit risk in the retail sector, it believes this risk is mitigated due to the diverse nature of the customers it serves, including, but not limited to, its type, geographic location, size, and beverage channel. Potential losses on the Company’s receivables are dependent on each individual customer’s financial condition and sales adjustments granted after the balance sheet date. The Company carries its trade accounts receivable at net realizable value. Typically, accounts receivable have terms of net 30 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the Company’s efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
Accounts receivable, net, is as follows:
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| Concentrations of Credit Risk |
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 Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The Company has not experienced any loss as a result of these deposits. These cash balances are maintained with one bank. As of June 30, 2016, three customers accounted for 16%, 12% and 11% of the Company’s trade receivables, respectively. As of December 31, 2015, two customers accounted for 14% and 30% of the Company’s trade receivables. The Company does not generally require collateral or other security to support customer receivables. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required. |
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| Inventories |
Inventories
The Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists primarily of bottled iced tea.
The Company values its inventories at the lower of cost or net realizable value, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. During the three months ended June 30, 2016 and 2015, the Company recorded charges of $107,062 and $0, respectively, and during the six months ended June 30, 2016 and 2015, the Company recorded charges of $121,412 and $0, respectively, to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the dates presented:
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| Property and Equipment |
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, 2016 and 2015, depreciation expense was $39,004 and $25,116, respectively. For the six months ended June 30, 2016 and 2015, depreciation expense was $77,698 and $49,535, respectively. |
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| Intangible Assets |
Intangible Assets
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or when circumstances indicate that there could be an impairment. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Intangibles assets with indefinite useful lives consist of the cost to purchase an internet domain name for $20,000. The domain name is considered to have a perpetual life and as such, is not amortized. Insignificant costs incurred associated with renewing this asset are expensed as incurred.
Intangible assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include website development costs of $4,992 and $7,494 as of June 30, 2016 and December 31, 2015, respectively. The estimated useful life of the capitalized costs of the Company’s website is 3 years and is depreciated on a straight line basis. As of June 30, 2016, the cost of the website development was $15,000 and the accumulated amortization was $10,008. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. Amortization expense was $1,251 and $1,251 for the three months ended 2016 and 2015, respectively and $2,502 and $2,502 for the six months ended 2016 and 2015, respectively. |
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| Deferred Offering Costs |
Deferred Offering Costs
The Company capitalizes the costs related to proposed offerings of its equity instruments as deferred offering costs and records the deferred offering costs as an offset to additional paid in capital upon the completion of the associated capital raising activity. |
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| Income Taxes |
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. |
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| Earnings Per Share |
Earnings per share
Basic net earnings 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 exercise of stock options and warrants. The computation of diluted earnings per share excludes those dilutive securities 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 in periods where the exercise of such options would be antidilutive.
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
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| Fair Value of Financial Instruments |
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accrued expenses and notes payable 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. |
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| Seasonality |
Seasonality
The Company’s business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales. |
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| Recent Accounting Pronouncements |
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 of adopting this standard.
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 of the new guidance on the condensed consolidated financial statements.
On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. This update requires that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income tax expense or benefit on the income statement. The amendment also states that excess tax benefits should be classified along with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606)”, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements.
In May 2016, the FASB issued Accounting Standards Update ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its financial statements. |
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| Management's Evaluation of Subsequent Events |
Management’s Evaluation of Subsequent Events
The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the review, other than as described in Note 1, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements. |
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Summary of Significant Accounting Policies (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Accounts Receivable |
Accounts receivable, net, is as follows:
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| Schedule of Inventory |
The following table summarizes inventories as of the dates presented:
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| Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share |
Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.
