UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016

 

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

 

For the transition period from _____________ to _____________

 

Commission File Number 001-37808

 

LONG ISLAND ICED TEA CORP.

(Exact Name of Issuer as Specified in Its Charter)

 

Delaware		47-2624098
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

116 Charlotte Avenue, Hicksville, NY 11801

(Address of Principal Executive Office)

 

(855) 542-2832

(Issuer’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

As of November 10, 2016, 7,308,756 shares of common stock, par value $.0001 per share, were issued and outstanding.

 

 

 

LONG ISLAND ICED TEA CORP.

 

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	3
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2016 and 2015	4
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2016	5
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2016 and 2015	6
Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 4. Controls and Procedures	35
PART II. OTHER INFORMATION	36
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6. Exhibits	37
Signatures	38

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2016				December 31, 2015
		(unaudited)
ASSETS
Current Assets:
Cash		$	359,613			$	207,192
Accounts receivable, net (including amounts due from related parties of $56,493 and $67,992, respectively)			1,469,666				363,096
Inventories, net			978,159				712,558
Restricted cash			-				127,580
Short-term investments			2,507,302				-
Prepaid expenses and other current assets			87,654				48,237
Total current assets			5,402,394				1,458,663
Property and equipment, net			253,299				360,920
Intangible assets			23,741				27,494
Other assets			55,633				67,438
Deferred financing costs			954,113				1,838,082
Total assets		$	6,689,180			$	3,752,597
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	886,601			$	601,681
Accrued expenses			1,347,420				458,938
Current portion of automobile loans			12,643				19,231
Current portion of equipment loan			38,996				36,627
Total current liabilities			2,285,660				1,116,477
Line of credit			-				1,091,571
Other liabilities			30,000				30,000
Deferred rent			2,710				4,648
Long term portion of automobile loans			20,475				36,864
Long term portion of equipment  loan			46,876				76,477
Total liabilities			2,385,721				2,356,037
Commitments and contingencies, Note 7
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;7,168,621 and 4,635,783 shares issued and outstanding,as of September 30, 2016 and December 31, 2015, respectively			717				463
Additional paid-in capital			15,222,983				3,926,074
Accumulated deficit			(10,920,241	)			(2,529,977	)
Total stockholders’ equity			4,303,459				1,396,560
Total liabilities and stockholders’ equity		$	6,689,180			$	3,752,597

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		For the Three Months Ended   September  30,								For the Nine Months Ended   September  30,
		2016				2015				2016				2015
Net sales		$	1,301,125			$	456,787			$	3,412,961			$	1,397,244
Cost of goods sold			1,196,790				392,606				3,253,278				1,104,723
Gross profit			104,335				64,181				159,683				292,521
Operating expenses:
General and administrative expenses			2,170,522				646,788				3,957,763				1,264,436
Selling and marketing expenses			661,247				371,211				2,031,873				994,544
Total operating expenses			2,831,769				1,017,999				5,989,636				2,258,980
Operating Loss			(2,727,434	)			(953,818	)			(5,829,953	)			(1,966,459	)
Other expenses:
Other income (expense)			4,070				-				4,070				(3,327	)
Interest expense			(579,710	)			(872	)			(976,427	)			(47,056	)
Loss on inducement			(1,587,954	)			-				(1,587,954	)			-
Net loss		$	(4,891,028	)		$	(954,690	)		$	(8,390,264	)		$	(2,016,842	)
Weighted average number of common shares
outstanding – basic and diluted			6,514,295				4,470,639				5,407,036				3,450,625
Basic and diluted net loss per share		$	(0.75	)		$	(0.21	)		$	(1.55	)		$	(0.58	)

  

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016

(UNAUDITED)

 

		Common Stock								Additional Paid-in				Accumulated				Total Stockholders’
		Shares				Amount				Capital				Deficit				Equity
Balance at January 1, 2016			4,635,783			$	463			$	3,926,074			$	(2,529,977	)		$	1,396,560
Issuance of common stock to consultants, employees, vendors, and customers			50,800				5				205,695				-				205,700
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 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				770,819				-				770,820
Disgorgement on short swing profit			-				-				56,250				-				56,250
Net loss			-				-				-				(8,390,264	)			(8,390,264	)
Balance at  September 30, 2016			7,168,621			$	717			$	15,222,983			$	(10,920,241	)		$	4,303,459

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Nine Months Ended September 30,
		2016				2015
Cash Flows From Operating Activities
Net loss		$	(8,390,264	)		$	(2,016,842	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense			35,234				20,040
Depreciation and amortization expense			120,871				80,331
Deferred rent			(1,938	)			(801	)
Stock based compensation			1,010,820				207,949
Loss on disposal of property and equipment			515				3,327
Amortization of deferred financing costs			883,969				-
Paid-in-kind interest			77,805				-
Inducement expense			1,587,954				-
Changes in assets and liabilities:
Accounts receivable			(1,141,804	)			(203,375	)
Inventory			(265,601	)			(452,577	)
Restricted cash			127,580				-
Prepaid expenses and other current assets			(39,417	)			(22,782	)
Other assets			11,805				(58,895	)
Accounts payable			430,620				243,707
Accrued expenses			986,023				276,068
Other liabilities			-				(92,466	)
Total adjustments			3,824,436				526
Net cash used in operating activities			(4,565,828	)			(2,016,316	)
Cash Flows From Investing Activities
Investment in short-term investments			(2,507,302	)			-
Purchases of property and equipment			(9,497	)			(65,036	)
Net cash used in investing activities			(2,516,799	)			(65,036	)
Cash Flows From Financing Activities
Repayment of automobile loans			(22,977	)			(13,318	)
Repayment of equipment loans			(27,232	)			-
Proceeds from line of credit			500,000				-
Proceeds from the reverse merger with Cullen Agricultural Holding Corporation			-				120,841
Proceeds from the sale of common stock, net of costs			-				568,468
Proceeds from the sale of common stock and warrants, net of costs			861,790				475,885
Proceeds from the Public Offering, net of costs			5,867,217				-
Proceeds from Bass Properties LLC loan			-				150,000
Proceeds from Cullen Agricultural Holding Corporation loan			-				250,000
Proceeds from Ivory Castle Limited loan			-				400,000
Proceeds from disgorgement of short swing profit			56,250				-
Net cash provided by financing activities			7,235,048				1,951,876
Net increase (decrease) in cash			152,421				(129,476	)
Cash, beginning of period			207,192				398,164
Cash, end of period		$	359,613			$	268,688
Cash paid for interest		$	19,898			$	2,954
Non-cash investing and financing activities:
Issuance of common stock to consultants, vendors, employees, and customers		$	205,700			$	-
Net assets acquired in reverse merger		$	-			$	1,751,655
Conversion of loans payable and accrued interest to stockholders’ equity		$	-			$	555,910
Costs related to issuance of common stock and warrants included in accrued expenses		$	-			$	109,769
Purchase of a truck in exchange for accounts receivable		$	-			$	9,500
Payment of accounts payable through the issuance of common stock		$	-			$	134,270
Issuance of common stock in exchange for Brentwood line of credit and related warrants		$	1,669,376			$	-

 

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS

 

Business Organization

 

Long Island Iced Tea Corp, a Delaware C-Corporation (“LIIT”), was formed on December 23, 2014. LIIT was formed in order to allow for the completion of mergers between Cullen Agricultural Holding Corp. (“Cullen”) and Long Island Brand Beverages LLC (“LIBB”). On December 31, 2014, LIIT entered into a merger agreement, as amended as of April 23, 2015, with Cullen, a public company, Cullen Merger Sub, Inc. (“Cullen Merger Sub”), LIBB Acquisition Sub, LLC (“LIBB Merger Sub”), Long Island Brand Beverages LLC and the founders of LIBB (“Founders”). Pursuant to the merger agreement, (a) Cullen Merger Sub was to be merged with and into Cullen, with Cullen surviving and becoming a wholly-owned subsidiary of LIIT and (b) LIBB Merger Sub was to be merged with and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of LIIT (the “Mergers”). As a result of the merger which was consummated on May 27, 2015, LIIT consisted of its wholly owned subsidiaries, LIBB (its operating subsidiary) and Cullen and Cullen’s wholly owned subsidiaries (collectively the “Company”).

 

For accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percent of the LIIT’s shares and will exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a public shell company at the time of the transaction. Pursuant to Accounting Standards Codification (“ASC”) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated statements of operations and statements of cash flows of LIBB have been retroactively updated to reflect the recapitalization.

 

Overview

 

The Company is a holding company operating through its wholly-owned subsidiary, LIBB. The Company is engaged in the production and distribution of premium Non-Alcoholic ready-to-drink (“NARTD”) iced tea in the beverage industry. The Company is currently organized around our flagship brand Long Island Iced Tea, a premium NARTD tea made from a proprietary recipe and with quality components. The Company’s mission is to provide consumers with premium iced tea offered at an affordable price.

 

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

 

During the second quarter of 2016, the Company began selling aloe juices and commenced selling a private label version of its iced tea product. For the three and nine months ended September 30, 2016, the Company’s aloe juice product accounted for approximately 35% and 23%, respectively, of the Company’s consolidated net sales.

 

The Company sells its products to regional retail chains and to a mix of independent mid-to-large range distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels, principally in the New York, New Jersey, Connecticut and Pennsylvania markets. During 2016, the Company has also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. The Company’s products are currently available in 12 states that have a cumulative population of 100 million people. The Company has also begun to sell its products globally in regions such as South Korea and multiple Caribbean nations.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS, continued

 

Liquidity and Management’s Plan

 

The Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of debt and equity, and through utilizing trade credit with its vendors.

 

As of September 30, 2016, the Company has cash of $359,613 and short-term investments of $2,507,302. The Company incurred net losses of $4,891,028 and $8,390,264 for the three and nine months ended September 30, 2016, respectively. At September 30, 2016, the Company’s stockholders’ equity was $4,303,459. As of September 30, 2016, the Company had working capital of $3,116,734.

 

During the nine months ended September 30, 2016, the Company raised net proceeds of $6,729,007 through the sale of 1,500,631 shares of common stock and 230,475 warrants to purchase common stock.

 

On November 23, 2015, LIIT and LIBB entered into a Credit and Security Agreement (the “Credit Agreement”), by and among LIBB, as the borrower, LIIT and Brentwood LIIT Inc., as the lender. Brentwood LIIT Inc.’s interest in the Credit Agreement and the related agreements and instruments thereunder was subsequently transferred to Brentwood LIIT (NZ) Ltd. (the “Lender”). Brentwood LIIT Inc. and the Lender are controlled by a related party, Eric Watson, who beneficially owned approximately 16% of the Company on November 23, 2015 and 18.2% as of September 30, 2016. The Credit Agreement provides for a revolving credit facility in an initial amount of up to $1,000,000, subject to increases at the Lender’s discretion as provided in the Credit Agreement (the “Available Amount”), up to a maximum amount of $5,000,000 (which was subsequently reduced to $3,500,000 in connection with the closing of the Offering, as defined below) (the ” Facility Amount”). The Available Amount may be increased, in increments of $500,000, up to the Facility Amount, and LIBB may obtain further advances, subject to the approval of the Lender. On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained the other $250,000 of the approved advances from the Lender, as a result of which the Available Amount was borrowed in full.

