10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

(Mark One)

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 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 000-37808

 

LONG ISLAND ICED TEA CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   47-2624098
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)

 

116 Charlotte Avenue, Hicksville, New York   11801
(Address of Principal Executive Offices)   (Zip Code)

 

(855) 542-2832

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common stock, Par Value $0.0001 Per Share   The NASDAQ Stock Market LLC

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.

Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement 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 if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

[  ]

 

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company)  

 

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 June 30, 2016 (the Registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of common stock held by non-affiliates was approximately $13,425,565 (based on a closing price of $7.78 per share).

 

As of March 30, 2017, there were 8,393,066 shares of common stock, $.0001 par value per share, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

 

 

  

 

 

LONG ISLAND ICED TEA CORP.

FORM 10-K

TABLE OF CONTENTS

 

PART I  
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 13
ITEM 1B. UNRESOLVED STAFF COMMENTS 22
ITEM 2. PROPERTY 22
ITEM 3. LEGAL PROCEEDINGS 22
ITEM 4. MINE SAFETY DISCLOSURES 22
PART II  
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 22
ITEM 6. SELECTED FINANCIAL DATA 23
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 33
ITEM 9a. CONTROL AND PROCEDURES 33
ITEM 9B. OTHER INFORMATION 34
PART III  
ITEM 10. DIRECTORS, EXECUTIVE OFFICES AND CORPORATE GOVERNANCE 34
ITEM 11. EXECUTIVE COMPENSATION 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS 49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR INDEPENDENCE 51
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 55
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 55
SIGNATURES 59

 

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 Unless otherwise stated, as used herein, the terms the “Company” and “LIIT” and references to “we ,” “us” and “our” refer collectively to Long Island Iced Tea Corp. and its wholly-owned subsidiaries, Long Island Brand Beverages LLC (“LIBB”) and Cullen Agricultural Holding Corp. (“Cullen”).

 

This Annual Report on Form 10-K (“Form 10-K“) contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Many of the forward-looking statements are located in Item 7 of Part II of this Form 10-K under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements provide current expectations of future events based on certain assumptions and are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A of Part I of this Form 10-K under the heading “Risk Factors.” The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended December 31st and the associated quarters, months and periods of those fiscal years.

 

PART I

 

ITEM 1. BUSINESS.

 

Overview

 

We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium Non-Alcoholic Ready-to-Drink (“NARTD”) beverages. We are currently organized around our flagship iced tea product, under the brand Long Island Iced Tea®. The Long Island Iced Tea name for a cocktail originated in Long Island in the 1970’s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe and with quality components. Long Island Iced Tea ® is sold in 27 states across the U.S., primarily on the East Coast, through a network of national and regional retail chains and distributors.

 

Since February 2016, we have been engaged in the aloe juice business, under the brand ALO Juice. ALO Juice is a NARTD functional beverage made from juice derived from the aloe plant known as aloe vera. ALO Juice sources its aloe plants from harvests in Thailand. The plants are exported from there to South Korea where they are processed in a unique whole leaf manner to ensure the nutritional and health benefits are maintained from the plant all the way through to the bottling process.

 

On March 14, 2017, we announced the expansion of our brand with the launch of The Original Long Island Brand™ Lemonade. This lemonade is a NARTD functional beverage made from a proprietary recipe with quality components.

 

Our mission is to provide consumers with “better-for-you” premium beverages offered at an affordable price.

 

We aspire to be a market leader in the development of beverages that are convenient and appealing to consumers. There are two major target markets for our beverages: consumers on the go and health conscious consumers. Consumers on the go are families, employees, students and other consumers who lead a busy lifestyle. With increasingly hectic and demanding schedules, there is a need for products that are accessible and readily available. Health conscious consumers are individuals who are becoming more interested and better educated on what is included in their diets, causing them to shift away from options perceived as less healthy such as carbonated soft drinks (“CSDs”) towards alternative beverages such as iced tea.

 

We continually seek to expand our product line. We are exploring entry into the $222 billion U.S. alcohol industry, with the hope to establish ourselves as a multi-product alcoholic and non-alcoholic beverage company.

 

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We also continually seek to better develop emerging markets, as well as expand our overall geographic footprint. We entered into new business arrangements involving international specialists contracted to (i) identify new market opportunities and (ii) assist in the overall management of our international expansion efforts. During 2016, the Company announced new distributorships in Columbia, Honduras, Dominican Republic, St Martin and Bermuda. We also worked alongside new distributor partnerships in Puerto Rico, Canada and South Korea to further expand distribution points throughout their respective markets. New developments included (i) new retail partnerships opened with supermarket chains such as Pueblos and Supermax in Puerto Rico, (ii) our first shipment to Canada in November 2016, and (iii) multiple reorders received from the South Korean distributor.

 

Corporate History

 

We were incorporated on December 23, 2014 in the State of Delaware as a wholly owned subsidiary of Cullen.

 

On May 27, 2015, we closed the business combination (the “Business Combination”) contemplated by the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of December 31, 2014 and amended as of April 23, 2015, by and among Cullen, us, Cullen Merger Sub, Inc., LIBB Acquisition Sub, LLC, LIBB, Philip Thomas and Thomas Panza, who formerly owned a majority of the outstanding membership units of LIBB, and the other former members of LIBB executing a joinder thereto. Pursuant to the Merger Agreement, (i) Cullen Merger Sub, Inc. merged with and into Cullen, with Cullen surviving as a wholly owned subsidiary of ours and the stockholders of Cullen receiving one share of our common stock for every 15 shares of Cullen common stock held by them and (ii) LIBB Acquisition Sub, LLC merged with and into LIBB, with LIBB surviving as a wholly owned subsidiary of ours and the members of LIBB receiving an aggregate of 2,633,334 shares of our common stock.

 

Upon the closing of the Business Combination, we became the new public company, Cullen and LIBB became wholly-owned subsidiaries of ours and the stockholders of Cullen and the members of LIBB became our stockholders. In addition, the historical financial statements of LIBB became our financial statements. As a result of the Business Combination, the business of LIBB became our business. Cullen is currently inactive and no significant operations are being undertaken by it. LIBB was formed as a limited liability company under the laws of New York on February 18, 2011.

 

Our principal executive offices are located at 116 Charlotte Avenue, Hicksville, NY 11801. Our telephone number is (855) 542-2832. Our website address is www.longislandicedtea.com . The information contained on, or accessible from, our corporate website is not part of this annual report and you should not consider information contained on our website to be a part of this Form 10-K.

 

Recent Developments

 

ALO Juice

 

During 2016, we began selling ALO Juice. The aloe juice product is purchased in its finished form from a third party supplier. On December 8, 2016, in order to bolster our aloe juice business and further meet growing consumer demand for “better-for-you” beverages, the Company entered into an agreement to purchase the intellectual property related to this product, including trade names, formulas and recipes, from the owners of the ALO Juice® brand. Consideration upon the closing of the transaction will consist of 5,000 shares of our common stock. We expect to close this transaction by early Spring 2017.

 

Separately, we entered into an employment agreement with Julio X Ponce, majority interest member of the ALO Juice® brand owner. Mr. Ponce was hired at an annual salary of $90,000 to advance the sales of ALO Juice to the Southeast and Latin American regions effective January 1, 2017.

 

Lemonade

 

On March 14, 2017, we announced that we are expanding our brand to include lemonade. The Original Long Island Brand™ Lemonade range consists of 9 real-fruit flavors, and is available in both single 18oz bottles and 12-packs. This premium lemonade is intended to be differentiated from other lemonade beverages in the US market. It is made with 100% raw cane sugar and non-GMO ingredients that incorporate the “better-for-you” attributes that are prominent within our iced tea brand, and will complement Long Island Iced Tea®. We expect that this product will be available in select markets in early Spring 2017. It’s our objective to grow market share and offer this product alongside our iced tea products.

 

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January 2017 Offering

 

On January 30, 2017, we consummated the public offering (the “January 2017 Offering”) of an aggregate of 376,340 shares of our common stock, through Alexander Capital, L.P., as placement agent, pursuant to the terms of a selling agent agreement, dated January 25, 2017, with the placement agent and subscription agreements with each of the investors in the offering. Of the aggregate number of shares sold, 300,000 shares were sold to the public at a price of $4.00 per share and 76,340 of the shares were sold to our officers and directors at a price of $4.10 per share, the most recent closing bid price of the common stock at the time the officers and directors executed their subscription agreements. The offering generated total net proceeds, after payment of the placement agent fees and other offering expenses, of approximately $1.4 million.

 

The offering was made pursuant to our existing shelf registration statement on Form S-3 (File No. 333-213874), which was filed with the Securities and Exchange Commission (“SEC”) on September 30, 2016 and declared effective by the SEC on October 14, 2016, and is described in more detail in a prospectus supplement dated January 27, 2017 and the accompanying base prospectus dated October 14, 2016.

 

December 2016 Offering

 

On December 27, 2016, we consummated an underwritten public offering (the “December 2016 Offering”) of 406,550 shares of our common stock, through Network 1 Financial Securities, Inc. (the “Network 1”) and Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016, with Network 1, as representative of the underwriters. The Shares were sold for a price to the public of $4.00 per share. The offering generated total net proceeds, after underwriting discounts and payment of other offering expenses, of approximately $1.4 million.

 

The offering was made pursuant to our existing shelf registration statement on Form S-3 (File No. 333-213874), which was filed with the SEC on September 30, 2016 and declared effective by the SEC on October 14, 2016, and is described in more detail in a prospectus supplement dated December 21, 2016 and the accompanying base prospectus dated October 14, 2016.

 

July 2016 Offering and Recapitalization

 

On July 28 and 29, 2016, we sold an aggregate of 1,270,156 shares of our common stock in a public offering (the “July 2016 Offering”) at an offering price of $5.50 per share, pursuant to our registration statement on Form S-1 (File No. 333-210669). The sale generated gross proceeds of $6,985,858 and net proceeds of $5,867,217 after deducting commissions and other offering expenses. In connection with sale of the shares, our common stock was approved for listing on the Capital Market of The NASDAQ Stock Market LLC (“Nasdaq”).

 

Network 1 Financial Services, Inc. (“Network 1”) acted as selling agent for the July 2016 Offering, on a “best efforts” basis, pursuant to a selling agent agreement dated July 15, 2016. Alexander Capital acted as a selected dealer for the selling agent. The shares were sold in the July 2016 Offering pursuant to a subscription agreement between us and each investor in the offering.

 

As part of Network 1’s compensation for the sale of the shares in the July 2016 Offering, we issued to Network 1 and its designees warrants to purchase an aggregate of 31,522 shares of our common stock. The warrants are exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, expiring on July 14, 2021. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split or our recapitalization, reorganization, merger or consolidation.

 

In connection with the sale of the shares in the July 2016 Offering, we completed a recapitalization (the “Recapitalization”) with Brentwood LIIT (NZ) Ltd., as successor in interest to Brentwood LIIT Inc. (“Brentwood”). Brentwood is our lender under the certain Credit and Security Agreement (the “Credit Agreement”), dated as of November 23, 2015 and amended as of January 10, 2016 and April 8, 2016, by and among us, LIBB and Brentwood. 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 “Brentwood Note”), which is convertible into shares of our common stock at a conversion price of $4.00 per share. In addition, in connection with the establishment of the Credit Facility, we issued to Brentwood a warrant (the “Brentwood Warrant”) to purchase 1,111,111 shares of our common stock, at an exercise price of $4.50 per share, expiring on November 23, 2018. Pursuant to the Recapitalization, all of the outstanding principal and interest under the Brentwood Note was converted into 421,972 shares of our common stock and the Brentwood Warrant was exchanged for 486,111 shares of our common stock. We may continue to request advances under the Credit Facility subject to the terms and conditions of the Credit Agreement, except that, in connection with the Recapitalization, the maximum amount (the “Facility Amount”) of loans that may be made under the Credit Facility was reduced to $3,500,000. Brentwood is owned by Eric Watson, who as of March 30, 2017, beneficially owned approximately 17.3% of our outstanding Common Stock, and KA#2 Ltd., who as of March 30, 2017, beneficially owned approximately 4.1% of our outstanding Common Stock.

 

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UBS Credit Line

 

On October 27, 2016, the Company entered into a fully collateralized credit line (the “UBS Credit Line”) with UBS Bank USA (“UBS”). The UBS Credit Line has a borrowing capacity of $1,300,000 and bears interest at a floating rate, depending on the time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of December 31, 2016, the interest rate on the UBS Credit Line was 3.272%. The UBS Credit Line was collateralized by certain of the Company’s short-term investments. As of December 31, 2016, $1,280,275 was outstanding on the UBS Credit Line. The Company paid off the UBS Credit Line in full on January 18, 2017.

 

Industry Opportunity

 

Non-Alcoholic Beverage Market

 

Iced Tea

 

Globally, NARTD tea products are ranked as the 4th largest beverage category, behind carbonated soft drinks, water and dairy. The non-alcohol iced tea global category size is estimated at $55 billion and growing at a 6.6% compound annual growth rate (“CAGR”). (Source: Euromonitor International, “Versatility of RTD Tea Generates Bright Spot in Global Soft Drinks”, May 2014.

 

The U.S. non-alcoholic liquid refreshment beverage market consists of a number of different products, and CSDs are the top selling beverage category. However, consumers are increasingly coming to view CSDs (typically caffeinated as well as high in sugar and preservatives) with disfavor. In volume, the CSD category declined 0.6% in 2016, 1.5% in 2015, 1.6% in 2014, 2.3% in 2013 and 1.5% in 2012. (Sources: Euromonitor International, “Carbonates in the US”, February 2017).

 

CSDs have historically dominated the non-alcoholic liquid refreshment beverage market and been primarily controlled by two industry giants, Coca-Cola and PepsiCo. However, a number of beverages began to emerge in the 1990s as alternatives to CSDs as part of a societal shift towards beverages that are perceived to be healthier. The alternative beverage category of the market has resulted in the birth of multiple new product segments that include sports drinks, energy drinks and NARTD teas.

 

According to a 2017 Euromonitor International industry report, the U.S. NARTD tea segment was expected to have $7.1 billion of revenue in 2016, a 7.9% increase from the prior year and an 8.3% annualized growth rate over the last 5 years (2011 – 2016) (Source: Euromonitor International , “RTD Tea in the US”, February 2017). The industry report also forecasted an annual revenue growth rate of 5.3% over the coming five years, with revenues reaching $9.2 billion in 2021.

 

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In 2014, consumers showed special interest in healthier versions of NARTD teas, preferring unsweetened teas.

 

Leading Flavors 2016 ($7.1bn)

 

Regular and Unsweetened Tea   40.7%
Fruit-Flavored Tea   24.4%
Sweetened Tea   19.0%
White Tea   9.3%
Other Tea   4.9%
Rooibos Tea   1.7%

 

(Source: Euromonitor International, “RTD Tea in the US”, February 2017).

 

Lemonade

 

According to IBISWorld, lemonade comprises 8.2% of the $12.0 billion juice market in 2016. Lemonade sales totaled 451 million liters in 2015.

 

(Source: IBISWorld Industry Report 31211c, “Juice Production in the US”, January 2017).

 

ALO Juice

 

The global aloe vera-based drinks market is an expanding category, expected to grow at a CAGR of close to 10% during the forecast period for 2016 through 2020, according to a Technavio report dated November 2016. The Americas is expected to grow at an 11.24% CAGR over the same period. (Source: Technavio Market Research Report, “Aloe Vera-Based Drinks Market”, November 2016)

 

Potential Expansion into Alcoholic Beverage Market

 

We have begun exploring the development, production, marketing and distribution of alcoholic beverages, to augment our current NARTD tea business. In June 2015, we engaged Julian Davidson, who has many years of experience in the alcohol industry, as a consultant to help evaluate the opportunity, as well as to assist in our core NARTD tea business. In June 2016, Mr. Davidson became our Executive Chairman.

 

The alcohol beverage market consists of beer, cider/perry, ready-to-drink/high-strength premixes, spirits and wine. The total sales of U.S. alcohol beverage market reached $222 billion in 2015, growing at a 1.1% CAGR from 2010 to 2015. Of that $222 billion, 47.1% was from beer, 0.8% from cider/perry, 2.1% from Alcoholic Ready-to-Drink (“ARTD”) beverages/high-strength premixes, 30.9% from spirits and 19.1% from wine. (Source: Euromonitor, “Alcoholic Drinks in the US”, June 2016).

 

Our Products and Services

 

Long Island Iced Tea® was first launched in the New York metro market by LIBB in July 2011, positioning itself as a premium iced tea beverage offered at an affordable price. We help differentiate ourselves from competitors with a proprietary recipe and quality components. Long Island Iced Tea® is a 100% brewed tea, using black tea leaves and purified water via reverse osmosis. It is gluten-free, free of genetically modified organisms, or “GMOs,” and certified Kosher with no artificial colors or preservatives.

 

Long Island Iced Tea® is primarily produced and bottled in the U.S. Northeast. This production in the Northeast, combined with its “Made in America” tag-line and brand name, all improve its credentials as a part of the local community from which we take our name.

 

We have developed ten flavors of Long Island Iced Tea® in an effort to ensure that our products meet the desired taste preferences of consumers. Regular flavors, which use natural cane sugar as a sweetener, include lemon, peach, raspberry, green tea & honey, half tea & half lemonade, guava, mango, and sweet tea. Diet flavors, which use sucralose (generic Splenda) instead of natural cane sugar as a sweetener, include diet lemon and diet peach. These flavors are currently available in twelve packs of 20oz polyethylene terephthalate bottles.

 

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We have unveiled a new 18oz bottle and label design for our flagship Long Island Iced Tea® Brand, which will replace our 20oz size. The sleeker and slimmer 18oz design accentuates an authentic and fresh spirit of Long Island Iced Tea® products, which we believe will have a positive impact on our product gross margins. The bold and cleanly designed label aligns with our core brand image, clearly emphasizing the brand’s premium ingredients and better-for-you positioning. Both the label and customized bottle cap include informative health cues that include “non-GMO,” “100% raw cane sugar,” “no additives,” and “low calories” for diet flavors. The new bottles are expected to reach retail stores in early 2017. Any reference to 20oz size is intended to include both 18oz and 20oz packaging within this annual report.

 

We have also recently developed three twenty-four pack of sixty calorie flavors that are served in 12oz bottles. The sixty calorie flavors have reduced sugar content, are caffeine free and include mango, peach, and raspberry. This package was designed to meet certain nutritional guidelines for sales in schools. During May 2015, we launched four flavors, lemon, peach, mango, and green tea and honey, in gallon containers. During February 2016, we also launched sweet tea, which is also served in a gallon container. In addition, during April 2016, we launched a private label line, consisting of four flavors, for one of our existing customers.

 

We have also recently developed The Original Long Island Brand™ Lemonade, which comes in nine real-fruit flavors, and is available in both single 18oz bottles and 12-packs that will be sold in the same locations that our iced tea is offered in early 2017.

 

ALO Juice has been distributed in New York City since 2008, and in Florida since 2012. We commenced distribution of ALO Juice in February 2016. It is packed in 0.5 liter and 1.5 liter bottles, with a wide variety of flavors including Original, Mango, Pomegranate, Pineapple and Raspberry. Aloe vera juice contains nutrients which include vitamins A, C, E, and B12, as well as minerals like potassium, zinc, and magnesium. It also provides antioxidants, helps to balance metabolism, and supports normal circulation and blood pressure.

 

Our Competitive Strengths

 

We believe that a differentiated brand will be a key competitive strength in the NARTD tea segment. Key points of differentiation for Long Island Iced Tea® and Long Island Brand™ Lemonade include:

 

  A better and bolder tasting bottled iced tea as a result of premium ingredients that include natural cane sugar (sucralose for diet flavors), hot-filled using black and green tea leaves, that is offered at an affordable price;
     
  Immediate global recognition of the “Long Island Iced Tea” phrase associated with the cocktail;
     
  Made in America;
     
  Strong Northeast roots where it is locally produced;
     
  The use of non-GMO ingredients; and
     
  Our product being corn free, hormone/antibiotic free, gluten free, natural and having no artificial color/flavor.

