As filed with the Securities and Exchange Commission on June 9, 2016.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware | 2080 | 47-2624098 | ||
(State or Other Jurisdiction of
Incorporation or Organization) |
(Primary Standard Industrial
Classification Code Number) |
(I.R.S. Employer
Identification Number) |
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies of communications, including communications sent to agent for service, should be sent to :
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David Alan Miller, Esq.
Jeffrey M. Gallant, Esq. Graubard Miller The Chrysler Building 405 Lexington Avenue New York, New York 10174 Telephone: (212) 818-8800 Fax: (212) 818-8881 |
Ross Carmel, Esq.
Peter DiChiara, Esq. Carmel, Milazzo & DiChiara LLP 261 Madison Avenue, 9 th Floor New York, New York 10016 Telephone: (212) 658-0458 Fax: (646) 838-1314 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
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.
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Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer
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(Do not check if a smaller reporting company) |
Smaller reporting company x |
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the commission, acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
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PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION | DATED JUNE 9, 2016 |
This is a firm commitment public offering of 1,538,462 shares of common stock of Long Island Iced Tea Corp. Currently, our common stock is quoted on the OTCQB Marketplace, or the OTCQB, under the symbol LTEA. The last reported sale price of our common stock on June 7, 2016 was $9.11 per share.
We have applied to list our shares of common stock for trading on the NASDAQ Capital Market under the symbol LTEA. No assurance can be given that our application will be approved or that we will continue to trade on NASDAQ following this offering.
Investing in our common stock involves a high degree of risk. See Risk Factors beginning on page 11 of this prospectus for a discussion of the risks that should be considered in connection with an investment in our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 and have elected to comply with certain reduced public company reporting requirements.
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Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Underwriting discounts and commissions (1) | $ | $ |
(1) | Does not include a non-accountable expense allowance equal to 2% of the gross proceeds of this offering payable to Network 1 Financial Securities, Inc., the representative of the underwriters. See Underwriting for a description of compensation payable to the underwriters. |
Alexander Capital, L.P. will act as a selling agent for the representative of the underwriters.
We have granted a 45-day option to the representative of the underwriters to purchase up to 230,769 additional shares of common stock solely to cover over-allotments, if any.
The underwriters expect to deliver our shares to purchasers in the offering on or about , 2016.
Prospectus dated , 2016.
You should rely only on the information contained in this prospectus. No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.
Information contained in, and that can be accessed through, our website, www.longislandicedtea.com , does not constitute part of this prospectus.
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This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary does not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, especially Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and the related notes, before making an investment decision. Certain statements in this summary are forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements. See Cautionary Note Regarding Forward-Looking Statements.
| the terms the Company and LIIT and we, us and our refer collectively to Long Island Iced Tea Corp. and its wholly-owned subsidiaries, Long Island Brand Beverages LLC, or LIBB, and Cullen Agricultural Holding Corp., or Cullen; and |
| the term common stock refers to our common stock, par value $0.0001 per share. |
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, or NARTD, iced tea in the beverage industry. We are currently organized around our flagship brand Long Island Iced Tea®. The Long Island Iced Tea name for a cocktail originated in Long Island in the 1970s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe and with quality components. Long Island Iced Tea® is sold primarily on the East Coast of the U.S. 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 options perceived as less healthy such as carbonated soft drinks, or CSDs, towards alternative beverages such as iced tea.
In addition, we have begun exploring entry into the $215 billion U.S. alcohol industry, with the hope to establish ourselves as a multi-product alcoholic and non-alcoholic beverage company.
Globally, non-alcohol ready to drink tea products are ranked as the 4 th largest beverage category, behind carbonated soft drinks, water and dairy. The non-alcohol iced tea global category size is estimated at $55 billion, and is estimated to be growing at a 6.6% compound annual growth rate, or CAGR. (Source: Euromonitor International, Versatility of RTD Tea Generates Bright Spot in Global Soft Drinks, May 2014).
The U.S. non-alcoholic liquid refreshment beverage market consists of a number of different products, and CSDs are the top selling beverage category. However, consumers are increasingly coming to view CSDs (typically caffeinated as well as high in sugar and preservatives) with disfavor. The CSD category declined 0.9% in 2014, 3% in 2013 and 1.2% in 2012. (Source: Beverage-Digest, Special Issue: U.S. Beverage Results for 2014, March 2015).
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CSDs have historically dominated the non-alcoholic liquid refreshment beverage market and been primarily controlled by two industry giants, Coca-Cola and Pepsico. However, a number of beverages began to emerge in the 1990s as alternatives to CSDs as part of a societal shift towards beverages that are perceived to be healthier. The alternative beverage category of the market has resulted in the birth of multiple new product segments that include sports drinks, energy drinks and NARTD teas.
According to a 2014 IBISWorld industry report, the U.S. NARTD tea segment was expected to have $5.3 billion of revenues in 2014, a 3.3% increase from the prior year and a 6.1% annualized growth rate over the five years from 2009 to 2014. (Source: IBISWorld Industry Report OD4297, RTD Tea Production in the US, December 2014). The industry report also forecasted an annualized revenue growth rate of 10.2% between 2014 and 2019, with revenues reaching $8.6 billion in 2019.
Consumers have shown special interest in perceived healthier versions of NARTD teas, preferring all natural and diet teas.
Products and Services Segmentation 2014 ($5.3 billion)
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All-Natural Tea | 36.1 | % | ||
Diet Tea | 25.8 | % | ||
Fruit-Flavored Tea | 20.2 | % | ||
Organic Tea | 10.3 | % | ||
Herbal Tea | 7.6 | % |
(Source: IBISWorld Industry Report OD4297, RTD Tea Production in the US, December 2014)
The existence of this trend toward healthier versions of products is reinforced by a 2015 Nielsen Health and Wellness study, where six key elements of our premium liquid (corn free, hormone/antibiotic free, non-gmo, gluten free, natural, and no artificial color/flavor) rank in the top 20 of four-year CAGR, when measured against 64 Health and Wellness categories.
We have begun exploring the development, production, marketing and distribution of alcoholic beverages, to augment our current NARTD tea business. In June 2015, we engaged Julian Davidson, who has many years of experience in the alcohol industry, as a consultant to help evaluate the opportunity, as well as to assist in our core NARTD tea business. In June 2016, Mr. Davidson became our Executive Chairman.
The alcohol beverage market consists of beer, cider/perry, ready-to-drink/high-strength premixes, spirits and wine. The total sales of U.S. alcohol beverage market reached $215 billion in 2014, growing at a 3.3% CAGR from 2009 to 2014. Of that $215 billion, 46.8% was from beer, 1.0% from cider/perry, 2.5% from alcoholic ready-to-drink, or ARTD, beverages and high-strength premixes, 30.5% from spirits and 19.2% from wine. (Source: Euromonitor International, Passport: Alcoholic Drinks in the US, June 2015).
Long Island Iced Tea® was first launched in the New York metro market by LIBB in July 2011, positioning itself as a premium iced tea beverage offered at an affordable price. We help differentiate ourselves from competitors with a proprietary recipe and quality components. Long Island Iced Tea® is a 100% brewed tea, using black tea leaves and purified water via reverse osmosis. It is gluten-free, free of genetically modified organisms, or GMOs, and certified Kosher with no artificial colors or preservatives.
Long Island Iced Tea® is primarily produced and bottled in the U.S. Northeast. This production in the Northeast, combined with its Made in America tag-line and brand name, all improve its credentials as a part of the local community from which we take our name.
We have developed ten flavors of Long Island Iced Tea® in an effort to ensure that our products meet the desired taste preferences of consumers. Regular flavors, which use natural cane sugar as a sweetener, include lemon, peach, raspberry, green tea & honey, half tea & half lemonade, guava, mango, and sweet tea. Diet flavors, which use sucralose (generic Splenda) instead of natural cane sugar as a sweetener, include diet lemon and diet peach. These flavors are currently available in twelve packs of 20 ounce polyethylene terephthalate bottles.
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We have also recently developed three twenty-four pack of sixty calorie flavors that are served in twelve ounce bottles. The sixty calorie flavors have reduced sugar content, are caffeine free and include mango, peach, and raspberry. This package was designed to meet certain nutritional guidelines for sales in schools. During May 2015, we launched four flavors, lemon, peach, mango, and green tea and honey, in gallon containers. During February 2016, we also launched sweet tea, which is also served in a gallon container.
Also during February 2016, we began exploring the sale of aloe juice products as part of our product line. The aloe juice product is purchased in its finished form from a supplier. In addition, during April 2016, we launched a private label line, consisting of four flavors, for one of our existing customers.
We believe that a differentiated brand will be a key competitive strength in the NARTD tea segment. Key points of differentiation for Long Island Iced Tea® include:
| A better and bolder tasting bottled iced tea as a result of premium ingredients that include natural cane sugar (sucralose for diet flavors), hot-filled using black and green tea leaves, that is offered at an affordable price; |
| Immediate global recognition of the Long Island Iced Tea phrase associated with the cocktail; |
| Made in America; |
| Strong Northeast roots where it is locally produced; |
| The use of non-GMO ingredients; and |
| Our product being corn free, hormone/antibiotic free, gluten free, natural and having no artificial color/flavor. |
The NARTD tea market is a crowded space and as a result we believe in pricing our products competitively. We highlight to consumers our use of premium ingredients and our affordable price. The suggested retail price for a 20 ounce bottle of Long Island Iced Tea® is $1.00 to $1.50 and the suggested retail price for a 12 ounce bottle is $1.00 to $1.25. The suggested retail price for our gallon containers is $2.99 to $3.49. Management has set pricing levels to reflect current pricing dynamics in the industry. There has been downward pressure on prices, which management believes is caused by the entrance of major multinational beverage corporations into the alternative beverage category, leading to consolidation in the industry.
In addition to a potential expansion into ARTD beverages, we are seeking to organically grow our NARTD tea and related product sales.
We intend to increase our market share in our existing geographic markets and expand into additional geographic markets in the U.S., capitalizing on an iconic name with unique brand awareness to create a familiar and easily recognizable non-alcoholic iced tea. We also are exploring international markets on a highly selective and limited basis, which may include royalty and licensing agreements. As discussed below in Our Customers , we generally focus our sales efforts on approaching beverage distributors and taking advantage of their unique positioning in the retail industry. However, a portion of our sales efforts are also dedicated to direct sales to retailers, because some wholesale chains such as Sams Club and Costco request direct shipments from the product supplier. In addition, we are exploring several new sales channels. We currently are conducting a small scale business trial in which we sell our beverage product alongside other snacks in vending machines. We also commenced selling our twelve ounce lower calorie products in schools, in some cases through sales to purchasing cooperatives that represent multiple school districts, but also via the vending machine business trial.
During the quarter ended December 31, 2015, we determined the brand had sufficient scale, distribution and volume per point of distribution to test market expansion into (1) additional U.S. states, (2) significant new regional chains, and (3) national chains. To facilitate this expansion, we recruited Joseph Caramele, our Vice President of National Sales & Marketing. Mr. Caramele had spent the previous nine years working in national and chain account sales for Arizona Beverages USA, at which time he oversaw the regional and national
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chain account expansion. Since October 1, 2015, we have introduced our products in Florida and selected states in the Midwest, and have reached agreement with a limited number of regional and national chains. We recently began receiving purchase orders from these accounts, and incorporating their logistics and delivery requirements into our systems. Aligned with this expansionary plan, we have increased the number of full time employees in our sales staff to meet the demands of these initiatives.
As part of our marketing efforts, we commonly use store demos, as we have found a positive correlation between demos and sales especially at the introduction phase in new stores. We expect to continue using store demos in order to increase brand awareness and sales as we continue to expand into new markets. We also use co-op advertising (advertisements by retailers that include the specific mention of manufacturers, who, in turn, repay the retailers for all or part of the cost of the advertisement) and special promotions, together with its retail partners, so as to complement other marketing efforts towards brand awareness.
We also seek to expand our product line. From time to time, we explore and test market potential new NARTD products that may, in the future, contribute to our operating performance. In addition, we are currently testing certain complementary products that will sit alongside our flagship Long Island Brand tea. We also may consider exploring strategic acquisitions from time to time, although this is not a primary business focus.
We sell our products to a mix of independent mid-to-large size beverage distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the New York, New Jersey, Connecticut and Pennsylvania markets. We have also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. Our products are currently available in twelve states that have a cumulative population of 100 million. While we primarily sell our products indirectly through distributors, at times we sell directly to the retail outlets and we may sell to certain retail outlets both directly and indirectly through distributors. We also sell our products directly to the distribution facilities of some of our retailers and through road shows, which are temporary installations at retail outlets staffed by our employees or contractors.
For the three months ended March 31, 2016, two customers accounted for 16% and 12% of net sales, respectively. In addition, we collect vending proceeds based on contracts in certain school districts. Sales within one school district accounted for 13% of our net sales during the three months ended March 31, 2016. For the year ended December 31, 2015, one customer, Wakefern Food Corp., accounted for 10% of net sales. For the year ended December 31, 2014, our top three customers, Costco Wholesale, Windmill Distributing, and CFG Distributors LLC, accounted for 32%, 16% and 14%, of net sales, respectively.
Our sales are typically governed by short-term purchase orders. We do not have any material contracts or other material arrangements with our customers or distributors and do not obtain commitments from them to purchase or sell a minimum amount of our products or to purchase or sell such products at a minimum price. Because our sales may be concentrated with a few customers, our results of operations may be materially adversely affected if one of these customers significantly reduces the volume of its purchases or demands a reduction in price, which may occur at any time due to the absence of such purchase commitments.
Our management team consists of persons with substantial experience in the beverage industry. Philip Thomas, our Chief Executive Officer and LIBBs co-founder, has over 16 years of beverage experience. Julian Davidson, our Executive Chairman, has nearly 25 years of experience in the beverage industry, including most recently serving as Chief Executive Officer of Independent Liquor NZs businesses in New Zealand, the U.S. and Canada. Independent Liquor NZ is a manufacturer and distributor of pre-mixed ARTD beverages, as well as having beer, spirit and cider portfolios. Richard Allen, our Chief Financial Officer has over 30 years of experience in the beverage and food industries, including roles at Beverage Innovations, Cadbury Schweppes and Snapple. Peter Dydensborg, our Chief Operating Officer, has over 30 years of experience in the consumer packaged goods industry, including ten years of beverage experience. Joseph Caramele, our Vice President of National Sales & Marketing, has substantial experience in the beverage industry, having spent the past nine years at Arizona Beverages USA, most recently as Executive National Sales Director for the past
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five years. As Executive National Sales Director, he managed a team of 85 individuals and portfolio of over 100 accounts with annual retail sales estimated to be over $850 million. We intend to expand our current management and recruit other skilled officers and employees with experience relevant to our business focus.
On April 19, 2016, the United States Patent and Trademark Office registered our mark Long Island Iced Tea (U.S. 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 and we still may be open to claims of others contesting our trademarks.
On November 23, 2015, we entered into a Credit and Security Agreement, or the Credit Agreement, as amended as of January 10, 2016 and April 7, 2016, with Brentwood LIIT Inc., or Brentwood, as the lender. Brentwood is owned by Eric Watson, who currently beneficially owns approximately 28.7% of our outstanding common stock, and KA#2 Ltd., which currently beneficially owns approximately 10.4% of our outstanding common stock. The Credit Agreement provides for a revolving credit facility, or the Credit Facility. The amount available to be advanced under the Credit Facility, or the Available Amount, may be increased from time to time, in increments of $500,000, up to a maximum of $5,000,000, or the Facility Amount, and we may obtain further advances, subject to the approval of Brentwood. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. Brentwood has approved an Available Amount of $1,500,000 and has made advances to us in the same amount. 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), is $1,627,930.
The loans under the Credit Agreement are evidenced by a promissory note, or the Brentwood Note. Brentwood may elect to convert the outstanding principal and interest under the Brentwood Note into shares of our common stock at a conversion price of $4.00 per share. In addition, in connection with the establishment of the Credit Facility, we issued a warrant to Brentwood, or the Brentwood Warrant. The Brentwood Warrant entitles the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision.
Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock (assuming there are no further advances by Brentwood) at the closing of the offering. In addition, Brentwood will exchange the Brentwood Warrant for 486,111 shares of our common stock at such time. The Credit Facility will remain outstanding, except that the Facility Amount will be reduced to $3,500,000. These transactions are sometimes referred to as the Recapitalization. The Recapitalization will occur only if the gross proceeds from the offering are at least $5 million.
Commencing on August 10, 2015 and ending on October 30, 2015, we conducted a best efforts private placement of up to $3,000,000 of units, or the August Private Placement, 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.
Commencing on November 24, 2015 and ending on March 14, 2016, we conducted a best efforts private placement offering, or the November Private Placement, of up to $3,000,000 of units, at a price of $4.00 per unit, through a placement agent acting on a best efforts basis. During the private placement, we sold an aggregate of 189,975 units for total gross proceeds of $759,900. The units consisted of one share of common stock (for an aggregate of 189,975 shares) and one warrant (for an aggregate of 189,975 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share,
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expiring on November 30, 2018. Of such amount, 171,725 units, representing total gross proceeds of $686,900, were sold after December 31, 2015.
On January 26, 2016, we granted 8,956 shares of our common stock to each of our nonemployee directors, Kerry Kennedy, Paul Vassilakos, Edward Hanson and Richard Roberts, for an aggregate of 35,824 shares, as compensation for their services as directors. On the same day, we also granted 7,500 shares of our common stock to each of the members of our advisory board, John Carson, Tom Cardella, Dan Holland and David Williams, for an aggregate of 30,000 shares of its common stock, as compensation for their advisory services.
On March 29 and 31, 2016, we sold an additional 58,750 units on a private placement basis, or the March Private Placement, directly to various accredited investors, at a price of $4.00 per unit, for aggregate gross proceeds of $235,000. The units consisted of one share of common stock (for an aggregate of 58,750 shares) and one warrant (for an aggregate of 58,750 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on March 29, 2019.
On March 31, 2016, we granted 7,500 shares of our common stock to our Vice President of National Sales & Marketing, Joseph Caramele, and we granted an aggregate of 34,133 shares of common stock to several consultants, vendors and advisors, which includes 15,833 shares issued to Bert Moore, a member of our advisory board, related to a consumer marketing project.
Investing in our common stock involves risks. For a discussion of these risks and other considerations that could negatively affect us, including risks related to this offering and our common stock, see Risk Factors and Cautionary Statement Concerning Forward-Looking Statements . These risks include, among others:
| We operate in highly competitive markets. |
| We may not effectively respond to changing consumer preferences, trends, health concerns and other factors. |
| Costs for our raw materials may increase substantially. |
| Fluctuations in our results of operations from quarter to quarter could have a disproportionate effect on our overall financial condition and results of operations. |
| We depend on a small number of large retailers for a significant portion of our sales. |
| We do not have registered ownership of our trade name and our intellectual property rights could be infringed or we could infringe the intellectual property rights of others, and adverse events regarding licensed intellectual property, including termination of distribution rights, could harm our business. |
| We have experienced cash losses from operations and our ability to grow and compete in the future will be adversely affected if adequate capital is not available to us. |
| Our new product line has minimal gross margins, may not generate sufficient revenue or other benefits to justify its introduction and may divert sales from our higher margin existing product lines. |
| We have a limited operating history. |
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and the requirement to obtain stockholder approval of any golden parachute payments not previously approved.
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In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or Securities Act, for complying with new or revised accounting standards. We have irrevocably opted not to take advantage of such extended transition period, and will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We can remain an emerging growth company until December 31, 2020. However, if any of our non-convertible debt issued within a three-year period or our total revenues exceed $1 billion or the market value of our shares of common stock that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, we would cease to be an emerging growth company as of the following fiscal year.
We were incorporated on December 23, 2014 in the State of Delaware as a wholly owned subsidiary of Cullen.
On May 27, 2015, we closed the business combination, or the Business Combination, contemplated by the Agreement and Plan of Reorganization, or the Merger Agreement, dated as of December 31, 2014 and amended as of April 23, 2015, by and among Cullen, us, Cullen Merger Sub, Inc., LIBB Acquisition Sub, LLC, LIBB, Philip Thomas and Thomas Panza, who formerly owned a majority of the outstanding membership units of LIBB, and the other former members of LIBB executing a joinder thereto. Pursuant to the Merger Agreement, (i) Cullen Merger Sub, Inc. merged with and into Cullen, with Cullen surviving as a wholly owned subsidiary of ours and the stockholders of Cullen receiving one share of our common stock for every 15 shares of Cullen common stock held by them and (ii) LIBB Acquisition Sub, LLC merged with and into LIBB, with LIBB surviving as a wholly owned subsidiary of ours and the members of LIBB receiving an aggregate of 2,633,334 shares of our common stock.
Upon the closing of the Business Combination, we became the new public company, Cullen and LIBB became wholly-owned subsidiaries of ours and the stockholders of Cullen and the members of LIBB became our stockholders. In addition, the historical financial statements of LIBB became our financial statements. As a result of the Business Combination, the business of LIBB became our business. Cullen is currently inactive and no significant operations are being undertaken by it as of the date of this prospectus. LIBB was formed as a limited liability company under the laws of New York on February 18, 2011.
Our principal executive offices are located at 116 Charlotte Avenue, Hicksville, NY 11801. Our telephone number is (855) 542-2832. Our website address is www.longislandicedtea.com . The information contained on, or accessible from, our corporate website is not part of this prospectus and you should not consider information contained on our website to be a part of this prospectus or in deciding whether to purchase our common stock.
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Common stock offered by us |
1,538,462 shares of our common stock. |
Over-allotment Option |
The underwriters have an option to purchase up to 230,769 additional shares of our common stock to cover over-allotments. The underwriters could exercise this option at any time within 45 days from the date of this prospectus. |
Common stock to be outstanding after this offering |
7,485,260 shares of our common stock, or 7,716,029 shares of our common stock if the underwriters exercise their over-allotment option in full. The number of shares of our common stock to be outstanding after this offering is based on the shares to be sold in this offering, plus 4,973,715 shares of common stock outstanding as of June 7, 2016, plus an aggregate of 65,000 shares of common stock issuable to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen and John Carson, which shares will be issued at or prior to the closing of the offering. |
Use of Proceeds |
We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $8,600,000, or approximately $9,965,000 if the underwriters exercise their over-allotment option in full, assuming a public offering price of $6.50 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, sales and marketing activities, product development, general and administrative matters, capital expenditures and acquisitions. |
Risk Factors |
Investing in our common stock involves a high degree of risk. See Risk Factors beginning on page 11 of this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock. |
Market Symbol and Listing |
Our common stock is quoted on the OTCQB under the symbol LTEA. In conjunction with this offering, we have applied to have our common stock listed on the NASDAQ Capital Market under the symbol LTEA. |
Unless otherwise indicated, all information in this prospectus:
| assumes the underwriters will not exercise their over-allotment option; |
| assumes the Recapitalization will occur, but excludes 908,083 shares of common stock issuable in connection with the Recapitalization; |
| excludes 10,000 shares of common stock that we intend to issue to Richard Allen, our Chief Financial Officer, and 5,000 shares of common stock that we intend to issue to John Carson, a member of the advisory board; |
| excludes 50,000 shares of common stock that are issuable to Julian Davidson, our Executive Chairman, upon the closing of the offering, and 35,000 shares of common stock and an option to purchase 5% of our fully-diluted common stock outstanding as of immediately after the offering issuable to Mr. Davidson subsequent to the offering, in each case if the gross proceeds from the offering are at least $10,000,000; |
| excludes 633,715 shares of common stock issuable upon the exercise of currently outstanding options and warrants (other than the Brentwood Warrant), which have a weighted average exercise price of $5.23 per share and a weighted average duration of 3.21 years as of March 31, 2016; and |
| excludes 466,667 shares of common stock reserved for issuance pursuant to our 2015 Long-Term Incentive Equity Plan, or the 2015 Plan. |
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The following table presents a summary of certain of our consolidated historical financial data. Historical results are not necessarily indicative of results to be expected for any future period. You should read the following summary financial information together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated financial data for the three months ended March 31, 2016 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data for the fiscal years ended December 31, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated financial data as of December 31, 2013 and 2012 and for the years then ended is derived from audited financial statements of LIBB, as our predecessor, which are not included in this prospectus. The summary consolidated financial data as of December 31, 2011 and for the period from February 18, 2011 (inception) through December 31, 2011 is derived from unaudited financial statements of LIBB, as our predecessor.
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Statement of Operations Data:
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Net sales | $ | 508,169 | $ | 264,722 | $ | 1,899,230 | $ | 1,744,440 | $ | 886,061 | $ | 1,003,502 | $ | 238,305 | ||||||||||||||
Gross Profit | $ | 40,551 | $ | 71,413 | $ | 343,090 | $ | 240,294 | $ | 152,325 | $ | 72,956 | $ | 17,776 | ||||||||||||||
Operating loss | $ | (1,223,657 | ) | ($355,791 | ) | $ | (3,052,229 | ) | $ | (3,041,083 | ) | $ | (264,120 | ) | $ | (128,824 | ) | $ | (60,525 | ) | ||||||||
Other expense | $ | (193,413 | ) | $ | (22,875 | ) | $ | (128,040 | ) | $ | (110,298 | ) | $ | (53,812 | ) | $ | (44,108 | ) | $ | (12,273 | ) | |||||||
Net loss | $ | (1,417,070 | ) | $ | (378,666 | ) | $ | (3,180,269 | ) | $ | (3,151,381 | ) | $ | (317,932 | ) | $ | (172,932 | ) | $ | (72,798 | ) | |||||||
Net loss per share | $ | (0.30 | ) | $ | (0.14 | ) | $ | (0.85 | ) | $ | (1.20 | ) | $ | (0.12 | ) | $ | (0.07 | ) | $ | (0.03 | ) | |||||||
Weighted average shares outstanding basic and diluted | 4,720,929 | 2,633,334 | 3,744,931 | 2,633,334 | 2,633,334 | 2,633,334 | 2,633,334 |
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Balance Sheet Data:
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Current Assets:
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Cash | $ | 362,854 | $ | 207,192 | $ | 398,164 | $ | 604,841 | $ | 25,960 | $ | 136,177 | ||||||||||||
Accounts receivable, net | 392,763 | 363,096 | 174,637 | 118,102 | 133,102 | 42,317 | ||||||||||||||||||
Inventories, net | 481,478 | 712,558 | 561,107 | 165,907 | 234,491 | 155,679 | ||||||||||||||||||
Restricted cash | 120,000 | 127,580 | | | | | ||||||||||||||||||
Prepaid expenses and other current assets | 218,354 | 48,237 | 9,573 | 77,708 | 29,646 | 613 | ||||||||||||||||||
Total current assets | 1,575,449 | 1,458,663 | 1,143,481 | 966,558 | 423,199 | 334,786 | ||||||||||||||||||
Property and equipment, net | 322,226 | 360,920 | 242,123 | 33,717 | 54,383 | 10,223 | ||||||||||||||||||
Intangible assets | 26,243 | 27,494 | 32,498 | 20,000 | | | ||||||||||||||||||
Other assets | 103,600 | 67,438 | 11,706 | 12,150 | 4,900 | 2,000 | ||||||||||||||||||
Deferred offering costs | $ | 53,383 | | | | | | |||||||||||||||||
Deferred financing costs | 1,679,426 | 1,838,082 | | | | | ||||||||||||||||||
Total assets | $ | 3,760,327 | $ | 3,752,597 | $ | 1,429,808 | $ | 1,032,425 | $ | 482,482 | $ | 347,009 | ||||||||||||
Current Liabilities:
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Accounts payable | $ | 401,929 | $ | 601,681 | $ | 825,044 | $ | | $ | | $ | | ||||||||||||
Accrued expenses | 353,750 | 458,938 | 112,819 | 85,110 | 15,829 | 16,225 | ||||||||||||||||||
Current portion of automobile loans | 19,578 | 19,231 | 17,915 | | | | ||||||||||||||||||
Current portion of equipment loan | 37,102 | 36,627 | | | | | ||||||||||||||||||
Total current liabilities | 812,359 | 1,116,477 | 955,778 | 85,110 | 15,829 | 16,225 | ||||||||||||||||||
Loans payable | | | 1,500,000 | 1,400,000 | | | ||||||||||||||||||
Line of credit | 1,377,930 | 1,091,571 | | | 491,110 | 337,236 | ||||||||||||||||||
Other liabilities | 30,000 | 30,000 | 92,466 | | | | ||||||||||||||||||
Deferred rent | 4,130 | 4,648 | 5,966 | | | | ||||||||||||||||||
Long term portion of automobile loans | 31,837 | 36,864 | 56,096 | | | | ||||||||||||||||||
Long term portion of equipment loan | 66,849 | 76,477 | | | | | ||||||||||||||||||
Total liabilities | 2,323,105 | 2,356,037 | 2,610,306 | 1,485,110 | 506,939 | 353,461 | ||||||||||||||||||
Total stockholders equity (deficiency) | 1,437,222 | 1,396,560 | (1,180,498 | ) | (452,685 | ) | (24,457 | ) | (6,452 | ) | ||||||||||||||
Total liabilities and stockholders equity (deficit) | $ | 3,760,327 | $ | 3,752,597 | $ | 1,429,808 | $ | 1,032,425 | $ | 482,482 | $ | 347,009 |
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Investing in our common stock involves a high degree of risk. The most significant risks include those described below; however, additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, results of operations and financial condition could be materially adversely affected. In this case, the trading price of our common stock would likely decline and you might lose part or all of your investment in our common stock.
Our industry is highly competitive. We compete with multinational corporations with significant financial resources, including Dr Pepper Snapple Group, Inc. and Arizona Beverage Company. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. Our inability to compete effectively could result in a decline in our sales. We are subject to competition from companies, including from some of our customers, that either currently manufacture or are developing products directly in competition with our products. These generic or store-branded products may be a less expensive option for consumers than our products making it more difficult to sell our product. As a result, we may have to reduce our prices or increase our spending on marketing, advertising and product innovation. Any of these could negatively affect our business and financial performance.
Consumers preferences can change due to a variety of factors, including aging of the population, social trends, negative publicity, economic downturn or other factors. If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop new products in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.
The principal raw materials we use in our business are bottles, caps, labels, packaging materials, tea essence and tea base, sugar, natural flavors and other sweeteners, juice, electricity, fuel and water. The cost of the raw materials can fluctuate substantially. We may not be able to pass along any increases in such costs to our customers or consumers, which could negatively affect our business and financial performance. We presently do not mitigate our exposure to volatility in the prices of raw materials through the use of forward contracts, pricing agreements or other hedging arrangements.
Most of the raw materials we use are available from only a few suppliers. If these suppliers are unable or unwilling to meet our requirements, we could suffer shortages or substantial cost increases. Changing suppliers can require long lead times. The failure of our suppliers to meet our needs could occur for many reasons, including fires, natural disasters, weather, manufacturing problems, disease, crop failure, strikes, transportation interruption, government regulation, political instability and terrorism. A failure of supply could also occur due to suppliers financial difficulties, including bankruptcy. Any significant interruption to supply or cost increase could substantially harm our business and financial performance.
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Our products are currently produced by three established co-packing companies. A disruption in our production at, or our relationships with, our third party beverage co-packing facilities could have a material adverse effect on our business. In addition, a disruption could occur at any of our storage facilities or those of our suppliers, co-packers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, manufacturing problems, disease, strikes, transportation interruption, government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.
We take great care in ensuring the quality and safety in the manufacture of our products. Our third-party co-manufacturer is required to maintain the quality of our products and to comply with our product specifications and requirements for certain certifications. Our third-party co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of our product. However, our products could still otherwise become contaminated. A contamination could occur in our operations or those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
From time to time in the normal course of our business operations, we may become subject to litigation that may result in liability or negatively affect our operating results. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. See Business Legal Proceedings for more information.
We experience seasonal fluctuations in revenues and operating income. Historically, sales during the second and third fiscal quarters have generally been the highest. Any factors that harm our second or third quarter operating results, including adverse weather or unfavorable economic conditions, could have a disproportionate effect on our results of operations for the entire fiscal year. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.