 

On July 28 and 29, 2016, the Company sold 1,270,156 shares (the “Shares”) of common stock in a public offering (the “Offering”) at an offering price of $5.50 per share, pursuant to the Company’s registration statement on Form S-1 (File No. 333-210669). The sale of the Shares generated gross proceeds of $6,985,858 and net proceeds of $5,867,217 after deducting commissions and other offering expenses. In connection with sale of the Shares, the Company’s common stock was approved for listing on the NASDAQ Capital Market under its current symbol, “LTEA.” The Offering was terminated on August 4, 2016. No further sales of shares were made in the Offering.

 

In connection with the sale of the Shares, the Company completed a recapitalization transaction (the “Recapitalization”) with the Lender. Pursuant to the Recapitalization, the Lender converted all of the outstanding principal and interest ($1,669,376) under the Credit Agreement into 421,972 shares of common stock and exchanged its warrant for 486,111 shares of common stock. As of September 30, 2016, the balance under the Credit Agreement was $0.

 

In connection with the consummation of the Offering, on July 29, 2016, the selling agents were issued warrants to purchase an aggregate of 31,522 shares of common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock issuable upon exercise of the warrants are subject to adjustment for stock splits and similar adjustments. The warrants contain provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights at the Company’s expense until July 28, 2021.

 

On October 12, 2016, the Company filed a “shelf” registration statement on Form S-3/A Amendment No. 1, under which the Company may from time to time, sell any combination of debt or equity securities up to an aggregate initial offering price not to exceed $50,000,000. (See Note 10 – Subsequent Events)

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 NOTE 1 – BUSINESS ORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS, continued

 

Liquidity and Management’s Plan, continued

 

The Company believes that as a result of the commitment for financing from a stockholder and its working capital as of September 30, 2016, its cash resources will be sufficient to fund the Company’s net cash requirements for the next twelve months from the date these condensed consolidated financial statements are issued. However, in order to execute the Company’s long-term growth strategy, the Company may need to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that the Company will be able to raise such funds on terms that would be acceptable to the Company.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the result that may be expected for the year ending December 31, 2016. These condensed consolidated financial statements should be read in conjunction with the financial statements for the year ended December 31, 2015 and related notes thereto included in the Company’s Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on March 22, 2016.

 

Principles of Consolidation

 

The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to, assessing the collectability of accounts receivable, accrual of rebates to customers, the valuation of inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, the fair value of a beneficial conversion feature and other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

 

Revenue Recognition

 

Revenue is stated net of sales discounts and rebates paid to customers (see “Customer Marketing Programs and Sales Incentives,” below). Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determinable; (2) evidence of a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance required; and (4) amounts are collectible under normal payment terms. These conditions typically occur when the products are delivered to or picked up by the Company’s customers.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Customer Marketing Programs and Sales Incentives, continued

 

The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for various discounts to the end retailers or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace.

 

In addition, during the three and nine months ended September 30, 2016, the Company issued shares of common stock in the amounts of 0 and 3,400, respectively, at a fair value of $4.00 per share, to customers and the owners of customers. Included in the costs of these programs were costs associated with the fair value of shares issued, which totaled $0 and $26,221 for the three months September 30, 2016 and 2015, respectively and $45,165 and $54,919 for the nine months ended September 30, 2016 and 2015, respectively.

 

Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In some cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the store of the customer. The Placement Fees are recorded as a reduction of revenue. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative revenue with that particular customer, such negative revenue is reclassified and recorded as a part of selling and marketing expense. For the three and nine months ended September 30, 2016, the Company recorded $0 and $11,087, respectively, of Placement Fees to selling and marketing expense. No such Placement Fees were recorded in selling and marketing expense for the three and nine months ended September 30, 2015.

 

Shipping and Handling Costs

 

Shipping and handling costs incurred to move finished goods from the Company’s sales distribution centers to customer locations are included in selling and marketing expenses on the condensed consolidated statements of operations and totaled $117,998 and $27,563 for the three months ended September 30, 2016 and 2015, respectively and $319,668 and $71,813 for the nine months ended September 30, 2016 and 2015, respectively.

 

Advertising

 

The Company expenses advertising costs as incurred. Advertising expense totaled $84,433 and $29,130, respectively, for the three months ended September 30, 2016 and 2015 and $114,980 and $155,623, respectively, for the nine months ended September 30, 2016 and 2015.

 

Research and Development

 

The Company expenses the costs of research and development as incurred. For the three and nine months ended September 30, 2016, research and development expense related to new product initiatives were $0 and $46,667, respectively. These expenses were incurred pursuant to a product development agreement, which will require the Company to pay $40,000 in cash and $40,000 in common stock upon the completion of the arrangement. There were no research and development expenses incurred during the three and nine months ended September 30, 2015. Research and development expenses are included within general and administrative expenses within the condensed consolidated statement of operations. As of September 30, 2016, $50,000 was included in accrued expenses in the condensed consolidated balance sheet related to this arrangement.

 

Operating Leases

 

The Company records rent related to its operating leases on a straight line basis over the lease term.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Restricted Cash

 

Pursuant to the terms of the Credit Agreement with Lender, the Company was required to utilize $150,000 of certain $1,000,000 in proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Company’s cash on hand was restricted for use in the development of an alcohol business. On March 17, 2016, LIBB entered into an agreement with Lender whereby such restriction was lifted.

 

Accounts Receivable

 

The Company sells products to distributors and in certain cases directly to retailers, and extends credit, generally without requiring collateral, based on its evaluation of the customer’s financial condition. While the Company has a concentration of credit risk in the retail sector, it believes this risk is mitigated due to the diverse nature of the customers it serves, including, but not limited to, its type, geographic location, size, and beverage channel. Potential losses on the Company’s receivables are dependent on each individual customer’s financial condition and sales adjustments granted after the balance sheet date. The Company carries its trade accounts receivable at net realizable value. Typically, accounts receivable have terms of net 30 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables; (2) analyzing its history of sales adjustments; and (3) reviewing its high-risk customers. Past due receivable balances are written off when the Company’s efforts have been unsuccessful in collecting the amount due.

 

Accounts receivable, net, is as follows:

 

		As of
		September 30, 2016				December 31, 2015
Accounts receivable, gross		$	1,545,061			$	405,096
Allowance for doubtful accounts			(75,395	)			(42,000	)
Accounts receivable, net		$	1,469,666			$	363,096

 

Concentrations of Credit Risk

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions, short-term investments and accounts receivable. At times, the Company’s cash in banks is in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. The Company has not experienced any loss as a result of these deposits. These cash balances are maintained with one bank. As of September 30, 2016, the Company was exposed to concentrations of credit risk through short-term investments. As of September 30, 2016, three customers accounted for 25%, 11% and 11% of the Company’s trade receivables, respectively. As of December 31, 2015, two customers accounted for 14% and 30% of the Company’s trade receivables. The Company does not generally require collateral or other security to support customer receivables. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses, as required.

 

Inventories

 

The Company’s inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists primarily of bottled iced tea.

 

The Company values its inventories at the lower of cost or net realizable value, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. As of September 30, 2016 and December 31, 2015, the Company recorded a reserve of $28,615 and $41,790, respectively, to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the dates presented:

 

		As of
		September 30, 2016				December 31, 2015
Finished goods, net		$	543,755			$	565,624
Raw materials and supplies, net			434,404				146,934
Total inventories		$	978,159			$	712,558

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Property and Equipment

 

Property and equipment is recorded at cost. Major property additions, replacements, and betterments are capitalized, while maintenance and repairs that do not extend the useful lives of an asset or add new functionality are expensed as incurred. Depreciation is recorded using the straight-line method over the respective estimated useful lives of the Company’s assets. The estimated useful lives typically are 3 years for cold-drink containers, such as reusable fridges, wood racks, vending machines, barrels, and coolers, and are depreciated using the straight-line method over the estimated useful life of each group of equipment, as determined using the group-life method. Under this method, the Company does not recognize gains or losses on the disposal of individual units of equipment when the disposal occurs in the normal course of business. The Company capitalizes the costs of refurbishing its cold-drink containers and depreciates those costs over the estimated period until the next scheduled refurbishment or until the equipment is retired. The estimated useful lives are typically 3 to 5 years for office furniture and equipment and are depreciated on a straight-line basis. The estimated useful lives for trucks and automobiles are typically 3 to 5 years and are depreciated on a straight line basis. For the three months ended September 30, 2016 and 2015, depreciation expense was $39,420 and $27,043, respectively. For the nine months ended September 30, 2016 and 2015, depreciation expense was $117,118 and $76,578, respectively. The Company disposed of one of its vehicles on July 18, 2016. In connection with the disposal, the Company recognized a loss of $515.

 

Intangible Assets

 

Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or when circumstances indicate that there could be an impairment. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

 

Intangibles assets with indefinite useful lives consist of the cost to purchase an internet domain name for $20,000. The domain name is considered to have a perpetual life and as such, is not amortized. Insignificant costs incurred associated with renewing this asset are expensed as incurred.

 

Intangible assets with finite useful lives are amortized over their expected useful life. Intangible assets with useful lives are tested for impairment when circumstances indicate that there could be an impairment. Intangible assets with finite useful lives include website development costs of $3,741 and $7,494 as of September 30, 2016 and December 31, 2015, respectively. The estimated useful life of the capitalized costs of the Company’s website is 3 years and is depreciated on a straight line basis. As of September 30, 2016, the cost of the website development was $15,000 and the accumulated amortization was $11,259. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. Amortization expense was $1,251 and $1,251 for the three months ended 2016 and 2015, respectively and $3,753 and $3,753 for the nine months ended September 30, 2016 and 2015, respectively.

 

Deferred Offering Costs

 

The Company capitalizes the costs related to proposed offerings of its equity instruments as deferred offering costs and records the deferred offering costs as an offset to additional paid in capital upon the completion of the associated capital raising activity.

 

Income Taxes

 

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement, and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company estimates the degree to which tax assets and credit carry forwards will result in a benefit based on expected profitability by tax jurisdiction.