 

The NARTD tea market is a crowded space and, as a result, we believe in pricing our products competitively. We highlight to consumers our use of premium ingredients and our affordable price. The suggested retail price for a 20oz. bottle of Long Island Iced Tea® is $1.00 to $1.50, and the suggested retail price for a 12oz. bottle is $1.00 to $1.25. The suggested retail price for our gallon containers is $2.99 to $3.49. The suggested retail price of The Original Long Island Brand™ Lemonade is $1.25 to $1.79 per 18oz bottle. ALO Juice® has a suggested retail price of $1.49 to $1.79 for the 500 ml bottle and $2.39 to $2.79 for the 1.5 liter bottle. Management has set pricing levels to reflect current pricing dynamics in the industry. There has been downward pressure on prices, which management believes is caused by the entrance of major multinational beverage corporations into the alternative beverage category. This is starting to lead towards industry consolidation, in what is currently considered a somewhat fragmented marketplace.

 

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Our Business Strategies

 

In addition to a potential expansion into alcoholic beverages, we are seeking to organically grow our NARTD tea and related product sales, capitalizing on an iconic name with unique brand awareness to create familiar and easily recognizable beverages.

 

We intend to increase our market share in our existing geographic markets and expand into additional geographic markets in the U.S. We also are exploring international markets on a highly selective and limited basis, which may include royalty and licensing agreements. As discussed below in ” Our Customers ,” we generally focus our sales efforts on approaching beverage distributors and taking advantage of their unique positioning in the retail industry. However, a portion of our sales efforts are also dedicated to direct sales to retailers, because some wholesale chains such as Sam’s Club and Costco request direct shipments from the product supplier. In addition, we are exploring several new sales channels. We currently are conducting a small scale business trial in which we sell our beverage product alongside other snacks in vending machines. We also commenced selling our twelve ounce lower calorie products in schools, in some cases through sales to purchasing cooperatives that represent multiple school districts, but also via the vending machine business trial.

 

During the quarter ended December 31, 2015, we determined the brand had sufficient scale, distribution and volume per point of distribution to test market expansion into (i) additional U.S. states, (ii) significant new regional chains, and (iii) national chains. To facilitate this expansion, we recruited Joseph Caramele, our Vice President of National Sales & Marketing. Mr. Caramele had spent the previous nine years working in national and chain account sales for Arizona Beverages USA, at which time he oversaw the regional and national chain account expansion. In 2016, Mr. Caramele’s responsibilities included building sales and distribution footprint throughout the Southeast, Midwest and eventually across the entire country. Additionally, Mr. Caramele is responsible for extending our sales outreach by developing broker relationships with companies such as SellEthics Marketing Inc. and JOH. These brokers were contracted to assist in the execution of company marketing plans (primarily at store level) and utilize networks to accelerate national expansion efforts.

 

As part of our marketing efforts, we commonly use store demos, as we have found a positive correlation between demos and sales especially at the introduction phase in new stores. We expect to continue using store demos in order to increase brand awareness and sales as we continue to expand into new markets. We also use co-op advertising (advertisements by retailers that include the specific mention of manufacturers, who, in turn, repay the retailers for all or part of the cost of the advertisement) and special promotions, together with its retail partners, so as to complement other marketing efforts towards brand awareness.

 

We also seek to expand our product line. From time to time, we explore and test market potential of new NARTD products that may, in the future, contribute to our operating performance. We expect that the introduction of The Original Long Island Brand™ Lemonade, with nine different flavors, will be able to attract a new market segment of beverage drinkers. We expect that our ALO Juice brand product will sit alongside our flagship Long Island Brand tea. We are committed to building the ALO Juice brand and expanding its distribution. To accomplish our long-term growth strategy for this brand, we entered into an agreement to acquire the intellectual property related to this product. We expect to close this agreement by April 2017. We also may consider exploring our strategic acquisitions from time to time, although this is not a primary business focus.

 

Manufacturing and Raw Materials

 

Long Island Iced Tea® and Long Island Brand™ Lemonade are currently produced by Brooklyn Bottling Group, Wayne County Foods, Inc., Polar Corp., and LiDestri Spirits, all of which are established co-packing companies with reputable quality control. We intend to identify additional co-packers in the U.S. and other countries to support the continued growth of the brand. ALO Juice is purchased as a finished product from a third party supplier in South Korea.

 

The principal raw materials we use in our iced tea and lemonade business are bottles, caps, labels, packaging materials, tea essence and tea base, lemonade base, sugar, natural flavors and other sweeteners, juice, electricity, fuel and water. Our principal suppliers for the year ended December 31, 2016, were Zuckerman-Honickman, Inc. (bottles) and Allen Flavors, Inc. (natural flavors) who, together with Lidestri Spirits (copacker), accounted for 46% of our purchases of inventory and copacking fees. In addition, 23% of our purchases were related to the purchase of finished bottled ALO Juice, which is purchased from suppliers located in South Korea. Our principal iced tea suppliers for the year ended December 31, 2015 were Zuckerman-Honickman, Inc. (bottles), Dominos Food, Inc. (sugar) and Allen Flavors, Inc. (natural flavors) who, together with Union Beverage Packers LLC (copacker), accounted for 80% of our purchases of raw materials inventory and copacking fees.

 

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Our relationships with our suppliers and co-packers are typically governed by short-term purchase orders or similar arrangements. We do not have any material contracts or other material arrangements with these parties and presently do not mitigate our exposure to volatility in the prices of raw materials or co-packing services through the use of forward contracts, pricing agreements or other hedging arrangements. Accordingly, we are subject to fluctuations in the costs of our raw materials and co-packing services.

 

Furthermore, some of our raw materials, such as bottles, caps, labels, tea essence and tea base, sugar, natural flavors and other sweeteners, and juice, are available from only a few suppliers. As a result, we may be subject to substantial increases in prices or shortages of raw materials, if the suppliers are unable or unwilling to meet our requirements.

 

Our Customers

 

We sell our products to a mix of independent mid-to-large size beverage distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the New York, New Jersey, Connecticut and Pennsylvania markets. We have also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island, North Carolina, South Carolina and parts of the Midwest. Our products are currently available in twenty three states that have a cumulative population of 100 million. While we primarily sell our products indirectly through distributors, at times we sell directly to the retail outlets and we may sell to certain retail outlets both directly and indirectly through distributors. We also sell our products directly to the distribution facilities of some of our retailers and through “road shows,” which are temporary installations at retail outlets staffed by our employees or contractors.

 

For the year ended December 31, 2016, our top customers, Seba Distribution LLC and Garden Foods, accounted for 20% and 11% of the Company’s net sales, respectively. For the year ended December 31, 2015, one customer, Wakefern Food Corp., accounted for 10% of net sales.

 

Our sales are typically governed by short-term purchase orders. We do not have any material contracts or other material arrangements with our customers or distributors and do not obtain commitments from them to purchase or sell a minimum amount of our products or to purchase or sell such products at a minimum price. Because our sales may be concentrated with a few customers, our results of operations may be materially adversely affected if one of these customers significantly reduces the volume of its purchases or demands a reduction in price, which may occur at any time due to the absence of such purchase commitments.

 

Management

 

Our management team consists of persons with substantial experience in the beverage industry. Philip Thomas, our Chief Executive Officer and LIBB’s co-founder, has over 16 years of beverage experience. Julian Davidson, our Executive Chairman, has over 25 years of experience in the beverage industry, including most recently serving as Chief Executive Officer of Independent Liquor NZ’s businesses in New Zealand, the U.S. and Canada. Independent Liquor NZ is a manufacturer and distributor of pre-mixed ARTD beverages, as well as having beer, spirit and cider portfolios. Richard Allen, our Chief Financial Officer, has over 30 years of experience in the beverage and food industries, including roles at Beverage Innovations, Cadbury Schweppes and Snapple. Joseph Caramele, our Vice President of National Sales & Marketing, has substantial experience in the beverage industry, having spent the past nine years at Arizona Beverages USA, most recently as Executive National Sales Director for the past five years. As Executive National Sales Director, he managed a team of 85 individuals and portfolio of over 100 accounts with annual retail sales estimated to be over $850 million. We intend to expand our current management and recruit other skilled officers and employees with experience relevant to our business focus as needed.

 

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Operations and Assets

 

We currently use co-packing companies, Brooklyn Bottling Group, Wayne County Foods, Inc., Polar Corp., and LiDestri Spirits to manufacture Long Island Iced Tea® and Long Island Brand™ Lemonade. The product is shipped directly to distributors or retailers as well as to our warehouse in Hicksville, NY or our other storage facilities prior to delivery to sales partners. Principal assets include vehicles to support the marketing of the brand and to transport the product, as well as storage equipment for the warehouse. Our principal assets also include display equipment such as vending machines, refrigerators and racks. This equipment is strategically placed at retail locations in order to market our product line.

 

We purchase our aloe juice product through a third party supplier in its finished form. There are no current operations or assets; however, after the close of the asset purchase agreement we will acquire only the intellectual property to produce ALO Juice including tradenames, formulas, and recipes.

 

Seasonality

 

The beverage market is subject to some seasonal variations. As the iced tea beverage segment, including Long Island Iced Tea®, experiences its highest levels of demand during the warm spring and summer months, cold or rainy weather during this time may have a short-term impact on customer demand and therefore result in lower sales.

 

Competition

 

The beverage industry is extremely competitive. Long Island Iced Tea is competing with a wide range of beverages that are produced by a large number of manufacturers. Most of these brands have enjoyed broad public recognition for many years, accomplished through continuous and well-funded marketing campaigns. We will compete with all types of beverages, both CSDs and non-CSDs, facing higher competition from direct product competitors in the NARTD tea market. Key direct competitors are Arizona Beverage Company, Unilever, Dr. Pepper Snapple Group, Inc. and Nestle SA. In order to be able to compete successfully in the industry, we have to distinguish our products in price and in taste and flavor, and offer attractive promotions to customers and appealing packaging. Moreover, we will have to well position the brand with targeted sales and marketing campaigns.

 

The aloe juice business is a fast growing industry as consumer demand grows for a “better-for-you” beverage that has healthy benefits and is great tasting. The aloe juice segment is projected to experience high growth worldwide for the foreseeable future and there will be opportunities for new entrances in the market. The presence of small and large vendors makes the global aloe vera-based drinks market extremely fragmented. Intense competition prevails in the market in terms of price, quality, innovation, reputation, and distribution. Key direct competitors that provide a high quality aloe juice product are OKF Aloe King, Alo Farms, Forever Living Products, and Houssy Global.

 

Intellectual Property

 

“Long Island Iced Tea” is a trademark of ours. We currently have federal registration of the trademark “Long Island Iced Tea” and are pursuing such registration of the trademark “The Original Long Island Brand.” We intend to seek registration of such trademarks in other countries as well. In addition, we are seeking or plan to seek a number of other trademarks for tag lines and product designs.

 

We filed applications with the USPTO for the registration of the trademark “Long Island Brand Iced Tea” on August 28, 2012 and subsequently for the registration of the trademark “Long Island Iced Tea” on July 23, 2013. Both applications encountered resistance to registration as a result of the existence of the mark “Long Island” for “iced tea.” We determined that the mark “Long Island” for “iced tea” was abandoned. As a result we filed a petition to cancel the registration on this ground. In January 2015, the petition was granted and the mark was cancelled. Accordingly, we petitioned for the mark “Long Island Iced Tea” to be placed on the supplemental register. On April 19, 2016, the USPTO registered the mark “Long Island Iced Tea” (Registration No. 4,943,056) on the supplemental register. Registration on the supplemental register allows the use of the “®” symbol, blocks later filed applications for confusingly similar marks, and allows us to sue infringers in federal court which has well-settled case law and standards. Notwithstanding the foregoing, the supplemental register does not provide all the protection of a registration on the principal register. At this time, the mark is not “incontestable” and we may be open to claims of others contesting the trademark.

 

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In addition, we have filed trademark applications for “The Original Long Island Brand” as a standard character mark and as a stylized mark, which are pending before the USPTO. In each case, the application is for use of the trademark with iced tea, tea based products, juices, water, beverages and other similar products. “The Original Long Island Brand” standard character trademark has been in use in commerce by us since at least as early as February 29, 2012. We also plan to file for stylized marks protecting certain other tag lines and product designs. With respect to the pending trademark applications for “The Original Long Island Brand” (standard character mark and stylized mark), the USPTO has made an initial determination that both marks are geographically descriptive. This determination is refutable and the USPTO has afforded the company the opportunity to produce evidence to establish that the marks have become distinctive of the goods in commerce. Similar issues, or other issues, also may arise in connection with the other marks for which we are seeking registration or intend to seek registration. Registration of these marks will allow us to utilize the “®” symbol to notify others that our marks are federally registered and allow us to enforce these marks in federal court, among other benefits. There can be no assurance, however, that the USPTO will approve these applications.

 

Our intellectual property is protected through the acquisition of registered and unregistered trademarks as described above, the acquisition of patents, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing our intellectual property rights. We intend to aggressively assert our rights under trade secret, unfair competition, trademark, copyright and other similar laws to protect our intellectual property, including product design, product research and concepts and trademarks, against any infringer. Although any assertion of our rights could result in a substantial cost to us, and diversion of our efforts, management believes that the protection of our intellectual property will be a key component of our operating strategy. Notwithstanding the foregoing, there can be no assurance that the trademarks described above or our other intellectual property rights will adequately protect information that we deem to be proprietary.

 

In an effort to further develop our branding strategy, we acquired the uniform resource locator (URL) www.longislandicedtea.com.

 

Environmental and Other Regulations

 

The conduct of our businesses, and the production, distribution, sale, advertising, labeling, safety, transportation and use of our products, are and will be subject to various laws and regulations administered by federal, state and local governmental agencies in the U.S., as well as to foreign laws and regulations administered by government entities and agencies in markets where we may operate and sell products.

 

In the U.S., we are or may be required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, laws governing equal employment opportunity, customs and foreign trade laws and regulations, laws regulating the sales of products in schools, and various other federal statutes and regulations. We will rely on legal and operational compliance programs, as well as local counsel, to guide our businesses in complying with applicable laws and regulations of the jurisdictions in which we do business. Our third-party co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of our product.

 

We also may in the future be affected by other existing, proposed and potential future regulations or regulatory actions, including those described below, any of which could adversely affect our business, financial condition and results of operations. Changes in government regulation, or failure to comply with existing regulations, could adversely affect our business. Public health officials and health advocates are increasingly focused on the public health consequences associated with obesity, especially as the disease affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an increased focus on caffeine content in beverages.

 

Legislation has been enacted in certain U.S. states in which our products may be sold that requires collection and recycling of containers or that prohibits the sale of our beverages in certain non-refillable containers unless a deposit or other fee is charged. It is possible that similar or more restrictive legal requirements may be proposed or enacted in the future.

 

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We do not anticipate at this time that the cost of compliance with U.S. and foreign laws will have a material financial impact on our operations, business or financial condition, but there are no guarantees that new regulatory and tariff legislation may not have a material negative effect on our business in the future.

 

Research and Development

 

We have incurred approximately $47,067 and $13,333 to research opportunities related to new product initiatives. These costs were reflected in research and development expense for the years ended December 31, 2016 and 2015, respectively.

 

Employees

 

At December 31, 2016, we had 19 full time employees and 1 part time employee. We also engaged the services of independent contractors to assist our management team in developing our product offerings.

 

Additional Information

 

We file or furnish reports, proxy statements and other information with the Securities and Exchange Commission (the ” SEC ”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Such reports, proxy statements and other information filed by us with the SEC are available free of charge on our website at www.longislandicedtea.com. The public also may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site at www.sec.gov that contains such reports, proxy statements and other information regarding issuers that file electronically with the SEC. We also make copies of these reports, proxy statements and other information available, free of charge through our website at http://www.longislandicedtea.com. The contents of these websites are not incorporated into this filing. Further, any references to website URLs in this Form 10-K are intended to be inactive textual references only.

 

ITEM 1A. RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this Form 10-K, before deciding to invest in our securities. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our securities could decline and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We operate in highly competitive markets, which could negatively affect our sales.

 

Our industry is highly competitive. We compete with multinational corporations with significant financial resources, including Dr. Pepper Snapple Group, Inc. and Arizona Beverage Company. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. Our inability to compete effectively could result in a decline in our sales. We are subject to competition from companies, including from some of our customers, that either currently manufacture or are developing products directly in competition with our products. These generic or store-branded products may be a less expensive option for consumers than our products making it more difficult to sell our product. As a result, we may have to reduce our prices or increase our spending on marketing, advertising and product innovation. Any of these could negatively affect our business and financial performance.

 

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We may not effectively respond to changing consumer preferences, trends, health concerns and other factors. If we do not effectively anticipate these trends, then quickly develop new products, our sales could suffer.

 

Consumers’ preferences can change due to a variety of factors, including aging of the population, social trends, negative publicity, economic downturn or other factors. If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop new products in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.

 

Costs for our raw materials may increase substantially, which could negatively affect our financial performance.

 

The principal raw materials we use in our business are bottles, caps, labels, packaging materials, tea essence and tea base, sugar, natural flavors and other sweeteners, juice, electricity, fuel and water. The cost of the raw materials can fluctuate substantially. We may not be able to pass along any increases in such costs to our customers or consumers, which could negatively affect our business and financial performance. We presently do not mitigate our exposure to volatility in the prices of raw materials through the use of forward contracts, pricing agreements or other hedging arrangements.

 

Certain raw materials we use are available only from a limited number of suppliers. In the event our suppliers are unable or unwilling to meet our requirements, we could suffer shortages or substantial cost increases.

 

Most of the raw materials we use are available from only a few suppliers. If these suppliers are unable or unwilling to meet our requirements, we could suffer shortages or substantial cost increases. Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability and terrorism. A failure of supply could also occur due to suppliers’ financial difficulties, including bankruptcy. Any significant interruption to supply or cost increase could substantially harm our business and financial performance.

 

Substantial disruption to production at our third party beverage co-packing facilities and our storage facilities could occur, which could disrupt or delay our production or cause us to incur substantially higher costs.

 

Our products are currently produced by three established co-packing companies. A disruption in our production at, or our relationships with, our third party beverage co-packing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our storage facilities or those of our suppliers, co-packers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, manufacturing problems, disease, strikes, transportation interruption, government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.

 

We rely, in part, on our third party beverage co-packing facilities to maintain the quality of our products. The failure or inability of this co-manufacturer to comply with the specifications and requirements of our products could result in product recall and could adversely affect our reputation.

 

We take great care in ensuring the quality and safety in the manufacture of our products. Our third-party co-manufacturer is required to maintain the quality of our products and to comply with our product specifications and requirements for certain certifications. Our third-party co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of our product. However, our products could still otherwise become contaminated. A contamination could occur in our operations or those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.

 

We may be subject to litigation. The cost of defending against such litigation and the negative publicity related to such litigation may adversely affect our business, financial condition and results of operations.

 

From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability or negatively affect our operating results. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. For more information, see the item “Legal Proceedings” in this annual report on 10-K

 

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Fluctuations in our results of operations from quarter to quarter could have a disproportionate effect on our overall financial condition and results of operations.

 

We experience seasonal fluctuations in revenues and operating income. Historically, sales during the second and third fiscal quarters have generally been the highest. Any factors that harm our second or third quarter operating results, including adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.

 

In order to prepare for our peak selling season, we must produce and keep in stock more inventory than we would carry at other times of the year. Any unanticipated decrease in demand for our products during our peak selling season could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit.

 

A deterioration of global economic conditions may adversely affect our industry, business and result of operations.