In order to prepare for our peak selling season, we must produce and keep in stock more inventory than we would carry at other times of the year. Any unanticipated decrease in demand for our products during our peak selling season could require us to sell excess inventory at a substantial markdown, which could reduce our net sales and gross profit.
Disruptions in the current global credit and financial markets in the past several years have included diminished liquidity and credit availability, a decline in consumer confidence, a decline in economic growth, an increased unemployment rate and uncertainty about economic stability. While certain of these negative
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trends have reversed in recent years, there can be no assurance that there will not be renewed deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. Any adverse global economic conditions and tightening of credit in financial markets may lead consumers to postpone spending, which may cause our customers to cancel, decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers, manufacturers, distributors or customers could result in product delays, increased accounts receivable defaults and inventory challenges. We are unable to predict the likely duration and severity of disruptions in the credit and financial markets and adverse global economic conditions.
Certain retailers that we service primarily through our distributors make up a significant percentage of our products retail volume, including volume sold by our bottlers and distributors. We also sell directly to certain retail accounts, including Costco, and to the distribution facilities of such retailers. For the three months ended March 31, 2016, two customers accounted for 16% and 12% of net sales, respectively. In addition, we collect vending proceeds based on contracts in certain school districts. Sales within one school district accounted for 13% of our net sales during the three months ended March 31, 2016. For the year ended December 31, 2014, our top three customers, Costco Wholesale, Windmill Distributing, and CFG Distributors LLC, accounted for 32%, 16% and 14% of net sales, respectively. For the year ended December 31, 2015, our top customer, Wakefern Food Corp., accounted for approximately 10% of our net sales and sales to Costco represented 6% of our net sales. Some retailers also offer their own private label products that compete with some of our brands. The loss of sales of any of our products in a major retailer could have a material adverse effect on our business and financial performance.
Consolidation has resulted in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we, and our bottlers and distributors, do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer.
Our customers do not provide us with firm, long-term or short-term volume purchase commitments. As a result of the absence of such contracts, we could have periods during which we have no or limited orders for our products, but we will continue to have to pay our costs, including those to maintain our work force and service our indebtedness with reduced sales. We cannot assure you that we will be able to timely find new customers to supplement periods where we experience no or limited purchase orders or that we can recover fixed costs as a result of experiencing reduced purchase orders. Periods of no or limited purchase orders for our products could have a material adverse effect on our net income and cause us to incur losses. Conversely, we may experience unanticipated increased orders for our products from these customers that can create supply chain problems and may result in orders we may be unable to meet. Unanticipated fluctuations in product requirements by our customers could result in fluctuations in our results from quarter to quarter.
In May 2015, we developed a gallon product line featuring five of our existing flavors. Our gross margins on this product line are minimal. Accordingly, this product line may not generate sufficient revenues or other benefits to justify its introduction. In addition, to the extent distributors choose to carry the gallon product line
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instead of our higher margin 20 ounce product line, it may negatively affect our operating results, specifically our gross margin. Although we believe the gallon size has a different function and manner of consumption, consumers may choose to purchase the gallon size instead of the 20 ounce size, because the gallon size offers a better per ounce value. This would result in an overall lower gross margin for our business.
We possess intellectual property that is important to our business. This intellectual property includes our logo, trademarks for Long Island Iced Tea and The Original Long Island Brand, various other trademarks, copyrights, patents, ingredient formulas, business processes and other trade secrets. However, we do not currently have registered ownership of the trademark The Original Long Island Brand and do not have registered ownership on the principal register of the trademark Long Island Iced Tea as described below and elsewhere herein. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend ourselves against claims. We cannot be certain that the steps we take to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. Our business is also highly dependent upon our distribution rights. If we are unable to protect our intellectual property rights, including the right to our trade name and logo, our brands, products and business could be harmed and could have a material adverse effect on our business and financial performance.
On April 19, 2016, the USPTO registered our mark Long Island Iced Tea (Registration No. 4,943,056) on the supplemental register. Registration on the supplemental register allows the use of the ® symbol, blocks later filed applications for confusingly similar marks, and allows us to sue infringers in federal court, which has well-settled case law and standards. Notwithstanding the foregoing, the supplemental register does not provide all the protection of a registration on the principal register. As with any other registered mark, we may be open to claims of others contesting the trademark.
In addition, we have filed trademark applications for The Original Long Island Brand as a standard character mark and as a stylized mark, which applications are pending review by the USPTO. The applications are for use of the trademarks with iced tea, tea based products, juices, water, beverages and other similar products. LIBB also plans to file for stylized marks protecting certain other tag lines and product designs. With respect to the pending trademark applications for The Original Long Island Brand (standard character mark and stylized mark), the USPTO has made an initial determination that both marks are geographically descriptive. This determination is refutable and the USPTO has afforded the company the opportunity to produce evidence to establish that the marks have become distinctive of the goods in commerce. There can be no assurance that the USPTO will approve these applications.
As of March 31, 2016, we had approximately $1,533,296 of total indebtedness (comprised primarily of $1,377,930 of indebtedness under the Credit Agreement, which bears interest at the prime rate plus 7.5%). In addition, in May 2016, the Lenders made an additional advance of $250,000 to us under the Credit Agreement. While our debt under the Credit Agreement will be converted in connection with the Recapitalization, and although we may pay interest that accrues on any future loans under the Credit Facility by capitalizing the interest and adding it to the principal balance of such loans, we may obtain further advances under the Credit Facility in the future and we may not be able to generate sufficient cash to service such debt as cash payments become due. If new debt is added to our current debt levels, the related risks for us could intensify.
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Our substantial debt could have important consequences. In particular, it could:
| require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures and other general corporate purposes; |
| limit, along with the restrictive covenants of our indebtedness, among other things, our ability to borrow additional funds; |
| limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; |
| increase our vulnerability to general adverse economic and industry conditions; and |
| place us at a competitive disadvantage compared to our competitors that have less debt. |
In addition, if we are unable to make payments as they come due or comply with the restrictions and covenants in the Credit Agreement and the other agreement governing our indebtedness, there could be a default under the terms of such agreements. In such event, or if we are otherwise in default under the Credit Agreement or such other agreements, including pursuant to the cross-default provisions of such agreements, the lenders could terminate their commitments to lend or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our lenders under the Credit Agreement could foreclose on their security interests in our assets, including the equity interests in our material subsidiaries. If any of those events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing. Even if we could obtain alternative financing, it might not be on terms that are favorable or acceptable to us. Additionally, we may not be able to amend the Financing Agreement or obtain needed waivers on satisfactory terms or without incurring substantial costs. Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.
The execution of our business strategy depends largely on the continued efforts of our executive management, including Julian Davidson (our Executive Chairman), Philip Thomas (co-founder of LIBB and our Chief Executive Officer), Richard Allen (our Chief Financial Officer) and Peter Dydensborg (our Chief Operating Officer). We are also dependent on the efforts of Joe Caramele, our Vice President of National Sales & Marketing, whose skills, knowledge and contacts would be difficult to replace. As we have a limited operating history, we are highly dependent upon these individuals knowledge, experience and reputation within the industry. Any or all of these individuals may in the future choose to discontinue their employment with us. If so, we may not be able to find adequate replacements for them. Without their experience, expertise and reputation, our development efforts and future prospects would be substantially impaired. We have employment agreements in place with these individuals that include non-competition provisions.
We are subject to a variety of federal, state and local laws and regulations in the U.S., and other countries in which we do business. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. Violations of these laws or regulations could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on soft drinks or ingredients could increase our costs. Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling laws, such as Californias Prop 65, which requires warnings on any product with substances that the state lists as potentially causing cancer or birth defects, could become applicable to our products. Some local and regional governments and school boards have enacted, or have
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proposed to enact, regulations restricting the sale of certain types of soft drinks in schools. Any violations or changes of regulations could have a material adverse effect on our profitability, or disrupt the production or distribution of our products, and negatively affect our business and financial performance.
The ability of our business to grow and compete depends on the availability of adequate capital. We currently have negative cash flows from operations due in part to substantial marketing and promotional related expenses as well as our payroll expense. While we expect that the proceeds of this offering will be sufficient to meet our working capital needs for the next 12 months, we may require additional capital in the future to finance our growth strategy or for other purposes. In such event, we cannot assure you that we will be able to obtain equity or debt financing on acceptable terms or at all. As a result, we cannot assure you that adequate capital will be available to finance our current growth plans, take advantage of business opportunities or respond to competitive pressures, any of which could harm our business.
We have a limited operating history and a history of operating losses. There is no guarantee that we will become a profitable business. Further, our future operating results depend upon a number of factors, including our ability to manage our growth, retain our customer base and to successfully identify and respond to emerging trends in our market areas.
We are exploring entry into the alcoholic beverage industry. As we principally have been engaged in the production of NARTD teas, we have limited experience with developing, producing, marketing and distributing alcoholic beverages. Additionally, we will be exposed to significant operating costs associated with developing new products and entering a new sector of the beverage industry and will face new regulatory burdens, which could have an adverse impact on our business as well as place us at a disadvantage relative to more established alcoholic beverage market participants. Furthermore, the alcoholic beverage industry is highly competitive. We will compete with multinational corporations with significant financial resources. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. In addition:
| We may not be able to adequately distinguish our alcohol products from our non-alcohol products. Our inability to create the proper differentiation could result in customer confusion and could have adverse regulatory consequences. |
| We may not be able establish the proper infrastructure to support the supply chain from the manufacturing of the product to the ultimate purchase by the end consumer. |
As a result of the foregoing factors, we may be unsuccessful in expanding our business to include alcoholic beverages. Furthermore, attempting such an expansion will require a substantial investment of resources and management time, which could materially adversely affect our more established non-alcoholic beverage business as well. Accordingly, we can offer no assurance that if we expand our business beyond NARTD teas, we will be able to effectively develop, produce, market and distribute such beverages. Such failure could materially and adversely affect our business, financial condition, results of operations and cash flows.
We have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate paying dividends in the foreseeable future, but
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expect to retain earnings to finance the growth of our business. Therefore, any return on investments will only occur if the market price of our common stock appreciates.
Our common stock is traded on the OTCQB, which is an over-the-counter market. The over-the-counter markets are inter-dealer markets that may provide significantly less liquidity than national securities exchanges. As a result, an active public market for our common stock may not develop or be sustained, which could affect your ability to sell, or depress the market price of, our common stock. We have applied to have our common stock listed on the Nasdaq Capital Market, but we cannot assure you that our application will be approved or that, if approved, our common stock will continue to trade on Nasdaq following this offering. Even if it is approved for trading and continues to trade on Nasdaq, we are unable to predict whether an active trading market for our common stock will develop or will be sustained.
The price and volume of our common stock may be volatile and subject to fluctuations. Some of the factors that could cause fluctuations in the stock price or trading volume of our common stock include:
| general market and economic conditions and market trends, including in the beverage industry and the financial markets generally; |
| the political, economic and social situation in the U.S.; |
| actual or expected variations in operating results; |
| announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, capital commitments, or other business developments; |
| adoption of new accounting standards affecting the industry in which we operate; |
| operations and stock performance of competitors; |
| litigation or governmental action involving or affecting us or our subsidiaries; |
| recruitment or departure of key personnel; |
| purchase or sales of blocks of our common stock; and |
| operating and stock performance of the companies that investors may consider to be comparable. |
There can be no assurance that the price of our common stock will not fluctuate or decline significantly. The stock market in recent years has experienced considerable price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies and that could materially adversely affect the price of our common stock, regardless of our operating performance. You should also be aware that price volatility might be worse if the trading volume of shares of our common stock is low, as it historically has been.
On November 23, 2015, we entered into the Credit Agreement with Brentwood. The loans under the credit agreement are evidenced by the Brentwood Note. Brentwood may elect to convert the outstanding principal and interest under the Brentwood Note into shares of our common stock at a conversion price of $4.00 per share. In addition, in connection with the establishment of the credit facility, we issued the Brentwood Warrant to Brentwood. The Brentwood Warrant entitles the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision. Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock (assuming there are no further advances by Brentwood) at the closing of the offering if the gross proceeds from this offering are at least $5 million. In addition, Brentwood will exchange the Brentwood Warrant for 486,111 shares of our common stock at such time. See Certain Relationships and Related-Party
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Transactions and Shares Eligible for Resale for more information. The sale, or even the possibility of sale, of such shares could have an adverse effect on the market price of the common stock or on our ability to obtain future financing.
We presently have outstanding (i) employee stock options to purchase 194,667 shares of common stock at an exercise price of $3.75 per share held by certain of our executive officers, (ii) warrants to purchase up to 404,475 shares of common stock at an exercise price of $6.00 per share that were issued in the August Private Placement, the November Private Placement and the March Private Placement, and (iii) warrants to purchase up to 34,573 shares of common stock at an exercise price of $4.50 per share that were issued to the placement agent for the August Private Placement and the November Private Placement. In addition, if the gross proceeds from the offering are at least $10,000,000, Julian Davidson will be eligible to receive 50,000 shares of common stock. Furthermore, subsequent to the offering, Mr. Davidson will be eligible to receive an additional 35,000 shares of common stock and options to purchase 5% of our fully-diluted common stock outstanding immediately after the offering. In addition, we have granted certain demand and piggyback registration rights (i) to the investors in the August Private Placement, the November Private Placement and the March Private Placement with respect to the 404,475 shares of common stock and the shares underlying the 404,475 warrants sold to them in such offerings, (ii) to the former LIBB members with respect to the 2,633,334 shares of common stock issued to them in Business Combination, (iii) to Brentwood with respect to the 908,083 shares of common stock issuable in the Recapitalization and with respect to any shares of common stock in the future issuable upon conversion of the Brentwood Note and (iv) to the founders of Cullens predecessor with respect to the shares that were originally issued to them prior to such predecessors initial public offering. See Shares Eligible for Resale for more information. If and to the extent these warrants and options are exercised, or these registration rights are exercised, you may experience dilution to your holdings and/or it may have an adverse effect on the market price of our common stock.
Our amended and restated certificate of incorporation allows our board of directors to issue 35,000,000 shares of common stock and 1,000,000 shares of preferred stock and to set the terms of such preferred stock. Following this offering and the Recapitalization, and assuming the exercise in full of the over-allotment option and the issuance of 65,000 shares of common stock to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen and John Carson, we expect we will have 26,248,589 authorized but unissued shares of common stock available for issuance after appropriate reservation for our outstanding options and warrants and for the 2015 Plan. The issuance of additional common stock may dilute the economic and voting rights of our existing stockholders. In addition, the terms of such preferred stock may materially adversely impact the dividend and liquidation rights of holders of the common stock.
Our charter contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors and the ability of the board of directors to designate the terms of and issue new series of preferred stock. We are also subject to anti-takeover provisions under Delaware law, which could delay or prevent a change of control. Together, these provisions may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
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Not all of our senior executive officers or directors have extensive experience managing a publicly traded company, and they may not be successful in doing so. The demands of managing a publicly traded company, like ours, is much greater as compared to those of a private company, and some of our senior executive officers and directors may not be able to successfully meet those increased demands.
We are an emerging growth company as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors may find our common stock less attractive because we rely, or may rely, on these exemptions. If some investors find our common stock less attractive as a result, the price of our common stock may be reduced, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.
In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We could remain an emerging growth company until December 31, 2020, although a variety of circumstances could cause us to lose that status earlier. For as long as we take advantage of the reduced reporting obligations, the information that we provide stockholders may be different from information provided by other public companies.
We became subject to the reporting requirements of the Exchange Act, and the other rules and regulations of the SEC, including the Sarbanes-Oxley Act, upon consummation of the Business Combination with LIBB and Cullen as described in Business below. These requirements and rules may place a strain on our systems and resources and those of our subsidiaries, including LIBB, which was not previously subject to such regulation. For example, the Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition and the Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources, will make certain activities more time-consuming and will cause us to incur significant legal, accounting and other expenses that we had not previously incurred. Furthermore, the expenses incurred by public companies, generally, for reporting and corporate governance purposes have been increasing, which may further strain our resources. We may need to upgrade our systems or create new systems, implement additional financial and management controls, reporting systems and procedures, expand or outsource our internal audit function, and hire additional accounting and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired. In addition, our limited management resources may exacerbate the difficulties in complying with these reporting and other requirements while focusing on executing our business strategy. Our incremental general and administrative expenses as a publicly traded corporation will include costs associated with reports to stockholders, tax returns, investor relations, registrar and transfer agents fees, incremental director and officer liability insurance costs and director compensation. During 2015, we estimate that we incurred approximately $283,000 in additional costs in connection with being a public company,
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excluding compensation to directors and additional employees and all stock-based compensation. We cannot predict or estimate the amount of the additional costs we may incur in future years, the timing of any increases in such costs or the degree of impact that our managements attention to these matters will have on our business.