 

In its interim financial statements, the Company follows the guidance in ASC 270, “Interim Reporting” and ASC 740 “Income Taxes”, whereby the Company utilizes the expected annual effective tax rate in determining its income tax provisions for the interim periods. That rate differs from U.S. statutory rates primarily as a result of valuation allowance related to the Company’s net operating loss carryforward as a result of the historical losses of the Company.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Income Taxes, continued

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary. The Company accounts for uncertain tax positions in accordance with ASC 740 - “Income Taxes”. No uncertain tax provisions have been identified. The Company accrues interest and penalties, if incurred, on unrecognized tax benefits as components of the income tax provision in the accompanying condensed consolidated statements of operations. Our primary tax jurisdictions are our federal, various state, and local taxes. Generally, Federal, State and Local authorities may examine the Company’s tax returns for three years from the date of filing.

 

In accordance with ASC 740, the Company evaluates whether a valuation allowance should be established against the net deferred tax assets based upon the consideration of all available evidence and using a “more likely than not” standard. Significant weight is given to evidence that can be objectively verified. The determination to record a valuation allowance is based on the recent history of cumulative losses and current operating performance. In conducting the analysis, the Company utilizes an approach, which considers the current year loss, including an assessment of the degree to which any losses are driven by items that are unusual in nature and incurred to improve future profitability. In addition, the Company reviews changes in near-term market conditions and any other factors arising during the period, which may impact its future operating results.

 

Earnings per share

 

Basic net earnings per common share is computed by dividing net loss by the weighted-average number of common shares outstanding. Diluted earnings per share reflect, in periods in which they have a dilutive effect, the impact of common shares issuable upon exercise of stock options and warrants. The computation of diluted earnings per share excludes those dilutive securities with an exercise price in excess of the average market price of the Company’s common shares during the periods presented. The computation of diluted earnings per share excludes outstanding options in periods where the exercise of such options would be antidilutive.

 

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share because the effect of their inclusion would have been anti-dilutive.

 

		For the Three and Nine Months Ended September 30,
		2016				2015
Options to purchase common stock			465,411				194,667
Warrants to purchase common stock			470,570				-
Total potentially dilutive securities			935,981				194,667

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Fair Values of Financial Instruments

 

The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses, notes payable and other current liabilities, approximate fair value due to the short-term nature of these instruments.

 

ASC 820 “Fair Value Measurements and Disclosures” provides the framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).

 

Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1 Quoted prices in active markets for identical assets or liabilities.

 

Level 2 Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly.

 

Level 3 Significant unobservable inputs that cannot be corroborated by market data.

 

Fair values for short-term money market investments are determined from quote prices in active markets for these money market funds, and are considered to be Level 1.

 

The carrying value of financial instruments in the Company’s consolidated financial statements at September 30, 2016 and December 31, 2015 are as follows:

 

		Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)				Quoted Prices for Similar Assets or Liabilities in Active Markets (Level 2)				Significant Unobservable Inputs (Level 3)
Short-term investments at September 30, 2016		$	2,507,302			$	-			$	-
Short-term investments at December 31, 2015		$	-			$	-			$	-

 

Seasonality

 

The Company’s business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements

 

In January 2016, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update (“ASU”) 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

In February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

On March 30, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation (Topic 718)”. This update requires that all excess tax benefits and tax deficiencies arising from share-based payment awards should be recognized as income tax expense or benefit on the income statement. The amendment also states that excess tax benefits should be classified along with other income tax cash flows as an operating activity. In addition, an entity can make an entity-wide accounting policy election to either estimate the number of awards expected to vest or account for forfeitures as they occur. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

In April 2016, the FASB issued Accounting Standards Update ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606)”, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”). ASU 2016-10 clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

In May 2016, the FASB issued Accounting Standards Update ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606)”, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”). The core principal of ASU 2016-12 is the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of this update are effective for annual and interim periods beginning after December 15, 2017, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Recent Accounting Pronouncements, continued

 

In August 2016, the FASB issued Accounting Standards Update ASU No. 2016-15 “Statement of Cash Flows (Topic 230)”, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The amendments for this update provide guidance on the eight specific cash flows: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The provisions of this update are effective for annual and interim periods beginning after December 15, 2016, with early application permitted. The Company is currently evaluating the impact the adoption of this standard will have on its condensed consolidated financial statements.

 

Management’s Evaluation of Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued. Based upon the review, other than as presented within Note 10, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.

 

NOTE 3 – EQUIPMENT LOAN

 

On November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp. (“Magnum”), an entity managed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, and certain of his family members. In exchange for the exclusive right to stock vending machines owned by Magnum, the Company agreed to reimburse Magnum for the cost of products to stock the machines and the costs that Magnum incurred to acquire the machines including machines which were purchased with an equipment loan. The total principal amount of the payments underlying the agreement upon inception was $117,917. The reimbursements will be made in 35 monthly payments of principal and interest in the amount of $3,819 with an interest rate of 10%. Upon completion of these payments in October 2018, Magnum will transfer ownership of the vending machines to the Company. In addition, in exchange for the right to stock certain other vending machines that the Company has the right to use, the Company agreed to purchase the products required to be displayed in those vending machines from Magnum, at a price equal to Magnum’s cost for such products. The Company may terminate the agreement and all obligations to make future payments on ten days’ written notice to Magnum. As of September 30, 2016 and December 31, 2015, the outstanding balance on the equipment loan was $85,872 and $113,104, respectively.

 

NOTE 4 – LINE OF CREDIT

 

On November 23, 2015 and December 10, 2015, LIBB obtained an aggregate of $1,000,000 in advances from the Lender, constituting the full Available Amount at such time. On March 17, 2016, LIIT, LIBB and the Lender agreed to increase the Available Amount by $500,000 to $1,500,000 and approved an additional $500,000 in advances. On March 24, 2016, LIBB obtained $250,000 of the approved advance from the Lender and during May 2016, LIBB obtained an additional $250,000 of the approved advances from the Lender, as a result of which as of May 20, 2016 the Available Amount was borrowed in full.

 

As of September 30, 2016 and December 31, 2015, the outstanding balance on the line of credit was $0 and $1,091,571, respectively.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 – LINE OF CREDIT, continued

 

The credit facility bears interest at a rate equal to the prime rate (3.5% at December 31, 2015 and September 30, 2016) plus 7.5%, compounded monthly, and matures on November 23, 2018. Effective January 10, 2016, the Credit Agreement was amended such that interest was compounded on a quarterly basis. Upon the occurrence of an event of default, the Credit Agreement provides for an additional 8% interest pursuant to the terms of the agreement. The outstanding principal and interest under the credit facility are payable in cash on the maturity date. The Company also paid the Lender a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount of the loan, and will pay the Lender $30,000 for its expenses at the maturity date. The compounded interest and capitalized fees are excluded when determining whether the Available Amount has been exceeded. The credit facility is secured by a first priority security interest in all of the assets of LIIT and LIBB, including the membership interests in LIBB held by LIIT. LIIT also has guaranteed the repayment of LIBB’s obligations under the credit facility. In addition, the credit facility will be guaranteed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, in certain limited circumstances up to a maximum amount of $200,000.

 

The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.

 

In connection with the establishment of the credit facility, the Company issued a warrant to the Lender. The warrant entitled the holder to purchase 1,111,111 shares of the Company’s common stock at an exercise price of $4.50 and included a cashless exercise provision. Also, as part of the Recapitalization, the warrant was exchanged for 486,111 shares of the Company’s common stock. (See Induced Conversion below for the accounting of the Recapitalization).

 

The Lender will have certain “piggyback” registration rights, on customary terms, with respect to the shares of the Company’s common stock issued or issuable upon conversion of the credit facility and upon exchange of the warrant.

 

The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.

 

The Lender may accelerate the credit facility upon the occurrence of certain events of default, including a failure to make a payment under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing of a bankruptcy petition or a similar event with respect to LIBB or the Company or the occurrence of an event of default under other material indebtedness of LIBB or the Company. The Company and LIBB also made certain customary representations, warranties and covenants, including negative covenants with respect to the incurrence of indebtedness. As of September 30, 2016, the Company was in compliance with these covenants.

 

Deferred financing costs related to the Credit Agreement, which are included in the accompanying condensed consolidated balance sheet, are amortized over the three year term of the line of credit agreement. As of September 30, 2016, the net carrying amount of deferred financing costs was $954,113. As of December 31, 2015, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $65,797.

 

During April 2016, the Company entered into an amendment to the agreement with the Lender, which provided for the Recapitalization. Upon a capital raise of at least $5,000,000, the Lender agreed to convert all of the outstanding principal and interest under the Credit Facility into 421,972 shares of common stock (assuming all approved advances are completed and there are no further advances by the Lender) at the closing of the Offering. In addition, the Lender agreed to exchange its 1,111,111 warrants for 486,111 shares of common stock at such time. The Credit Facility would remain outstanding except that the Facility Amount would be reduced to $3,500,000. In connection with the reduction in the capacity of the Credit Facility, the Company recorded a charge of $408,000 to interest expense to reduce proportionally the unamortized deferred financing costs. Any amounts drawn from the Facility Amount require lender approval. The Recapitalization was effectuated upon the closing of the Offering.

 

In addition, the Company and LIBB entered into an Amendment No. 1 (the “Registration Rights Amendment”) to the Registration Rights Agreement (the “Registration Rights Agreement”), dated as of December 3, 2015, by and among LIBB, the Company and the Lender. The Registration Rights Amendment amended the Registration Rights Agreement, effective as of the closing of a Qualified Public Offering, so that the “piggyback” registration rights granted to the Lender thereunder will apply to the shares issuable in the Recapitalization.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 4 – LINE OF CREDIT, continued

 

Induced conversion of the credit facility and the related warrants

 

As disclosed above, on July 29, 2016, as part of the Recapitalization, the outstanding balance and accrued interest on the credit facility and the Lender’s warrant to purchase 1,111,111 shares of the Company’s common stock was converted into a total of 908,083 shares of the Company’s common stock. The Company accounted for this transaction as an “induced conversion” in accordance with the Accounting Standards Codification (“ASC”) 470-20-40-16. The transaction qualifies as an inducement as the Company effectively lowered the exercise price of the warrant in order to induce the holder to convert the debt and warrants to shares of common stock. The Company’s purpose for the inducement was to improve the Company’s balance sheet and capitalization ahead of its proposed public offering.

 

ASC 470-20-40-16 prescribes that, upon an induced conversion of convertible debt, the Company should recognize in earnings the difference between (a) the fair value of the securities issued upon conversion and (b) the fair value of the securities that would have been issued in accordance with the original conversion terms. The Company determined that during April 2016, the Company’s common stock had a fair value of $5.50 per share. During April 2016, the Company determined that its common stock did not have sufficient trading volume for the market based trading price to be relied upon as a reliable measure of fair value. As such, the Company needed to utilize another measure in order to determine fair value. The Company determined that the best measure of fair value was the $5.50 price of shares issued upon the consummation of the Offering, which closed in July 2016. This fair value was consistent with the range of pricing established with the Company’s bankers ahead of the Offering, and aligned with the fact that the inducement transaction would only be effected upon the closing of the Offering.