 

Disruptions in the global credit and financial markets and in economic conditions generally may include diminished liquidity and credit availability, a decline in consumer confidence, a decline in economic growth, an increased unemployment rate and uncertainty about economic stability. Such disruptions may affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. Any adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers, manufacturers, distributors or customers could result in product delays, increased accounts receivable defaults and inventory challenges. We are unable to predict the likely duration and severity of disruptions in the credit and financial markets and adverse global economic conditions.

 

Our sales growth is dependent upon maintaining our relationships with existing distributors and retailers and the loss of any one such distributor or retailer could materially adversely affect our business and financial performance.

 

Certain retailers that we service primarily through our distributors make up a significant percentage of our products’ retail volume, including volume sold by our bottlers and distributors. We also sell directly to certain retail accounts and to the distribution facilities of such retailers. Some retailers also offer their own private label products that compete with some of our brands. For the year ended December 31, 2016, two customers, Seba Distribution LLC and Garden Foods accounted for 20% and 11% of our net sales, respectively. For the year ended December 31, 2015, one customer, Wakefern Food Corp., accounted for 10% of net sales. The loss of sales of any of our products in a major retailer could have a material adverse effect on our business and financial performance.

 

Food and beverage retailers in the U.S. have been consolidating which may reduce our ability to increase both our revenue and our gross margins.

 

Consolidation has resulted in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we, and our bottlers and distributors, do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer.

 

We do not have any contracts with our customers that require the purchase of a minimum amount of our products. The absence of such contracts could result in periods during which we must continue to pay costs and service indebtedness with reduced sales.

 

Our customers do not provide us with firm, long-term or short-term volume purchase commitments. As a result of the absence of such contracts, we could have periods during which we have no or limited orders for our products, but we will continue to have to pay our costs, including those to maintain our work force and service our indebtedness with reduced sales. We cannot assure you that we will be able to timely find new customers to supplement periods where we experience no or limited purchase orders or that we can recover fixed costs as a result of experiencing reduced purchase orders. Periods of no or limited purchase orders for our products could have a material adverse effect on our net income and cause us to incur losses. Conversely, we may experience unanticipated increased orders for our products from these customers that can create supply chain problems and may result in orders we may be unable to meet. Unanticipated fluctuations in product requirements by our customers could result in fluctuations in our results from quarter to quarter.

 

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We have developed a gallon product line in which our gross margins are minimal, and therefore may not generate sufficient revenues or other benefits to justify its introduction. In addition, the gallon product line may divert sales from our higher margin 20oz product line, which would adversely affect our business.

 

In May 2015, we developed a gallon product line featuring five of our existing flavors. Our gross margins on this product line are minimal. Accordingly, this product line may not generate sufficient revenues or other benefits to justify its introduction. In addition, to the extent distributors choose to carry the gallon product line instead of our higher margin 20oz product line, it may negatively affect our operating results, specifically our gross margin. Although we believe the gallon size has a different function and manner of consumption, consumers may choose to purchase the gallon size instead of the 20oz size, because the gallon size offers a better per ounce value. This would result in an overall lower gross margin for our business.

 

We do not have registered ownership of certain of our trade names and our intellectual property rights could be infringed or we could infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination of distribution rights, could harm our business.

 

We possess intellectual property that is important to our business. This intellectual property includes our logo, trademarks for “Long Island Iced Tea” and “The Original Long Island Brand,” various other trademarks, copyrights, patents, ingredient formulas, business processes and other trade secrets. However, we do not currently have registered ownership of the trademark “The Original Long Island Brand” and do not have registered ownership on the principal register of the trademark “Long Island Iced Tea” as described below. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend ourselves against claims. We cannot be certain that the steps we take to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. Our business is also highly dependent upon our distribution rights. If we are unable to protect our intellectual property rights, including the right to our trade name and logo, our brands, products and business could be harmed and could have a material adverse effect on our business and financial performance.

 

On April 19, 2016, the United States Patent and Trademark Officer, or the “USPTO,” registered our mark “Long Island Iced Tea” (Registration No. 4,943,056) on the supplemental register. Registration on the supplemental register allows the use of the “®” symbol, blocks later filed applications for confusingly similar marks, and allows us to sue infringers in federal court, which has well-settled case law and standards. Notwithstanding the foregoing, the supplemental register does not provide all the protection of a registration on the principal register. As with any other registered mark, we may be open to claims of others contesting the trademark.

 

In addition, we have filed trademark applications for “The Original Long Island Brand” as a standard character mark and as a stylized mark, which applications are pending review by the USPTO. The applications are for use of the trademarks with iced tea, tea based products, juices, water, beverages and other similar products. We also plan to file for stylized marks protecting certain other tag lines and product designs. With respect to the pending trademark applications for “The Original Long Island Brand” (standard character mark and stylized mark), the USPTO has made an initial determination that both marks are geographically descriptive. This determination is refutable and the USPTO has afforded us the opportunity to produce evidence to establish that the marks have become distinctive of the goods in commerce. There can be no assurance that the USPTO will approve these applications.

 

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If we incur substantial debt, it could adversely affect our liquidity and results of operations.

 

As of December 31, 2016, we had approximately $1,385,775 of total indebtedness, consisting principally of a draw of $1,280,275 on a fully collateralized line of credit that we maintain. In addition, we may obtain up to a maximum of $3,500,000 in advances under the Credit Agreement, subject to the terms and conditions of the Credit Agreement, including a requirement that we obtain prior approval of Brentwood for each advance. While our existing level of debt is not substantial and we may pay interest that accrues on any future loans under the Credit Agreement by capitalizing the interest and adding it to the principal balance of such loans, we may incur significant indebtedness in the future, including through advances under the Credit Agreement, and we may not be able to generate sufficient cash to service such debt as cash payments become due. If new debt and/or new credit sources are added to our existing debt and credit sources, the related risks for us could intensify.

 

If we incur substantial debt, it could have important consequences. In particular, it could:

 

  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures and other general corporate purposes;
     
  limit, along with the restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds;
     
  limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
     
  increase our vulnerability to general adverse economic and industry conditions; and
     
  place us at a competitive disadvantage compared to our competitors that have less debt.

 

In addition, if we are unable to make payments as they come due or comply with the restrictions and covenants in the Credit Agreement or any other agreements governing our indebtedness, there could be a default under the terms of such agreements. In such event, or if we are otherwise in default under the Credit Agreement or such other agreements, including pursuant to any cross-default provisions of such agreements, the lenders could terminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our lenders under the Credit Agreement could foreclose on their security interests in our assets, including the equity interests in our material subsidiaries. If any of those events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us. Additionally, we may not be able to amend the Credit Agreement or obtain needed waivers on satisfactory terms or without incurring substantial costs. Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.

 

The loss of the services of our key personnel could negatively affect our business, as could our inability to attract and retain qualified management, sales and technical personnel as and when needed.

 

The execution of our business strategy depends largely on the continued efforts of our executive management, including Julian Davidson (our Executive Chairman), Philip Thomas (co-founder of LIBB and our Chief Executive Officer), Richard Allen (our Chief Financial Officer) and Peter Dydensborg (our Chief Operating Officer). As we have a limited operating history, we are highly dependent upon these individuals’ knowledge, experience and reputation within the industry. Any or all of these individuals may in the future choose to discontinue their employment with us. If so, we may not be able to find adequate replacements for them. Without their experience, expertise and reputation, our development efforts and future prospects would be substantially impaired. We have employment agreements in place with these individuals that include non-competition provisions.

 

We may not comply with applicable government laws and regulations, and they could change. Any violations could result in reputational damage or substantial penalties, and any changes could result in increased compliance costs.

 

We are subject to a variety of federal, state and local laws and regulations in the U.S., and other countries in which we do business. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. Violations of these laws or regulations could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on soft drinks or ingredients could increase our costs. Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling laws, such as California’s “Prop 65,” which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, could become applicable to our products. Some local and regional governments and school boards have enacted, or have proposed to enact, regulations restricting the sale of certain types of soft drinks in schools. Any violations or changes of regulations could have a material adverse effect on our profitability, or disrupt the production or distribution of our products, and negatively affect our business and financial performance.

 

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Our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us or not available on terms favorable to us.

 

The ability of our business to grow and compete depends on the availability of adequate capital. We currently have negative cash flows from operations due in part to lower gross margins and operating expenses to build out our infrastructure and fulfil our public company obligations. We expect that our working capital, proceeds from recent stock offerings, and the commitment for financing from certain stockholders will be sufficient to meet our net cash requirements through March 31, 2018. However, we may require additional capital in the future to finance our growth strategy or for other purposes. In such event, we cannot assure you that we will be able to obtain equity or debt financing on acceptable terms or at all. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.

 

We have a limited operating history and history of operating losses, and there is no guarantee that we will achieve profitability.

 

We have a limited operating history and a history of operating losses. There is no guarantee that we will become a profitable business. Further, our future operating results depend upon a number of factors, including our ability to manage our growth, retain our customer base and to successfully identify and respond to emerging trends in our market areas.

 

While we currently produce only non-alcoholic beverages, we are exploring entry into the alcoholic beverage industry. To the extent that we expand our operations into new sectors of the beverage industry, our business operations may suffer from a lack of experience, significant costs of entry and the competitive conditions in the market, among other factors, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

We are exploring entry into the alcoholic beverage industry. As we principally have been engaged in the production of NARTD teas, we have limited experience with developing, producing, marketing and distributing alcoholic beverages. Additionally, we will be exposed to significant operating costs associated with developing new products and entering a new sector of the beverage industry and will face new regulatory burdens, which could have an adverse impact on our business as well as place us at a disadvantage relative to more established alcoholic beverage market participants. Furthermore, the alcoholic beverage industry is highly competitive. We will compete with multinational corporations with significant financial resources. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. In addition:

 

  We may not be able to adequately distinguish our alcohol products from our non-alcohol products. Our inability to create the proper differentiation could result in customer confusion and could have adverse regulatory consequences.
     
  We may not be able establish the proper infrastructure to support the supply chain from the manufacturing of the product to the ultimate purchase by the end consumer.

 

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As a result of the foregoing factors, we may be unsuccessful in expanding our business to include alcoholic beverages. Furthermore, attempting such an expansion will require a substantial investment of resources and management time, which could materially adversely affect our more established non-alcoholic beverage business as well. Accordingly, we can offer no assurance that if we expand our business beyond NARTD teas, we will be able to effectively develop, produce, market and distribute such beverages. Such failure could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

Risks Related to an Investment in Our Common Stock

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate paying dividends in the foreseeable future, but expect to retain earnings to finance the growth of our business. Therefore, any return on investments will only occur if the market price of our common stock appreciates.

 

A robust public market for our common stock may not develop or be sustained, which could affect your ability to sell our common stock or depress the market price of our common stock.

 

Our common stock is listed on NASDAQ, but we cannot assure you that our common stock will continue to trade on this market or another national securities exchange. In addition, we are unable to predict whether an active trading market for our common stock will develop or will be sustained.

 

The trading price and trading volume of our common stock may be volatile.

 

The price and volume of our common stock may be volatile and subject to fluctuations. Our stock has traded at a low of $3.73 to a high of $12.55 in since January 1, 2016. Some of the factors that could cause fluctuations in the stock price or trading volume of our common stock include:

 

  general market and economic conditions and market trends, including in the beverage industry and the financial markets generally;
     
  the political, economic and social situation in the U.S.;
     
  actual or expected variations in operating results;
     
  announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, or other business developments;
     
  adoption of new accounting standards affecting the industry in which we operate;
     
  operations and stock performance of competitors;
     
  litigation or governmental action involving or affecting us or our subsidiaries;
     
  recruitment or departure of key personnel;
     
  purchase or sales of blocks of our common stock; and
     
  operating and stock performance of the companies that investors may consider to be comparable.

 

There can be no assurance that the price of our common stock will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies and that could materially adversely affect the price of our common stock, regardless of our operating performance. You should also be aware that price volatility might be worse if the trading volume of shares of our common stock is low, as it historically has been.

 

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Our outstanding warrants and options will increase the number of shares outstanding and available for sale in the public markets, which may have an adverse effect on the market price of our common stock.

 

We presently have outstanding (i) stock options to purchase 862,964 shares of common stock at a weighted average exercise price of $4.77 per share held by certain of our executive officers, directors and employees, (ii) warrants to purchase up to 404,475 shares of common stock at an exercise price of $6.00 per share that were issued in the private placements described herein, (iii) warrants to purchase up to 34,573 shares of common stock at an exercise price of $4.50 per share that were issued to Network 1 and its designees as compensation for acting as the placement agent for such private placements, and (iv) warrants to purchase up to 31,522 shares of common stock at an exercise price of $4.50 per share that were issued to Network 1 and its designees as compensation for acting as the placement agent for the Public Offering, and (v) warrants to purchase up to 165,000 shares of common stock at an exercise price of $4.18 per share that were issued to a stockholder in consideration of a commitment to fund the Company. If and to the extent these warrants and options are exercised, you may experience dilution to your holdings and/or it may have an adverse effect on the market price of our common stock. The market price of our common stock also may be adversely affected, if and to the extent the shares registered for resale pursuant to this prospectus are sold in the public markets.

 

The substantial number of shares that are eligible for sale pursuant to our resale registration statement could cause the market price for our common stock to decline or make it difficult for us to sell equity securities in the future.

 

We have an effective registration statement registering the resale by certain of our stockholders of up to 4,348,889 shares of our common stock. Expectations that shares of our common stock may be sold by the selling stockholders could create an “overhang” that may adversely affect the market price for our common stock.

 

We cannot predict the effect on the market price of our common stock from time to time as a result of (i) sales by the stockholders of some or all of the 4,348,889 shares of our common stock under our resale registration statement, (ii) the availability of such shares of common stock for sale by the selling stockholders, or (iii) the perception that such shares may be offered for sale by the selling stockholders. Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales will occur, could cause the market price of our common stock to decline or make future offerings of our equity securities more difficult. Any sale, or perceived impending sale, of a substantial number of shares of our common stock could cause our stock price to fluctuate or decline.

 

We have the ability to issue additional shares of common stock and “blank check” preferred stock, which could affect the rights of holders of the common stock.

 

Our amended and restated certificate of incorporation allows our board of directors to issue 35,000,000 shares of common stock and 1,000,000 shares of preferred stock and to set the terms of such preferred stock. We have 25,108,400 authorized but unissued shares of common stock available for issuance after appropriate reservation for our outstanding options and warrants. The issuance of additional common stock may dilute the economic and voting rights of our existing stockholders. In addition, the terms of such preferred stock may materially adversely impact the dividend and liquidation rights of holders of the common stock.

 

Provisions in our amended and restated certificate of incorporation and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management.

 

Our charter contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors and the ability of the board of directors to designate the terms of and issue new series of preferred stock. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

 

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Our senior executive officers and directors may not be able to successfully manage a publicly traded company.

 

Not all of our senior executive officers or directors have extensive experience managing a publicly traded company, and they may not be successful in doing so. The demands of managing a publicly traded company, like ours, is much greater as compared to those of a private company, and some of our senior executive officers and directors may not be able to successfully meet those increased demands.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common shares less attractive to investors.

 

We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (“JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive because we rely, or may rely, on these exemptions. If some investors find our common stock less attractive as a result, the price of our common stock may be reduced, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

 

In addition, under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

 

We could remain an “emerging growth company” until December 31, 2020, although a variety of circumstances could cause us to lose that status earlier. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided by other public companies.

 

Obligations associated with being a public company require significant company resources and management attention, which may have a material adverse effect on our financial condition and results of operations.

 

We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition and the Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. These reporting and other obligations place significant demands on our management, administrative, operational and accounting resources, make certain activities more time-consuming and cause us to incur significant legal, accounting and other expenses. In order to comply with these obligations, we may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, expand or outsource our internal audit function, and hire additional accounting and finance staff. Because our resources are limited compared to many public companies, these requirement may impose a disproportionate financial burden on us. Furthermore, our limited management resources may exacerbate the difficulties in complying with these reporting and other requirements and prevent us from focusing on executing our business strategy. In addition, if we are unable to comply with the financial reporting requirements and other rules that apply to reporting companies, the market price of our common stock could be adversely affected.

 

As an “emerging growth company” and a “smaller reporting company” we intend to continue to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” or “smaller reporting companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and other scaled disclosure requirements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In general, we will remain an “emerging growth company” until December 31, 2020, although a variety of circumstances could cause us to lose that status earlier, and will remain a “smaller reporting company” for each fiscal year where our public float remains below $75 million as of the last day of the second fiscal quarter of the prior fiscal year. We intend to take advantage of some or all of these exemptions and reduced reporting requirements until we are no longer an “emerging growth company” and/or a “smaller reporting company,” at which time, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with these additional requirements.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTY

 

Our principal office is located in a 5,000 square foot facility at 116 Charlotte Avenue, Hicksville, NY 11801. We also ship product to our warehouse at this facility. On June 6, 2014, we entered into a three-year lease with a two-year renewal option for this facility. The lease provided for annual base rent of $50,000 through June 30, 2015 and $51,500 through June 30, 2016, and provides for annual base rent of $53,045 through June 30, 2017. We believe that our facilities are adequate for our current and reasonably foreseeable future needs and that our properties are in good condition and suitable to conduct our business.

 

ITEM 3. LEGAL PROCEEDINGS

 

We are involved in various claims and legal actions arising from time to time in the ordinary course of business. In the opinion of our management, the ultimate disposition of these matters in the ordinary course of business will not have a material adverse effect on our financial position, results of operations or cash flows.

 

In addition, we are involved in the following legal action:

 

Revolution Marketing, LLC. On August 1, 2014, an action was filed by LIBB in the Supreme Court in the State of New York entitled Long Island Brand Beverages LLC v. Revolution Marketing, LLC 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 believe it is too early to determine the probable outcome of this matter.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

The historical trading price of our common stock includes the trading of Cullen common stock from prior to the consummation of the Business Combination with Cullen and LIBB. Since July 29, 2016, our common stock has been listed on the Nasdaq Capital Market under the symbol “LTEA”. Prior to July 29, 2016, our common stock was quoted on the over-the-counter markets, as follows: from October 1, 2015 to July 29, 2016, on the OTCQB under the symbol “LTEA”; from July 27, 2015 to October 1, 2015, on the OTCBB under the symbol “LTEA”; and from June 1, 2015 (the effective date of the Business Combination for market trading purposes) to July 27, 2015, on the OTCBB under the symbol “OLIC.” Prior to June 1, 2015, Cullen’s common stock was quoted on the OTCBB under the symbol “CAGZ.” All historical trading prices have been adjusted to reflect the effective 15-to-1 reverse stock split that occurred as a result of the exchange ratio under the Merger Agreement, which provided for Cullen stockholders to receive one share of our common stock for every 15 shares of Cullen common stock held by them immediately prior to the Business Combination. The following table sets forth the range of high and low sales prices for the applicable period on a post-split basis.

 

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   Common Stock 
   High ($)   Low ($) 
Fiscal Year Ended December 31, 2017:          
First Quarter*  $4.32   $3.76 
Fiscal Year Ended December 31, 2016:          
Fourth Quarter  $5.91   $3.73 
Third Quarter   8.39    4.00 
Second Quarter   12.55    6.81 
First Quarter   10.70    3.99 
Fiscal Year Ended December 31, 2015:          
Fourth Quarter  $9.75   $3.35 
Third Quarter   10.00    6.95 
Second Quarter**   11.25    1.00 
First Quarter   15.00    2.85 

 

 

 

* Through March 27, 2017.
** We consummated the Business Combination with Cullen and LIBB on May 27, 2015, which became effective for market trading purposes on June 1, 2015.

 

Holders

 

As of March 27, 2017, there were 8,393,066 shares of our common stock outstanding. Our shares of common stock are held by approximately 122 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of banks, brokers and other nominees.