We will be required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act as early as December 31, 2016, although as an emerging growth company we will be exempt from certain of its requirements for so long as we remain as such. For example, Section 404 of the Sarbanes-Oxley Act requires that we and our independent auditors report annually on the effectiveness of our internal control over financial reporting; however, as an emerging growth company we may take advantage of an exemption from the auditor attestation requirement. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent auditors on the effectiveness of our internal control over financial reporting, unless at such time we are a non-accelerated filer. We currently qualify as a non-accelerated filer and will generally continue to qualify as such for each fiscal year thereafter where our public float remains below $75 million as of the last day of the second fiscal quarter of the prior fiscal year. Management, however, is not exempt from Section 404 of the Sarbanes-Oxley Act, and will be required to, among other things, maintain and periodically evaluate our internal control over financial reporting and disclosure controls and procedures. In particular, we will need to perform system and process evaluation and testing of our internal control over financial reporting to allow us to report on the effectiveness of our internal control over financial reporting, as required. Any failure to maintain effective internal control over financial reporting could have a material adverse effect on our business, prospects, liquidity, results of operations and financial condition. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to fines, sanctions and other regulatory action.
As an emerging growth company, we also intend to continue to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as a smaller reporting company, we are permitted to take advantage of reduced disclosure requirements, some of which are the same as the exemptions available to an emerging growth company. In general, we will remain a smaller reporting company for each fiscal year where our public float remains below $75 million as of the last day of the second fiscal quarter of the prior fiscal year. We intend to take advantage of these exemptions and reduced reporting requirements until we are no longer an emerging growth company and/or a smaller reporting company, at which time, we expect to incur significant additional expenses and devote substantial management effort toward ensuring compliance with these additional requirements, including Section 404 of the Sarbanes-Oxley Act.
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This prospectus includes forward-looking statements in addition to historical and current information. These forward-looking statements are included throughout this prospectus, including in Prospectus Summary , Risk Factors , Managements Discussion and Analysis of Financial Condition and Results of Operations and Business and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. We may use the words such as anticipate, assume, believe, continue, could, estimate, expect, intend, may, plan, potential, predict, project, future, will, seek, foreseeable and similar terms and phrases to identify forward-looking statements in this prospectus.
The forward-looking statements contained in this prospectus are based on managements current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those described in Risk Factors. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements. Any forward-looking statement made by us in this prospectus speaks only as of the date of this prospectus. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws.
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We estimate that the net proceeds from our sale of shares of common stock in this offering will be approximately $8,600,000 based on an assumed public offering price of $6.50 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $9,965,000, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, sales and marketing activities, product development, general and administrative matters, capital expenditures and acquisitions. In the event that any net proceeds are not immediately applied, we may temporarily hold them as cash, deposit them in banks or invest them in cash equivalents or securities.
The following table sets forth our cash and capitalization as of March 31, 2016. You should read this table together with Managements Discussion and Analysis of Financial Condition and Results of Operations and our unaudited consolidated financial statements included elsewhere in this prospectus.
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2016, on:
| an actual basis; |
| on a pro forma basis to give effect to the Recapitalization and the issuance of 65,000 shares of common stock to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen, and John Carson; |
| on a pro forma as adjusted basis to give effect to the issuance and sale by us of shares in this offering at an assumed public offering price of $6.50 per share, assuming no exercise of the overallotment option, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
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March 31, 2016 | ||||||||||||
Actual | Pro Forma |
Pro Forma
As Adjusted |
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(unaudited) | (unaudited) | (unaudited) | ||||||||||
Assets
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Cash | $ | 362,854 | $ | 612,854 | $ | 9,972,854 | ||||||
Long-Term Liabilities | $ | 1,510,746 | $ | 132,816 | $ | 132,816 | ||||||
Stockholders Equity
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Preferred stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding | | | ||||||||||
Common stock, par value $0.0001; authorized 35,000,000 shares; 4,973,715 shares issued and outstanding on an actual basis; 5,946,798 shares issued and outstanding on a pro forma basis; 7,485,260 shares issued and outstanding on a pro forma as adjusted basis | 497 | 595 | 749 | |||||||||
Additional paid in capital | 5,383,772 | 8,549,041 | 17,148,887 | |||||||||
Accumulated deficit | (3,947,047 | ) | (5,484,435 | ) | (7,163,861 | ) | ||||||
Total Stockholders Equity | $ | 1,437,222 | 3,065,201 | 9,985,775 | ||||||||
Total Capitalization
|
$ | 45,758,178 | $ | 38,654,187 | $ | 48,654,187 |
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If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering.
Our net tangible book value as of March 31, 2016 was ($268,447) or ($0.05) per share of common stock. Our pro forma net tangible book value as of March 31, 2016 was 1,359,483, or $0.23 per share of common stock. Our pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the total number of shares of our common stock outstanding as of March 31, 2016, after giving effect to the Recapitalization and the issuance of 65,000 shares of common stock to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen, and John Carson.
After giving effect to the sale in our initial public offering of 1,538,462 shares of common stock at an assumed initial public offering price of $6.50 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2016 would have been approximately $11,665,152, or $1.56 per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $1.33 per share to our existing stockholders and an immediate dilution of $4.94 per share to investors purchasing shares in our initial public offering.
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Assumed public offering price per share of common stock | $ | 6.50 | ||
Pro forma net tangible book value per share as of March 31, 2016 | $ | 0.23 | ||
Increase in net tangible book value per share attributable to this offering | $ | 1.33 | ||
Pro forma as adjusted net tangible book value per share after this offering | $ | 1.56 | ||
Dilution to new investors | $ | 4.94 |
Each $1.00 increase (decrease) in the assumed public offering price of $6.50 per share would increase (decrease) the net tangible book value, as adjusted to give effect to this offering, by $0.19 per share and the dilution to new investors by $0.81 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions. If the underwriters exercise their over-allotment option in full, the net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $1.69 per share, and the dilution as adjusted net tangible book value per share to investors in this offering would be $4.81 per share of our common stock.
The table below summarizes as of March 31, 2016, after giving effect to the Recapitalization and the issuance of 65,000 shares of common stock to John Carson, Richard Allen, and Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by our existing stockholders and (ii) to be paid by new investors purchasing shares in our common stock in this offering at an assumed combined public offering price of $6.50 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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Shares Purchased | Total Consideration |
Average
Price Per Share |
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Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders | 5,946,798 | 79 | % | $ | 8,549,636 | 46 | % | $ | 1.44 | |||||||||||
New investors | 1,538,462 | 21 | % | 10,000,000 | 54 | % | 6.50 | |||||||||||||
Total | 7,485,260 | 100 | % | $ | 18,549,636 | 100 | % | $ | 2.48 |
After giving effect to the sale of shares in this offering by us, if the underwriters over-allotment option is exercised in full, our existing stockholders would own 77% and our new investors would own 23% of the total number of shares of our common stock outstanding after the offering.
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The total number of shares of our common stock reflected in the discussion and tables above is based on 5,946,798 shares of our common stock outstanding, as of March 31, 2016, after giving effect to the Recapitalization and the issuance of 65,000 shares of common stock to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen and John Carson, but excludes:
| 35,000 shares of common stock and an option to purchase 5% of our fully-diluted common stock outstanding as of immediately after the offering issuable to Mr. Davidson subsequent to the offering, in each case if the gross proceeds from the offering are at least $10,000,000; |
| 633,715 shares of common stock issuable upon the exercise of currently outstanding options and warrants (other than the Brentwood Warrant), which have a weighted average exercise price of $5.23 per share and a weighted average duration of 3.21 years as of March 31, 2016; |
| 466,667 shares of common stock reserved for issuance pursuant to our 2015 Plan. |
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The historical trading price of our common stock includes the trading of Cullen common stock for periods prior to the consummation of the Business Combination with Cullen and LIBB. Since July 27, 2015, our common stock has been quoted under the symbol LTEA, initially on the Over-the-Counter Bulletin Board, or the OTCBB, and, since October 1, 2015, on the OTCQB. From June 1, 2015, the effective date of the Business Combination for market trading purposes, to July 27, 2015, our common stock was quoted on the OTCBB under the symbol OLIC. Prior to June 1, 2015, Cullens common stock was quoted on the OTCBB under the symbol CAGZ. All historical trading prices have been adjusted to reflect the 15-to-1 reverse stock split that occurred as a result of the exchange ratio under the Merger Agreement, which provided for Cullen stockholders to receive one share of our common stock for every 15 shares of Cullen common stock held by them immediately prior to the Business Combination.
The following table sets forth the range of high and low sales prices for the applicable period.
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Common Stock | ||||||||
High ($) | Low ($) | |||||||
Fiscal Year 2016:
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Second Quarter* | $ | 12.5500 | $ | 7.7700 | ||||
First Quarter | 10.7000 | 3.9900 | ||||||
Fiscal Year 2015:
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Fourth Quarter | $ | 9.7500 | $ | 3.3500 | ||||
Third Quarter | 10.0000 | 6.9500 | ||||||
Second Quarter** | 11.2494 | 1.0000 | ||||||
First Quarter | 14.9993 | 2.8499 | ||||||
Fiscal Year 2014:
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Fourth Quarter | $ | 6.2997 | $ | 2.0999 | ||||
Third Quarter | 10.4995 | 5.2497 | ||||||
Second Quarter | 11.8494 | 7.0496 | ||||||
First Quarter | 7.9496 | 1.1999 |
* | Through June 7, 2016. |
** | Effective May 27, 2015, we consummated the Business Combination with Cullen and LIBB. |
As of June 7, 2016, there were 4,973,715 shares of our common stock outstanding. Our shares of common stock are currently held by approximately 130 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of banks, brokers and other nominees. We expect to have in excess of 300 beneficial holders upon consummation of this offering, as required for initial listing on the Nasdaq Capital Market.
We have not paid any cash dividends on our common stock to date. Any future decisions regarding dividends will be made by our board of directors. We do not anticipate paying dividends in the foreseeable future, but expect to retain earnings to finance the growth of our business. Our board of directors has complete discretion on whether to pay dividends. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
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The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in Risk Factors and Cautionary Note Regarding Forward-Looking Statements. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements included elsewhere in this prospectus.
We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium NARTD 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 sold primarily on the East Coast of the United States through a network of national and regional retail chains and distributors. Our mission is to provide consumers with premium iced tea offered at an affordable price.
We aspire to be a market leader in the development of iced tea beverages that are convenient and appealing to consumers. There are two major target markets for Long Island Iced Tea®: consumers on the go and health conscious consumers. Consumers on the go are families, employees, students and other consumers who lead a busy lifestyle. With increasingly hectic and demanding schedules, there is a need for products that are accessible and readily available. Health conscious consumers are individuals who are becoming more interested and better educated on what is included in their diets, causing them to shift away from the options perceived as less healthy such as CSDs towards alternative beverages such as iced tea.
In addition, we have begun exploring entry into the $215 billion U.S. alcohol industry, with the hope to establish ourselves as a multi-product alcoholic and non-alcoholic beverage company.
We generate income through the sale of our iced teas. The following are highlights of our operating results for the three months ended March 31, 2016:
| Net sales . During the three months ended March 31, 2016, we had net sales of $508,169, an increase of $243,447 over the three months ended March 31, 2015. Included in our net sales was a reduction to net sales of $13,600 related to a non-recurring issuance of common stock to certain distributors. In the absence of this issuance of common stock, sales would have increased to $521,769 for the three months ended March 31, 2016. The increase is primarily due to brand momentum and an increase in distribution. The increase was also bolstered by the sale of our product line in gallon containers. |
| Margin . Our margin decreased by 19% for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The decrease was due to the fact that during the three months ended March 31, 2015 we received a credit of $120,000 from one of our vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive impact of $28,477 on our gross profit in the prior year. Furthermore, during May 2015 and January 2016, we introduced five of our flavors in gallon containers. Sales of our gallon containers carry lower margins than our standard 20 ounce containers. As a result, our margins during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 were negatively impacted by the introduction of gallon container sales into our sales mix. In addition, during the three months ended March 31, 2016, we recorded an adjustment of $14,350 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. |
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| Operating expenses . During the three months ended March 31, 2016, our operating expenses were $1,264,208, an increase of $837,004 as compared to three months ended March 31, 2015. The increase in operating expenses for the three months ended March 31, 2016 related primarily to increased payroll (including stock based compensation), increases in advisory board and board of directors fees, and increases in legal and consulting expenses. |
The following are highlights of our operating results for the years ended December 31, 2015 and 2014:
| Net sales . During the year ended December 31, 2015, we had net sales of $1,899,230, an increase of $154,790 over the year ended December 31, 2014. The primary drivers of this change were increases in our gallon sales which were launched for the first time in May 2015 as well as expansion into new markets. These increases were offset by a decline in our sales to Costco from the prior year as our product was not carried in Costcos product line, and we performed fewer road shows in the current year. |
| Margin . Our margin increased by 4% for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The primary reason for the increase was the fact that the Company received a credit of $120,000 from one of the Companys vendors related to production issues during the first quarter of 2015, which resulted in a reduction of the cost of the inventory affected by the production issues. Our ability to sell this inventory has resulted in improved margins of approximately 6% during the year ended December 31, 2015. These positive impacts were partially offset by the addition of smaller margin gallon containers to the product line. In addition, during the year ended December 31, 2015, we recorded an adjustment of $41,790 to reduce the cost of our gallons to the estimated net realizable value. |
| Operating expenses . During the year ended December 31, 2015, our operating expenses were $3,395,319, an increase of $113,942 as compared to the year ended December 31, 2014. These increases were primarily the result of costs for stock based compensation and other fees related to our board of directors and advisory board as well as an increase in our general and administrative salaries. These increases were offset by decreases in operating expenses for the year-end period related primarily to decreased advertising and other marketing expenses as a result of the cost of our marketing campaigns for 2015 as well as decreased costs related to the performance of our roadshows at Costco as compared to the prior year. |
Historically, our cash generated from operations has not been sufficient to meet our expenses. Accordingly, we have historically financed our business through the sale of equity interests or through the issuance of promissory notes. During the year ended December 31, 2015, our cash flows used in operations were $3,084,756 and our net cash provided by financing activities was $2,994,627. During the three months ended March 31, 2016, our cash flows used in operations were $768,912 and our net cash provided by financing activities was $924,574. We had working capital of $763,090 as of March 31, 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.
We believe that the key uncertainties and trends in our business are as follows:
| We believe that using various marketing tools, which may result in significant advertising expenses, will be necessary in order to increase product awareness in order to compete with our competitors, including large and well established brands with access to significant capital resources. |
| Customer trends and tastes can change for a variety of reasons including health consciousness, government regulations and variation in demographics. We will need to be able to adapt to changing preferences in the future. |
| Our sales growth is dependent upon maintaining our relationships with existing and future customers who may generate substantial portions of our revenue, which includes sales to retailers where there may be concentrations. |
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| 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. See Business Legal Proceedings for more information. There are no assurances that there will be successful outcomes to these matters. |
| We have developed a gallon product line featuring five of our existing flavors. Our gross margins are minimal on this product. There are no assurances we will be successful in increasing the margins on this product line. |
| We are exploring potential opportunities to expand our business to include alcoholic beverages. This expansion may require a substantial investment of resources and management time, and there can be no assurances that our efforts will be successful. |
The preparation of the financial statements in conformity with United States Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in these consolidated financial statements. We believe that, of our significant accounting policies (see Note 2 of the financial statements included in this prospectus), the following policies are the most critical.
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 Companys customers.