 

During the three and nine months ended September 30, 2016, the Company recorded a non-cash charge of $1,587,954 related to the “induced conversion”, which is recorded on the Statement of Operations as loss on induced conversion of line of credit and warrants. The induced conversion charge was measured as of April 2016, the date the agreement was reached, and recorded on July 29, 2016, the date the conversion was consummated. The charge was calculated as follows:

 

		For the three and nine months ended September 30, 2016
Fair value of securities to be issued upon original conversion terms:
Line of credit ($1,669,372 converted at $4.00 per share into 417,344 shares of common stock, which had a fair value of $5.50 per share)		$	2,295,392
Warrants (1,111,111 shares of common stock at a fair value of $5.50 per share, less $5,000,000 in exercise proceeds)			1,111,111
Total fair value of securities issued upon conversion		$	3,406,503
Fair value of securities issued upon conversion:
Shares of common stock			908,083
Fair value per share		$	5.50
Aggregate fair value of common stock to be issued upon original conversion terms		$	4,994,457
Loss on induced conversion of line of credit and warrants		$	(1,587,954	)

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

From January 1, 2016 to March 14, 2016, the Company sold 171,725 units to investors at $4.00 per unit for gross proceeds of $686,900. Each unit consists of one share of common stock and a warrant to purchase one share of common stock. The Company incurred costs of $60,110 related to these sales resulting in net proceeds of $626,790. As part of these sales 25,000 units were sold to Thomas Cardella, who subsequently became a member of the Company’s Board of Directors, and 7,500 shares were sold to Paul Vassilakos, a member of the Board of Directors. The sales were part of a private placement of up to $3,000,000 of units (the “Second Offering”) conducted by the Company on a “best efforts” basis through a placement agent (the “Placement Agent”) that commenced on November 24, 2015. The Offering terminated on March 14, 2016.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – STOCKHOLDERS’ EQUITY, continued

 

The Placement Agent for the Second Offering was paid a commission equal to 10% of the aggregate purchase price from the Units sold to investors introduced to the Company by the Placement Agent. The Company also paid the Placement Agent a non-accountable expense allowance equal to 3% of the aggregate purchase price from the Units sold to (i) investors introduced to the Company by the Placement Agent and (ii) investors not introduced to the Company by the Placement Agent who purchase less than $500,000 of Units in the aggregate (together, the “Covered Investors”). From March 1, 2016 through March 14, 2016, the Placement Agent was only entitled to a 3% non-accountable allowance for investors introduced by our Company to the Placement Agent. In addition, the Placement Agent received warrants to purchase a number of shares of common stock equal to 10% of the total shares of common stock included in the Units sold in the Second Offering to the Covered Investors, with an exercise price of $4.50 per share.

 

Each warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on November 30, 2018. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.

 

During the year ended December 31, 2015 and through March 14, 2016, the Company sold 345,725 units through the Placement Agent. As a result, on March 29, 2016, 34,573 warrants were issued to the Placement Agent. The warrants have an exercise price of $4.50 per share and expire on October 30, 2020.

 

On March 29, 2016 and March 31, 2016, the Company entered into subscription agreements for the sale of 58,750 units for gross proceeds of $235,000 at $4.00 per unit, including 2,500 units sold to family members of Philip Thomas, CEO and a member of the Board of Directors and 2,500 to a relative of Thomas Panza, a greater than 10% owner of the Company (the “March Sales”). Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Such subscriptions were closed and funded during April 2016.

 

Each warrant issued in the March Sales entitles the holder to purchase one share of the Company’s common stock at an exercise price of $6.00 per share, commencing immediately and expiring on March 29, 2019. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. The Company, at its option, may call the warrants for redemption, in whole and not in part, at a price of $0.01 per warrant, if (i) the closing price per share of the common stock is at least $10.00 for 30 consecutive trading days ending on the third business day prior to the notice of redemption or (ii) the common stock is listed for trading on a national securities exchange and the closing price per share of common stock on the first day of trading on such exchange is at least $7.50. The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.

 

During the year ended December 31, 2015, the Company entered into agreements with four members of its Advisory Board. Upon signing the agreement, each Advisory Board Member was entitled to receive 7,500 shares of common stock. These shares were issued on January 26, 2016.

 

On January 26, 2016, 35,824 shares of common stock were issued to the non-employee members of the Board of Directors as compensation for their services during the year ended December 31, 2015.

 

On March 31, 2016, the Company issued 3,400 shares of common stock to customers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $13,600 as a reduction to net sales in the accompanying condensed consolidated statements of operations.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 – STOCKHOLDERS’ EQUITY, continued

 

On March 31, 2016, the Company issued 1,200 shares of common stock to suppliers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $4,800 in cost of goods sold in the accompanying condensed consolidated statements of operations.

 

On March 31, 2016, the Company issued 2,000 shares of common stock to brokers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $8,000 in selling and marketing expenses in the accompanying condensed consolidated statements of operations.

 

On March 31, 2016, the Company issued 6,700 shares of common stock to consultants of the Company. As a result, for the three and nine months ended September 30, 2016, the Company recorded $0 and $26,800, respectively, in general and administrative expenses in the condensed consolidated statements of operations.

 

On March 31, 2016, the Company issued 5,000 shares of common stock to a consultant pursuant to a consulting services agreement. The terms of the agreement require the consultant to perform services for the Company through February 23, 2017. For the three and nine months ended September 30, 2016, the Company recorded $5,455 and $10,909 of market research expense (reflected in selling and marketing expenses in the Condensed Consolidated Statement of Operations) and as a result, $9,091 was included in prepaid expenses in the accompanying balance sheet as of September 30, 2016.

 

On March 31, 2016, the Company issued 15,833 shares of common stock to a consultant, who also became a member of the Company’s Advisory Board on March 31, 2016. The shares were issued pursuant to a consulting agreement for future services. For the three and nine months ended September 30, 2016, the Company recorded $0 and $63,332 of market research expense and as a result, $0, was included in prepaid expenses in the accompanying balance sheet as of September 30, 2016. In addition, pursuant to the terms of the consulting agreement, the Company was required to make an advance payment of $20,000 which was made during April 2016. In addition the consultant will be paid an additional $30,000 in cash upon completion of the consultant’s services.

 

On March 31, 2016, the Company issued 7,500 shares of common stock to an employee of the Company. During the three and nine months ended September 30, 2016, $0 and $30,000 was included in selling and marketing expenses in the accompanying condensed consolidated statements of operations related to this issuance.

 

On April 6, 2016, $56,250 of proceeds was received from a shareholder who had purchased shares in September 2015 representing the disgorgement of a short swing profit on the shareholder’s September 2015 sale of the Company’s stock.

 

On July 29, 2016, the Company issued 10,000 shares of common stock to its Chief Financial Officer pursuant to his employment agreement. During the three and nine months ended September 30, 2016, $40,000 and $40,000 was included in general and administrative expenses in the accompanying condensed consolidated statements of operations related to this issuance.

 

On July 29, 2016, the Company issued 5,000 shares of common stock to a consultant in exchange for services. During the three and nine months ended September 30, 2016, $20,000 and $20,000 was included in general and administrative expenses in the accompanying condensed consolidated statements of operations related to this issuance.

 

On July 29, 2016, the Company issued 1,667 shares of common stock to a consultant pursuant to a consulting services agreement. During the three and nine months ended September 30, 2016, $9,169 and $9,169 was included in general and administrative expenses in the accompanying condensed consolidated statements of operations related to this issuance.

 

 

NOTE 6 – STOCK BASED COMPENSATION

 

Stock Options

 

On May 27, 2015, the Company’s board of directors adopted the 2015 Long-Term Incentive Equity Plan (“2015 Stock Option Plan”). The 2015 Stock Option Plan provides for the grant of stock options, stock appreciation rights, restricted stock and other stock-based awards to, among others, the officers, directors, employees and consultants of the Company. The total number of shares of common stock reserved under the Plan are 466,667.

 

On May 27, 2015, as part of their employment agreements but not under the 2015 Stock Option Plan, the Company granted the officers of the Company and Mr. Panza, options to purchase 194,667 shares at an exercise price of $3.75 which are exercisable until May 26, 2020. These options vest on a quarterly basis over the two year period from the date of issuance.

 

On August 18, 2016, as part of his consulting agreement but not under the 2015 Stock Option Plan, the Company’s board of directors granted to Julian Davidson, an option to purchase 286,744 shares of the Company’s common stock at an exercise price of $5.50 per share which expires on July 28, 2021. This option vested one third immediately, and then will vest one third on July 28, 2017 and the remainder on July 28, 2018.

 

The following table summarizes the stock option activity of the Company:

 

		Shares				Weighted Average Exercise Price				Weighted Average Grant Date Fair Value				Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding at January 1, 2016			194,667			$	3.75			$	6.22
Granted			286,744			$	5.50			$	2.71
Exercised			-			$	-			$	-
Expired, forfeited or cancelled			(16,000	)		$	3.75			$	6.22
Outstanding at September 30, 2016			465,411			$	4.83			$	4.06				4.4			$	123,280
Exercisable at September 30, 2016			207,248			$	4.56			$	4.60				4.4			$	77,050

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock on September 30, 2016.

 

As of September 30, 2016, there was a total of $867,517 of unrecognized compensation expense related to stock options. The cost is expected to be recognized through 2018 over a weighted average period of 1.37 years.

 

Stock Warrants

 

From January 1, 2016 through March 14, 2016, in connection with the Second Offering, the Company issued warrants to purchase 171,725 shares of the Company’s common stock to investors at an exercise price of $6.00 per share. These warrants were fully vested upon issuance and expire on November 30, 2018.

 

From January 1, 2016 through March 14, 2016, in connection with the Second Offering, the Company issued warrants to purchase 34,573 shares of the Company’s common stock to the placement agent at an exercise price of $4.50 per share. These warrants were fully vested upon issuance and expire on October 30, 2020.

 

On March 29, 2016 and March 31, 2016 in connection with the March Sales, the Company issued warrants to purchase 58,750 shares of the Company’s common stock at an exercise price of $6.00 per share. These warrants were fully vested upon issuance and expire on March 29, 2019.