 

Dividends

 

We have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate paying dividends in the foreseeable future, but expect to retain earnings to finance the growth of our business. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

 

Unregistered Sales of Equity Securities

 

During the fiscal quarter ended December 31, 2016, we issued 38,500 shares of our common stock to certain vendors of ours in consideration of services rendered. The shares were issued in private placements pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Executive Summary

 

Overview

 

We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium NARTD beverages. We are currently organized around our flagship iced tea product, under the brand Long Island Iced Tea®. The Long Island Iced Tea name for a cocktail originated in Long Island in the 1970’s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe and with quality components. Long Island Iced Tea ® is sold in 27 states across the U.S., primarily on the East Coast, through a network of national and regional retail chains and distributors.

 

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Since February 2016, we have been engaged in the aloe juice business, under the brand ALO Juice. ALO Juice is a NARTD functional beverage made from juice derived from the aloe plant known as aloe vera. ALO Juice sources its aloe plants from harvests in Thailand. The plants are exported from there to South Korea where they are processed in a unique whole leaf manner to ensure the nutritional and health benefits are maintained from the plant all the way through to the bottling process.

 

On March 14, 2017, we announced the expansion of our brand with the launch of The Original Long Island Brand™ Lemonade. This lemonade is a NARTD functional beverage made from a proprietary recipe with quality components.

 

Our mission is to provide consumers with “better-for-you” premium beverages offered at an affordable price.

 

We aspire to be a market leader in the development of beverages that are convenient and appealing to consumers. There are two major target markets for our beverages: consumers on the go and health conscious consumers. Consumers on the go are families, employees, students and other consumers who lead a busy lifestyle. With increasingly hectic and demanding schedules, there is a need for products that are accessible and readily available. Health conscious consumers are individuals who are becoming more interested and better educated on what is included in their diets, causing them to shift away from options perceived as less healthy such as CSDs towards alternative beverages such as iced tea.

 

We continually seek to expand our product line. We are exploring entry into the $222 billion U.S. alcohol industry, with the hope to establish ourselves as a multi-product alcoholic and non-alcoholic beverage company.

 

We also continually seek to better develop emerging markets, as well as expand our overall geographic footprint. We entered into new business arrangements involving international specialists contracted to (i) identify new market opportunities and (ii) assist in the overall management of our international expansion efforts. During 2016, the company announced new distributorships in Columbia, Honduras, Dominican Republic, St Martin and Bermuda. We also worked alongside new distributor partnerships in Puerto Rico, Canada and South Korea to further expand distribution points throughout their respective markets. New developments included (i) new retail partnerships opened with supermarket chains such as Pueblos and Supermax in Puerto Rico, (ii) our first shipment to Canada in November 2016, and (iii) multiple reorders received from the South Korean distributor.

 

We were incorporated on December 23, 2014 in the State of Delaware. Our corporate offices are located at 116 Charlotte Avenue, Hicksville, NY 11801 and our telephone number at that location is (855) 542-2832.

 

Highlights

 

We generate income through the sale of our NARTD beverage. The following are highlights of our operating results for the years ended December 31, 2016 and 2015:

 

  Net sales. During the year ended December 31, 2016, we had net sales of $4,558,030, representing an increase of $2,658,800 over the year ended December 31, 2015. The increase is due to a combination of brand momentum and an increase in distribution, including $1,054,990 in sales of our new aloe juice products. The increase was also bolstered by an increase of $891,665 in the sale of our iced tea in gallon containers, which helped us to gain incremental distribution and shelf space in target retail outlets.
     
  Margin. Our margin decreased by 11% for the year ended December 31, 2016 as compared to the year ended December 31, 2015. There were two primary reasons for the decreased margins during the year ended December 31, 2016. The first reason for the decrease was due to the fact that, beginning May 2015, we introduced and are selling five of our iced tea flavors in gallon containers. Sales of our gallon containers have and continue to be sold below their cost in order to drive expanded distribution and brand visibility to consumers on retail store shelves. As a result, during the year ended December 31, 2016 our negative margin on the sale of iced tea gallon containers was $299,671 as compared to a negative margin of $21,669 for the year ended December 31, 2015. The second reason for the decrease was that during 2015, we received a one-time cost reduction of approximately $120,000 from a supplier that did not reoccur in 2016. These negative factors were partially offset by the introduction of sales through vending machines and the aloe juice product line, which together have positively impacted our margins.

 

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  Operating expenses. During the year ended December 31, 2016, our operating expenses were $8,107,786, an increase of $4,712,467 as compared to the year ended December 31, 2015. The increases in operating expenses for the year ended December 31, 2016 related primarily to increased staffing costs as we build out our organization (including stock based compensation), increases in Advisory Board and Board of Directors fees, increases in legal, professional, consulting, and investor relations expenses and an increase in printing and filing fees, principally on account of the full year impact of being a public company.

 

Historically, our cash generated from operations has not been sufficient to meet our expenses. During 2016, we have most significantly financed our business through the sale of equity interests. During the year ended December 31, 2016, our cash flows used in operations were $6,472,204 and our net cash provided by financing activities was $9,924,974. We had working capital of $3,518,886 as of December 31, 2016.

 

In order to execute our long-term growth strategy, we expect to continue to raise additional funds through equity offerings, debt financings, or other means. There are no assurances that we will be able to raise such funds on acceptable terms or at all.

 

Uncertainties and Trends in Our Business

 

We believe that the key uncertainties and trends in our business are as follows:

 

  We believe that using various marketing tools, which may result in significant advertising expenses, will be necessary 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 3 of Part I of this Form 10-K. 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 gallon product line has previously sold below cost. There are no assurance we will be successful in increasing margins on this product line.
     
 

We operate in highly competitive markets.

     
  We are exploring potential opportunities to expand our business to include alcoholic beverages. This expansion may require a substantial investment of resources and management time, and there can be no assurances that our efforts will be successful.

 

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  Costs for our raw materials may increase substantially.
     
  Our intellectual property rights could be infringed or we could infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination of distribution rights, could harm our business.
     
  We have experienced cash losses from operations and our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us.
   
  We have a limited operating history.

 

Critical Accounting Policies

 

The preparation of the financial statements in conformity with United States Generally Accepted Accounting Principles 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 financial statements included in this Form 10-K), 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. For sales where certain revenue recognition criteria have not been met at the date of delivery, the Company defers recognition of such revenue until such recognition criteria are met.

 

Customer Marketing Programs and Sales Incentives

 

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 consolidated 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.

 

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. 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. For sales where certain revenue recognition criteria have not been met at the date of delivery, the Company defers recognition of such accounts receivable until such recognition criteria are met.

 

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Inventories

 

The Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists of bottled and packaged iced tea and ALO Juice. The Company values its inventories at the lower of cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Included in inventory at December 31, 2016 was finished goods inventory with a cost of approximately $320,000 that was delivered to a distributor, and is held in inventory until such revenue recognition criteria are met.

 

Business Combination

 

For accounting purposes, the Business Combination was treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percentage of the Company’s shares and 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 balance sheet, statement of operations, and statement 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.

 

Results of Operations

 

Comparison of the years ended December 31, 2016 and December 31, 2015

 

   For the Years Ended December 31, 
   2016   2015 
         
Net sales  $4,558,030   $1,899,230 
Cost of goods sold   4,239,317    1,556,140 
Gross profit   318,713    343,090 
           
Operating expenses:          
General and administrative expenses   4,958,076    1,946,270 
Selling and marketing expenses   3,149,710    1,449,049 
Total operating expenses   8,107,786    3,395,319 
           
Operating Loss   (7,789,073)   (3,052,229)
           
Other expenses:          
Other expense   (3,593)   (3,327)
Interest expense   (1,066,969)   (124,713)
Loss on inducement   (1,587,954)   - 
           
Net loss  $(10,447,589)  $(3,180,269)

 

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Net Sales and Gross Profit

 

Net sales for the year ended December 31, 2016 increased by $2,658,800, or 140%, to $4,558,030 as compared to $1,899,230 for the year ended December 31, 2015. The increase is due to a combination of iced tea brand momentum and an increase in distribution. During the year ended December 31, 2016, our iced tea product distribution expanded into 11 additional states and into over 1,000 new retail outlets. The increase was also bolstered by the sale of the Company’s iced tea product line in gallon containers. Net sales of our iced tea product in gallons during the year ended December 31, 2016 increased by $891,665 and were $1,243,074 as compared to $351,409 for the year ended December 31, 2015. During 2016, we began selling our iced tea and other purchased products in vending machines. Vending machine sales were $185,285 during the 2016 year. During the first quarter of 2016, we began selling a line of aloe juice products realizing year one revenues of $1,054,990.

 

Gross profit decreased by $24,377, or 7%, to $318,713 for the year ended December 31, 2016 from $343,090 for the year ended December 31, 2015. Our gross profit percentage decreased to 7% for the year ended December 31, 2016 as compared to 18% for the year ended December 31, 2015. The decrease in gross profit percentage was due to (a) selling our gallon containers at or below costs to certain distributors in order to acquire more shelf space and consumer visibility for the brand; (b) an increase in costs to produce certain new package offerings for our 20oz product line; and (c) introductory pricing given to new customers on our 20oz product line during the year ended December 31, 2016.

 

General and administrative expenses

 

General and administrative expenses for the year ended December 31, 2016 increased by $3,011,806, or 155%, to $4,958,076 as compared to $1,946,270 for the year ended December 31, 2015. This increase was principally the result of our efforts to build out our management and support team to support our growth, enhance our corporate governance and the effects of bearing public company costs for the full year of 2016. Specifically, our personnel costs increased by approximately $524,000 in connection with hiring our executive chairman, chief financial officer and other supporting personnel. We incurred an increase of approximately $1,013,585 in stock-based compensation costs, an increase of approximately $252,000 in costs in connection with the compensation of our Board of Directors and Advisory Board and an increase of approximately $520,000 in the costs of being a public company, consisting principally of legal, accounting, filing and related costs. The remainder of the cost increases primarily related to costs incurred in support of the expansion of business, including increases in rent and storage fees, insurance costs, website and internet costs and depreciation expense related to the purchase of vending machines in the fourth quarter of 2015.

 

Selling and marketing expenses

 

Selling and marketing expenses for the year ended December 31, 2016 increased by $1,700,661, or 117%, to $3,149,710 as compared to $1,449,049 for the year ended December 31, 2015. The increase was principally the result of key management hires to expand the capabilities of the sales and marketing organization, strategic spending in support of brand and investor awareness and increases in freight out and other costs consistent with the revenue growth. Specifically, our personnel cost increased by approximately $250,568 in connection with the hiring of our vice president of national sales and marketing and other supporting personnel. We incurred an increase of $85,000 in stock-based compensation costs. Sales commissions paid to brokers increased by approximately $64,000 in support of new sales distribution. Our investor and public relations costs increased by $719,609, consisting of $513,940 in cash costs and $205,669 for stock-based compensation. We incurred an increase of approximately $127,596 in connection with our exploration of opportunities for expansion into the liquor industry. Freight out increased by $293,434 during the year ended December 31, 2016 as compared to the year ended December 31, 2015 due to increased volume as well as increased freight rates resulting from shipments from a storage facility located in Georgia.

 

Interest expense

 

Interest expense for the year ended December 31, 2016 increased by $942,256, or 756%, to $1,066,969 as compared to $124,713 for the year ended December 31, 2015. Interest expense for the year ended December 31, 2016, principally consisted of the amortization of deferred financing costs of $995,550 (including a $408,000 charge to proportionally reduce the deferred financing costs with the reduction of the credit facility) and interest of $72,226 in connection with the Brentwood line of credit.

 

Loss on induced conversion of credit facility and warrants

 

During the year ended December 31, 2016, the Company recorded a non-cash charge of $1,587,954 for an induced conversion of its credit facility and related warrants. No such charge was recorded during the year ended December 31, 2015.

 

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Liquidity and Capital Resources

 

Sources of Liquidity

 

We have most significantly financed our business through the sale of equity interests. We had working capital of $3,518,886 as of December 31, 2016. We believe that, as a result of proceeds from our recent common stock offerings, the commitment for financing from certain members of management and a stockholder and our working capital as of December 31, 2016 that our cash resources will be sufficient to fund our net cash requirements through March 31, 2018.

 

We also rely on debt to finance our business. The following table provides an overview of our borrowings as of December 31, 2016:

 

 

Description of Debt

 

 

Holder

  Interest Rate   Balance at
December 31, 2016
 
Line of Credit*  Brentwood LIIT Inc.   Prime Plus 7.5%  $- 
UBS Credit Line  UBS Bank USA   LIBOR plus 2.5%  $1,280,275 
Automobile loans  Various   3.59% to 10.74%  $29,026 
Equipment Loan Reimbursement Agreement  Magnum Vending Corp.   10%  $76,474 

 

* On July 29, 2016, all outstanding principal and interest under the Brentwood line of credit was converted into 421,972 shares of common stock in connection with closing of the Offering. No further draws have been made under the line of credit.

 

Below is a summary of our financing activities during the last two fiscal years. In order to execute our long-term growth strategy, including 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.

 

Financing Activity

 

Line of Credit

 

On November 23, 2015, we entered into the Credit Agreement with LIBB and Brentwood. Brentwood is controlled by Eric Watson, who as of March 27, 2017 beneficially owned approximately 17.3% of our outstanding common stock. The Credit Agreement provided for a revolving Credit Facility in an initial available amount (the “Available Amount”) of up to $1,000,000, subject to increases as provided in the Credit Agreement, up to a maximum Facility Amount of $5,000,000. The loans under the Credit Agreement were evidenced by Brentwood.

 

The initial Available Amount available under the Credit Facility was advanced to us in two installments, the first $350,000 having been advanced on November 23, 2015 and the next $650,000 having been advanced on December 10, 2015. On March 17, 2016, Brentwood approved an increase of $500,000 in the Available Amount under the Credit Agreement and approved advances in the same amount. On March 24, 2016, an advance of $250,000 was received by the Company, and an additional advance of $250,000 was received during May 2016. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. As of December 31, 2016 and December 31, 2015, the outstanding balance of the loans under the Credit Facility was $0 and $1,091,571, respectively.

 

The Credit Facility bears interest at rate equal to the prime rate plus 7.5%, compounded quarterly, and matures on November 23, 2018. As of December 31, 2015, $4,071 of interest has been compounded and added to the principal balance of the loans. 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 Brentwood 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 Brentwood Warrant to Brentwood. The Brentwood Warrant entitled the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and included a cashless exercise provision.

 

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 Brentwood was converted into 421,972 shares of common stock. Upon closing of the Offering, pursuant to the recapitalization, the Brentwood Warrant was exchanged 486,111 shares of common stock. As of December 31, 2016, the principal amount of loans outstanding was $0. In connection with the recapitalization the Facility Amount was reduced to $3,500,000. Any amounts drawn from the Facility Amount require Brentwood’s approval.

 

These shares were registered for resale under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared effective by the SEC on January 31, 2017.

 

Magnum Vending Corp

 

On November 23, 2015, the Company entered into an expense 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 certain costs that Magnum incurred to acquire the machines including machines which were purchase 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, 2016 and 2015, the total principal amount of the payments underlying the agreement was $117,917 and $117,917, respectively and we had made cumulative principal and interest payments of $52,879 under the agreement.

 

Bass Properties and Ivory Castle

 

On April 28, 2015, LIBB received $150,000 as proceeds from a loan from Bass Properties, LLC (“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 (“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, of $555,910 were converted into 138,979 shares of the Company’s common stock.

 

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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.

 

We made additional sales in the November Offering after December 31, 2015, as described above under “2016 Financing Activity”.

 

Commencing on November 23, 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”). 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. 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. The units consisted of one share of common stock (for an aggregate of 189,975 shares) and one warrant (for an aggregate of 189,975 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.

 

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. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on March 29, 2019. Included in the proceeds for the March Sales were subscriptions receivable of $120,000, which were collected during April 2016.

 

2015 Business Combination

 

On May 27, 2015, we completed the Business Combination contemplated by the Merger Agreement. 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.

 

July 2016 Offering

 

On July 28 and 29, 2016, we sold 1,270,156 Shares in the July 2016 Offering. The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $5,867,217 after deducting commissions and other offering expenses. On August 4, 2016, the July 2016 Offering was terminated. No further sales of shares were made in the July 2016 Offering.

 

UBS Line of Credit

 

On October 27, 2016, we entered into the UBS Credit Line with UBS. The UBS Credit Line has a borrowing capacity of $1,300,000 and bears interest at a floating rate, depending on the time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of December 31, 2016, the interest rate on the UBS Credit Line was 3.272%. The UBS Credit Line was collateralized by certain of our short-term investments. As of December 31, 2016, $1,280,275 was outstanding on the UBS Credit Line. We paid off the UBS Credit Line in full on January 18, 2017.

 

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December 2016 Offering

 

On December 27, 2016, we consummated December 2016 Offering of 406,550 shares of our common stock, through Network 1 and Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016, with Network 1, as representative of the underwriters. The Shares were sold for a price to the public of $4.00 per share. The offering generated total net proceeds, after underwriting discounts and payment of other offering expenses, of approximately $1.4 million.

 

Cash flows

 

Net cash used in operating activities

 

Net cash used in operating activities was $6,472,204 for the year ended December 31, 2016 as compared to net cash used in operating activities of $2,957,176 for the year ended December 31, 2015. Cash used in operating activities for the year ended December 31, 2016 was primarily the result of a net loss of $10,447,589. The net loss was offset primarily by non-cash charges of $4,189,506, consisting principally of $1,175,672 of stock based compensation, $1,587,954 of loss on inducement and $995,549 of amortization of deferred financing costs. Cash used in operating activities increased on account of a $1,194,997 and $550,728 increase in accounts payable and accrued expenses, respectively, and decreased on account of a $1,456,596 increase in accounts receivable. Cash used in operating activities for the year ended December 31, 2015 was primarily the result of the net loss of $3,180,269.

 

Net cash used in investing activities

 

Net cash used in investing activities was $2,410,412 for the year ended December 31, 2016 as compared to $228,423 for the year ended December 31, 2015. Net cash used in investing activities for the year ended December 31, 2016 was primarily due to our purchase of short-term investment securities of $2,419,767. Cash used in investing activities for the year ended December 31, 2015 pertained primarily to the purchase of display items, trucks, and automobiles during these periods.

 

Net cash provided by financing activities

 

Net cash provided by financing activities was $9,924,974 for the year ended December 31, 2016 as compared to net cash provided by financing activities of $2,994,627 for the year ended December 31, 2015. Cash flows from financing activities were primarily the result of $5,867,217 representing the proceeds from our July 2016 Public Offering, net of costs, $1,423,141 representing the proceeds from our December 2016 Offering, net of costs, $861,790 from the March and April 2016 sale of common stock and warrants, net of costs, $1,275,000 in proceeds from the collateralized UBS line of credit, and $500,000 in proceeds under the Credit Agreement with Brentwood. Net cash used in financing activities consisted of repayments of automobile loans and equipment of $27,069 and $36,630, respectively. During the year ended December 31, 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 and Ivory Castle. These loans, together with accrued interest, were converted into 138,979 shares of Company common stock. In addition, the Company received net proceeds of $568,468 through the issuance of 142,636 shares of common stock. In addition, the Company received net proceeds of $588,492 through the issuance of common stock and warrants during the year ended December 31, 2015. In addition, the Company raised $1,000,000 from the proceeds from its line of credit with the Lender which were offset by cash paid for deferred financing costs of $60,445. These proceeds were offset by repayments of the Company’s automobile loans and equipment loans of $22,729.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

This information appears following Item 15 of Part III of this Form 10-K and is incorporated herein by reference.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROL 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 and our Chief Financial 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) and Chief Financial Officer (our principal financial officer and principal accounting officer) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016. Based on this evaluation, our Chief Executive 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 December 31, 2016 due to a material weakness in our internal control over financial reporting as described below.