The Company participates in various programs and arrangements with customers designed to increase the sale of its products. Among these programs are arrangements under which allowances can be earned by customers for attaining agreed upon sales levels or for participating in specific marketing programs. The Company believes that its participation in these programs is essential to ensuring volume and revenue growth in a competitive marketplace. The costs of all these various programs are recorded as a reduction of sales in the consolidated financial statements.
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 customers financial condition. Potential losses on the Companys receivables are dependent on each individual customers 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 Companys efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
The Companys inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists of bottled and packaged iced tea. The Company values its inventories at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
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For accounting purposes, the Business Combination was treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percentage of the Companys shares and exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a public shell company at the time of the transaction. Pursuant to Accounting Standards Codification (ASC) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated balance sheet, statement of operations, and statement of cash flows of LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical condensed consolidated financial statements of LIBB are now reflected as those of the Company.
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For the Three Months Ended
March 31, |
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2016 | 2015 | |||||||
Net sales | 508,169 | 264,722 | ||||||
Cost of goods sold | 467,618 | 193,309 | ||||||
Gross profit | 40,551 | 71,413 | ||||||
Operating expenses:
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General and administrative expenses | 777,665 | 219,423 | ||||||
Selling and marketing expenses | 486,543 | 207,781 | ||||||
Total operating expenses | 1,264,208 | 427,204 | ||||||
Operating Loss | (1,223,657 | ) | (355,791 | ) | ||||
Other expenses:
|
||||||||
Interest expense | (193,413 | ) | (22,875 | ) | ||||
Net loss | $ | (1,417,070 | ) | $ | (378,666 | ) |
Net sales for the three months ended March 31, 2016 increased by $243,447, or 92%, to $508,169 as compared to $264,722 for the three months ended March 31, 2015. Included in our net sales was a reduction to net sales of $13,600 related to a non-recurring issuance of common stock to certain distributors. In the absence of this issuance of common stock, sales would have increased to $521,769 for the three months ended March 31, 2016. The increase is primarily due to brand momentum and an increase in distribution. The increase was also bolstered by the sale of our product line in gallon containers. Net sales of our product in gallons during the three months ended March 31, 2016 were approximately $149,000 as compared to $0 for the three months ended March 31, 2015. In addition, we purchased vending machines in the fourth quarter of 2015. Sales of our iced tea products as well as other products purchased from vendors were approximately $64,000 during the three months ended March 31, 2016 as compared to $0 for the three months ended March 31, 2015. We also began selling certain juice products in the first quarter of 2016. Sales of these products were approximately $24,000 during the three months ended March 31, 2016. The remainder of the increase was due to increased distribution, including in the Midwest of the United States.
Gross profit decreased by $30,862, or 43%, from $71,413 for the three months ended March 31, 2015 to $40,551 for the nine months ended September 30, 2015. Our gross profit percentage decreased by 19% for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The decrease was due to the fact that during the three months ended March 31, 2015 we received a credit of $120,000 from one of our vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive impact of $28,477 on our gross profit in the prior year. Furthermore, during May 2015 and January 2016, we introduced five of our flavors in gallon containers. Sales of our gallon containers carry lower margins than our standard 20 ounce containers. As a result, our margins
29
during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 were negatively impacted by the introduction of gallon container sales into our sales mix. In addition, during the three months ended March 31, 2016, we recorded an adjustment of $14,350 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.
General and administrative expenses for the three months ended March 31, 2016 increased by $558,242, or 254%, to $777,665 as compared to $219,423 for the three months ended March 31, 2015. During the three months ended March 31, 2016, costs incurred related to our board of directors and advisory board were $110,000, which consisted of fees to be paid in cash and common stock to the directors and advisory board members, as compared to $0 during the three months ended March 31, 2015. During the three months ended March 31, 2016, our general and administrative salaries increased by $28,700 as compared to the three months ended March 31, 2015. This was primarily the result of the increase in the Chief Executive Officers salary, which took place on May 27, 2015 in connection with the consummation of the business combination between us, LIBB and Cullen. In addition, we incurred $105,740 in stock based compensation expense that was allocated to general and administrative expenses during the three months ended March 31, 2016. Legal and professional fees increased by $97,536 which included fees paid to our consultants of $55,800 as well as increased accounting and legal costs related to the filing of our Form 10-K. Additionally, during the three months ended March 31, 2016, we incurred $46,667 related to costs of our 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 for the three months ended March 31, 2016 increased by $278,762, or 134%, to $486,543 as compared to $207,781 for the three months ended March 31, 2015. Selling and marketing expenses increased largely due to increased selling salaries of $142,000 primarily related to the hiring of new employees, including a national vice president. Included in this amount was $30,000 of stock based compensation to this employee. In addition, stock based compensation allocated to selling and marketing expenses related to stock options increased by $45,613. Additionally sales commissions paid to brokers increased by approximately $31,000 due to stock issued to brokers worth $8,000 and the increase in commissions related to our sales through vending machines. Freight out increased by $29,038 during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 due to increased volume as well as increased freight rates resulting from shipments from a storage facility located in Georgia. Demo expenses also increased by approximately $25,000 as a result of demos put on in support of our gallon brand. The remainder of the increase was caused by various other marketing expenses.
Other expense, which consisted of interest expense, for the three months ended March 31, 2016 increased by $170,538, or 746%, to $193,413 as compared to $22,875 for the three months ended March 31, 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.
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|
|
|
||||||
For the Years Ended
December 31, |
||||||||
2015 | 2014 | |||||||
Net sales | $ | 1,899,230 | $ | 1,744,440 | ||||
Cost of goods sold | 1,556,140 | 1,504,146 | ||||||
Gross profit | 343,090 | 240,294 | ||||||
Operating expenses:
|
||||||||
General and administrative expenses | 1,946,270 | 1,073,867 | ||||||
Selling and marketing expenses | 1,449,049 | 2,207,510 | ||||||
Total operating expenses | 3,395,319 | 3,281,377 | ||||||
Operating Loss | (3,052,229 | ) | (3,041,083 | ) | ||||
Other expenses:
|
||||||||
Other expense | (3,327 | ) | | |||||
Interest expense | (124,713 | ) | (110,298 | ) | ||||
Total other expenses | (128,040 | ) | (110,298 | ) | ||||
Net loss | $ | (3,180,269 | ) | $ | (3,151,381 | ) |
Net sales for the year ended December 31, 2015 increased by $154,790, or 9%, to $1,899,230 as compared to $1,744,440 for the year ended December 31, 2014. The sales increase was primarily driven by the sales of our gallons which were introduced during May 2015. Sales of our gallons were approximately $351,000 during the year ended December 31, 2015, including sales to one customer which accounted for approximately 10% of our sales for the year ended December 31, 2015. The Company also experienced an increase in sales as a result of the Companys focus on increasing brand recognition and expanding its customer base through the utilization of new distributors particularly in the New Jersey, Philadelphia, Florida, Virginia, and New England areas. These sales increases in 2016 were partially offset by decreases in our sales to Costco from approximately $562,000 for the year ended December 31, 2015 to approximately $118,000 for the year ended December 31, 2014. This was due to the fact that for the year ended December 31, 2014, we performed more road shows and product demonstrations. In addition, during the year ended December 31, 2014 we were sold in Costcos product line. During the year ended December 31, 2015, our product was not sold in Costcos regular product line.
Gross profit increased by $102,796, or 43%, from $240,294 for the year ended December 31, 2014 to $343,090 for the year ended December 31, 2015. Gross profit percentage increased by 4% from 14% for the year ended December 31, 2014 to 18% for the year ended December 31, 2015. The primary reason for the increase was due to the fact that the Company received a credit of $120,000 from one of the Companys vendors related to production issues. The cost of the inventory affected by these production issues was reduced by $91,523 resulting in a positive impact of $28,477 on our gross profit. The Company maintained this inventory, and as a result, sales of this inventory over the remainder of this fiscal year resulted in a positive impact on our margins which may not be indicative of future results. Our margins were also positively impacted by the fact that in some regions we were selling directly to retailers which resulted in higher case prices. These increases in our margins were offset by the sales of our gallon product line, which have lower gross margins. In addition, during the year ended December 31, 2015, we recorded an adjustment of $41,790 to reduce the cost of our gallons to the estimated net realizable value, which further offset the increase in our margins.
General and administrative expenses for the year ended December 31, 2015, increased by $872,403, or 81%, to $1,946,270 as compared to $1,073,867 for the year ended December 31, 2014. During the year ended December 31, 2015, costs incurred related to our board of directors and advisory board were $240,000, which consisted of fees to be paid in common stock to the directors and advisory board members, as compared to $0 during the year ended December 31, 2014. During the year ended December 31, 2015, the Companys general
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and administrative salaries increased by $251,624 as compared to the year ended December 31, 2014. This was primarily the result of officers salaries including the Chief Executive Officer and Chief Accounting Officer of the Company. In addition, the Company incurred $251,019 in stock based compensation expense that was allocated to general and administrative expenses during the year ended December 31, 2015. In addition, there were increases in insurance expense of $54,538 primarily related to our directors and officers insurance. Depreciation and amortization expense increased by $39,481 primarily as a result of increased capital expenditures in the prior year related to display items such as wood racks and refrigerators as well as automobiles and trucks. SEC filing expenses, stock transfer fees, and other filing fees also increased by $63,567, primarily as a result of the fact that the Company became a public entity on May 27, 2015. The Company also experienced increases in office expenses, rent expense (including storage fees), and bad debt expense. These increases were offset by decreases in accounting and legal fees of $158,524 primarily related to the accounting and audit services needed in the prior year period to prepare for the Business Combination.
Selling and marketing expenses for the year ended December 31, 2015 decreased by $758,461, or 34%, to $1,449,049 as compared to $2,207,510 for the year ended December 31, 2014. Selling and marketing expenses decreased largely due to decreased advertising expenses from $697,146 for the year ended December 31, 2014 to $246,997 for the year ended December 31, 2015. In addition, the costs to perform road shows and product demonstrations, including staff and sample expenses at these shows, decreased by approximately $232,385 for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This was due to the fact that we performed fewer road shows and product demonstrations during the period along with the fact that they were mainly staffed in house during the current year. Selling salaries also declined by $267,952 during the year ended December 31, 2015 as compared to the year ended December 31, 2014. In addition the Companys selling and marketing expenses decreased due to the fact that the Company changed the style of its labels in 2014. As a result, design costs decreased by $45,625. These declines in selling expenses were offset primarily by increases in freight of $89,362 and stock based compensation allocated to selling expenses of $108,283.
Other expense, which consisted primarily of interest expense, for the year ended December 31, 2015, increased by $17,742, or 16%, to $128,040 as compared to $110,298 for the year ended December 31, 2014. Interest expense increase were primarily the result of the Credit Facility with Brentwood on November 23, 2015.
We have historically been financed by debt from our stockholders and unrelated third parties. In addition, we have also been financed by the sale of equity interests. We had working capital of $763,090 and $342,186 as of March 31, 2016 and December 31, 2015, respectively. We believe that, as a result of a commitment for financing from a stockholder and our working capital as of March 31, 2016, our cash resources will be sufficient to fund our net cash requirements through the May 2017.
The following table provides an overview of our borrowings as of March 31, 2016:
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|
|
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|||||||||
Description of Debt | Holder | Interest Rate |
Balance at
March 31, 2016 |
|||||||||
Line of Credit | Brentwood LIIT Inc. | Prime Plus 7.5% | $ | 1,377,930 | ||||||||
Automobile loans | Various | 3.59% to 10.74% | $ | 51,415 | ||||||||
Equipment Loan Reimbursement Agreement | Magnum Vending Corp. | 10% | $ | 103,951 |
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Below is a summary of our financing activities during the last two fiscal years and the three months ended March 31, 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.
Commencing on November 24, 2015 and ending on March 14, 2016, we conducted the November Private Placement of up to $3,000,000 of units, at a price of $4.00 per unit, through a placement agent. From January 1, 2016 to March 14, 2016, we sold an aggregate of 171,725 units for total gross proceeds of $686,900 in the private placement. The units consisted of one share of common stock (for an aggregate of 171,725 shares) and one warrant (for an aggregate of 171,725 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.
On March 29, 2016, we commenced the March Private Placement of units, at a price of $4.00 per unit. As of March 31, 2016, we had sold an aggregate of 58,750 units for total gross proceeds of $235,000. The units consisted of one share of common stock (for an aggregate of 58,750 shares) and one warrant (for an aggregate of 58,750 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on March 29, 2019. Included in the proceeds for the March Private Placement were subscriptions receivable of $120,000 which were collected during April 2016.
In March 2016, Brentwood approved an increase of $500,000 in the Available Amount under the Credit Agreement and approved advances in the same amount. Of such advances, $250,000 had been received by us as of March 31, 2016, and an additional $250,000 was received by us during May 2016. As of March 31, 2016, the outstanding balance of the loans under the Credit Facility, including capitalized interest and fees (both of which are excluded when determining whether the Available Amount has been reached), was $1,377,930. Currently, the total Available Amount is $1,500,000 (all of which has been advanced to us) and the outstanding balance of the loans under the Credit Facility, including capitalized interest and fees, is $1,627,930. The terms of the Credit Agreement are described more fully below in 2015 Borrowing Activity .
Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock (assuming there are no further advances by Brentwood) at the closing of the offering. In addition, Brentwood will exchange the Brentwood Warrant for 486,111 shares of our common stock at such time. The Credit Facility will remain outstanding, except that the Facility Amount will be reduced to $3,500,000. The Recapitalization will occur only if the gross proceeds from this offering are at least $5 million.
On November 23, 2015, we entered into the Credit Agreement with Brentwood. Brentwood is owned by Eric Watson, who currently beneficially owns approximately 28.7% of our outstanding common stock, and KA#2 Ltd., which currently beneficially owns approximately 10.4% of our outstanding common stock. 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 the Facility Amount, and we may obtain further advances, subject to the approval of Brentwood. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. As of December 31, 2015, the total Available Amount was $1,000,000 (all of which had been advanced to us) and 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%, 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. As of December 31, 2015, $4,071 of interest has been compounded and added to the principal balance of the loans. 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
33
LIBBs obligations under the Credit Facility. In addition, LIBBs 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.
The loans under the Credit Agreement are evidenced by the Brentwood Note. Brentwood may elect to convert the outstanding principal and interest under the Brentwood 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 Brentwood Warrant to Brentwood. The Brentwood Warrant entitles the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision. The exercise price and number of shares of our common stock or property issuable on exercise of the Brentwood Warrant are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of the common stock, or in the event of a fundamental transaction.
Brentwood will have certain piggyback registration rights, on customary terms, with respect to the shares of our common stock issuable upon conversion of the Brentwood Note and upon exercise of the Brentwood Warrant.
On November 23, 2015, we entered into a reimbursement agreement with Magnum Vending Corp., or Magnum, an entity managed by Philip Thomas, the Companys Chief Executive Officer and a director of ours, and certain of his family members. In exchange for the exclusive right to stock vending machines owned by Magnum, we agreed to reimburse Magnum for certain costs that Magnum incurred to acquire the machines 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 us. 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 Companys common stock.
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 the August Private Placement of up to $3,000,000 of units, 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.
34
On November 24, 2015, we commenced the November Private Placement 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 Private Placement after December 31, 2015, as described above under 2016 Financing Activity .
Net proceeds after all direct costs related to the August Private Placement and the November Private Placement, including the value of warrants issued to the placement agent in the offerings, were $540,946 for the year ended December 31, 2015.
On May 27, 2015, we completed the Business Combination contemplated by the Merger Agreement. Prior to the closing of the Business Combination, we were a wholly-owned subsidiary of Cullen formed solely for the purpose of consummating the Business Combination, LIBB was a private operating company and Cullen was a public company seeking alternative strategic opportunities in all industries and regions in an effort to maximize stockholder value. Upon the closing of the Business Combination, we became the new public company and Cullen and LIBB became wholly-owned subsidiaries of ours. As a result of the consummation of the Business Combination, we gained access to the cash held by Cullen of $120,841. Under the Merger Agreement, upon consummation of the Business Combination, the holders of the LIBB membership interests received 2,633,334 shares of Company common stock, subject to adjustment based on LIBBs and Cullens net working capital at the closing. On July 16, 2015, the payment of the net working capital adjustment under the Merger Agreement was waived by the parties.