 

On July 29, 2016, in connection with the consummation of the Offering, the Company issued warrants to purchase 31,522 shares of the Company’s common stock. These warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 6 – STOCK BASED COMPENSATION, continued

 

Stock Warrants

 

The following table summarizes the stock warrant activity of the Company:

 

		Number of shares				Weighted average exercise price				Weighted average contractual life (years)
Outstanding - January 1, 2016			1,285,111			$	4.70				-
Issued			296,570			$	5.92
Expired			-			$	-
Exchanged (See Note 4)			(1,111,111	)		$	4.50
Outstanding September 30, 2016			470,570			$	5.95				2.46
Exercisable at September 30, 2016			470,570			$	5.95				2.46

 

Stock-Based Compensation Expense

 

The following tables summarize total stock-based compensation costs recognized for the three and nine months ended September 30, 2016 and 2015:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Stock options		$	438,113			$	151,354			$	740,820			$	207,949
Warrants			-				-				30,000				-
Common Stock			-				-				240,000				-
Total		$	438,113			$	151,354			$	1,010,820			$	207,949

 

The total amount of stock-based compensation was reflected within the statements of operations as:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
General and administrative		$	412,439				105,740			$	853,859			$	145,279
Sales and marketing			25,674				45,614				156,961				62,670
Total		$	438,113			$	151,354			$	1,010,820			$	207,949

 

  

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company is involved in various claims and legal actions arising from time to time in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters in the ordinary course of business will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. Legal costs related to these matters are expensed as they are incurred.

 

On August 1, 2014, an action was filed by LIBB in the Supreme Court in the State of New York entitled Long Island Brand Beverages LLC v. Revolution Marketing, LLC (“Revolution”) and Ascent Talent, Model Promotion Ltd. LIBB is seeking damages of $10,000,000 for several claims including breach of contract and fraud occurring during 2014. Revolution has filed a counterclaim for breach of contract and related causes of action, claiming damages in the sum of $310,880, and seeking punitive damages of $5,000,000. Ascent has filed a pre-answer motion to dismiss LIBB’s complaint. LIBB filed papers in opposition to the motion to dismiss. In addition, Revolution has filed a motion to amend its answer to include cross-claims against Ascent which were not asserted in its original answer of record. On February 5, 2016, the Court rendered a decision, denying the motion to dismiss with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution seeking to amend its answer to include cross claims against Ascent. The Company’s management and legal counsel believe it is too early to determine the probable outcome of this matter.

 

Brokerage Arrangements

 

The Company maintains arrangements with sales brokers who help with bringing new distributors and retail outlets to the Company. These sales brokers receive a commission for these services. Commissions to these brokers currently range from 2-5% of sales. In addition, the Company sells its products through alternative vending channels. Commissions resulting from sales through these channels are currently 42%.

 

Employment Agreements

 

On February 1, 2016, the Company entered into an agreement with an employee. The employee is to be paid a base salary of $120,000 per annum through December 31, 2018. In addition, the employee was awarded 7,500 shares of common stock at the inception of the agreement (See Note 5). In addition, at December 31, 2016, the employee will be paid a bonus between 20% and 40% of the employee’s base salary, with the amount above 20% to be determined at the discretion of the Board of Directors.

 

On June 6, 2016, the Company entered into an employment agreement with Richard Allen to serve as the Company’s Chief Financial Officer. The agreement has a term of three years, and automatically renews for one year periods thereafter unless either party provides notice of its decision not to renew. Mr. Allen will receive a base salary of $170,000 and an incentive bonus of up to 50% of his base salary at the discretion of the Board of Directors. The Company granted Mr. Allen 8,333 shares of its common stock on May 31, 2017. The Company will grant to Mr. Allen that additional number of shares of the Company’s common stock which shall have fair market values equal to $50,000 on each of May 31, 2018 and 2019.

 

Consulting Agreements

 

On June 6, 2016, the Company entered into an amendment to the consulting agreement with Julian Davidson which provides for him to serve as the Company’s Executive Chairman. Either Mr. Davidson or the Company may terminate the consulting agreement with 30 days’ prior written notice. Pursuant to the consulting agreement, as in effect prior to its amendment and restatement as described below, the Company (a) paid to Mr. Davidson $10,000 per month, and (b) granted to Mr. Davidson 1,667 shares of common stock per month (an aggregate of 4,302 shares). The consulting agreement, as amended, contains provisions for protection of the Company’s intellectual property and confidentiality and non-competition restrictions for Mr. Davidson (generally imposing restrictions during the term of the consulting agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Company’s customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 7 – COMMITMENTS AND CONTINGENCIES, continued

 

Consulting Agreements, continued

 

On August 18, 2016, the Company entered into a second amendment to the consulting agreement with Julian Davidson. The amendment modified the condition that was required to be satisfied for certain changes in the compensation payable to Mr. Davidson under the consulting agreement to take effect. After the amendment, upon the Company completing an equity raise with gross proceeds of at least $6,900,000, the monthly cash fee to Mr. Davidson increases to $20,000 per month, the monthly stock grant to Mr. Davidson is eliminated and Mr. Davidson receives a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of the Company’s common stock. The amendment also modified the compensation that will be payable to Mr. Davidson under his agreement. Mr. Davidson is entitled to receive an option to purchase 4% of the fully diluted common stock outstanding immediately after the Offering, or 286,744 shares of the Company’s common stock. On August 18, 2016, the Company granted to Mr. Davidson and option to purchase 286,744 shares of common stock. (See Note 6 – Stock Based Compensation)

 

On October 5, 2016, the Company entered into an amended and restated consulting agreement with Julian Davidson (“Davidson Amendment”), effective as of September 29, 2016, which provides for him to continue to serve as the Company’s Executive Chairman. Mr. Davidson was entitled to enter into the Davidson Amendment pursuant to the terms of his previously existing consulting agreement, as described above.

 

Under the Davidson Amendment, (a) starting on September 29, 2016, the Company will pay to Mr. Davidson an annual fee of $250,000, payable $20,833 per month, (b) the Company will pay Mr. Davidson an incentive of $75,000 on the date of the agreement and will pay to him $165,000 on the first anniversary of such date, (c) on September 29, 2016, the Company granted Mr. Davidson 15,000 shares of the Company’s common stock, (d) Mr. Davidson will be eligible to receive annually an additional fee of up to 50% of his annual fee based on Consultant’s performance over each calendar year, and (e) upon the Company completing an offering or offerings that raises gross proceeds of at least $3,000,000 from the sale of its equity securities, then the Company will issue to Mr. Davidson 20,000 shares of the Company’s common stock and an option to purchase a 71,686 shares of the Company’s common stock with an exercise price equal to the fair market value of the common stock as of such date. Unless such option is granted under a existing long-term incentive equity plan of the Company, the option will not be exercisable with respect to any of the underlying shares prior to obtaining shareholder approval for it.

 

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

 

NOTE 8 – MAJOR CUSTOMERS AND VENDORS

 

For the three months ended September 30, 2016, three customers accounted for 22%, 11% and 11% of net sales. For the three months ended September 30, 2015, one customer accounted for 10% of net sales.

 

For the nine months ended September 30, 2016, three customers accounted for 13%, 12%, and 10% of net sales. For the nine months ended September 30, 2015, no customers accounted for more than 10% of net sales.

 

For the three months ended September 30, 2016 and September 30, 2015, the largest vendors represented approximately 78% (five vendors) and 80% (three vendors) of purchases, respectively. For the nine months ended September 30, 2016 and 2015, the largest vendors represented approximately 69% (four vendors) and 82% (four vendors) of purchases, respectively. As of September 30, 2016 two suppliers accounted for 18% and 13% of accounts payable, respectively. As of September 30, 2015 15% of accounts payable was with one vendor.

 

 

LONG ISLAND ICED TEA CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 9 - RELATED PARTIES

 

During the year ended December 31, 2015, the Company entered into the Credit Agreement with the Lender, a related party (see Note 4).

 

The Company recorded revenue related to sales to two entities, whose owners became employees of the Company during 2014. For the three months ended September 30, 2016 and 2015, sales to these related parties were $7,628 and $3,945, respectively and $7,936 and $35,140, respectively for the nine months ended September 30, 2016 and 2015. As of September 30, 2016, accounts receivable from these customers were $11,554. As of December 31, 2015, accounts receivable from these customers were $15,513.

 

The Company recorded revenue related to sales to an entity, CFG Distributors LLC, whose owner became an employee of the Company during 2015. For the three months ended September 30, 2016 and 2015, sales to this related party were $25 and $742, respectively. For the nine months ended September 30, 2016 and 2015, sales to this related party were $463 and $11,716, respectively. As of September 30, 2016, the amount due from this customer was $44,939. As of December 31, 2015, accounts receivable from this customer were $51,961, which was included in accounts receivable.

 

In addition, the Company recorded revenue related to sales to an entity owned by an immediate family member of Philip Thomas, CEO, stockholder, and member of the Board of Directors. Mr. Thomas is also an employee of this entity. For the three months ended September 30, 2016 and 2015, sales to this related party were $426 and $1,512, respectively. For the nine months ended September 30, 2016 and 2015, sales to this related party were $3,063 and $1,653, respectively. As of September 30, 2016 and December 31, 2015, there was $0 and $518, respectively, due from this related party which was included in accounts receivable in the condensed consolidated balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the three and nine months ended September 30, 2016, the Company purchased $0 and $17,514, respectively, of product from this vendor. As of September 30, 2016, the outstanding balance due to this entity included in accounts payable was $0. As of December 31, 2015, the outstanding balance due to this entity included in accounts payable was $3,242.

 

During the three and nine months ended September 30, 2016, the Company accrued $77,250 and $232,250, respectively, in expenses related to fees payable to the Company’s Board of Directors which were included in general and administrative expenses in the condensed consolidated statements of operations. The non-employee members of the Board of Directors will each receive common stock with a fair value of $35,000 and $30,000 in cash, for their services through 2016.

 

A stockholder and a company owned by member of the Board of Directors of the Company has paid certain expenses on behalf of the Company. As of September 30, 2016, the accounts payable and accrued expenses due to these parties were $0. As of December 31, 2015 accounts payable and accrued expenses to these parties were $87,258.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Filing of registration statement

 

On October 12, 2016, the Company filed a “shelf” registration statement on Form S-3/A amendment No. 1, which became effective on October 14, 2016. The “shelf” registration statement allows the Company from time to time to sell any combination of debt or equity securities described in the registration statement up to aggregate initial offering price not to exceed $50,000,000.

 

Financing Arrangement

 

On October 27, 2016, the Company entered into a credit line (the “UBS Credit Line”) with UBS Bank USA (“UBS”). The UBS Credit Line has a borrowing capacity of $1,300,000 and bears interest at a floating rate, depending on the time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of November 11, 2016, the interest rate on the UBS Credit Line was 3.089%. The UBS Credit Line is collateralized by certain of the Company’s short-term investments. As of November 11, 2016, $400,000 was outstanding on the UBS Credit Line.