 

Limitations on Internal Control over Financial Reporting

 

An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process used to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles in the United States, and that our receipts and expenditures are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive) and Chief Financial Officer (our principal financial officer and principal accounting officer), we performed a complete documentation of the Company’s significant processes and key controls, and conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2016 due to the material weakness described below.

 

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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.

 

  Our processes lacked timely and complete reviews and analysis of information used to prepare our financial statements and disclosures in accordance with accounting principles generally accepted in the United States of America.

 

The Company is evaluating this weakness to determine the appropriate remedy. 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 also 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.

 

This Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting as such report is not required for smaller reporting companies.

 

Changes in Internal Control over Financial Reporting

 

During the quarter ended December 31, 2016, the Company hired a full-time Controller. In connection with this hire, the Company has made improvements in routinization of its closing process that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

There have been no other 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.

 

ITEM 9B. OTHER INFORMATION

 

None.

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The Company’s directors and executive officers are as follows:

 

Name   Age   Position
Julian Davidson   52   Executive Chairman
Philip J. Thomas   41   Chief Executive Officer and Director
Tom Cardella   62   Director
Edward Hanson   41   Director
Kerry Kennedy   57   Director
Richard Y. Roberts   65   Director
Paul N. Vassilakos   40   Director
Richard B. Allen   62   Chief Financial Officer
Peter Dydensborg   57   Chief Operating Officer

 

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Julian Davidson has been the Company’s Executive Chairman since June 2016 and a consultant to the Company since June 2015. Mr. Davidson has also served on the board of Smartfoods Limited, a privately held food manufacturing, marketing and distribution company, since May 2015. From October 2011 to June 2015, Mr. Davidson served on the board of the Lantern Hotel Group, an Australian Stock Exchange-listed company. From April 2009 to December 2014, Mr. Davidson was Chief Executive Officer of Independent Liquor (NZ) Limited. From February 2007 to April 2009, Mr. Davidson was Chief Financial Officer of Independent Liquor Group. From September 2006 to January 2007, Mr. Davidson acted as a consultant to a consortium of private equity investors who acquired Independent Liquor (NZ) Limited. From April 2005 to October 2006, Mr. Davidson formed and ran Consolidated Hotels and Taverns Limited, an investment company which purchased and operated a portfolio of hotels and taverns. From 1991 to 2005, Mr. Davidson held senior management and leadership roles in Lion Nathan, Australasia’s largest brewer, including as Managing Director of Lion Breweries (NZ) Limited from January 2002 to March 2005. Commencing September 2001, Mr. Davidson completed three months at Harvard Business School, graduating with a Program for Management Development (PMD) in December 2011. From March 1998 to September 2001, Mr. Davidson served as Managing Director of the Tooheys Brewery. From September 1996 to March 1998, Mr. Davidson acted as Finance Director for Lion Nathan Australia. From August 1995 to September 1996, Mr. Davidson worked at Pepsi Cola Bottlers Australia/New Zealand (a Lion Nathan/Pepsi Cola International JV) as Finance Director. From August 1992 to August 1995, he served as the Finance Director of the Swan Brewery in Western Australia. From August 1991 to August 1992, Mr. Davidson was the Lion Nathan Group Internal Audit Manager. From 1985 to 1991, Mr. Davidson worked as an auditor with Deloitte. Mr. Davidson’s tertiary education was at the Auckland Technical Institute (1983 – 1986). Mr. Davidson is a Chartered Accountant (NZ). The Company believes Mr. Davidson’s contacts and past business experience in the U.S. and global beverage industry make him well suited to serve as a member of the Board.

 

Philip J. Thomas has served as the Company’s Chief Executive Officer and as member of the Board since the consummation of the Business Combination on May 27, 2015. Mr. Thomas also served as the Company’s Chairman of the Board from May 2015 until June 2016. Mr. Thomas also has served as the Chief Executive Officer of LIBB since its formation in February 2011 and previously served as the Managing Member and a member of the board of managers of LIBB from February 2011 until May 2015. Since 2005, Mr. Thomas has also served as President of Capital Link LLC, a nationally recognized ATM processing network that he founded. Capital Link partnered with, among others, WSFS Bank (NASAQ: WSFS), Cash Connect, RBSWorldPay (RBS) and Switch Commerce, and these parties, in the aggregate, fund over 13,000 ATMs in all 50 states with over $8 billion annually. From 2008 to November 2010, he served as Chief Executive Officer of KarbonEx Corp, a company he founded dedicated to creating innovative, market driven solutions to address climate change and resolve the way businesses impact the environment. Prior to this, Mr. Thomas revitalized his family’s 45 year old food and beverage distribution business, Magnum Enterprises, by creating strategic partnerships with Coca-Cola, Vitamin Water and Kelloggs. Mr. Thomas began his career in 1998 while attending college at James Madison University where he created Highlawn Restaurant & Lounge, which he sold in 2001. Mr. Thomas received a B.S. from James Madison University, where he was a Division I GTE scholar athlete. The Company believes Mr. Thomas’ business experience in the beverage industry makes him well suited to serve as a member of the Board.

 

Tom Cardella has served as a member of the Board since April 2016. Mr. Cardella is the founder of Cardella & Associates LLC and is a beverage industry consultant. Prior to founding Cardella & Associates in February 2015, Mr. Cardella was the President and Chief Executive Officer of Tenth and Blake Beer Company, a division of MillerCoors, from June 2010 to January 2015. He also served as President Eastern Division for MillerCoors from June 2008 to June 2010, where he was responsible for all commercial operations in the eastern half of the United States. Prior to the merger with Coors, Mr. Cardella was Executive Vice President of Sales and Distribution for Miller Brewing Company from May 2006 to June 2008. From August 2005 through April 2006, he held the position of Senior Vice President of Market Development and Import Brands with Miller. Prior to rejoining the Miller Brewing Company in August 2005, Mr. Cardella spent nearly a decade at InBev where he held several senior-level positions, including U.S. Vice President of Sales from September 2004 through August 2005, Chief Executive Officer of Beck’s North America from June 2003 through August 2004, Vice President of Strategy for FEMSA Cerveza in Monterey, Mexico (joint venture of InBev/Femsa) from January 2001 through May 2003, and Vice President of Marketing at Labatt USA from January 1996 through December 2000. Mr. Cardella spent the earlier years of his career with Miller Brewing Co. from 1978 through 1995 in various sales and marketing positions. Mr. Cardella has served on the board of directors of the Green Bay Packers since July 2010, the United Way of Greater Milwaukee since March 2010 and the Marcus Center for Performing Arts since July 2012. He also has served on the board of directors for the North American Brewing Company (parent company is FIFCO, San Jose, Costa Rica) since January 2016. Mr. Cardella received a B.A. from the State University of New York College at Geneseo and completed the Advanced Management Program at Harvard Business School in 2000. The Company believes Mr. Cardella’s contacts and past business experience in the beverage industry make him well suited to serve as a member of the Board.

 

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Edward Hanson has been a member of the Board since the consummation of the Business Combination on May 27, 2015. Mr. Hanson also has been a member of Cullen’s board of directors since October 2009. Mr. Hanson has served as a principal of Global Partners Fund, a private equity fund investing in asset backed businesses, since 2009. Prior to this, he was a director of Babcock & Brown (UK) Ltd. Babcock & Brown was a principal investment firm headquartered in Sydney and Mr. Hanson worked in the London office from 1997 to 2009. He focused on Private Equity and Real Estate. Mr. Hanson received a Bachelor of Commerce from the University of Auckland in New Zealand. The Company believes Mr. Hanson’s business experience and contacts and relationships make him well suited to serve as a member of the Board.

 

Kerry Kennedy has been a member of the Board since the consummation of the Business Combination on May 27, 2015. Ms. Kennedy also has been a member of Cullen’s board of directors since October 2009. She is an American human rights activist and writer. Since April 1988, she has worked at the Robert F. Kennedy Human Rights and acted as its executive director and currently its president. Ms. Kennedy was the chair of the Amnesty International Leadership Council from January 1999 to 2010. She was a director of Endeavor Acquisition Corp. from July 2005 to December 2007, a director of Victory Acquisition Corp. from January 2007 to April 2009, a director of Triplecrown Acquisition Corp. (a predecessor of the Company) (“Triplecrown”) from June 2007 to October 2009 and a director of Home Loan Servicing Solutions, Ltd. from October 2011 to December 2015. She also served on the board of directors of the International Center for Ethics, Justice and Public Life at Brandeis University. She has served on the board of Aptus Health since 2014. She also serves on the boards of directors of the United States Institute of Peace, a Senate confirmed position, and Human Rights First. Ms. Kennedy received a B.A. from Brown University in 1982 and an LLM from Boston College Law School in 1987. The Company believes Ms. Kennedy’s contacts and philanthropic work make her well suited to serve as a member of the Board.

 

Richard Y. Roberts has been a member of the Board since the consummation of the Business Combination on May 27, 2015. Mr. Roberts also has been a member of Cullen’s board of directors since October 2009. In March 2006, Mr. Roberts co-founded a regulatory/legislative consulting firm, Roberts, Raheb & Gradler LLC. He was a partner with Thelen Reid & Priest LLP, a national law firm, from January 1997 to March 2006. From August 1995 to January 1997, Mr. Roberts was a consultant at Princeton Venture Research, Inc., a private consulting firm. From 1990 to 1995, Mr. Roberts was a commissioner of the SEC, and, in this capacity, was actively involved in, has written about or has testified on, a wide range of subjects affecting the capital markets. Since leaving the SEC, Mr. Roberts has been a frequent media commentator and writer on various securities public policy issues and has assisted the Governments of Romania and Ukraine in the development of a securities market. Mr. Roberts was a director of Red Mountain Resources, Inc., an oil and natural gas exploration public company, from October 2011 until February 2016. He was a director of Nyfix, Inc. from September 2005 to December 2009, Endeavor Acquisition Corp. from July 2005 to December 2007, a director of Victory Acquisition Corp. from January 2007 to April 2009 and a director of Triplecrown from June 2007 to October 2009. From 1987 to 1990, he was the chief of staff for Senator Richard Shelby. He is a member of the Alabama Bar and the District of Columbia Bar. Mr. Roberts is a member of the Advisory Board of Securities Regulation & Law Reports, of the Advisory Board of the International Journal of Disclosure and Governance, and of the Editorial Board of the Municipal Finance Journal. Mr. Roberts also previously served as a member of the District 10 Regional Consultative Committee of the Financial Industry Regulatory Authority, the Market Regulation Advisory Board of the FINRA, and the Legal Advisory Board of the FINRA. Mr. Roberts received a B.E.E. from Auburn University in 1973, a J.D. from the University of Alabama School of Law in 1976, and a Master of Laws from the George Washington University Law Center in 1981. The Company believes Mr. Roberts’ contacts and past business experience, including at the SEC, make him well suited to serve as a member of the Board.

 

Paul N. Vassilakos has served as a member of the Board since the Company’s inception. In addition, he served as the Company’s Chief Executive Officer from its inception until the consummation of the Business Combination on May 27, 2015. Mr. Vassilakos also has served as Cullen’s Chief Executive Officer and as a member of its board of directors since November 2013 and as Cullen’s assistant treasurer since October 2009. Mr. Vassilakos founded Petrina Advisors, Inc., a privately held advisory firm providing investment banking services, in July 2007 and has served as its president since its formation. Mr. Vassilakos also founded and, since December 2006, has served as the vice president of Petrina Properties Ltd., a privately held real estate holding company. From November 2011 through February 2012, Mr. Vassilakos served as Chief Executive Officer, Chief Financial Officer and director of Soton Holdings Group, Inc., a publicly held company now known as Rio Bravo Oil, Inc. Mr. Vassilakos also previously served as interim President and Chief Executive Officer of Red Mountain Resources, Inc. from February 2011 to March 2011. From February 2002 through June 2007, Mr. Vassilakos served as vice president of Elmsford Furniture Corp., a privately held furniture retailer in the New York area. Mr. Vassilakos also served on the Boards of Directors of Cross Border Resources, Inc. (since April 2012) and Red Mountain Resources, Inc. (since October 2011), oil and natural gas exploration public companies, until February 2016. Mr. Vassilakos received a B.S. in finance from the Leonard N. Stern Undergraduate School of Business in 1998 and was a licensed Registered Securities Representative (Series 7 and 63) from February 1996 through February 2002. The Company believes Mr. Vassilakos’s extensive public company and capital markets experience, as well as his professional contacts and other business experience, make him well suited to serve on the Board.

 

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Richard B. Allen has served as the Company’s Chief Financial Officer since June 2016. Mr. Allen previously worked for Beverage Innovations, an incubator beverage company, serving on its board of directors from July 2011 to November 2015 and serving as Chief Financial Officer from July 2011 to September 2012. Prior to Beverage Innovations he was a consultant to various beverage companies from 2007 to 2011. For over ten years Mr. Allen previously held various senior positions at Snapple and Cadbury Schweppes, who purchased Snapple in 2000 from Triarc Industries. He served as Senior Vice President of Business Development and Mergers and Acquisitions for Cadbury Schweppes Americas Beverages from 2006 to 2007. Mr. Allen also served as General Manager of Pacific Snapple Distributors from 2004 to 2005, Senior Vice President of Business Development and M&A for Snapple Distributors from 2003 to 2004 and Chief Financial Officer of Snapple Beverage Group from 1997 to 2003. Before joining Snapple, Mr. Allen worked for RJR Nabisco, previously Nabisco Brands and Standard Brands, from 1979 to 1996 in various audit, accounting and analytic positions culminating in Vice President and Corporate Assistant Controller. Mr. Allen began his career in public accounting with PriceWaterhouse Coopers from 1977 to 1979. Mr. Allen received a B.S. in Accounting from Lehigh University in 1977 and an MBA in Finance from Fairleigh Dickinson University in 1993. Mr. Allen is a Certified Public Accountant.

 

Peter Dydensborg has served as the Company’s Chief Operating Officer since the consummation of the Business Combination on May 27, 2015. Mr. Dydensborg also has served as Chief Operating Officer of LIBB since January 2014. From 2004 to January 2014, Mr. Dydensborg served as Director of Sales Off Premise for Phoenix Beverages New York, or “Phoenix.” Phoenix was the largest Heineken Beer distributor in the United States. During his ten year career with Phoenix, Mr. Dydensborg’s role was to create innovative market solutions in cooperation with national brewers to drive sales and market share. From 1994 to 2004, Mr. Dydensborg was with The Keebler Company which was later acquired by the Kellogg Company. While with these companies, Mr. Dydensborg was promoted into several roles throughout the east coast, including managing the Metro New York Zone Market (sales and operations) and restoring the Atlanta Zone market (which included Florida and Alabama). Prior to this, Mr. Dydensborg was with CPC International (which sold products such as Arnold Bread and Thomas English Muffins) in an Account Management Role. He managed several leading retailers in the metro New York market in this position. Mr. Dydensborg started he career in 1987 in sales management with the New York Coca Cola Bottling company in the New Jersey market. Mr. Dydensborg received a B.B.A. in Management from Georgia State University and was a member of the Georgia State Soccer team in the SEC conference.

 

Strategic Advisory Board

 

The Company has a strategic advisory board that assists its management in exploring business opportunities. The Company’s strategic advisory board is distinct from the Board. Individual members of the strategic advisory board regularly provide the Company with advice on product development and business opportunities. The advisors meet weekly to discuss business objectives. The advisors have entered into confidentiality agreements with the Company and retain no intellectual property rights to the Company’s products. They are compensated for their time through awards of stock and annual cash fees. The current advisors are:

 

John Carson. Mr. Carson is Chairman of the Board of Intercontinental Beverage Capital Inc. (“ IBC “). He is former Chairman, Chief Executive Officer and President of several leading beverage companies including Marbo, Inc. and Triarc Beverages, both private equity backed corporations. As Chairman of Triarc Beverages (RC Cola), he led the acquisition and integration of Snapple Beverages and expanded business internationally by leading negotiations in China, Japan, Mexico, South America, Russia and Poland. Mr. Carson led the sale of the entire beverage portfolio of Triarc to Cadbury Schweppes, generating a significant return for investors. He is former President of Cadbury Schweppes North America where he led the expansion of the Schweppes brand beyond mixers and into adult soft drinks. He also led the expansion of the Tampico brand throughout new markets, including Mexico, Brazil and the emerging U.S. Hispanic and African American markets. Mr. Carson is a Board Member of the National Soft Drink Association and Director of Water Source Inc.

 

Dan Holland. Mr. Holland is the former Chief Executive Officer of XXIV Karat Wines, which was founded in 2012 and offers the first gold infused sparkling wine. He is the former President and Chief Executive Officer of The Rising Beverage Co (Los Angeles, CA) and prior to that served as an adviser for First Beverage Group. Mr. Holland began his career at Mission Beverage, where he served as president for 15 years. During his tenure as President of Mission Beverage, Mr. Holland served on many distributor and supplier councils, which help companies such as Coors Brewing Co., Heineken, Guinness, Anheuser-Busch InBev and Glaceau, direct their business nationally and internationally.

 

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Bert Moore. Mr. Moore is currently a managing partner at WiderLens, a high-end strategic brand consultancy. Prior to that, he was the CEO of StrawberryFrog NYC, one of the leading independent marketing agency networks in the world. Prior to joining StrawberryFrog, Mr. Moore was a partner and Chief Strategy Officer at Deutsch New York, as well as leading strategy and planning efforts on global businesses and new business efforts emanating out of North America for its parent Deutsch Inc., a multi-disciplinary marketing communications agency headquartered in New York City. Prior to joining Deutsche New York in 2011, Mr. Moore was the Global Chief Strategy Officer for Lowe & Partners, an international integrated marketing agency. At Lowe & Partners, he created one of the most effective strategy departments in advertising, winning EFFIES in over 50 markets around the world and enabling the agency to triple in size over seven years. He began his career in 1988 as a consultant for an offshoot of McKinsey. Mr. Moore has earned significant commercial and cultural experience having worked in most business sectors and in over 70 markets around the world. Some longstanding clients include; Aramark, Beam Inc, LG, Mahindra, Nike, Pernod Ricard, Reuters, Singapore Government, Unilever and Virgin. He has served on the boards of three global agencies; Burson Marsteller, Lowe+Partners and WeberShandwick. During his time in the UK, he sat on the commercial advisory boards of both The Prince’s Trust and National Society for the Prevention of Cruelty to Children.

 

David “Bump” Williams. Mr. Williams is the President and Chief Executive Officer of The BWC Company, a consulting company that works across the entire 6-tier network of beverages. Mr. Williams began his career at Procter & Gamble (“P&G”) where he developed a National Sales Program (Publishers Clearing House) that incorporated all P&G brands being merchandised across the United State with key national retailers. In 1986 he left P&G to head up Analytics and National Accounts at the A.C. Nielsen Company where he developed the industry’s first Beverage Vertical servicing a multitude of manufacturers, retailers and distributors. In 1994 he joined Information Resources, Inc. as the President of Global Consulting where he was responsible for the use of store-level data and consumer segmentation analyses that allowed the beverage industry to develop specific advertising, point of sale and new product launches at targeted consumers and specific demographic audiences. In 2008, Mr. Williams resigned his post at IRI and retired but has continued to provide consulting to several retailers to conduct analyses on the health of their beverage business and determine business plans and strategies designed to capitalize on changing consumer purchase behavior. He works on new product launches, pricing and promotion analytics, mergers and acquisitions, market expansion and strategic business planning. Mr. Williams serves on several boards of directors and advisors across the beverage alcohol and non-alcoholic beverage community.

 

Family Relationships

 

There are no family relationships among any of the Company’s directors or executive officers.

 

Leadership Structure

 

The Board is divided into two classes, Class 1 and Class 2. The Class 1 directors will hold office until the annual meeting of directors to be held in 2018 and the Class 2 directors will hold office until the annual meeting of directors to be held in 2017. Thereafter, each director holds office until the second succeeding annual meeting of stockholders after his or her election, or until his or her death, resignation, removal or the earlier termination of his or her term of office. Edward Hanson, Kerry Kennedy and Richard Y. Roberts are the Class 1 directors and Julian Davidson, Philip Thomas, Paul Vassilakos and Tom Cardella are the Class 2 directors.