During 2014, LIBB entered into various loan agreements for the purchase of trucks and automobiles. The total amount of borrowing for these loans was $84,795. The loans require monthly installments of principal ranging from $282 to $758 per month. Interest rates on these loans range from 3.59% to 10.74%. These loans mature at various dates through 2019.
On August 26, 2013, LIBB and Nortle Holdings Limited entered into a loan and option agreement. The Nortle loan was secured by the inventory and accounts receivable of LIBB. The Nortle loan provided for Nortle to lend us an aggregate of $200,000, bearing interest at 6% per annum. The Nortle loan and all accrued interest thereon, were due and payable on August 31, 2014. The Nortle option agreement provided that through October 18, 2013, Nortle had the option to loan LIBB an additional $300,000, on the same terms as the Nortle loan. In the event that Nortle did not exercise the Nortle option by October 18, 2013, then on such date, the interest rate on the existing loan with Nortle would increase to 12% per annum for the remaining term. Due to the fact that the Nortle option to advance additional funds was not exercised, the interest rate was increased to 12% per annum. On June 25, 2014, Nortle converted its loan and accrued interest of $217,951 into equity interests of LIBB. Such equity interests were converted into shares of our common stock in the Business Combination.
On November 19, 2013, LIBB and Cullen entered into a loan agreement. Pursuant to the Cullen loan agreement, Cullen loaned LIBB $600,000, bearing interest at 6% per annum with principal and accrued interest due on August 31, 2014. The Cullen loan agreement provided Cullen with the option to loan LIBB an additional $600,000. The Cullen loan agreement also required that LIBB utilize $450,000 of the loan to repay certain outstanding indebtedness. On December 5, 2013, Cullen exercised its option and extended to LIBB an additional loan in the amount of $600,000 also bearing interest at 6% per annum with principal and accrued interest due on August 31, 2014. On April 1, 2014, LIBB received $300,000 as proceeds from an additional loan from Cullen, bearing interest at 6% per annum with principal and accrued interest due and payable on August 31, 2014. On August 15, 2014, the maturity date of the Cullen loan agreement and the additional loan was extended to November 15, 2014. On November 7, 2014, the maturity date was further extended to March 15, 2015. On March 4, 2015, the maturity date was further extended to March 15, 2016. Upon consummation of the Business Combination, these loans by Cullen were forgiven.
35
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.
On April 22, 2014, LIBB received $1,300,000 from the proceeds of a loan from Ivory Castle, bearing interest at 6% per annum and with a maturity of August 31, 2014. Interest was payable upon maturity of the loan. The agreement also included provisions whereby the Company agreed to enter into a good faith negotiation for the purchase of membership interests by Ivory Castle. On June 25, 2014, Ivory Castle converted its loan and accrued interest of $1,309,107 into equity interest in LIBB. Such equity interests were converted into shares of our common stock in the Business Combination.
On September 26, 2014, LIBB raised $194,504, net of costs of raising capital of $5,468, as a result of the sale of equity interests. Such equity interests were converted into shares of our common stock in the Business Combination.
From October 1, 2014 through December 5, 2014, LIBB raised an additional $702,007 as a result of the issuance of equity interests. Such equity interests were converted into shares of our common stock in the Business Combination.
Net cash used in operating activities
Net cash used in operating activities was $768,912 for the three months ended March 31, 2016 as compared to net cash used in operating activities of $502,745 for the three months ended March 31, 2015. Cash used in operating activities for the three months ended March 31, 2016 was primarily the result of the net loss of $1,417,070 offset by non-cash charges of $477,689. Cash used in operating activities for the three months ended March 31, 2015 was $502,745. This was primarily the result of net losses of $378,666 and increases in inventory of $275,213.
Net cash used in investing activities
Net cash used in investing activities was $0 and $5,850 for the three months ended March 31, 2016 and 2015, respectively.
Net cash provided by financing activities
Net cash provided by financing activities was $924,574 for the three months ended March 31, 2016 as compared to net cash provided by financing activities of $245,657 for the three months ended March 31, 2015. Cash flows from financing activities were primarily the result of $250,000 in proceeds under the Credit Agreement with Brentwood and $741,790 from the sale of common stock and warrants, net of costs. These proceeds were offset by payments of deferred offering costs of $53,383, repayments of automobile loans of $4,680, and repayments of equipment loans of $9,153. During the three months ended March 31, 2015, LIBB received $250,000 in loans from Cullen prior to the business combination between us, LIBB and Cullen. Proceeds from this loan were offset by payments of automobile loans of $4,363.
Net cash used in operating activities was $3,084,756 for the year ended December 31, 2015 as compared to net cash used in operating activities of $2,481,308 for the year ended December 31, 2014. Cash used in operating activities for the year ended December 31, 2015 was primarily the result of the net loss of $3,180,269. Net loss was offset primarily by non-cash charges of $567,926 which were primarily attributable to depreciation and amortization, stock based compensation, and amortization of deferred financing costs. These non-cash charges were primarily offset by decreases in accounts payable and increases in inventory and accounts receivable. Cash used in operating activities for the year ended December 31, 2014 was primarily the
36
result of the net loss of $3,151,381. The effect of our net losses on our cash flows were reduced by the increases in inventory and accounts receivable which were partially offset by increases in accounts payable and accrued expenses.
Net cash used in investing activities was $100,843 for the year ended December 31, 2015 as compared to $211,095 for the year ended December 31, 2014. Cash used in investing activities pertained primarily to the purchase of display items, trucks, and automobiles during these periods.
Net cash provided by financing activities was $2,994,627 for the year ended December 31, 2015 as compared to net cash provided by financing activities of $2,485,726 for the year ended December 31, 2014. During the year ended December 31, 2015, and prior to the Business Combination, we received additional proceeds of $250,000 from a loan from Cullen. Upon the consummation of the Business Combination, we received $120,841 in cash from Cullen. In addition, LIBB received loans totaling $550,000 from two of our stockholders, Bass Properties and Ivory Castle. These loans, together with accrued interest, were converted into 138,979 shares of our common stock. In addition, we received net proceeds of $568,468 through the issuance of 142,636 shares of common stock. In addition, we received net proceeds of $588,492 through the issuance of common stock and warrants during the year ended December 31, 2015. In addition, we raised $1,000,000 from the proceeds from our line of credit with Brentwood which was offset by cash paid for deferred financing costs of $60,445. These proceeds were offset by repayments of our automobile loans and equipment loans of $22,729. During the year ended December 31, 2014, LIBB received $1,300,000 in loans from Ivory Castle, which were converted into membership interests in LIBB, and $300,000 in loans from Cullen. LIBB also raised net proceeds of $896,510 through the sale of membership interests. In addition, we raised $30,000 from a promissory note with our managing member which was repaid in October 2014. Lastly, cash flows from financing activities consisted of repayments of automobile loans of $10,784.
We do not have any off-balance sheet financing arrangements.
The following table discloses aggregate information about material contractual obligations (excluding employment agreements) and periods in which payments were due as of December 31, 2015.
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Total |
Less than
1 year |
1 to 3 years | 3 to 5 years |
More than
5 years |
||||||||||||||||
Line of Credit (1) | $ | 1,091,571 | | $ | 1,091,571 | | | |||||||||||||
Automobile loans | $ | 56,095 | $ | 19,231 | $ | 26,345 | $ | 10,519 | | |||||||||||
Hicksville Lease (2) | $ | 78,796 | $ | 52,273 | $ | 26,523 | | | ||||||||||||
Equipment Loan Reimbursement Agreement | $ | 113,104 | $ | 36,627 | $ | 76,477 | | |
(1) | Upon completion of the Recapitalization (which will occur at the closing this offering assuming the gross proceeds of this offering are at least $5 million), assuming no other advances are made by Brentwood under the line of credit, the outstanding principal and interest on the line of credit will be converted into 421,972 shares of our common stock. |
(2) | On June 6, 2014, LIBB entered into a three-year lease with a two-year renewal option for a 5,000 square foot facility in Hicksville, NY. |
There were no material changes in our contractual obligations as of March 31, 2016, except that $1,377,930 was outstanding under Credit Agreement with Brentwood.
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We are a holding company operating through our wholly-owned subsidiary, LIBB. We are engaged in the production and distribution of premium NARTD iced tea in the beverage industry. We are currently organized around our flagship brand Long Island Iced Tea®. The Long Island Iced Tea name for a cocktail originated in Long Island in the 1970s, and its national recognition is such that it is ranked as the fourth most popular cocktail in restaurants and bars in the U.S. (Source: Nielsen CGA, On-Premise Consumer Survey, 2016). Our premium NARTD tea is made from a proprietary recipe and with quality components. Long Island Iced Tea® is sold primarily on the East Coast of the U.S. 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 options perceived as less healthy such as CSDs towards alternative beverages such as iced tea.
In addition, we have begun exploring entry into the $215 billion U.S. alcohol industry, with the hope to establish ourselves as a multi-product alcoholic and non-alcoholic beverage company.
We were incorporated on December 23, 2014 in the State of Delaware.
On May 27, 2015, we closed the Business Combination contemplated by the Merger Agreement. Pursuant to the Merger Agreement, (i) Cullen Merger Sub, Inc. merged with and into Cullen, with Cullen surviving as a wholly owned subsidiary of ours and the stockholders of Cullen receiving one share of our common stock for every 15 shares of Cullen common stock held by them, and (ii) LIBB Acquisition Sub, LLC merged with and into LIBB, with LIBB surviving as a wholly owned subsidiary of ours and the members of LIBB receiving an aggregate of 2,633,334 shares of our common stock.
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, Cullen and LIBB became wholly-owned subsidiaries of ours and the stockholders of Cullen and the members of LIBB became our stockholders. In addition, the historical financial statements of LIBB became our financial statements. As a result of the Business Combination, the business of LIBB became our business. Cullen is currently inactive and no significant operations are being undertaken by it as of the date of this prospectus. LIBB was formed as a limited liability company under the laws of New York on February 18, 2011.
Our corporate offices are located at 116 Charlotte Avenue, Hicksville, NY 11801 and our telephone number at that location is (855) 542-2832.
Globally, non-alcohol ready to drink tea products are ranked as the fourth largest beverage category, behind carbonated soft drinks, water and dairy. The non-alcohol iced tea global category size is estimated at $55 billion, and is estimated to be growing at a 6.6% CAGR. (Source: Euromonitor International, Versatility of RTD Tea Generates Bright Spot in Global Soft Drinks, May 2014).
The U.S. non-alcoholic liquid refreshment beverage market consists of a number of different products, and CSDs are the top selling beverage category. However, consumers are increasingly coming to view CSDs
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(typically caffeinated as well as high in sugar and preservatives) with disfavor. The CSD category declined 0.9% in 2014, 3% in 2013 and 1.2% in 2012. (Source: Beverage-Digest, Special Issue: U.S. Beverage Results for 2014, March 2015).
CSDs have historically dominated the non-alcoholic liquid refreshment beverage market and been primarily controlled by two industry giants, Coca-Cola and Pepsico. However, a number of beverages began to emerge in the 1990s as alternatives to CSDs as part of a societal shift towards beverages that are perceived to be healthier. The alternative beverage category of the market has resulted in the birth of multiple new product segments that include sports drinks, energy drinks and NARTD teas.
According to a 2014 IBISWorld industry report, the U.S. NARTD tea segment was expected to have $5.3 billion of revenues in 2014, a 3.3% increase from the prior year and a 6.1% annualized growth rate over the five years from 2009 to 2014. (Source: IBISWorld Industry Report OD4297, RTD Tea Production in the US, December 2014). The industry report also forecasted an annualized revenue growth rate of 10.2% between 2014 and 2019, with revenues reaching $8.6 billion in 2019.
Consumers have shown special interest in healthier versions of NARTD teas, preferring all natural and diet teas.
Products and Services Segmentation 2014 ($5.3 billion)
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All-Natural Tea | 36.1 | % | ||
Diet Tea | 25.8 | % | ||
Fruit-Flavored Tea | 20.2 | % | ||
Organic Tea | 10.3 | % | ||
Herbal Tea | 7.6 | % |
(Source: IBISWorld Industry Report OD4297, RTD Tea Production in the US, December 2014)
The existence of this trend toward healthier versions of products is reinforced by a 2015 Nielsen Health and Wellness study, where six key elements of our premium liquid (corn free, hormone/antibiotic free, non-gmo, gluten free, natural, and no artificial color/flavor) rank in the top 20 of four-year CAGR, when measured against 64 Health and Wellness categories.
We have begun exploring the development, production, marketing and distribution of alcoholic beverages, to augment our current NARTD tea business. In June 2015, we engaged Julian Davidson, who has many years of experience in the alcohol industry, as a consultant to help evaluate the opportunity, as well as to assist in our core NARTD tea business. In June 2016, Mr. Davidson became our Executive Chairman.
The alcohol beverage market consists of beer, cider/perry, ready-to-drink/high-strength premixes, spirits and wine. The total sales of U.S. alcohol beverage market reached $215 billion in 2014, growing at a 3.3% CAGR from 2009 to 2014. Of that $215 billion, 46.8% was from beer, 1.0% from cider/perry, 2.5% from alcoholic ready-to-drink, or ARTD, beverages and high-strength premixes, 30.5% from spirits and 19.2% from wine. (Source: Euromonitor International, Passport: Alcoholic Drinks in the US, June 2015).
Long Island Iced Tea® was first launched in the New York metro market by LIBB in July 2011, positioning itself as a premium iced tea beverage offered at an affordable price. We help differentiate ourselves from competitors with a proprietary recipe and quality components. Long Island Iced Tea® is a 100% brewed tea, using black tea leaves and purified water via reverse osmosis. It is gluten-free, free of genetically modified organisms, or GMOs, and certified Kosher with no artificial colors or preservatives.
Long Island Iced Tea® is primarily produced and bottled in the U.S. Northeast. This production in the Northeast, combined with its Made in America tag-line and brand name, all improve its credentials as a part of the local community from which we take our name.
We have developed ten flavors of Long Island Iced Tea® in an effort to ensure that our products meet the desired taste preferences of consumers. Regular flavors, which use natural cane sugar as a sweetener, include
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lemon, peach, raspberry, green tea & honey, half tea & half lemonade, guava, mango, and sweet tea. Diet flavors, which use sucralose (generic Splenda) instead of natural cane sugar as a sweetener, include diet lemon and diet peach. These flavors are currently available in twelve packs of 20 ounce polyethylene terephthalate bottles.
We have also recently developed three twenty-four pack of sixty calorie flavors that are served in twelve ounce bottles. The sixty calorie flavors have reduced sugar content, are caffeine free and include mango, peach, and raspberry. This package was designed to meet certain nutritional guidelines for sales in schools. During May 2015, we launched four flavors, lemon, peach, mango, and green tea and honey, in gallon containers. During February 2016, we also launched sweet tea, which is also served in a gallon container.
Also, during February 2016, we began exploring the sale of aloe juice products as part of our product line. The aloe juice product is purchased in its finished form from a supplier. In addition, during April 2016, we launched a private label line, consisting of four flavors, for one of our existing customers.
We believe that a differentiated brand will be a key competitive strength in the NARTD tea segment. Key points of differentiation for Long Island Iced Tea® include:
| A better and bolder tasting bottled iced tea as a result of premium ingredients that include natural cane sugar (sucralose for diet flavors), hot-filled using black and green tea leaves, that is offered at an affordable price; |
| Immediate global recognition of the Long Island Iced Tea phrase associated with the cocktail; |
| Made in America; |
| Strong Northeast roots where it is locally produced; |
| The use of non-GMO ingredients; and |
| Our product being corn free, hormone/antibiotic free, gluten free, natural and having no artificial color/flavor. |
The NARTD tea market is a crowded space and as a result we believe in pricing our products competitively. We highlight to consumers our use of premium ingredients and our affordable price. The suggested retail price for a 20 ounce bottle of Long Island Iced Tea® is $1.00 to $1.50 and the suggested retail price for a 12 ounce bottle is $1.00 to $1.25. The suggested retail price for our gallon containers is $2.99 to $3.49. Management has set pricing levels to reflect current pricing dynamics in the industry. There has been downward pressure on prices, which management believes is caused by the entrance of major multinational beverage corporations into the alternative beverage category, leading to consolidation in the industry.