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Stock Based Compensation (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of Stock Options, Activity |
The following table summarizes the stock option activity of the Company:
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| Schedule of Warrant Activity |
The following table summarizes the stock warrant activity of the Company:
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| Schedule of Stock Based Compensation Expense |
The following tables summarize total stock-based compensation costs recognized for the three and six months ended June 30, 2016 and 2015:
The total amount of stock-based compensation was reflected within the statements of operations as:
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Summary of Significant Accounting Policies - Schedule of Accounts Receivable (Details) - USD ($) |
Jun. 30, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Accounting Policies [Abstract] | ||
| Accounts receivable, gross | $ 1,217,787 | $ 405,096 |
| Allowance for doubtful accounts | (60,000) | (42,000) |
| Accounts receivable, net | $ 1,157,787 | $ 363,096 |
Summary of Significant Accounting Policies - Schedule of Inventory (Details) - USD ($) |
Jun. 30, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Accounting Policies [Abstract] | ||
| Finished goods | $ 450,514 | $ 565,624 |
| Raw materials and supplies | 188,516 | 146,934 |
| Total inventories | $ 639,030 | $ 712,558 |
Summary of Significant Accounting Policies - Schedule of Computation of Anti-Dilutive Earnings Per Share (Details) - shares |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
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| Total potentially dilutive securities | 2,166,798 | 194,667 | 2,089,309 | 194,667 |
| Options To Purchase Common Stock [Member] | ||||
| Total potentially dilutive securities | 194,667 | 194,667 | 194,667 | 194,667 |
| Warrants To Purchase Common Stock [Member] | ||||
| Total potentially dilutive securities | 1,550,159 | 1,550,159 | ||
| Shares Issuable Upon Conversion of Convertible Debt [Member] | ||||
| Total potentially dilutive securities | 421,972 | 344,483 | ||
Equipment Loan (Details) - USD ($) |
Nov. 23, 2015 |
Jun. 30, 2016 |
Dec. 31, 2015 |
|---|---|---|---|
| Short-term Debt [Line Items] | |||
| Debt instrument, face amount | $ 117,917 | ||
| Debt instrument, periodic payment, total | $ 3,819 | ||
| Debt instrument, interest rate during period | 10.00% | ||
| Equipment Loan [Member] | |||
| Short-term Debt [Line Items] | |||
| Loans payable, total | $ 95,024 | $ 113,104 |
Stock Based Compensation - Schedule of Warrant Activity (Details) - Warrant [Member] |
6 Months Ended |
|---|---|
|
Jun. 30, 2016
$ / shares
shares
| |
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |
| Number of shares, Outstanding beginning balance | shares | 1,285,111 |
| Number of shares, Issued | shares | 265,048 |
| Number of shares, Expired | shares | |
| Number of shares, Forfeited | shares | |
| Number of shares, Outstanding ending balance | shares | 1,550,159 |
| Weighted Average Exercise Price, Outstanding beginning balance | $ / shares | $ 4.7 |
| Weighted Average Exercise Price, Issued | $ / shares | 5.8 |
| Weighted Average Exercise Price, Expired | $ / shares | |
| Weighted Average Exercise Price, Forfeited | $ / shares | |
| Weighted Average Exercise Price, Outstanding ending balance | $ / shares | $ 4.89 |
| Weighted Average Remaining Contractual Term (Years) | 2 years 5 months 9 days |
Stock Based Compensation - Schedule of Stock Based Compensation Expense (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
|
| Share-based compensation | $ 151,352 | $ 56,595 | $ 332,706 | $ 56,595 |
| General and Administrative [Member] | ||||
| Share-based compensation | 105,739 | 39,539 | 211,479 | 39,539 |
| Sales and Marketing [Member] | ||||
| Share-based compensation | 45,613 | 17,056 | 121,227 | 17,056 |
| Stock Options [Member] | ||||
| Share-based compensation | 151,352 | 56,595 | 302,706 | 56,595 |
| Warrant [Member] | ||||
| Share-based compensation | $ 30,000 | |||
Major Customers and Vendors (Details Narrative) |
3 Months Ended | 6 Months Ended | ||
|---|---|---|---|---|
Jun. 30, 2016 |
Jun. 30, 2015 |
Jun. 30, 2016 |
Jun. 30, 2015 |
|
| Supplier One [Member] | Accounts Payable [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 20.00% | |||
| Supplier Two [Member] | Accounts Payable [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 10.00% | |||
| Customer One [Member] | Sales Revenue, Net [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 15.00% | 11.00% | 12.00% | |
| Customer Two [Member] | Sales Revenue, Net [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 12.00% | 10.00% | ||
| No Customers [Member] | Sales Revenue, Net [Member] | Maximum [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 10.00% | |||
| Four Vendors [Member] | Cost of Goods, Total [Member] | ||||
| Concentration Risk [Line Items] | ||||
| Concentration Risk, Percentage | 68.00% | 86.00% | 70.00% | 69.00% |