 

The Board has determined to keep the positions of chairman of the board and principal executive officer separate at this time. This permits the Company’s principal executive officer to concentrate his efforts on managing the Company’s business operations and development. This also allows the Company to maintain an independent chairman of the board who oversees, among other things, communications and relations between the Board and senior management, consideration by the Board of the Company’s strategies and policies and evaluation by the Board of the Company’s principal executive officer.

 

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Independence of Directors

 

The Company’s common stock is listed on the Nasdaq Capital Market and the Company adheres to the Nasdaq listing standards in determining whether a director is independent. The Board consults with its counsel to ensure that its determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Nasdaq requires that a majority of the Board must be composed of “independent directors,” which is defined generally as a person other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, the Company has determined that each of Messrs. Hanson, Roberts and Cardella and Ms. Kennedy is an independent director.

 

Board Role in Risk Oversight

 

The Board’s primary function is one of oversight. The Board as a whole works with the Company’s management team to promote and cultivate a corporate environment that incorporates enterprise-wide risk management into strategy and operations. Management periodically reports to the Board about the identification, assessment and management of critical risks and management’s risk mitigation strategies. Each committee of the Board is responsible for the evaluation of elements of risk management based on the committee’s expertise and applicable regulatory requirements. In evaluating risk, the Board and its committees consider whether the Company’s programs adequately identify material risks in a timely manner and implement appropriately responsive risk management strategies throughout the organization. The audit committee focuses on assessing and mitigating financial risk, including risk related to internal controls, and receives at least quarterly reports from management on identified risk areas. In setting compensation, the compensation committee strives to create incentives that encourage behavior consistent with the Company’s business strategy, without encouraging undue risk-taking. The nominating committee considers areas of potential risk within corporate governance and compliance, such as management succession. Each of the committees reports regularly to the Board as a whole as to their findings with respect to the risks they are charged with assessing.

 

Board Meetings and Committees

 

The Board has three separately standing committees: the audit committee, the compensation committee and the nominating committee. Each committee is composed entirely of independent directors as determined in accordance with the rules of Nasdaq for directors generally, and where applicable, with the rules of Nasdaq for such committee. In addition, each committee has a written charter, a copy of which is available free of charge on the Company’s website at http://investors.longislandicedtea.com/charters.

 

Audit Committee

 

The audit committee consists of Tom Cardella, Edward Hanson and Richard Y. Roberts, each of whom is “independent” as defined in Rule 10A-3 of the Exchange Act and the Nasdaq listing standards, with Mr. Hanson serving as chairman. The audit committee’s duties, which are specified in the audit committee charter, include, but are not limited to:

 

  reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the Board whether the audited financial statements should be included in the Form 10-K;
     
  discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of the Company’s financial statements;
     
  discussing with management major risk assessment and risk management policies;
     
  monitoring the independence of the independent auditor;
     
  verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law;
     
  inquiring and discussing with management the Company’s compliance with applicable laws and regulations;

 

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  pre-approving all audit services and permitted non-audit services to be performed by the independent auditor, including the fees and terms of the services to be performed;
     
  appointing or replacing the independent auditor;
     
  determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work;
     
  establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or reports which raise material issues regarding the Company’s financial statements or accounting policies; and
     
  reviewing and approving any related party transactions the Company may enter into. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related party’s interest in the transaction.

 

Financial Experts on Audit Committee

 

The audit committee will at all times be composed exclusively of “independent directors” who are “financially literate” as defined under the Nasdaq listing standards. The definition of “financially literate” generally means being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. The Company has determined that Edward Hanson qualifies as an “audit committee financial expert,” as defined under rules and regulations of the SEC.

 

Compensation Committee

 

The compensation committee consists of Tom Cardella and Richard Y. Roberts, each of whom is an independent director, with Mr. Cardella serving as chairman. The principal functions of the compensation committee are:

 

  evaluating the performance of the Company’s officers,
     
  reviewing any compensation payable to the Company’s directors and officers,
     
  preparing compensation committee reports, and
     
  administering the issuance of any common stock or other equity awards granted to the Company’s officers and directors.

 

The compensation committee makes all decisions regarding executive officer compensation. The compensation committee periodically reviews the elements of compensation for the executive officers and, subject to any existing employment agreements, sets each element of compensation for the Chief Executive Officer and the other executive officers, including annual base salary, annual incentive bonus and equity compensation. The compensation committee also periodically reviews the terms of employment agreements with the executive officers, including in connection with any new hire or the expiration of any existing employment agreements. The compensation committee will consider the recommendations of the Executive Chairman and the Chief Executive Officer when determining compensation for the other executive officers. Executive officers do not determine any element or component of their own pay package or total compensation amount. The Chief Executive Officer has no role in determining and is not present for any discussions regarding his own compensation.

 

The compensation committee also reviews and approves the Company’s compensation plans, policies and programs and administers the Company’s equity incentive plans. In addition, the Executive Chairman, the Chief Executive Officer, the Chief Financial Officer and other members of management make recommendations to the compensation committee with regard to overall pay strategy including program designs, annual incentive design, and long-term incentive plan design for all employees. Management from time to time provides the compensation committee with market information and relevant data analysis as requested.

 

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The compensation committee retains sole authority to engage compensation consultants, including determining the nature and scope of services and approving the amount of compensation for those services, and legal counsel or other advisors. The compensation committee assesses the independence of any consultants pursuant to the rules and regulations of the SEC and the listing standards of Nasdaq. The Company will provide for appropriate funding, as determined by the compensation committee, for payment of any such investigations or studies and the compensation to any consulting firm, legal counsel or other advisors retained by the compensation committee. The Company engaged a compensation consultant as part of its development of an overall compensation strategy and establishment of individual compensation arrangements during the fiscal year ended December 31, 2016.

 

Nominating Committee

 

The nominating committee consists of Edward Hanson and Kerry Kennedy, each of whom is an independent director under the Nasdaq listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on the Board. The nominating committee will consider persons identified by its members, management, stockholders and others.

 

The guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated:

 

  should have demonstrated notable or significant achievements in business, education or public service;
     
  should possess the requisite intelligence, education and experience to make a significant contribution to the Board and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and
     
  should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the stockholders.

 

The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person’s candidacy for membership on the Board. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific Board needs that arise from time to time. Though the Board does not have specific guidelines on diversity, it is one of many criteria considered by the Board when evaluating candidates. The nominating committee does not distinguish among nominees recommended by stockholders and other persons. The Company does not pay any fee to or otherwise engage any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees.

 

The nominating committee does not have a written policy or formal procedural requirements for stockholders to submit recommendations for director nominations. However, the nominating committee will consider recommendations from stockholders. Stockholders should communicate nominee suggestions directly to the nominating committee and accompany the recommendation with biographical details and a statement of support for the nominee. The suggested nominee must also provide a statement of consent to being considered for nomination. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

In addition, pursuant to the Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of December 31, 2014 and amended as of April 23, 2015, by and among the Company, Cullen, Cullen Merger Sub, Inc., LIBB Acquisition Sub, LLC, LIBB and certain of the former members of LIBB, the parties to the agreement have agreed to take all necessary action so that Messrs. Thomas, Vassilakos, Hanson and Roberts and Ms. Kennedy are elected as directors through 2018.

 

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Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s officers, directors and persons who own more than ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership with the SEC. Officers, directors and ten percent stockholders are required by regulation to furnish the Company with copies of all Section 16(a) reports they file. Based solely on a review of such reports received by the Company and written representations from certain reporting persons that no Form 5s were required for those persons, the Company believes that, during the fiscal year ended December 31, 2016 and thereafter, all reports required to be filed by the Company’s officers, directors and persons who own more than ten percent of a registered class of the Company’s equity securities were filed on a timely basis, except that:

 

● Ivory Castle Limited did not timely file its Form 3;

 

● Vistra Asia Ltd. did not timely file its Form 3;

 

● Eric Watson did not timely file a Form 4 disclosing seven transactions (five purchase transactions for an aggregate of 1,712 shares of common stock and two sale transactions for an aggregate of 775 shares of common stock) that occurred during the period from June 2, 2015 to June 24, 2015;

 

● KA No. 2 Trustee Ltd. did not timely file its Form 3;

 

● Kerry Kennedy did not timely file a Form 4 disclosing one transaction (a grant of 8,956 shares of common stock) that occurred on January 26, 2016;

 

● Ivory Castle Limited did not timely file a Form 4 disclosing three transactions (two purchase transactions for an aggregate of 123,372 shares of common stock and 22,500 warrants and one sale transaction for an aggregate of 65,000 shares of common stock) that occurred between June 30, 2015 and January 20, 2016; and

 

● Ivory Castle Limited did not timely file a Form 4 disclosing one transaction (the sale of 77,000 shares of common stock) that occurred on May 2, 2016.

 

Code of Ethics

 

In May 2015, upon consummation of the Business Combination, the Board adopted a code of ethics that applies to the Company’s directors, officers and employees, including its Chief Executive Officer and Chief Financial Officer, as well to the directors, officers and employees of subsidiaries the Company has or may have in the future. The Company will provide a copy of its code of ethics, upon request of any person, without charge. Requests should be sent in writing to Long Island Iced Tea Corp., 116 Charlotte Avenue, Hicksville, New York 11801. The code of ethics also is available free of charge on the Company’s website at http://investors.longislandicedtea.com/committees-charters.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Executive Compensation

 

Summary Compensation Table

 

The following table sets forth all compensation of our Chief Executive Officer and each of our two most highly compensated executive officers other than our Chief Executive Officer (together, the “ Named Executive Officers “) for the fiscal years ended December 31, 2016 and 2015.

 

Name and Principal Position   Year     Salary (S)     Bonus ($)     Stock Awards ($)    

Option Awards

($)(1)

   

All Other Compensation

($)

    Total ($)  
Julian Davidson(2)     2016       -       211,250 (6)     381,161 (7)     776,933 (9)     167,499 (14)     1,536,843  
Executive Chairman     2015       -       -       -       -       -          
Philip Thomas(3)     2016       150,484       -       -       -       27,155 (12)     177,639  
Chief Executive Officer     2015       99,300       -       -       497,600 (10)     13,572 (12)     610,472  
Richard Allen(4)     2016       100,538       -       181,582 (8)     -       19,500 (13)     301,610  
Chief Financial Officer     2015       -       -       -       -       -       -  
Peter Dydensborg(5)     2016       130,500       -       -       -       24,235 (12)     154,735  
Chief Operating Officer     2015       135,808       -       -       364,909 (11)     21,211 (12)     521,928  

 

  (1) Represents the aggregate grant date fair value of awards computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718. Assumptions used in the calculation of these amounts are disclosed in Note 10 to our audited consolidated financial statements for the year ended December 31, 2016 contained herein.
     
  (2) The information in the table includes compensation to Mr. Davidson from June 6, 2016, which was the date he became the Executive Chairman of the Company, as well as fees paid to him prior to such date during 2016.
     
  (3) The information in the table includes compensation to Mr. Thomas from LIBB prior to the consummation of the Business Combination on May 27, 2015. Mr. Thomas became our Chief Executive Officer on such date.
     

 

(4) Mr. Allen was hired by the Company on June 6, 2016.
     
  (5) The information in the table includes compensation paid to Mr. Dydensborg by LIBB prior to the consummation of the Business Combination on May 27, 2015. Mr. Dydensborg became our Chief Operating Officer on such date.
     
  (6) The bonus includes Mr. Davidson’s earned cash bonuses.
     
  (7) This amount includes 1,667 shares issued on July 29, 2016 as part of the June consulting agreement. This amount also includes 15,000 shares which were issued on October 4, 2016 as part of the amended consulting agreement on September 29, 2016. In addition, 52,635 shares were also issued on October 4, 2016 as part of the June consulting agreement. All shares were issued at $5.50.

 

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  (8)

The amount includes the aggregate grant date fair value of 8,333 shares of its common stock the Company will grant to Mr. Allen on May 31, 2017. The amount also includes shares which shall have fair market values equal to $50,000 which will be granted to Mr. Allen on each of May 31, 2018 and 2019. The amount includes the grant date fair value of shares issued to Mr. Allen as a consultant. 

     
  (9)

The amount excludes the fair value of 71,686 options which were issued in February 2017 upon the completion of raising $3,000,000. The amount includes the fair value of 286,744 options issued to Mr. Davidson on August 18, 2016. 

     
  (10) This amount includes options granted to Mr. Thomas in connection with the Business Combination on May 27, 2015.
     
  (11) This amount includes options granted to Mr. Dydensborg in connection with the Business Combination on May 27, 2015.
     
  (12) This amount represents medical insurance and travel allowances paid to the officers by the Company.
     
  (13) This amount represents medical insurance and travel allowances as well as $7,500 which was paid to Mr. Allen in conjunction with his consulting agreement prior to becoming the Chief Financial Officer.
     
  (14) This amount includes consulting fees paid to Mr. Davidson during 2016 for his services as a consultant.

 

Compensation Arrangements

 

The Company’s compensation policies are intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of stockholder value.

 

Compensation Prior to the Business Combination

 

Paul N. Vassilakos served as Cullen’s sole executive officer during the period from January 1, 2015 to May 27, 2015, the date the Business Combination was consummated. Based on Cullen’s level of operations, financial condition and results of operations, Cullen’s board of directors, in consultation with its compensation committee, determined not to pay any compensation to Cullen’s officers during these periods. Mr. Vassilakos also served as the Company’s Chief Executive Officer from the Company’s inception through May 27, 2015. The Company did not pay him any compensation for such services.

 

Philip Thomas served as LIBB’s Chief Executive Officer during the period from January 1, 2015 to May 27, 2015, for which LIBB paid him $26,000 per year for such services. LIBB also reimbursed him for all out-of-pocket expenses he incurred on LIBB’s behalf.

 

Peter Dydensborg served as LIBB’s Chief Operating Officer during the period from January 1, 2015 to May 27, 2015, pursuant to a written employment agreement. Such agreement provided for Mr. Dydensborg to receive a base salary of $170,000 per year. Additionally, Mr. Dydensborg was entitled to an incentive bonus of not less than 15% of his base salary. The employment agreement with Mr. Dydensborg contained provisions for the protection of LIBB’s intellectual property and for non-compete restrictions during employment and in the event of termination (generally imposing restrictions on (i) employment or consultation with competing companies or customers, (ii) recruiting or hiring employees for a competing company and (iii) soliciting or accepting business from LIBB’s customers for a period of one year following termination).

 

Compensation after the Business Combination

 

Upon consummation of the Business Combination, Mr. Vassilakos resigned as the Company’s Chief Executive Officer. Messrs. Thomas and, Dydensborg and Meehan became the Company’s Chairman of the Board and Chief Executive Officer and, Chief Operating, respectively, and also retained their respective positions with LIBB.

 

In connection with the closing of the Business Combination, Messrs. Thomas and Dydensborg entered into new employment agreements with the Company to serve as the Company’s Chief Executive Officer and Chief Operating Officer, respectively. Each employment agreement has a term of two years from the closing of the Business Combination, except that the agreement with Mr. Dydensborg provides that either the Company or the executive can terminate the agreement with six months’ advance notice. The employment agreements provide for Messrs. Thomas and Dydensborg to receive base salaries of $150,000 and $130,000, respectively. Additionally, each is entitled to an incentive bonus of up to 50% and 40% of his base salary, respectively.

 

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Pursuant to their employment agreements, upon the closing of the Business Combination, Messrs. Thomas and Dydensborg also received a five-year option to purchase 80,000 shares of the Company’s common stock and 58,667 shares of the Company’s common stock, respectively, at an exercise price of $3.75 per share. The options vest quarterly in equal proportions over the two year employment term. If Mr. Thomas or Dydensborg’s employment is terminated by the Company without “cause” or by such executive with “good reason,” then the option granted to him will become vested in full and will be exercisable for one year from the date of termination. In addition, the options will be accelerated upon the occurrence of certain non-negotiated change of control transactions. In the event of certain negotiated change of control transactions, the compensation committee may, (i) accelerate the vesting of the options, or (ii) require the executive to relinquish the option to the Company upon the tender by the Company to the executive of cash in an amount equal to the repurchase value of such award.

 

On March 10, 2017, the employment agreement of Mr. Thomas was amended and restated in its entirety to extend the term to December 31, 2019, and increase the annual compensation to $250,000. In addition, Mr. Thomas’ incentive bonuses were changed so that he is eligible to be paid bonuses from time to time based on the achievement of performance goals for Mr. Thomas and the Company as established by the compensation committee. The agreement also included a one-time cash payment of $83,000 upon signing of agreement and an option award with a term of five years to purchase 75,000 shares of the Company’s common stock, with an exercise price of $4.50 per share. Of such shares, 25,000 shares are vested on the date of grant and the remaining 50,000 shares will vest in equal portions on March 10, 2018 and March 10, 2019.

 

Unless terminated by the Company without “cause” or by the executive with “good reason” (as such terms are defined in the employment agreements), upon termination the executives will be entitled only to their base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated by the Company without “cause” or by the executives with “good reason,” each executive is entitled to be paid severance (base salary for a period of six months), valid expense reimbursements and accrued but unused vacation pay.

 

Each of the employment agreements contains provisions for the protection of the Company’s intellectual property and confidential information and certain non-competition restrictions for the executives (generally imposing restrictions during employment and until May 27, 2017 on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).

 

In June 2016, Julian Davidson became the Company’s Executive Chairman and Richard Allen became the Company’s Chief Financial Officer.

 

On June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial Officer. The employment agreement has a term of three years, and automatically renews for additional one year periods thereafter unless either party provides notice of its decision not to renew. The employment agreements provides for Mr. Allen to receive a base salary of $170,000. If prior to December 31, 2016, the Company completes an equity offering with gross proceeds of at least $5,000,000 or the Company has net sales of at least $1,000,000 during any calendar month, Mr. Allen’s base salary will become $185,000 commencing on June 6, 2017, and $200,000 commencing on June 6, 2018. Additionally, he is entitled to an incentive bonus of up to 50% of his base salary. Furthermore, the Company will grant Mr. Allen 8,333 shares of the Company’s common stock on May 31, 2017 and a number of shares of the Company’s common stock having a fair market value equal to $50,000 on each of May 31, 2018 and 2019.

 

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Unless terminated by the Company without “cause” or by Mr. Allen with “good reason” (as such terms are defined in the employment agreements) or upon death or disability of Mr. Allen, upon termination Mr. Allen will be entitled only to his base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated upon death or disability of Mr. Allen, upon termination Mr. Allen will be entitled to his base salary through the date of termination, valid expense reimbursements and certain unused vacation pay, and all equity awards will vest to the extent they would have been vested at the next scheduled vesting date and will remain exercisable for at a certain period of time. If terminated by the Company without “cause” or by Mr. Allen with “good reason,” Mr. Allen is entitled to be paid severance equal to base salary for nine months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current year, valid expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and will remain exercisable for a certain period of time. If Mr. Allen’s agreement is not renewed, Mr. Allen is entitled to be paid severance equal to his base salary for five months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current year, valid expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and will remain exercisable for a certain period of time.

 

The employment agreement contains provisions for protection of the Company’s confidential information and certain non-competition restrictions for Mr. Allen (generally imposing restrictions during employment and for a period of nine months after the term of the employment agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).