In addition to a potential expansion into ARTD beverages, we seek organic growth of our NARTD tea and related product sales.
We intend to increase our market share in our existing geographic markets and expand into additional geographic markets in the U.S., capitalizing on an iconic name with unique brand awareness to create a familiar and easily recognizable non-alcoholic iced tea. We also are exploring international markets on a highly selective and limited basis, which may include royalty and licensing agreements. As discussed below in Our Customers , we generally focus our sales efforts on approaching beverage distributors and taking advantage of their unique positioning in the retail industry. However, a portion of our sales efforts are also dedicated to direct sales to retailers, because some wholesale chains such as Sams Club and Costco request direct shipments from the product supplier. In addition, we are exploring several new sales channels. We currently are conducting a small scale business trial in which we sell our beverage product alongside other snacks in vending machines. We also commenced selling our twelve ounce lower calorie products in schools, in some cases through sales to purchasing cooperatives that represent multiple school districts, but also via the vending machine business trial.
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During the quarter ended December 31, 2015, we determined the brand had sufficient scale, distribution and volume per point of distribution to test market expansion into (1) additional U.S. states, (2) significant new regional chains, and (3) national chains. To facilitate this expansion, we recruited Joseph Caramele, our Vice President of National Sales & Marketing. Mr. Caramele had spent the previous nine years working in national and chain account sales for Arizona Beverages USA, at which time he oversaw the regional and national chain account expansion. Since October 1, 2015, we have introduced our products in Florida and selected states in the Midwest, and have reached agreement with a limited number of regional and national chains. We recently began receiving purchase orders from these accounts, and incorporating their logistics and delivery requirements into our systems. Aligned with this expansionary plan, we have increased the number of full time employees in our sales staff to meet the demands of these initiatives.
As part of our marketing efforts, we commonly use store demos, as we have found a positive correlation between demos and sales especially at the introduction phase in new stores. We expect to continue using store demos in order to increase brand awareness and sales as we continue to expand into new markets. We also use co-op advertising (advertisements by retailers that include the specific mention of manufacturers, who, in turn, repay the retailers for all or part of the cost of the advertisement) and special promotions, together with its retail partners, so as to complement other marketing efforts towards brand awareness.
We also seek to expand our product line. From time to time, we explore and test market potential new NARTD products that may, in the future, contribute to our operating performance. In addition, we are currently testing certain complementary products that will sit alongside our flagship Long Island Brand product.
We sell our products to a mix of independent mid-to-large size beverage distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the New York, New Jersey, Connecticut and Pennsylvania markets. We have also begun expansion into other geographic markets, such as Florida, Virginia, Massachusetts, New Hampshire, Nevada, Rhode Island and parts of the Midwest. Our products are currently available in twelve states that have a cumulative population of 100 million. While we primarily sell our products indirectly through distributors, at times we sell directly to the retail outlets and we may sell to certain retail outlets both directly and indirectly through distributors. We also sell our products directly to the distribution facilities of some of our retailers and through road shows, which are temporary installations at retail outlets staffed by our employees or contractors.
For the three months ended March 31, 2016, two customers accounted for 16% and 12% of net sales, respectively. In addition, we collect vending proceeds based on contracts in certain school districts. Sales within one school district accounted for 13% of our net sales during the three months ended March 31, 2016. For the year ended December 31, 2015, one customer, Wakefern Food Corp., accounted for 10% of net sales. For the year ended December 31, 2014, our top three customers, Costco Wholesale, Windmill Distributing, and CFG Distributors LLC, accounted for 32%, 16% and 14%, of net sales, respectively.
Our sales are typically governed by short-term purchase orders. We do not have any material contracts or other material arrangements with our customers or distributors and do not obtain commitments from them to purchase or sell a minimum amount of our products or to purchase or sell such products at a minimum price. Because our sales may be concentrated with a few customers, our results of operations may be materially adversely affected if one of these customers significantly reduces the volume of its purchases or demands a reduction in price, which may occur at any time due to the absence of such purchase commitments.
Long Island Iced Tea® is currently produced by Union Beverage Packers LLC, Polar Corp., and LiDestri Spirits, all of which are established co-packing companies with reputable quality control. We intend to identify additional co-packers in the U.S. and other countries to support the continued growth of the brand.
The principal raw materials we use in our business are bottles, caps, labels, packaging materials, tea essence and tea base, sugar, natural flavors and other sweeteners, juice, electricity, fuel and water. Our principal suppliers for the three months ended March 31, 2016 were Zuckerman-Honickman, Inc., Seba Distribution LLC (juice products) and Allen Flavors, Inc. (natural flavors), who together with Lidestri Spirits accounted for 71% of our purchases of inventory and copacking fees. Our principal suppliers for the year ended
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December 31, 2015 were Zuckerman-Honickman, Inc. (bottles), Dominos Food, Inc. (sugar) and Allen Flavors, Inc. (natural flavors), who together with Union Beverage Packers LLC accounted for 80% of our purchases of raw materials inventory and copacking fees. Our principal suppliers in the year ended December 31, 2014, were Zuckerman-Honickman, Inc. (bottles) and Allen Flavors, Inc. (natural flavors), who together with Union Beverage Packers LLC accounted for 70% of our purchases of raw materials inventory and copacking fees.
Our relationships with our suppliers and co-packers are typically governed by short-term purchase orders or similar arrangements. We do not have any material contracts or other material arrangements with these parties and presently do not mitigate our exposure to volatility in the prices of raw materials or co-packing services through the use of forward contracts, pricing agreements or other hedging arrangements. Accordingly, we are subject to fluctuations in the costs of our raw materials and co-packing services.
Furthermore, some of our raw materials, such as bottles, caps, labels, tea essence and tea base, sugar, natural flavors and other sweeteners, and juice, are available from only a few suppliers. As a result, we may be subject to substantial increases in prices or shortages of raw materials, if the suppliers are unable or unwilling to meet our requirements.
We currently use co-packing companies, Union Beverage Packers LLC, Polar Corp., and LiDestri Spirits, to manufacture Long Island Iced Tea®. The product is shipped directly to distributors as well as to our warehouse in Hicksville, NY prior to delivery to sales partners. Principal assets include vehicles to support the marketing of the brand and to transport the product, as well as storage equipment for the warehouse. Our principal assets also include display equipment such as refrigerators and racks. This equipment is strategically placed at retail locations in order to market our product line.
The beverage market is subject to some seasonal variations. As the iced tea beverage segment, including Long Island Iced Tea®, experiences its highest levels of demand during the warm spring and summer months, cold or rainy weather during this time may have a short-term impact on customer demand and therefore result in lower sales.
The beverage industry is extremely competitive. Long Island Iced Tea® is competing with a wide range of beverages that are produced by a large number of manufacturers. Most of these brands have enjoyed broad public recognition for many years, accomplished through continuous and well-funded marketing campaigns.
Our management believes that the NARTD tea segment will have a moderate level of market share concentration, as the market landscape becomes more fragmented with the entrance of new competitors. Key competitors in the NARTD tea market are Arizona Beverage Company, Unilever, Dr Pepper Snapple Group, Inc. and Nestle SA. In order to be able to compete successfully in the industry, we have to distinguish our products in taste and flavor, offer attractive promotions to customers and appealing packaging. Moreover, we will have to well position the brand with targeted sales and marketing campaigns. We will compete with all types of beverages, both CSDs and non-CSDs, facing higher competition from direct product competitors such Snapple, Arizona and Nestea. Currently, the top six brands have approximately 64% of the NARTD market (Source: Euromonitor International, RTD Tea in the US, March 2015).
Long Island Iced Tea and The Original Long Island Brand are trademarks of ours. We currently have federal registration of the trademark Long Island Iced Tea and are pursuing such registration of the trademark The Original Long Island Brand. We intend to seek registration of such trademarks in other countries as well. In addition, we are seeking or plan to seek a number of other trademarks for tag lines and product designs.
We filed applications with the USPTO for the registration of the trademark Long Island Brand Iced Tea on August 28, 2012 and subsequently for the registration of the trademark Long Island Iced Tea on July 23,
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2013. Both applications encountered resistance to registration as a result of the existence of the mark Long Island for iced tea. We determined that the mark Long Island for iced tea was abandoned. As a result we filed a petition to cancel the registration on this ground. In January 2015, the petition was granted and the mark was cancelled. Accordingly, we petitioned for the mark Long Island Iced Tea to be placed on the supplemental register. On April 19, 2016, the USPTO registered the mark Long Island Iced Tea (Registration No. 4,943,056) on the supplemental register. Registration on the supplemental register allows the use of the ® symbol, blocks later filed applications for confusingly similar marks, and allows us to sue infringers in federal court which has well-settled case law and standards. Notwithstanding the foregoing, the supplemental register does not provide all the protection of a registration on the principal register. As with any other registered mark, we may be open to claims of others contesting the trademark.
In addition, we have filed trademark applications for The Original Long Island Brand as a standard character mark and as a stylized mark, which are pending before the USPTO. In each case, the application is for use of the trademark with iced tea, tea based products, juices, water, beverages and other similar products. The Original Long Island Brand standard character trademark has been in use in commerce by us since at least as early as February 29, 2012. We also plan to file for stylized marks protecting certain other tag lines and product designs. With respect to the pending trademark applications for The Original Long Island Brand (standard character mark and stylized mark), the USPTO has made an initial determination that both marks are geographically descriptive. This determination is refutable and the USPTO has afforded the company the opportunity to produce evidence to establish that the marks have become distinctive of the goods in commerce. Similar issues, or other issues, also may arise in connection with the other marks for which we are seeking registration or intend to seek registration. Registration of these marks will allow us to utilize the ® symbol to notify others that our marks are federally registered and allow us to enforce these marks in federal court, among other benefits. There can be no assurance, however, that the USPTO will approve these applications.
Our intellectual property is protected through the acquisition of registered and unregistered trademarks as described above, the acquisition of patents, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing our intellectual property rights. We intend to aggressively assert our rights under trade secret, unfair competition, trademark, copyright and other similar laws to protect our intellectual property, including product design, product research and concepts and trademarks, against any infringer. Although any assertion of our rights could result in a substantial cost to us, and diversion of our efforts, management believes that the protection of our intellectual property will be a key component of our operating strategy. Notwithstanding the foregoing, there can be no assurance that the trademarks described above or our other intellectual property rights will adequately protect information that we deem to be proprietary.
In an effort to further develop our branding strategy, we acquired the uniform resource locator (URL) www.longislandicedtea.com .
The conduct of our businesses, and the production, distribution, sale, advertising, labeling, safety, transportation and use of our products, are and will be subject to various laws and regulations administered by federal, state and local governmental agencies in the U.S., as well as to foreign laws and regulations administered by government entities and agencies in markets where we may operate and sell products.
In the U.S., we are or may be required to comply with federal laws, such as the Food, Drug and Cosmetic Act, the Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, laws governing equal employment opportunity, customs and foreign trade laws and regulations, laws regulating the sales of products in schools, and various other federal statutes and regulations. We will rely on legal and operational compliance programs, as well as local counsel, to guide our businesses in complying with applicable laws and regulations of the jurisdictions in which we do business. Our third-party co-manufacturer is also required to comply with Food and Drug Administration requirements for manufacturing of our product.
We also may in the future be affected by other existing, proposed and potential future regulations or regulatory actions, including those described below, any of which could adversely affect our business, financial condition and results of operations. Changes in government regulation, or failure to comply with
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existing regulations, could adversely affect our business. Public health officials and health advocates are increasingly focused on the public health consequences associated with obesity, especially as the disease affects children, and are seeking legislative change to reduce the consumption of sweetened beverages. There also has been an increased focus on caffeine content in beverages.
Legislation has been enacted in certain U.S. states in which our products may be sold that requires collection and recycling of containers or that prohibits the sale of our beverages in certain non-refillable containers unless a deposit or other fee is charged. It is possible that similar or more restrictive legal requirements may be proposed or enacted in the future.
We do not anticipate at this time that the cost of compliance with U.S. and foreign laws will have a material financial impact on our operations, business or financial condition, but there are no guarantees that new regulatory and tariff legislation may not have a material negative effect on our business in the future.
We have incurred approximately $46,667, $13,333 and $0 in research and development expenditures during the three months ended March 31, 2016, the year ended December 31, 2015 and the year ended December 31, 2014, respectively.
We currently have 19 full-time and 4 part-time employees. We also engage the services of independent contractors to assist us with management in developing our product offering.
Our future success depends in significant part upon the continued services of our key sales, technical, and senior management personnel and our ability to attract and retain highly qualified sales, technical, and managerial personnel. None of our employees are represented by a collective bargaining agreement and we have never experienced a work stoppage.
Our principal office is located in a 5,000 square foot facility at 116 Charlotte Avenue, Hicksville, NY 11801. We also ship product to our warehouse at this facility. On June 6, 2014, we entered into a three-year lease with a two-year renewal option for this facility. The lease provides for annual base rent of $50,000 through June 30, 2015, $51,500 through June 30, 2016, and $53,045 through June 30, 2017. We believe that our facilities are adequate for our current and reasonably foreseeable future needs and that our properties are in good condition and suitable to conduct our business.
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 actions:
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 LIBBs complaint. LIBB filed papers in opposition to the motion to dismiss. In addition, Revolution has filed a motion to amend its answer to include cross-claims against Ascent which were not asserted in its original answer of record. On February 5, 2016, the Court rendered a decision, denying the motion to dismiss with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution seeking to amend its answer to include cross claims against Ascent. Our management and legal counsel believes it is too early to determine the probable outcome of this matter.
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Madwell LLC . On October 3, 2014, an action was filed by Madwell LLC in the Supreme Court of New York entitled Madwell LLC v. Long Island Brand Beverages LLC, Philip Thomas, its Chief Executive Officer, and Paul Vassilakos, Cullens former Chief Executive Officer and one of our directors. Madwell was seeking $940,000, which included $440,000 for breach of contract and payment of services as well as punitive damages of $500,000. On July 31, 2015, we entered into a settlement agreement with Madwell. Pursuant to the settlement agreement, we agreed to pay Madwell $440,000 in six installments with the last installment due no later than December 31, 2015. In addition, Madwell agreed to discontinue its lawsuit and the parties agreed to mutual releases of liability related to fees for advertising, marketing and design services or any matter relating to the lawsuit. As of the date of this prospectus, the full amount has been paid to Madwell. In addition, we indemnified Mr. Vassilakos for a de minimis amount of expenses incurred by him in connection with this litigation. During January 2016, we made the final installment payment of $80,000 in settlement of the matter.
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The following table sets forth our directors and executive officers as of the date of this prospectus:
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Name | Age | Position | ||
Julian Davidson | 51 | Executive Chairman of the Board | ||
Philip J. Thomas | 40 | Chief Executive Officer and Director | ||
Tom Cardella | 61 | Director | ||
Edward Hanson | 41 | Director | ||
Kerry Kennedy | 56 | Director | ||
Richard Y. Roberts | 64 | Director | ||
Paul N. Vassilakos | 39 | Director | ||
Richard B. Allen | 61 | Chief Financial Officer | ||
Peter Dydensborg | 56 | Chief Operating Officer | ||
James Meehan | 35 | Chief Accounting Officer |
Julian Davidson has been our Executive Chairman since June 2016 and a consultant to us since June 2015. Mr. Davidson currently has served on the Board of Smartfoods Limited, a privately held food manufacturing, marketing and distribution company since May 2015. Mr. Davidson served on the board of the Lantern Hotel Group, an Australian Stock Exchange company from October 2011 to June 2015. Mr. Davidson was CEO of Independent Liquor (NZ) Limited from April 2009 to December 2014. From February 2007 to April 2009 Mr. Davidson was CFO of Independent Liquor Group. From September 2006 to January 2007, Mr. Davidson acted as a consultant to a consortium of private equity investors who acquired Independent Liquor (NZ) Limited. From April 2005 to October 2006, Mr. Davidson formed and ran an investment company named Consolidated Hotels and Taverns Limited which purchased and operated a portfolio of hotels and taverns From 1991 to 2005, Mr. Davidson held senior management and leadership roles in Lion Nathan, Australasias largest brewer. From January 2002 to March 2005 Mr. Davidson worked as Managing Director of Lion Breweries (NZ) Limited. Commencing September 2001 Mr. Davidson completed three months at Harvard Business School, graduating with a Program for Management Development (PMD) in December 2011. Mr. Davidson was appointed the Managing Director of the Tooheys Brewery in March 1998 through to September 2011. In September 1996, Mr. Davidson acted as Finance Director for Lion Nathan Australia, remaining in this role through to March 1998. In August 1995, Mr. Davidson joined Pepsi Cola Bottlers Australia/New Zealand (a Lion Nathan/Pepsi Cola International JV) as Finance Director, a position he held through to September 1996. From August 1992 to August 1995 he served as the Finance Director of the Swan Brewery in Western Australia. From August 1991 to August 1992, Mr. Davidson was the Lion Nathan Group Internal Audit Manager. From 1985 to 1991 Mr. Davidson worked as an auditor with Deloitte. Mr. Davidsons tertiary education was at the Auckland Technical Institute (1983 1986). Mr. Davidson is a Chartered Accountant (NZ). We believe Mr. Davidsons contacts and past business experience in the USA and global beverage industry make him well suited to serve as a member of our board of directors.