  

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

References in this quarterly report to “we,” “us”, or “our” or to “our company” or “the Company” refer to Long Island Iced Tea Corp., a holding company, and its wholly owned subsidiaries, including Long Island Brand Beverages LLC (“LIBB”) and Cullen Agricultural Holding Corp. (“Cullen”).

 

The information disclosed in this quarterly report, and the information incorporated by reference herein, include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, but are not limited to, statements regarding our or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

  

The forward-looking statements contained or incorporated by reference in this quarterly report are based on our current expectations and beliefs concerning future developments and their potential effects on us and speak only as of the date of such statement. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in this Item 2 of Part I of this quarterly report and in Item 1A of Part II of this quarterly report. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

  

The following discussion should be read in conjunction with our condensed consolidated interim financial statements and footnotes thereto contained in this quarterly report.

 

Overview

 

We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium Non-Alcoholic ready-to-drink (“NARTD”) iced tea in the beverage industry. We are currently organized around our flagship brand Long Island Iced Tea, a premium NARTD tea made from a proprietary recipe and with quality components. Long Island Iced Tea is sold in 12 states across the United States, primarily on the East Coast, through a network of national and regional retail chains and distributors. Our mission is to provide consumers with premium iced tea offered at an affordable price.

 

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

 

In addition, we have begun exploring global export opportunities, with product now distributed in South Korea and many Caribbean nations. We have just announced a partnership with a Canadian distributor, who will help us to distribute our products through Canada.

 

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

 

Recent Developments

 

Public Offering

 

On July 28 and 29, 2016, we sold 1,270,156 shares (the “Shares”) of common stock at a price of $5.50 per share, through Network I Financial Services, Inc. acting as a selling agent on a “best efforts” basis, pursuant to the Company’s registration statement on Form S-1 (File No. 333-210669) (the “Offering”).

 

  

The sale of the shares generated gross proceeds of $6,985,858 and net proceeds of $5,867,217 after deducting commissions and offering expenses. In connection with the sale of the shares, the common stock was approved for listing on the NASDAQ Capital Market under its current symbol, “LTEA.” On August 4, 2016, the Offering was terminated. No further sale of shares were made in the Offering.

 

As part of our selling agent’s compensation for the sale of the Shares, the Company issued warrants to purchase an aggregate of 31,522 shares of common stock. The warrants will be exercisable for cash or on a cashless basis at an exercise price of $6.875 per share, commencing on January 14, 2017 and expiring on July 14, 2021. The exercise price and number of shares of common stock issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, stock split or the Company’s recapitalization, reorganization, merger or consolidation. The warrants contain provisions for one demand registration of the sale of the underlying shares of common stock at the Company’s expense, an additional demand registration at the warrant holders’ expense, and unlimited “piggyback” registration rights at the Company’s expense until July 28, 2021.

 

Credit Agreement

 

We are party to a Credit and Security Agreement (the “Credit Agreement”) with LIBB, our wholly owned subsidiary, as the borrower, and Brentwood LIIT (NZ) Ltd. (as successor in interest to Brentwood LIIT Inc.), as the lender (the “Lender” or “Brentwood”). The Credit Agreement provides for a revolving credit facility (the “Credit Facility”). The loans made by Brentwood under the credit facility are evidenced by a secured convertible promissory note (the “Lender Note”). In addition, in connection with the establishment of the credit facility, the Company issued to Brentwood a warrant (the “Lender Warrant”) to purchase 1,111,111 shares of common stock, at an exercise price of $4.50 per share, expiring on November 23, 2018. The amount available to be advanced under the Credit Facility (the “Available Amount”) may be increased from time to time, in increments of $500,000, up to a specified maximum (the “Facility Amount”), and we may obtain advances under the Credit Facility, subject to the approval of Brentwood. As of immediately prior to the closing of the Offering, the principal amount of loans outstanding, including capitalized interest and fees (both of which are excluded when determining whether the Available Amount has been reached), was $1,669,376.

 

Upon the closing of the Offering, the Company completed a recapitalization transaction (the “Recapitalization”) with the Lender. Pursuant to the Recapitalization, all of the outstanding principal and interest under the Lender Note was converted into 421,972 shares of common stock and the Lender Warrant was exchanged for 486,111 shares of common stock. The Company may continue to request advances under the credit facility subject to the terms and conditions of the Credit Agreement, except that the Facility Amount was reduced from $5,000,000 to $3,500,000. Brentwood is owned by Eric Watson, who as of November 11, 2016 beneficially owned approximately 18.2% of our outstanding common stock, and KA#2 Ltd., which as of November 11, 2016 beneficially owned approximately 4.8% of our outstanding common stock.

 

UBS Credit Line

 

On October 27, 2016, the Company entered into a credit line (the “UBS Credit Line”) with UBS Bank USA (“UBS”). The UBS Credit Line has a borrowing capacity of $1,300,000 and bears interest at a floating rate, depending on the time requested for the borrowing. The interest is based on the ICE Swap Rate plus a margin of between 0.40% and 0.70%. As of November 11, 2016, the interest rate on the UBS Credit Line was 3.089%. The UBS Credit Line is collateralized by certain of the Company’s short-term investments. As of November 10, 2016, $400,000 was outstanding on the UBS Credit Line.

 

Private Issuances

 

Simultaneously with the closing of the Offering, the Company issued 1,667 shares of common stock to Julian Davidson, the Company’s Executive Chairman, 10,000 shares of common stock to Richard Allen, the Company’s Chief Financial Officer, and 5,000 shares of common stock to John Carson, a member of the Company’s advisory board, as compensation for services to the Company.

 

Intellectual Property

  

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

 

 

Board of Directors and Strategic Advisory Board

 

The Company has established a Strategic Advisory Board of business and industry professionals to help guide the Company’s business and market development. On March 31, 2016, the Company added Bert Moore to its Advisory Board.

 

On April 1, 2016, the board of directors (the “Board”) of the Company adopted a resolution expanding the size of the Board from five to six directors and appointed Tom Cardella as a Class 2 director (with a term expiring in 2017) to fill the newly created directorship.

 

Highlights

 

We generate income through the sale of our beverage products. The following are highlights of our operating results for the three and nine months ended September 30, 2016:

 

●

Net sales. During the three months ended September 30, 2016, we had net sales of $1,301,125, an increase of $844,338 over the three months ended September 30, 2015. During the nine months ended September 30, 2016, we had net sales of $3,412,961, an increase of $2,015,717 over the nine months ended September 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution, including $795,733 in sales of our new aloe products. The increase was also bolstered by an increase of $801,180 in the sale of the Company’s iced tea in gallon containers.

 

●

Margin. Our margin decreased by 6% for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015. Our margin decreased by 16% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The decrease was primarily due to the fact that, from May 2015 through January 2016, we introduced five of our flavors in gallon containers. Sales of our gallon containers have and continue to be sold below their costs. As a result, our margins during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 were negatively impacted by $18,667 (approximately 1% of net sales) by the inclusion of gallon container sales into our sales mix. In addition, as of September 30, 2016, the Company recorded a charge of $28,615 to reduce the cost of certain products to estimated net realizable value. These negative factors were partially offset by sales through vending machines which typically carry higher margins.

 

●

Operating expenses. During the three months ended September 30, 2016, our operating expenses were $2,831,769, representing an increase of $1,813,770 as compared to the three months ended September 30, 2015. During the nine months ended September 30, 2016, our operating expenses were $5,989,636, representing an increase of $3,730,656 as compared to the nine months ended September 30, 2015. The increases in operating expenses for the three and nine months ended September 30, 2016 related primarily to increased payroll (including stock based compensation), increases in Advisory Board and Board of Directors fees, increases in legal and consulting expenses and an increase in printing and filing fees due to being a public company.

 

Historically, our cash generated from operations has not been sufficient to meet our expenses. Accordingly, we have historically financed our business through the sale of equity interests or through the issuance of promissory notes and we have a commitment of financing from a stockholder. During the nine months ended September 30, 2016, our cash flows used in operating activities were $4,565,828, our net cash used in investing activities was $2,516,799 and our net cash provided by financing activities was $7,235,048. We had a working capital of $3,116,734 as of September 30, 2016.

 

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

 

 

Uncertainties and Trends in Our Business

 

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

 

●	We believe that using various marketing tools, which may include significant advertising expenses, will be necessary in order to increase product awareness in order to compete with our competitors, including large and well established brands with access to significant capital resources.

 

●	Customer trends and tastes can change for a variety of reasons including health consciousness, government regulations and variation in demographics. We will need to be able to adapt to changing preferences in the future.

 

●	Our sales growth is dependent upon maintaining our relationships with existing and future customers who may generate substantial portions of our revenue, which includes sales to retailers where there may be concentrations.

 

●	Our sales are subject to seasonality. Our sales are typically the strongest in the summer months in the northeastern United States.

 

●	We are currently involved in litigation. Please refer to Item 1 of Part II of this quarterly report. There are no assurances that there will be successful outcomes to these matters.

 

●	We developed a gallon product line featuring five of our existing flavors. The Company’s gallon product line has previously been sold below cost. There are no assurances we will be successful in increasing the margins on this product line.

  

Please refer to risks factors described in Item 1A of Part II of our quarterly report on Form 10-Q filed on May 9, 2016.

 

Accounting Policies

 

The preparation of the financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in these consolidated financial statements. We believe that, of our significant accounting policies (see Note 2 of the condensed consolidated financial statements included in this quarterly report), the following policies are the most critical.

 

Revenue Recognition

 

Revenue is stated net of sales discounts and rebates paid to customers. Net sales are recognized when all of the following conditions are met: (1) the price is fixed and determined; (2) evidence of a binding arrangement exists (generally, purchase orders); (3) products have been delivered and there is no future performance required; and (4) amounts are collectible under normal payment terms. These conditions typically occur when the products are delivered to or picked up by the Company’s customers.

 

Customer Marketing Programs and Sales Incentives

 

The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for attaining agreed upon sales levels or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace. The costs of all these various programs are recorded as a reduction of sales in the financial statements.

 

Additionally, the Company may be required to occasionally pay fees to its customers (“Placement Fees”) in order to place its products in the customers’ stores. In most cases, the Placement Fees carry no further benefit or minimum revenue guarantee other than the right to place the Company’s product in the customers’ stores. The Placement Fees are recorded as a reduction of sales. If, at the time the Placement Fees are recognized in the statement of operations, the Company has cumulative negative sales with that particular customer, such negative sales are reclassified and recorded as a part of selling and marketing expense.