 

On June 6, 2016, the Company amended its consulting agreement with Julian Davidson to provide, among other things, for him to serve as the Company’s Executive Chairman. Pursuant to the amendment, the Company agreed (a) to pay to Mr. Davidson $10,000 per month, and (b) to grant to Mr. Davidson 1,667 shares of the Company’s common stock per month. Upon the Company’s completing an equity raise with gross proceeds of at least $10,000,000, the monthly cash fee to Mr. Davidson under the consulting agreement would increase to $20,000 per month, the monthly stock grant to Mr. Davidson would be eliminated and Mr. Davidson would receive a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock. In addition, upon completion of the aforementioned equity raise and Mr. Davidson obtaining a work visa, Mr. Davidson could enter into an employment agreement with the Company in the form attached to the consulting agreement or into an amended consulting agreement with substantially similar terms (either such agreement, a “Replacement Agreement “). Mr. Davidson also could enter into a Replacement Agreement if more than two months had elapsed since the equity raise and he had not obtained a work visa.

 

The Company completed an equity raise in July 2016, but the gross proceeds were less than the $10,000,000 threshold described above. Effective as of August 18, 2016, the Company amended the consulting agreement to reduce the $10,000,000 threshold to $6,900,000 (which was less than the gross proceeds of the July 2016 equity raise). As a result of reducing the threshold, Mr. Davidson’s monthly cash fee increased to $20,000, his monthly stock grant was eliminated and he received a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock, all as described above. Also, as a result of the threshold reduction, Mr. Davidson would have the right to enter into a Replacement Agreement upon obtaining a work visa or upon the elapse of two months from the closing of the July 2016 equity raise. In addition, under the amendment, Mr. Davidson received stock options to purchase 286,744 shares of the Company’s common stock (in place of a stock option previously provided for in the form of Replacement Agreement) and certain of the terms of the form of Replacement Agreement were modified.

 

On September 29, 2016, after the expiration of two months from the July 2016 equity raise, Mr. Davidson elected to enter into a Replacement Agreement with the Company by amending and restating his consulting agreement. Under the amended and restated consulting agreement, as had been provided in the form of Replacement Agreement, (a) the Company will pay to Mr. Davidson a fee of $20,833 per month, (b) the Company paid Mr. Davidson an incentive of $75,000 on the date of the agreement and will pay to him $165,000 on the first anniversary of such date, (c) the Company granted Mr. Davidson 15,000 shares of the Company’s common stock on the date of the agreement, (d) Mr. Davidson will be eligible to receive an annual additional fee of up to 50% of his annual fee based on Consultant’s performance over each calendar year, and (e) if the Company completes an additional equity raise with gross proceeds of at least $3,000,000, then the Company will issue to Mr. Davidson 20,000 shares of the Company’s common stock and an option to purchase a 71,686 shares of the Company’s common stock with an exercise price equal to the fair market value of the common stock as of such date. If Mr. Davidson obtains a work visa, he has the right to enter into an employment agreement in the form attached to the amended and restated consulting agreement, which contains substantially the same compensation terms as the amended and restated consulting agreement. The form of employment agreement otherwise has similar terms to Mr. Allen’s employment agreement.

 

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The exercise price of the stock options to purchase 286,744 shares of the Company’s common stock issued to Mr. Davidson on August 18, 2016 is $5.50 per share. One-third of such stock options are immediately vested and the remaining two-thirds vest in equal installments on July 28, 2017 and 2018. The exercise price of the stock options to purchase 71,686 shares of the Company’s common stock that may be issued pursuant to the amended and restated consulting agreement will have an exercise equal to the market price of the Company’s common stock on the date of grant. These stock options will vest on the same schedule as the stock options issued on August 18, 2016. All the stock options will expire on July 28, 2021. If Mr. Davidson’s service to the Company is terminated by the Company without “cause” or by him with “good reason,” then the stock options granted to him will become vested in full and will be exercisable for one year from the date of termination. In addition, the stock options will be accelerated upon the occurrence of certain non-negotiated change of control transactions. In the event of certain negotiated change of control transactions, the compensation committee may, (i) accelerate the vesting of the stock options, or (ii) require the executive to relinquish the stock options to the Company upon the tender by the Company to the executive of cash in an amount equal to the repurchase value of such award. Notwithstanding the foregoing, none of the stock options are exercisable prior to the Company’s stockholders approving them. The stock options will be deemed cancelled, if the Company’s stockholders do not approve them.

 

Either Mr. Davidson or the Company may terminate the amended and restated consulting agreement with 30 days’ prior written notice. The amended and restated consulting agreement contains certain provisions for protection of the Company’s intellectual property and confidential information and certain non-competition restrictions for Mr. Davidson (generally imposing restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).

 

In connection with the Business Combination, the Company adopted the 2015 Plan, which is administered by the Company’s compensation committee. The committee may grant stock options, stock appreciation rights, restricted stock or other stock-based awards under the plan to the Company’s employees, officers, directors and consultants. The Board has reserved 466,667 shares of the Company’s common stock for issuance under the plan. No awards had been granted under the plan as of December 31, 2016. On January 18, 2017, the shareholders approved the amendments to the 2015 Plan (i) to increase the number of shares authorized for issuance from 466,667 to 750,000 shares, and (ii) to increase the number of shares that may be granted to a single participant in a calendar year from 100,00 to 300,000 shares.

 

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Outstanding Equity Awards Table

 

The following table sets forth unexercised options, unvested stock and equity incentive plan awards outstanding for the Named Executive Officers as of December 31, 2016.

 

Outstanding Option Awards at Fiscal Year-End for 2016

 

Name   Number of securities underlying unexercised options (#) exercisable     Number of securities underlying unexercised options (#) unexercisable     Option exercise price ($)     Option expiration date  
Julian Davidson     95,581       191,163 (1)   $ 5.50       7/18/2021  
Philip Thomas     60,000       20,000 (2)   $ 3.75       5/27/2020  
Richard Allen     -       - (3)   $ -       -  
Peter Dydensborg     44,000       14,667 (4)   $ 3.75       5/27/2020  

 

  (1) The options vest in two annual installments on July 18, 2017 and July 18, 2018. The amount excludes the fair value of 71,686 options which were issued in February 2017 upon the completion of raising $3,000,000 subsequent to September 29, 2016 and the fair value of an option to purchase 31,630 shares of common stock issued on January 5, 2017.
     
  (2) The options vest in two equal quarterly installments on February 27, 2017 and May 27, 2017. The amount excludes the fair value of an option to purchase 75,000 shares of common stock issued on March 10, 2017 in connection with the March 10, 2017 amended employment agreement of Mr. Thomas and the fair value of an option to purchase 45,547 shares of common stock issued on January 5, 2017.
     
  (3) Excludes the fair value of an option to purchase 30,111 shares of common stock issued on January 5, 2017.
     
  (4) The options vest in two equal quarterly installments on February 27, 2017 and May 27, 2017. Excludes the fair value of option to purchase 31,579 shares of common stock issued on January 5, 2017.

 

Outstanding Stock Awards at Fiscal Year-End for 2016

 

Name  

Number of shares or units of stock that have not vested

(#)

   

Market value of shares or units of stock that have not vested

(#)

   

Equity incentive plan awards: number of unearned shares, units or other rights that have not vested

(#)

    Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($)  
Julian Davidson     -       -       -       -  
Philip Thomas     -       -       -       -  
Richard Allen     32,314 (1)     84,749 (1)     -       -  
Peter Dydensborg     -       -       -       -  

 

  (1) The amount 8,333 shares of its common stock the Company will grant to Mr. Allen on May 31, 2017 at the stock price of $4.17 on December 31, 2016. The amount also excludes shares which shall have fair market values equal to $50,000 which will be granted to Mr. Allen on each of May 31, 2018 and 2019. For the purpose of the number of shares in the disclosure, the value of the stock of $4.17 per share was utilized. Number of shares not vested consist of 8,333 shares which will be issued on December 31, 2016 and an aggregate of 23,981 shares to be issued to Mr. Allen on each of May 31, 2018 and 2019, respectively. This represents stock valued at $34,748, 50,000 and 50,000, to be issued on May 31, 2018 and 2019, respectively.

 

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Director Compensation

 

The following table sets forth all compensation of our directors for the fiscal year ended December 31, 2016. The compensation for Mr. Davidson, who is our Executive Chairman, and Mr. Thomas, who is our Chief Executive Officer, is fully reflected in the Summary Compensation Table above.

 

Director Compensation for 2016

 

Name   Fees earned or paid in cash ($)    

Stock awards

($)(1)

    Total ($)  
Paul Vassilakos     30,000       35,000       65,000  
Edward Hanson     30,000       35,000       65,000  
Kerry Kennedy     30,000       35,000       65,000  
Thomas Cardella     26,500 (2)     35,000       61,500  
Richard Y. Roberts     30,000       35,000       65,000  

 

  (1) On January 17, 2017, each of Messrs. Vassilakos, Hanson, Cardella and Roberts and Ms. Kennedy were granted 8,393 shares of our common stock for their service as directors in 2016. The stock awards are not subject to vesting or other contractual restrictions. The amounts reported in the stock awards column represent the aggregate grant date fair value of awards computed in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification Topic 718. Assumptions used in the calculation of these amounts are disclosed in our audited consolidated financial statements for the year ended December 31, 2016 contained herein.
     
  (2) The amount includes $4,000, which was paid to Mr. Cardella for his services on the Company’s Advisory Board prior to becoming a member of the Board of Directors.

 

Director Compensation

 

In connection with the consummation of the Business Combination on May 27, 2015, we adopted compensation arrangements for our nonemployee directors. For the period from July 1, 2015 to December 31, 2015, each non-employee director received an annual award of $30,000 in shares of our common stock, valued as of December 31, 2015. Thereafter, each non-employee director receives an annual cash fee of $30,000. In addition, each non-employee director receives an annual award of $35,000 in shares of our common stock, valued as of December 31st of such year. The stock awards are not subject to vesting or other contractual restrictions.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth information regarding the beneficial ownership of our shares of common stock as of March 30, 2017, by:

 

  each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
     
  each of our officers and directors; and
     
  all our officers and directors as a group.

 

The percentage of beneficial ownership set forth in the table above is calculated based on 8,393,066 outstanding shares of common stock as of March 30, 2017. Unless otherwise indicated, the Company believes that all persons named in the table above have sole voting and investment power with respect to all the shares of common stock beneficially owned by them.

 

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Name and Address of Beneficial Owner(1)  

Amount and Nature of

Beneficial

Ownership

   

Percentage of Beneficial

Ownership

 
Current Directors and Officers:                
Paul N. Vassilakos (2)     118,321       1.4 %
Kerry Kennedy (3)     38,016       *  
Richard Y. Roberts (4)     38,016       *  
Edward Hanson (5)     38,016       *  
Tom Cardella (6)     70,893       *  
Julian Davidson (7)     222,000       2.6 %
Phil Thomas (8)     844,834       9.9 %
Richard Allen (9)     76,239       *  
Peter Dydensborg (10)     78,306       *  
All directors and executive officers (9 persons)     1,524,641       17.4 %
Five Percent Holders:                
Eric J. Watson (11)     1,482,821       17.3 %
Ivory Castle Limited (12)     875,243       10.4 %
                 

 

  * Less than one percent.
     
  (1) Unless otherwise indicated, the business address of each of the individuals is 116 Charlotte Avenue, Hicksville, NY 11801.
     
  (2) Includes (i) 23,750 shares subject to warrants that are currently exercisable, and (ii) 23,333 shares subject to stock options that are currently exercisable. Does not include 46,667 shares subject to stock options that will not become exercisable within 60 days.
     
  (3) Ms. Kennedy’s business address is c/o Robert F. Kennedy Center, 1367 Connecticut Avenue N.W., Suite 200, Washington, D.C. 20036.
     
  (4) Mr. Roberts’ business address is Roberts, Raheb & Gradler, LLC, 1200 New Hampshire Avenue N.W., Suite 300, Washington, D.C. 20036.
     
  (5) Mr. Hanson’s business address is 94 Draycott Ave, London SW3 3AD, United Kingdom.
     
  (6) Includes 25,000 shares subject to warrants that are currently exercisable.
     
  (7) Includes 123,430 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 266,630 shares subject to stock options that will not become exercisable within 60 days.
     
  (8) Includes (i) 6,250 shares subject to warrants that are currently exercisable, and (ii) 110,693 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 89,854 shares subject to stock options that will not become exercisable within 60 days.
     
  (9)

Includes 3,764 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 26,347 shares subject to stock options that will not become exercisable within 60 days.

     

 

 

(10) Includes 62,614 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 27,632 shares subject to stock options that will not become exercisable within 60 days.
     
  (11) Mr. Watson resigned from his positions as an officer and director of Cullen in November 2013. Represents shares of common stock held by Cullen Holdings, an entity controlled by Mr. Watson. Mr. Watson’s business address is Level 9, 68 Shorthand Street , P.O. Box 91296, Auckland, New Zealand. Included 165,000 shares subject to warrants that are currently exercisable.
     
  (12) John Matthew Ashwood and Michael Raymond Shue have voting and dispositive control over the shares of common stock held by Ivory Castle Limited. Includes 22,500 shares subject to warrants that are currently exercisable. Ivory Castle Limited’s business address is c/o Suite 5501, 55th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

 

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Equity Compensation Plans

 

As of December 31, 2016, we had the following compensation plans (including individual compensation arrangements) under which equity securities were authorized for issuance:

 

Plan category  

Number of securities

to be issued upon

exercise of

outstanding options,

warrants and rights

   

Weighted-average

exercise price of

outstanding options,

warrants and rights

   

Number of securities

remaining available for

future issuance under

equity compensation

plans (excluding

securities reflected in

column (a))

 
    (a)     (b)     (c)  
Equity compensation plans approved by security holders     -       -       365,032 (1)
Equity compensation plans not approved by security holders(1)     425,411 (2)   $ 4.93       -  
Total     425,411     $ 4.93       365,032  

 

 

 

  (1) Represents shares of common stock available for issuance under our 2015 Long-Term Incentive Plan. On January 17, 2017, the stockholders approved to increase the number of shares authorized under the 2015 Long-Term Incentive Plan to 750,000.
     
  (2) Represents stock option grants to Philip Thomas and Peter Dydensborg upon consummation of the Business Combination and stock options granted to Mr. Davidson on August 18, 2016 under his amended consulting agreement. The material terms of the stock options granted to Messrs. Thomas, Dydensborg and Davidson are described under Item 11 of Part III of this Form 10-K. On January 17, 2017, the stockholders approved Mr. Davidson’s stock option grant.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

Our Related Party Transactions

 

On November 23, 2015, we entered into a reimbursement agreement with Magnum Vending Corp. (“Magnum”), an entity managed by Philip Thomas, our Chief Executive Officer and a director of ours, and certain of his family members, and owned by Mr. Thomas’ father. In exchange for the exclusive right to stock vending machines owned by Magnum, we agreed to reimburse Magnum for certain costs that Magnum incurred to acquire the machines. The reimbursements will be made in 35 monthly payments, the first three in the amount of $14,544 and the remaining payments in the amount of $3,819. Upon completion of these payments, Magnum will transfer the vending machines to us. In addition, in exchange for the right to stock certain other vending machines that Magnum has the right to use, we 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. We may terminate the agreement and all obligations to make future payments on ten days’ written notice to Magnum.

 

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Also on November 23, 2015, the Company entered into a Credit and Security Agreement, as amended, as of January 10, 2016 and April 7, 2016 (the “Credit Agreement “), with Brentwood LIIT Inc., which subsequently assigned its interest to Brentwood LIIT (NZ) Ltd. ( the “ Lender “). The Lender is controlled by Eric Watson, who currently beneficially owns approximately 17.3% of the Company’s outstanding common stock. The Credit Agreement provides for a revolving credit facility (the “ Credit Facility “) in an available amount of up to $1,500,000, subject to increases as provided in the Credit Agreement (the “ Available Amount “), up to a maximum amount of $3,500,000 (the “ Facility Amount “). The Company paid the Lender a one-time facility fee of $87,500, which was capitalized and added to the principal amount of the loan, and will pay the Lender $30,000 for its expenses at the maturity date, November 23, 2018. In addition, in connection with the establishment of the Credit Facility, the Company issued a warrant to the Lender (the “ Lender Warrant “) entitling the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50. The Credit Facility bears interest at rate equal to the prime rate plus 7.5%, compounded quarterly, and matures on November 23, 2018. The loans under the Credit Agreement are evidenced by a secured promissory note (the “Lender Note”). The Lender may elect to convert the outstanding principal and interest under the Lender Note into shares of the Company’s common stock at a conversion price of $4.00 per share. As of December 31, 2016 and December 31, 2015, the outstanding balance of the loans under the Credit Facility was $0 and $1,091,571. The largest amount outstanding since the inception of the loans was $1,669,376. No interest was paid in cash on the loans, although $81,876 of interest was compounded by adding to the outstanding balance of the loans. Upon the closing of the Company’s July 2016 equity raise, the Company completed a recapitalization transaction with the Lender in accordance with to the April 7, 2016 amendment to the Credit Agreement (the “Recapitalization”). Pursuant to the Recapitalization, all of the outstanding principal and interest under the Lender Note was converted into 421,972 shares of common stock and the Lender Warrant was exchanged for 486,111 shares of common stock. The Company may continue to request advances under the credit facility subject to the terms and conditions of the Credit Agreement.

 

On April 28, 2015, we received $150,000 as proceeds from a loan from Bass Properties, LLC, a stockholder of ours. This note had an interest rate of 10% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued interest of $152,425 were converted into 38,107 shares of common stock.

 

On May 4, 2015, we received $400,000 as proceeds from a loan with Ivory Castle Limited, a stockholder of ours. This note has an interest rate of 6% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued interest of $403,485 were converted into 100,872 shares of common stock.

 

On June 30, 2015, a family member of Paul Vassilakos, a member of our board of directors, purchased 12,500 shares of common stock for $4.00 per share for an aggregate of $50,000. In addition, on June 30, 2015, family members of Philip Thomas, Chief Executive Officer and a member of our board of directors purchased 12,500 shares of common stock for $4.00 per share for an aggregate of $50,000.

 

On September 17, 2015, as part of the October Private Placement, Paul Vassilakos, a member of our board of directors, purchased 6,250 units from us at a purchase price of $4.00 per unit, for an aggregate of $25,000. On November 30, 2015 and March 14, 2016, as part of the February Private Placement, Mr. Vassilakos purchased 10,000 units and 7,500 units, respectively, in each case at a purchase price of $4.00 per unit, for an aggregate of $70,000. On September 30, 2015, as part of the October Private Placement, Philip Thomas, Chief Executive Officer and a member of our board of directors, purchased 6,250 units from us for a purchase price of $4.00 per unit, for an aggregate of $25,000. Ivory Castle Limited, a shareholder of ours, purchased 22,500 units from us for a purchase price of $4.00 per unit, for an aggregate of $90,000 and Bass Properties LLC, a shareholder of ours, purchased 15,000 units from us for a purchase price of $4.00 per unit, for an aggregate of $60,000. The private placements are described more fully in Item 7 of Part II of this Form 10-K.

 

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Philip Thomas, our Chief Executive Officer and a director of ours and the beneficial owner of 9.9% of our outstanding common stock, and Thomas Panza, the beneficial owner of 8.8% of our outstanding common stock, are parties to the Merger Agreement and certain related agreements, including lock-up agreements and a registration rights agreement. Pursuant to the Merger Agreement, upon consummation of the Business Combination on May 27, 2015, each of Messrs. Thomas and Panza was issued 721,641 shares of our common stock.

 

Pursuant to the lock-up agreements, Messrs. Thomas and Panza will not be able to sell any of the shares of our common stock that they received as a result of the Business Combination until May 27, 2016, subject to certain limited permitted transfers and subject to early release from such restrictions in the event that we consummate a liquidation, merger, stock exchange or other transaction that results in all of its stockholders having the right to exchange their shares of common stock for cash, securities or property.

 

Pursuant to the registration rights agreement, the former members of LIBB (the “LIBB members”), including Messrs. Thomas and Panza, are entitled to demand that we register the shares issued to them pursuant to the Merger Agreement under the Securities Act of 1933, as amended. The LIBB members can elect to exercise these registration rights at any time after the closing of the Business Combination. In addition, the LIBB members have certain “piggy-back” registration rights with respect to registration statements filed subsequent to consummation of the Business Combination. Notwithstanding such registration rights, the lock-up restrictions described above shall remain in effect for the balance of the twelve month period. These shares were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared effective by the SEC on January 31, 2017.

 

James Meehan, who was our Chief Accounting Officer until September 19, 2016 was paid $83,077 and $154,785 as compensation as an employee for the years ended December 31, 2016 and 2015, respectively. In 2016, Mr. Meehan also received 12,000 shares of the Company’s common stock for consulting services provided to the Company. In 2015, Mr. Meehan also received a five-year option to purchase 16,000 shares of our common stock, at an exercise price of $3.75 per share. Upon Mr. Meehan’s resignation, the option to purchase 16,000 shares was forfeited.

 

Thomas Panza, who as of March 27, 2017 beneficially owned 8.8% of the Company’s outstanding common stock, and served as the LIBB purchasing manager until October 31, 2016. In connection with this role, for the years ended December 31, 2016 and 2015, Mr. Panza was paid $70,769 and $53,077, respectively. In addition, at the closing of the Business Combination, he received a five-year option to purchase 40,000 shares of the Company’s common stock at an exercise price of $3.75 per share, vesting quarterly in equal proportions over the two year employment term. Upon Mr. Panza’s resignation, the option to purchase 40,000 shares was forfeited.

 

Cullen Investments Ltd., a company controlled by Eric Watson, who beneficially owns approximately 17.3% of our common stock, and Petrina Advisors, Inc., a company owned by Paul Vassilakos, a member of our board of directors, have paid certain expenses on our behalf. As of December 31, 2016 and 2015, accounts payable and accrued expenses to these parties were $4,032 and $87,258.

 

We record revenue related to sales to Magnum. For years ended December 31, 2016 and 2015, sales to this related party were $3,451 and $4,800, respectively. As of December 31, 2016 and December 31, 2015, there was $0 and $518, respectively, due from this related party which was included in accounts receivable in the consolidated balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the year ended December 31, 2016 and 2015, the Company purchased $27,557 and $9,356, respectively, of product from this entity. As of December 31, 2016 and 2016, the outstanding balance due to this entity included in accounts payable was $10,043 and $3,242, respectively.

 

On December 27, 2016, Long Island Iced Tea Corp. the Company consummated the December Offering of 406,550 shares of the Company’s common stock (including 2,375 shares being sold to a member of the Board of Directors, through Network 1 Financial Securities, Inc. and Dawson James Securities, Inc., as underwriters, pursuant to the terms of the underwriting agreement, dated December 21, 2016, between the Company and Network 1, as representative of the underwriters. The Shares were sold for a price to the public of $4.00 per share. The Offering generated total net proceeds, after underwriting discounts and payment of other offering expenses, of $1,423,128.

 

Effective on March 21, 2017, an entity controlled by Eric Watson, a stockholder who beneficially owns 17.3% of our shares on such date, Philip Thomas (Chief Executive Officer), Julian Davidson (Executive Chairman), Richard Allen (Chief Financial Officer), and Paul Vassilakos (Director) have committed to fund the Company’s net cash requirements through March 31, 2018. In consideration of this commitment, we granted the entity controlled by Eric Watson a one-year warrant to purchase up to 165,000 shares of our common stock at an exercise price of $4.18 per share. The exercise price and number of shares issuable upon exercise of the warrant may be adjusted in certain circumstances including in the event of a stock dividend, stock split, or our reorganization, merger or consolidation, or our dissolution in connection with the sale of our assets.

 

Cullen Related Party Transactions

 

The holders of such Founders’ Shares became stockholders of Cullen upon consummation of Cullen’s business combination with the predecessor and became stockholders of ours upon consummation of the Business Combination between us, Cullen and LIBB. These shares were registered under the Securities Act pursuant to a registration statement on Form S-3 (File No. 333-213875), which was declared effective by the SEC on January 31, 2017.

 

53
 

 

On December 31, 2014, Cullen entered into a Sale and Purchase Agreement with Hart Acquisitions LLC (“Hart”), an affiliate of Richard Watson, a former director of Cullen and the brother of Eric Watson, Cullen’s former Chief Executive Officer and current principal stockholder, pursuant to which, on January 31, 2015, Cullen sold to Hart certain assets and intellectual property related to Cullen’s former agricultural business for an aggregate of $125,000. The assets consisted of all of Cullen’s remaining equipment, including computer equipment, agricultural equipment, vehicles, a mower, and a tractor. The intellectual property consisted of Cullen’s proprietary farming system (including forage growth and yields, animal genetics and milking systems) that was developed by adapting established grazing science, processes, technology, and genetics to liquid milk production in the Southeastern United States. Additionally, in the event that Hart sells the intellectual property subject to the agreement or licenses the intellectual property to a third party at any time prior to January 31, 2020, Cullen will be entitled to 20% of the amount received from such sale or license.

 

Related Person Policy

 

Upon consummation of the Business Combination, we adopted a Related Person Policy that requires us (and our subsidiaries, including LIBB) to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except as approved by unconflicted executives, the board of directors, or audit committee in accordance with guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, (2) the Company or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.

 

Our audit committee, pursuant to its written charter, will be responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction in which he is a related party, but that director is required to provide the audit committee with all material information concerning the transaction. Additionally, we will require each of its directors and executive officers to complete an annual directors’ and officers’ questionnaire that elicits information about related party transactions.

 

These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.

 

Independence of Directors

 

The Company’s common stock is listed on the Capital Market of The NASDAQ Stock Market (“Nasdaq”) and the Company adheres to the Nasdaq listing standards in determining whether a director is independent. The Board consults with its counsel to ensure that its determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Nasdaq requires that a majority of the Board must be composed of “independent directors,” which is defined generally as a person other than an officer of a company, who does not have a relationship with the company that would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, the Company has determined that each of Messrs. Hanson, Roberts and Cardella and Ms. Kennedy is an independent director.

 

54
 

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

The firm of Marcum LLP (“ Marcum”) acts as our independent registered public accounting firm. The following is a summary of fees paid or to be paid to Marcum for services rendered. Marcum also acted as LIBB’s and Cullen’s principal accountant. The fees set forth below include audit fees paid by us, Cullen and LIBB.

 

    2016     2015  
LIIT                
Audit fees   $ 103,425     $ 69,000  
Audit-Related Fees   $ -     $ -  
Tax Fees   $ -     $ -  
All Other Fees (1)   $ 69,630     $ -  
Cullen                
Audit fees   $ -     $ 33,634  
Audit-Related Fees   $ -     $ -  
Tax Fees (2)   $ -     $ 3,975  
All Other Fees   $ -     $ -  
LIBB                
Audit fees   $ -     $ 33,670  
Audit-Related Fees   $ -     $ -  
Tax Fees   $ -     $ -  
All Other Fees   $ -     $ -  

 

(1) For services rendered for all other 2016 filings including S-1s, S-3, S-5, and proxy statements
(2) For tax compliance work.

 

Audit Committee Pre-Approval Policies and Procedures

 

Our audit committee pre-approved all the foregoing services provided to us. Cullen’s audit committee pre-approved all of the foregoing services provided to it. Because LIBB did not have an audit committee, the foregoing services provided to LIBB were approved by its managing member and board of managers. In accordance with Section 10A(i) of the Exchange Act, before we engage our independent accountant to render audit or non-audit services on a going-forward basis, the engagement will be approved by our audit committee.

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a) The following documents filed as a part of the report:

 

  (1) The following financial statements:

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

  (2) The financial statement schedules:

 

Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.

 

55
 

 

  (3) The following 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., LIBB Acquisition Sub, LLC, Long Island Brand Beverages LLC, Phil Thomas and Thomas Panza (incorporated by reference from Annex A-1 of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
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., LIBB Acquisition Sub, LLC, Long Island Brand Beverages LLC and Phil Thomas and Thomas Panza (incorporated by reference from Annex A-2 of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
3.1   Amended and Restated Certificate of Incorporation (incorporated by reference from Annex C of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
3.2   Bylaws (incorporated from Annex D of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
4.1   Specimen Common Stock Certificate of Long Island Iced Tea Corp (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.1   Form of Lock-Up Agreement (incorporated from Exhibit 10.1 to Cullen’s Current Report on Form 8-K filed on January 6, 2015).
     
10.2   Form of Escrow Agreement (incorporated by reference from Exhibit 10.4 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.3   Form of Registration Rights Agreement (incorporated from Exhibit 10.3 to Cullen’s Current Report on Form 8-K filed on January 6, 2015).
     
10.4*   Form of Employment Agreement between Long Island Iced Tea Corp. and Philip Thomas (incorporated by reference from Exhibit 10.9 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.5*   Form of Employment Agreement between Long Island Iced Tea Corp. and Peter Dydensborg (incorporated by reference from Exhibit 10.10 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.6*   Form of Employment Agreement between Long Island Iced Tea Corp. and James Meehan (incorporated by reference from Exhibit 10.11 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.7*   Form of Employment Agreement between Long Island Brand Beverages LLC. and Thomas Panza (incorporated by reference from Exhibit 10.12 to the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).

 

56
 

 

Exhibit No.   Description
     
10.8*   2015 Long-Term Incentive Equity Plan (incorporated by reference from Annex G of the proxy statement/prospectus that forms a part of the Company’s Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015).
     
10.9   First Amendment to Credit and Security Agreement, effective as of January 10, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp., and Brentwood LIIT Inc. (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 20, 2016).
     
10.10   Form of Warrant for November Private Placement (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 17, 2016).
     
10.11   Form of Subscription Agreement for November Private Placement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 17, 2016).
     
10.12   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 by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 8, 2016).
     
10.13   Form of Subscription Agreement for March Private Placement (incorporated by reference from Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2016).
     
10.14   Form of Warrant for March Private Placement (incorporated by reference from Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2016).
     
10.15   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).
     
10.16   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).
     
10.17   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).
     
10.18   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).
     
10.19   Consulting Agreement dated as of September 29, 2016 between Long Island Iced Tea Corp. and Julian Davidson (incorporated from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 5, 2016).
     
10.20*   Form of Executive Stock Option Agreement (incorporated by reference form exhibit 10.11 to the Company’s annual Report 10-K filed on March 22, 2016).
     
10.21   Form of Subscription Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015).
     
10.22   Form of Warrant (incorporated by reference from Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2015).
     
10.23   Expense Reimbursement Agreement, dated as of November 23, 2015, by and between Long Island Iced Tea Corp. and Magnum Vending Corp. (incorporated from Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on November 24, 2015).

 

57
 

 

Exhibit No.   Description
     
10.24   Credit and Security Agreement, dated as of November 23, 2015, 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 November 24, 2015).
     
10.25   Form of Secured Convertible Promissory Note (incorporated from Exhibit A to the Credit and Security Agreement). (incorporated from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 24, 2015).
     
10.26   Form of Lender Warrant (incorporated from Exhibit C to the Credit and Security Agreement). (incorporated from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on November 24, 2015).
     
10.27   Form of Parent Guaranty (incorporated from Exhibit D to the Credit and Security Agreement). (incorporated from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on November 24, 2015).
     
10.28   Registration Rights Agreement, dated as of December 3, 2015, 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 December 16, 2015).
     
10.29   Pledge and Escrow Agreement, dated as of December 3, 2015, by and among Long Island Iced Tea Corp., Brentwood LIIT Inc. and Graubard Miller. (incorporated from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 16, 2015).
     
21.1   Subsidiaries of the Registrant.
     
23.1   Consent of Marcum LLP
     
31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Accounting Officer.
     
32.1   Section 1350 Certifications of Chief Executive Officer and Chief Accounting Officer.
     
101.INS   XBRL Instance Document.
     
101.SCH   XBRL Taxonomy Extension Schema.
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase.
     
101.LAB   XBRL Taxonomy Extension Label Linkbase.
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase.

 

  Certain exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). Cullen agrees to furnish supplementally a copy of all omitted exhibits and schedules to the Securities and Exchange Commission upon its request.
  * Management contract or compensatory plan or arrangement.

 

58
 

 

SIGNATURES

 

Pursuant to the requirements of the Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March 2017.

 

  LONG ISLAND ICED TEA CORP.
   
  By: /s/ Philip Thomas
    Philip Thomas
    Chief Executive Officer

 

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
/s/ Philip Thomas   Director and Chief Executive   March 30, 2017
Philip Thomas   Officer (Principal Executive Officer)    
         
/s/ Richard Allen   Chief Financial Officer (Principal Financial    March 30, 2017
Richard Allen   Officer and Principal Accounting Officer)    
         
/s/ Julian Davidson   Executive Chairman    March 30, 2017
Julian Davidson        
         
/s/ Edward Hanson   Director   March 30, 2017
Edward Hanson        
         
/s/ Kerry Kennedy   Director    March 30, 2017
Kerry Kennedy        
         
/s/ Richard Roberts   Director   March 30, 2017
Richard Roberts        
         
/s/ Paul Vassilakos   Director    March 30, 2017
Paul Vassilakos        
         
/s/ Tom Cardella   Director    March 30, 2017
Tom Cardella        

 

59
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Audit Committee of the Board of Directors and Stockholders of Long Island Iced Tea Corp. and Subsidiaries

 

We have audited the accompanying consolidated balance sheets of Long Island Iced Tea Corp. and Subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Long Island Iced Tea Corp. and Subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Marcum LLP  
Melville, NY  
March 30, 2017  

 

F-1
 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   As of December 31, 
   2016   2015 
ASSETS          
Current Assets:          
Cash  $1,249,550   $207,192 
Accounts receivable, net (including amounts due from related parties of $55,615 and $67,992, respectively)   1,627,058    363,096 
Inventories, net   1,187,941    712,558 
Restricted cash   103,603    127,580 
Short term investments   2,389,521    - 
Prepaid expenses and other current assets   91,072    48,237 
Total current assets   6,648,745    1,458,663 
           
Property and equipment, net   218,036    360,920 
Intangible assets   22,500    27,494 
Other assets   52,470    67,438 
Deferred financing costs   842,533    1,838,082 
Total assets  $7,784,284   $3,752,597 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $886,316   $601,681 
Accrued expenses   911,843    458,938 
UBS Credit Line   1,280,275    - 
Current portion of automobile loans   11,446    19,231 
Current portion of equipment loan   39,979    36,627 
Total current liabilities   3,129,859    1,116,477 
           
Line of credit, related party   -    1,091,571 
Other liabilities   30,000    30,000 
Deferred rent   1,807    4,648 
Long term portion of automobile loans   17,580    36,864 
Long term portion of equipment loan   36,495    76,477 
Total liabilities   3,215,741    2,356,037 
           
Commitments and contingencies, Note 12          
           
Stockholders’ Equity          
Preferred stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding   -    - 
Common stock, par value $0.0001; authorized 35,000,000 shares; 7,715,306 and 4,635,783 shares issued and outstanding, as of December 31, 2016 and 2015, respectively   772    463 
Additional paid-in capital   17,575,583    3,926,074 
Accumulated deficit   (12,977,566)   (2,529,977)
Accumulated other comprehensive loss   (30,246)   - 
Total stockholders’ equity   4,568,543    1,396,560 
           
Total liabilities and stockholders’ equity  $7,784,284   $3,752,597 

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-2
 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

 

   For the Years Ended December 31, 
   2016   2015 
         
Net sales (including sales to related parties of $23,040 and $54,849, respectively)  $4,558,030   $1,899,230 
           
Cost of goods sold   4,239,317    1,556,140 
Gross profit   318,713    343,090 
           
Operating expenses:          
General and administrative expenses   4,958,076    1,946,270 
Selling and marketing expenses   3,149,710    1,449,049 
Total operating expenses   8,107,786    3,395,319 
           
Operating Loss   (7,789,073)   (3,052,229)
           
Other expenses:          
Other expense   (3,593)   (3,327)
Interest expense   (1,066,969)   (124,713)
Loss on inducement   (1,587,954)   - 
Total other expenses   (2,658,516)   (128,040)
           
Net loss  $(10,447,589)  $(3,180,269)
           
Unrealized loss on investments   (30,246)   - 
           
Comprehensive loss  $(10,477,835)  $(3,180,269)
           
Weighted average number of common shares outstanding – basic and diluted   5,889,428    3,744,931 
           
Basic and diluted net loss per share  $(1.77)  $(0.85)

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-3
 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

   Common Stock   Additional Paid-In   Accumulated   Accumulated Other Comprehensive   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Loss   Equity 
                         
Balance at January 1, 2015   2,633,334    263    3,184,574    (4,365,335)   -    (1,180,498)
                               
Reverse Merger with Cullen Agricultural Holding Corp.   1,518,749    152    1,872,344    -    -    1,872,496 
Common stock issued as payments to vendors   28,085    3    134,267    -    -    134,270 
Conversion of loans payable and accrued interest to stockholders’ equity   138,979    14    555,896    -    -    555,910 
Issuance of common stock, net of costs   142,636    14    568,454    -    -    568,468 
Issuance of common stock and warrants, net of costs   174,000    17    540,929    -    -    540,946 
Issuance of warrants to lenders   -    -    1,725,934    -    -    1,725,934 
Stock based compensation   -    -    359,303    -    -    359,303 
Reclassification of the historical losses of Long Island Brand Beverages LLC to additional paid in capital upon the date of the reverse merger with Cullen Agricultural Holding Corp.   -    -    (5,015,627)   5,015,627    -    - 
Net loss   -    -    -    (3,180,269)   -    (3,180,269)
                               
Balance at December 31, 2015   4,635,783    463    3,926,074    (2,529,977)   -    1,396,560 
                               
Issuance of common stock to consultants, employees, vendors, and customers   190,935    19    970,343    -    -    970,362 
Issuance of common stock and warrants, net of costs   230,475    23    861,767    -    -    861,790 
Issuance of warrants to placement agent   -    -    38,056    -    -    38,056 
Issuance of common stock to the Advisory Board and Board of Directors   65,824    7    239,993    -    -    240,000 
Issuance of common stock, net of costs   406,550    41    1,423,100    -    -    1,423,141 
Issuance of common stock and warrants in the Public Offering, net of costs   1,270,156    127    5,867,090    -    -    5,867,217 
Issuance of common stock in exchange for principal and warrants on Brentwood line of credit   908,083    91    3,257,239    -    -    3,257,330 
Stock based compensation   7,500    1    935,671    -    -    935,672 
Disgorgement on short swing profit   -    -    56,250    -    -    56,250 
Unrealized loss on investments   -    -    -    -    (30,246)   (30,246)
Net loss   -    -    -    (10,447,589)   -    (10,447,589)
                               
Balance at December 31, 2016   7,715,306   $772   $17,575,583   $(12,977,566)  $(30,246)  $4,568,543 

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-4
 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the years ended December 31, 
   2016   2015 
Cash Flows From Operating Activities          
Net loss  $(10,447,589)  $(3,180,269)
Adjustments to reconcile net loss to net cash used in operating activities:          
Bad debt expense   192,634    22,279 
Depreciation and amortization expense   162,500    114,467 
Deferred rent   (2,841)   (1,318)
Stock based compensation   1,175,672    359,303 
Amortization of deferred financing costs   995,549    65,797 
Paid-in-kind interest   77,805    4,071 
Loss on inducement   1,587,954    - 
Loss on disposal of property and equipment   233    3,327 
Changes in assets and liabilities:          
Accounts receivable   (1,456,596)   (220,238)
Inventory   (475,383)   (151,451)
Prepaid expenses and other current assets   (42,835)   (18,163)
Other assets   14,968    (55,732)
Accounts payable   1,194,997    (240,088)
Accrued expenses   550,728    433,305 
Other liabilities   -    (92,466)
Total adjustments   3,975,385    223,093 
           
Net cash used in operating activities   (6,472,204)   (2,957,176)
           
Cash Flows From Investing Activities          
Purchases of property and equipment