 

Results of Operations

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
Net sales		$	1,301,125			$	456,787			$	3,412,961			$	1,397,244
Cost of goods sold			1,196,790				392,606				3,253,278				1,104,723
Gross profit			104,335				64,181				159,683				292,521
Operating expenses:
General and administrative expenses			2,170,522				646,788				3,957,763				1,264,436
Selling and marketing expenses			661,247				371,211				2,031,873				994,544
Total operating expenses			2,831,769				1,017,999				5,989,636				2,258,980
Operating Loss			(2,727,434	)			(953,818	)			(5,829,953	)			(1,966,459	)
Other expenses:
Other income (expense)			4,070				-				4,070				(3,327	)
Interest expense			(579,710	)			(872	)			(976,427	)			(47,056	)
Loss on induced conversion of credit facility and warrants			(1,587,954	)			-				(1,587,954	)			-
Net loss		$	(4,891,028	)		$	(954,690	)		$	(8,390,264	)		$	(2,016,842	)

 

 

Comparison of the Three Months Ended September 30, 2016 and September 30, 2015

 

Net Sales and Gross Profit

 

Net sales for the three months ended September 30, 2016 increased by $844,338, or 184.84%, to $1,301,125 as compared to $456,787 for the three months ended September 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution. The increase was also bolstered by the sale of the Company’s product line in gallon containers and the Company’s aloe juice product. Net sales of our product in gallons during the three months ended September 30, 2016 increased by $281,885 and were $368,165 as compared to $86,280 for the three months ended September 30, 2015. We also began selling certain aloe juice products in the first quarter of 2016. Sales of these products were $464,114 during the three months ended September 30, 2016.

 

Gross profit for the three months ended September 30, 2016 increased by $40,154, or 63%, to $104,335 as compared to $64,181 for the three months ended September 30, 2015. Gross profit percentage decreased by 6% to 8% for the three months ended September 30, 2016 from 14% for the three months ended September 30, 2015. The decrease in gross margin was due to (a) selling our gallon containers at or below costs to certain distributors in order to acquire more shelf space at certain retailers; (b) an increase in costs to produce certain new package offerings for our 20 ounce product line; and (c) introductory pricing given to new customers on our 20 ounce product line during the three months ended September 30, 2016.

 

General and administrative expenses

 

General and administrative expenses for the three months ended September 30, 2016 increased by $1,523,734, or 236%, to $2,170,522 as compared to $646,788 for the three months ended September 30, 2015. During the three months ended September 30, 2016, the Company’s general and administrative salaries increased by $336,608 as compared to the three months ended September 30, 2015. In addition, the Company incurred $882,267 in stock-based compensation expense that was allocated to general and administrative expense during the three months ended September 30, 2016, an increase of $776,527 over the $105,740 for the three months ended September 30, 2015. This was primarily the result of officers’ salaries including the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer of the Company. The remaining increase in general and administrative expenses was caused primarily by increases in rent, insurance, and other administrative costs.

 

Selling and marketing expenses

 

Selling and marketing expenses for the three months ended September 30, 2016 increased by $290,036, or 78%, to $661,247 as compared to $371,211 for the three months ended September 30, 2015. Selling and marketing expenses increased largely due to an increase in costs of $91,698 for freight out, consistent with the increase in units sold as compared to the prior period. There was also an increase in selling salaries of $79,557 during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 due to an increase in efforts to sell the Company’s products. The Company also incurred $68,672 in connection with the in-store deployment of point of sale marketing materials during the three months ended September 30, 2016.

 

Interest expense

 

Interest expense for the three months ended September 30, 2016 increased by $578,838, or 66,381%, to $579,710 as compared to $872 for the three months ended September 30, 2015. The increase was primarily the result of the Credit Facility with Brentwood interest through July 28, 2016 and the related amortization of deferred financing costs associated with the agreement. During the three months ended September 30, 2016, the Company recorded interest expense of $408,000 to reduce the deferred financing costs proportionally with the reduction of the credit facility.

 

Loss on induced conversion of credit facility and warrants

 

During the three months ended September 30, 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 three months ended September 30, 2015.

 

 

Comparison of the Nine Months Ended September 30, 2016 and September 30, 2015

 

Net Sales and Gross Profit

 

Net sales for the nine months ended September 30, 2016 increased by $2,015,717, or 144%, to $3,412,961 as compared to $1,397,244 for the nine months ended September 30, 2015. The increase is due to a combination of brand momentum and an increase in distribution. The increase was also bolstered by the sale of the Company’s product line in gallon containers and the Company’s aloe juice product. Net sales of our product in gallons during the nine months ended September 30, 2016 increased by $801,180 and were $957,398 as compared to $156,218 for the nine months ended September 30, 2015. In addition, the Company purchased vending machines in the fourth quarter of 2015. Sales of our iced tea products in vending machines as well as other products purchased from vendors were $149,933 during the nine months ended September 30, 2016 as compared to $0 for the nine months ended September 30, 2015. We also began selling certain aloe juice products in the first quarter of 2016. Sales of these products were $795,733 during the nine months ended September 30, 2016.

 

Gross profit decreased by $132,838, or 45%, to $159,683 for the nine months ended September 30, 2016 from $292,521 for the nine months ended September 30, 2015. Our gross profit percentage decreased by 16% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The decrease in gross margin was due to (a) selling our gallon containers at or below costs to certain distributors in order to acquire more shelf space at certain retailers; (b) an increase in costs to produce certain new package offerings for our 20 ounce product line; and (c) introductory pricing given to new customers on our 20 ounce product line during the nine months ended September 30, 2016.

 

General and administrative expenses

 

General and administrative expenses for the nine months ended September 30, 2016 increased by $2,693,327, or 213%, to $3,957,763 as compared to $1,264,436 for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, the Company’s general and administrative salaries and stock-based compensation increased by $1,416,936 as compared to the nine months ended September 30, 2015. This was primarily the result of the increase in the Chief Executive Officer’s salary, which took place on May 27, 2015 in connection with the consummation of the business combination between us, LIBB and Cullen. Legal and professional fees increased by $283,101 which included increased accounting and legal costs related to our SEC report filings. Additionally, during the nine months ended September 30, 2016, the Company incurred $46,667 related to the costs of its alcohol development contract. The remainder of the cost increases primarily related to rent and storage fees, insurance costs, website and internet costs, press release costs and filing fees related to becoming a public company on May 27, 2015, and increases in depreciation expense related to the purchase of vending machines in the fourth quarter of 2015.

 

Selling and marketing expenses

 

Selling and marketing expenses for the nine months ended September 30, 2016 increased by $1,037,329, or 104%, to $2,031,873 as compared to $994,544 for the nine months ended September 30, 2015. Selling and marketing expenses increased largely due to increased selling salaries of approximately $348,497 primarily related to the hiring of new employees, including a national vice president. Included in this amount was $30,000 of stock based compensation to this employee. In addition, stock based compensation allocated to selling and marketing expenses related to stock options increased by $84,231. Additionally sales commissions paid to brokers increased by approximately $54,436 due to the increase in commissions related to our sales through vending machines. Freight out increased by $247,855 during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015 due to increased volume as well as increased freight rates resulting from shipments from a storage facility located in Georgia. The remainder of the increase was caused by various other marketing expenses.

 

Interest expense

 

Interest expense for the nine months ended September 30, 2016 increased by $929,371, or 1,975%, to $976,427 as compared to $47,056 for the nine months ended September 30, 2015. The increase was primarily the result of the Credit Facility with Brentwood and the related amortization of deferred financing costs associated with the agreement. During the nine months ended September 30, 2016, the Company recorded interest expense of $408,000 to reduce the deferred financing costs proportionally with the reduction of the credit facility.

 

Loss on induced conversion of credit facility and warrants

 

During the nine months ended September 30, 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 nine months ended September 30, 2015.

 

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

The Company has historically been financed by debt from its stockholders and unrelated third parties. In addition, the Company has also been financed by the sale of equity interests. We had working capital of $3,116,734 as of September 30, 2016. We believe that, as a result of proceeds from the Offering, the commitment of financing from a stockholder and our working capital as of September 30, 2016, we will have sufficient cash resources to fund our net cash requirements through November 14, 2017.

 

The following is an overview of our borrowings as of September 30, 2016:

  

Description of Debt		Holder		Interest Rate				Balance at September 30, 2016
Automobile Loans		Various			3.59% to 10.74	%		$	33,118
Equipment Loans		Magnum Vending Corp.			10	%		$	85,872
Line of Credit *		Brentwood LIIT Inc.			Prime plus 7.5	%		$	-

 

* On July 29, 2016, all outstanding principal and interest under the 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 nine months ended September 30, 2016. In order to execute our long-term growth strategy, which could include the expansion of the business to include alcoholic beverages, we may need to continue to raise additional funds through private equity offerings, debt financings, or other means. There are no assurances that we will be able to raise such funds on acceptable terms or at all.

 

2016 Financing Activity

 

Commencing on November 24, 2015 and ending on March 14, 2016, we conducted a private placement of up to $3,000,000 of units (the “November Offering”) on a “best efforts” basis through a placement agent (the “Placement Agent”). From January 1, 2016 to March 14, 2016, we raised gross proceeds of $686,900, through the sale of 171,725 units at $4.00 per unit. In a separate private offering, we also raised gross proceeds of $235,000, through the sale of 58,750 units at $4.00 per units, during March 2016 (the “March Sales”). Each unit issued in the November Offering and in the March Sales consists of one share of common stock and one warrant to purchase one share of common stock. Included in the proceeds for the March Sales were subscriptions receivable of $120,000, which were collected during April 2016.

 

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. In connection with the closing of the Offering, we completed the Recapitalization with Brentwood. Pursuant to the Recapitalization, all of the outstanding principal and interest under the Brentwood Note was converted into 421,972 shares of common stock. As of September 30, 2016, the principal amount of loans outstanding was $0.

 

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

 

2015 Borrowing Activity

 

On November 23, 2015, we entered into the Credit Agreement. The Credit Agreement provides for a revolving Credit Facility. The Available Amount under the Credit Facility may be increased from time to time, in increments of $500,000, up to a maximum Facility Amount of $3,500,000, and we may obtain further advances, subject to the approval of Brentwood. The loans under the Credit Agreement are evidenced by the Lender Note. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. Brentwood had approved an Available Amount of $1,000,000 and had made advances to us in the same amount as of December 31, 2015. As of December 31, 2015, the outstanding balance of the loans under the Credit Facility, including capitalized interest and fees as described below (both of which are excluded when determining whether the Available Amount has been reached), was $1,091,571.

 

 

The Credit Facility bears interest at rate equal to the prime rate plus 7.5% (11% at September 30, 2016), compounded quarterly, and matures on November 23, 2018. The outstanding principal and interest under the Credit Facility are payable in cash on the maturity date. We also paid Brentwood a one-time facility fee equal to 1.75% of the Facility Amount, which was capitalized and added to the principal amount of the loan, and will pay Brentwood $30,000 for its expenses at the maturity date. The Credit Facility is secured by a first priority security interest in all of our property, including the membership interests in LIBB held by us. We also have guaranteed the repayment of LIBB’s obligations under the Credit Facility. In addition, LIBB’s obligations are guaranteed by Philip Thomas, our Chief Executive Officer, in certain limited circumstances, up to a maximum of $200,000.

 

Brentwood may accelerate the amounts due under the Credit Facility upon the occurrence of certain events of default, including a failure to make a payment under the credit facility when due, a violation of the covenants contained in the Credit Agreement and related documents, a filing of a bankruptcy petition or a similar event with respect to us or the occurrence of an event of default under other material indebtedness of ours. The Company and LIBB also made certain customary representations and warranties and covenants, including negative covenants with respect to the incurrence of indebtedness.

 

Brentwood may elect to convert the outstanding principal and interest under the Lender Note into shares of our common stock at a conversion price of $4.00 per share. The conversion price and the shares of common stock or other property issuable upon conversion of the principal and interest are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of our common stock, or in the event of a fundamental transaction.

 

In addition, in connection with the establishment of the Credit Facility, we issued the Lender Warrant to Brentwood. The Lender Warrant entitled the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision. Upon the closing of the Offering, pursuant to the Recapitalization, the Lender Warrant was exchanged for 486,111 shares of common stock.

 

Brentwood will have certain “piggyback” registration rights, on customary terms, with respect to the shares of our common stock issued or issuable upon conversion of the Lender Note and upon exchange of the Brentwood Warrant.

 

On November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp., or “Magnum,” an entity managed by Philip Thomas, the Company’s Chief Executive Officer and a director of the Company, and certain of his family members. In exchange for the exclusive right to stock vending machines owned by Magnum, the Company agreed to reimburse Magnum for certain costs that Magnum incurred to acquire the machines including machines which were purchased with an equipment loan. The total principal amount of the payments underlying the agreement upon the inception of the agreement was $117,917. The reimbursements will be made in 35 monthly payments of principal and interest in the amount of $3,819 with an interest rate of 10%. Upon completion of these payments in October 2018, Magnum will transfer the vending machines to the Company. As of December 31, 2015, the total principal amount of the payments underlying the agreement was $117,917 and we had made principal and interest payments of $6,463 under the agreement.

 

On April 28, 2015, LIBB received $150,000 as proceeds from a loan from Bass Properties, LLC, or “Bass Properties,” which was at the time a stockholder of Cullen and member of LIBB. On May 4, 2015, LIBB received $400,000 as proceeds from a loan with Ivory Castle Limited, or “Ivory Castle,” which was at the time a member of LIBB. These notes bore interest at 6% per annum and were to mature on July 31, 2016. On June 30, 2015, these loans, together with accrued interest, a total of $555,910 were converted into 138,979 shares of the Company’s common stock.

 

On March 26, 2015, LIBB received $250,000 as proceeds from an additional loan from Cullen, bearing interest at 6% per annum with principal and interest due and payable on March 15, 2016. This loan was eliminated when consolidating the financial statements.

 

2015 Private Placements

 

On June 30, 2015, we received net proceeds of $468,468 through the issuance of 117,636 shares of common stock at an average price of approximately $4.00 per share.

 

On July 8, 2015, we received proceeds of $100,000 through the issuance of 25,000 shares of common stock at a price of $4.00 per share.

 

Commencing on August 10, 2015 and ending on October 30, 2015, we conducted a private placement of up to $3,000,000 of units (the “August Offering”), at a price of $4.00 per unit, through a placement agent. During the private placement, we sold an aggregate of 155,750 units for total gross proceeds of $623,000. The units consisted of one share of common stock (or an aggregate of 155,750 shares) and one warrant (or an aggregate of 155,750 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on September 17, 2018.

 

 

On November 24, 2015, we commenced the November Offering of up to $3,000,000 of units, at a price of $4.00 per unit, through a placement agent. As of December 31, 2015, we had sold an aggregate of 18,250 units for total gross proceeds of $73,000 in the private placement. The units consisted of one share of common stock (for an aggregate of 18,250 shares) and one warrant (for an aggregate of 18,250 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on November 30, 2018. We made additional sales in the November Offering after December 31, 2015, as described above under “2016 Financing Activity”.

 

Net proceeds after all direct costs related to the August Offering and the November Offering, including the value of warrants issued to the placement agent in the offerings, were $540,946 for the year ended December 31, 2015.

 

2015 Business Combination

 

On May 27, 2015, we completed the business combination contemplated by the Agreement and Plan of Reorganization, dated as of December 31, 2014, as amended, by and among us, Cullen, Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, LIBB, and Phil Thomas and Thomas Panza. Prior to the closing of the business combination, we were a wholly-owned subsidiary of Cullen formed solely for the purpose of consummating the business combination, LIBB was a private operating company and Cullen was a public company seeking alternative strategic opportunities in all industries and regions in an effort to maximize stockholder value. Upon the closing of the business combination, we became the new public company and Cullen and LIBB became wholly-owned subsidiaries of ours. As a result of the consummation of the business combination, we gained access to the cash held by Cullen of $120,841. Under the agreement, upon consummation of the business combination, the holders of the LIBB membership interests received 2,633,334 shares of our common stock, subject to adjustment based on LIBB’s and Cullen’s net working capital at the closing. On July 16, 2015, the payment of the net working capital adjustment under the agreement was waived by the parties.

 

Cash flows

 

Net cash used in operating activities

 

Net cash used in operating activities was $4,565,828 for the nine months ended September 30, 2016 as compared to net cash used in operating activities of $2,016,316 for the nine months ended September 30, 2015. Cash used in operating activities for the nine months ended September 30, 2016 was primarily the result of the net loss of $8,390,264 offset by non-cash charges of $3,715,230. Cash used in operating activities for the nine months ended September 30, 2015 was primarily the result of the net loss of $2,016,842.

 

Net cash used in investing activities

 

Net cash used in investing activities was $2,516,799 and $65,036 for the nine months ended September 30, 2016 and 2015, respectively. Net cash used in investing activities for the nine months ended September 30, 2016 was primarily due to our purchase of a short-term investment security of $2,507,302. Cash used in investing for the nine months ended September 30, 2015 was primarily due to the purchase of display items, trucks and automobiles.

 

Net cash provided by financing activities

 

Net cash provided by financing activities was $7,235,048 for the nine months ended September 30, 2016 as compared to net cash provided by financing activities of $1,951,876 for the nine months ended September 30, 2015. Cash flows from financing activities were primarily the result of $500,000 in proceeds under the Credit Agreement with Brentwood, $861,790 from the sale of common stock and warrants, net of costs, and $5,867,217 representing the proceeds from the Offering, net of costs. Net cash used in financing activities consisted of repayments of automobile loans of $22,977, and repayments of equipment loans of $27,232. During the nine months ended September 30, 2015, and prior to the Business Combination, we received 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, we received loans totaling $550,000 from two of our stockholders, Bass Properties LLC and Ivory Castle Limited. These loans, together with accrued interest, were converted into 138,979 shares of Company common stock. In addition, the Company received net proceeds of $568,468 through the issuance of 142,636 shares of common stock. In addition, the Company received net proceeds of $475,885 through the issuance of common stock and warrants.

 

Off-balance Sheet Arrangements

 

We do not have any off-balance sheet financing arrangements.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified under the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer 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) carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in paragraph (e) of Rules 13a-15 and 15d-15 under the Exchange Act) were not effective as of September 30, 2016 due to a material weakness in our internal control over financial reporting as described below

 

A material weakness is defined within the Public Company Accounting Oversight Board’s Auditing Standard No. 5, as a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. We determined that our internal control of financial reporting had the following material weakness:

 

●	Due to the small size of the Company, the Company does not maintain sufficient segregation of duties to ensure the processing, review and authorization of all transactions including non-routine transactions.

 

Because disclosure controls and procedures include those components of internal control over financial reporting that provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, management determined that its disclosure controls and procedures were not effective as a result of the foregoing material weakness in its internal control over financial reporting. The Company is evaluating this weakness to determine the appropriate remedy.

 

Changes in Internal Control over Financial Reporting

 

On September 19, 2016, James Meehan resigned as the Chief Accounting Officer and Secretary of Long Island Iced Tea Corp. Richard B. Allen, the Company’s Chief Financial Officer, assumed the duties of the Company’s principal accounting officer.

 

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.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. 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 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

On October 4, 2016, we issued 36,135 shares of our common stock and, on October 7, 2016, we issued 5,000 shares of our common stock, in each case to consultants of ours as compensation for services provided to us. The shares were issued on a private placement basis pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the offer and sale of securities not involving a public offering.

 

 

ITEM 6. EXHIBITS

 

(a) Exhibits:

 

Exhibit No.		Description
2.1		Agreement and Plan of Reorganization, dated as of December 31, 2014, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Phil Thomas and Thomas Panza (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on January 6, 2015).
2.2		Amendment No. 1 to Agreement and Plan of Reorganization, dated as of April 23, 2015, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Philip Thomas and Thomas Panza, and Philip Thomas, in his capacity as the “LIBB Representative” under the Merger Agreement on behalf of the other members of LIBB party to the Merger Agreement (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on April 24, 2015).
10.1		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).
31.1		Section 302 Certification by Chief Executive Officer.
31.2		Section 302 Certification by Chief Accounting Officer.
32		Section 906 Certification by Chief Executive Officer and Chief Accounting Officer.
101		Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 14, 2016

 

	LONG ISLAND ICED TEA CORP.
	By:	/s/ Richard Allen
	Name:	Richard Allen
	Title:	Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
2.1		Agreement and Plan of Reorganization, dated as of December 31, 2014, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Phil Thomas and Thomas Panza (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on January 6, 2015).
2.2		Amendment No. 1 to Agreement and Plan of Reorganization, dated as of April 23, 2015, by and among, Cullen Agricultural Holding Corp., Long Island Iced Tea Corp., Cullen Merger Sub, Inc., LIIT Acquisition Sub, LLC, Long Island Brand Beverages LLC, Philip Thomas and Thomas Panza, and Philip Thomas, in his capacity as the “LIBB Representative” under the Merger Agreement on behalf of the other members of LIBB party to the Merger Agreement (incorporated by reference to Exhibit 2.1 of Cullen Agricultural Holding Corp.’s Current Report on Form 8-K filed on April 24, 2015).
10.1		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).
31.1		Section 302 Certification by Chief Executive Officer.
31.2		Section 302 Certification by Chief Accounting Officer.
32		Section 906 Certification by Chief Executive Officer and Chief Accounting Officer.
101		Financial statements from the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2016, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail.
101.INS		XBRL Instance Document.
101.SCH		XBRL Taxonomy Extension Schema Document.
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.