Philip J. Thomas has served as our Chief Executive Officer since the consummation of the Business Combination on May 27, 2015. Mr. Thomas also served as our Chairman of the Board from May 2015 until June 2016. Mr. Thomas also has served as the Chief Executive Officer of LIBB since its formation in February 2011 and previously served as the Managing Member and a member of the board of managers of LIBB from February 2011 until May 2015. Since 2005, Mr. Thomas has also served as President of Capital Link LLC, a nationally recognized ATM processing network that he founded. Capital Link partnered with, among others, WSFS Bank (NASAQ: WSFS), Cash Connect, RBSWorldPay (RBS) and Switch Commerce, and these parties, in the aggregate, fund over 13,000 ATMs in all 50 states with over $8 billion annually. From 2008 to November 2010, he served as Chief Executive Officer of KarbonEx Corp, a company he founded dedicated to creating innovative, market driven solutions to address climate change and resolve the way businesses impact the environment. Prior to this, Mr. Thomas revitalized his familys 45 year old food and beverage distribution business, Magnum Enterprises, by creating strategic partnerships with Coca-Cola, Vitamin Water and Kelloggs. Mr. Thomas began his career in 1998 while attending college at James Madison University where he created Highlawn Restaurant & Lounge, which he sold in 2001. Mr. Thomas graduated
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from James Madison University, where he was a Division I GTE scholar athlete. We believe Mr. Thomas business experience in the beverage industry makes him well suited to serve as a member of the Companys board of directors.
Tom Cardella has served as a member of our board of directors since April 2016. Mr. Cardella is the founder of Cardella & Associates LLC and is a beverage industry consultant. Prior to founding Cardella & Associates in February 2015, Mr. Cardella was the President and CEO of Tenth and Blake Beer Company, a division of MillerCoors, from June 2010 to January 2015. He also served as President Eastern Division for MillerCoors from June 2008 to June 2010, where he was responsible for all commercial operations in the eastern half of the United States. Prior to the merger with Coors, Mr. Cardella was Executive Vice President of Sales and Distribution for Miller Brewing Company from May 2006 to June 2008. From August 2005 through April 2006, he held the position of Senior Vice President of Market Development and Import Brands with Miller. Prior to rejoining the Miller Brewing Company in August 2005, Mr. Cardella spent nearly a decade at InBev where he held several senior-level positions, including U.S. Vice President of Sales from September 2004 through August 2005, CEO of Becks North America from June 2003 through August 2004, Vice President of Strategy for FEMSA Cerveza in Monterey, Mexico (joint venture of InBev/Femsa) from January 2001 through May 2003, and Vice President of Marketing at Labatt USA from January 1996 through December 2000. Mr. Cardella spent the earlier years of his career with Miller Brewing Co. from 1978 through 1995 in various sales and marketing positions. Mr. Cardella has served on the Board of Directors of the Green Bay Packers since July 2010, the United Way of Greater Milwaukee since March 2010 and the Marcus Center for Performing Arts since July 2012. He also has served on the Board of Directors for the North American Brewing Company (parent company is FIFCO, San Jose, Costa Rica) since January 2016. Mr. Cardella received a bachelors degree from the State University of New York College at Geneseo and completed the Advanced Management Program at Harvard Business School in 2000. We believe Mr. Cardellas contacts and past business experience in the beverage industry make him well suited to serve as a member of our board of directors.
Edward Hanson has been a member of the Companys board of directors since the consummation of the Business Combination on May 27, 2015. Mr. Hanson also has been a member of Cullens board of directors since October 2009. Mr. Hanson has served as a principal of Global Partners Fund, a private equity fund investing in asset backed businesses, since 2009. Prior to this, he was a director of Babcock & Brown (UK) Ltd. Babcock & Brown was a principal investment firm headquartered in Sydney and Mr. Hanson worked in the London office from 1997 to 2009. He focused on Private Equity and Real Estate. Mr. Hanson received a Bachelor of Commerce from the University of Auckland in New Zealand. We believe Mr. Hansons business experience and contacts and relationships make him well suited to serve as a member of the Companys board of directors.
Kerry Kennedy has been a member of our board of directors since the consummation of the Business Combination on May 27, 2015. Ms. Kennedy also has been a member of Cullens board of directors since October 2009. She is an American human rights activist and writer. Since April 1988, she has worked at the Robert F. Kennedy Human Rights and acted as its executive director and currently its president. Ms. Kennedy was the chair of the Amnesty International Leadership Council from January 1999 to 2010. She was a director of Endeavor Acquisition Corp. from July 2005 to December 2007, a director of Victory Acquisition Corp. from January 2007 to April 2009, a director of Triplecrown from June 2007 to October 2009 and a director of Home Loan Servicing Solutions, Ltd. from October 2011 to December 2015. She also served on the board of directors of the International Center for Ethics, Justice and Public Life at Brandeis University. She has served on the board of Aptus Health since 2014. She also serves on the boards of directors of the United States Institute of Peace, a Senate confirmed position, and Human Rights First. Ms. Kennedy received a B.A. from Brown University in 1982 and an LLM from Boston College Law School in 1987. We believe Ms. Kennedys contacts and philanthropic work make her well suited to serve as a member of the Companys board of directors.
Richard Y. Roberts has been a member of our board of directors since the consummation of the Business Combination on May 27, 2015. Mr. Roberts also has been a member of Cullens board of directors since October 2009. In March 2006, Mr. Roberts co-founded a regulatory/legislative consulting firm, Roberts, Raheb & Gradler LLC. He was a partner with Thelen Reid & Priest LLP, a national law firm, from January 1997 to March 2006. From August 1995 to January 1997, Mr. Roberts was a consultant at Princeton Venture Research,
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Inc., a private consulting firm. From 1990 to 1995, Mr. Roberts was a commissioner of the Securities and Exchange Commission, and, in this capacity, was actively involved in, has written about or has testified on, a wide range of subjects affecting the capital markets. Since leaving the Commission, Mr. Roberts has been a frequent media commentator and writer on various securities public policy issues and has assisted the Governments of Romania and Ukraine in the development of a securities market. Mr. Roberts was a director of Red Mountain Resources, Inc., an oil and natural gas exploration public company, from October 2011 until February 2016. He was a director of Nyfix, Inc. from September 2005 to December 2009, Endeavor Acquisition Corp. from July 2005 to December 2007, a director of Victory Acquisition Corp. from January 2007 to April 2009 and a director of Triplecrown from June 2007 to October 2009. From 1987 to 1990, he was the chief of staff for Senator Richard Shelby. He is a member of the Alabama Bar and the District of Columbia Bar. Mr. Roberts is a member of the Advisory Board of Securities Regulation & Law Reports, of the Advisory Board of the International Journal of Disclosure and Governance, and of the Editorial Board of the Municipal Finance Journal. Mr. Roberts also previously served as a member of the District 10 Regional Consultative Committee of the Financial Industry Regulatory Authority, the Market Regulation Advisory Board of the FINRA, and the Legal Advisory Board of the FINRA. Mr. Roberts received a B.E.E. from Auburn University in 1973, a J.D. from the University of Alabama School of Law in 1976, and a Master of Laws from the George Washington University Law Center in 1981. We believe Mr. Roberts contacts and past business experience, including at the Securities and Exchange Commission, make him well suited to serve as a member of the Companys board of directors.
Paul N. Vassilakos has served as a member of our board of directors since our inception. In addition, he served as our Chief Executive Officer from our inception until May 2015. Mr. Vassilakos also has served as Cullens Chief Executive Officer and as a member of its board of directors since November 2013 and as Cullens assistant treasurer since October 2009. Mr. Vassilakos founded Petrina Advisors, Inc., a privately held advisory firm providing investment banking services, in July 2007 and has served as its president since its formation. Mr. Vassilakos also founded and, since December 2006, has served as the vice president of Petrina Properties Ltd., a privately held real estate holding company. From November 2011 through February 2012, Mr. Vassilakos served as Chief Executive Officer, Chief Financial Officer and director of Soton Holdings Group, Inc., a publicly held company now known as Rio Bravo Oil, Inc. Mr. Vassilakos also previously served as interim President and Chief Executive Officer of Red Mountain Resources, Inc. from February 2011 to March 2011. From February 2002 through June 2007, Mr. Vassilakos served as vice president of Elmsford Furniture Corp., a privately held furniture retailer in the New York area. Mr. Vassilakos also served on the Boards of Directors of Cross Border Resources, Inc. (since April 2012) and Red Mountain Resources, Inc. (since October 2011), oil and natural gas exploration public companies, until February 2016. Mr. Vassilakos received a B.S. in finance from the Leonard N. Stern Undergraduate School of Business in 1998 and was a licensed Registered Securities Representative (Series 7 and 63) from February 1996 through February 2002. We believe Mr. Vassilakoss extensive public company and capital markets experience, as well as his professional contacts and other business experience, make him well suited to serve on the Companys board of directors.
Richard B. Allen has served as Chief Financial Officer since June 2016. Mr. Allen previously worked for Beverage Innovations, an incubator beverage company, serving on its Board of Directors from July 2011 to November 2015 and serving as Chief Financial Officer from July 2011 to September 2012. Prior to Beverage Innovations he was a consultant to various beverage companies from 2007 to 2011. For over ten years Mr. Allen previously held various senior positions at Snapple and Cadbury Schweppes, who purchased Snapple in 2000 from Triarc Industries. He served as Senior Vice President of Business Development and Mergers and Acquisitions for Cadbury Schweppes Americas Beverages from 2006 to 2007. Mr. Allen also served as General Manager of Pacific Snapple Distributors from 2004 to 2005, Senior Vice President of Business Development and M&A for Snapple Distributors from 2003 to 2004 and Chief Financial Officer of Snapple Beverage Group from 1997 to 2003. Before joining Snapple, Mr. Allen worked for RJR Nabisco, previously Nabisco Brands and Standard Brands, from 1979 to 1996 in various audit, accounting and analytic positions culminating in Vice President and Corporate Assistant Controller. Mr. Allen began his career in public accounting with PriceWaterhouse Coopers from 1977 to 1979. Mr. Allen received a BS in Accounting from Lehigh University in 1977 and an MBA in Finance from Fairleigh Dickinson University in 1993. Mr. Allen is a Certified Public Accountant.
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Peter Dydensborg has served as our Chief Operating Officer since the consummation of the Business Combination on May 27, 2015. Mr. Dydensborg also has served as Chief Operating Officer of LIBB since January 2014. From 2004 to January 2014, Mr. Dydensborg served as Director of Sales Off Premise for Phoenix Beverages New York, or Phoenix. Phoenix was the largest Heineken Beer distributor in the United States. During his ten year career with Phoenix, Mr. Dydensborgs role was to create innovative market solutions in cooperation with national brewers to drive sales and market share. From 1994 to 2004, Mr. Dydensborg was with The Keebler Company which was later acquired by the Kellogg Company. While with these companies, Mr. Dydensborg was promoted into several roles throughout the east coast, including managing the Metro New York Zone Market (sales and operations) and restoring the Atlanta Zone market (which included Florida and Alabama). Prior to this, Mr. Dydensborg was with CPC International (which sold products such as Arnold Bread and Thomas English Muffins) in an Account Management Role. He managed several leading retailers in the metro New York market in this position. Mr. Dydensborg started he career in 1987 in sales management with the New York Coca Cola Bottling company in the New Jersey market. Mr. Dydensborg is a graduate from Georgia State University and was a member of the Georgia State Soccer team in the SEC conference.
James Meehan has served as our Chief Accounting Officer since the consummation of the Business Combination on May 27, 2015. Mr. Meehan also has served as the Chief Accounting Officer of LIBB since June 2014. From 2003 to June 2014, Mr. Meehan was employed by Marcum LLP, a public accounting firm where he serviced a wide variety of publicly and privately held companies. Mr. Meehan is a graduate of Manhattan College. Mr. Meehan is a Certified Public Accountant.
We have a strategic advisory board that assists our management in exploring business opportunities. Our strategic advisory board is distinct from our board of directors. Individual members of our strategic advisory board regularly provide us with advice on product development and business opportunities. Our advisors meet weekly to discuss business objectives. Our advisors have entered into confidentiality agreements with us and retain no intellectual property rights to our products. They are compensated for their time through awards of stock and annual cash fees. Our current advisors are:
John Carson . Mr. Carson is Chairman of the Board of Intercontinental Beverage Capital Inc. ( IBC ). He is former Chairman, Chief Executive Officer and President of several leading beverage companies including Marbo, Inc. and Triarc Beverages, both private equity backed corporations. As Chairman of Triarc Beverages (RC Cola), he led the acquisition and integration of Snapple Beverages and expanded business internationally by leading negotiations in China, Japan, Mexico, South America, Russia and Poland. Mr. Carson led the sale of the entire beverage portfolio of Triarc to Cadbury Schweppes, generating a significant return for investors. He is former President of Cadbury Schweppes North America where he led the expansion of the Schweppes brand beyond mixers and into adult soft drinks. He also led the expansion of the Tampico brand throughout new markets, including Mexico, Brazil and the emerging U.S. Hispanic and African American markets. Mr. Carson is a Board Member of the National Soft Drink Association and Director of Water Source Inc.
Dan Holland . Mr. Holland is the former Chief Executive Officer of XXIV Karat Wines, which was founded in 2012 and offers the first gold infused sparkling wine. He is the former President and Chief Executive Officer of The Rising Beverage Co (Los Angeles, CA) and prior to that served as an adviser for First Beverage Group. Mr. Holland began his career at Mission Beverage, where he served as president for 15 years. During his tenure as President of Mission Beverage, Mr. Holland served on many distributor and supplier councils, which help companies such as Coors Brewing Co., Heineken, Guinness, Anheuser-Busch InBev and Glaceau, direct their business nationally and internationally.
Bert Moore . Mr. Moore is currently a managing partner at WiderLens, a high-end strategic brand consultancy. Prior to that, he was the CEO of StrawberryFrog NYC, one of the leading independent marketing agency networks in the world. Prior to joining StrawberryFrog, Mr. Moore was a partner and Chief Strategy Officer at Deutsch New York, as well as leading strategy and planning efforts on global businesses and new business efforts emanating out of North America for its parent Deutsch Inc., a multi-disciplinary marketing communications agency headquartered in New York City. Prior to joining Deutsche New York in 2011, Mr. Moore was the Global Chief Strategy Officer for Lowe & Partners, an international integrated marketing
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agency. At Lowe & Partners, he created one of the most effective strategy departments in advertising, winning EFFIES in over 50 markets around the world and enabling the agency to triple in size over seven years. He began his career in 1988 as a consultant for an offshoot of McKinsey. Mr. Moore has earned significant commercial and cultural experience having worked in most business sectors and in over 70 markets around the world. Some longstanding clients include; Aramark, Beam Inc, LG, Mahindra, Nike, Pernod Ricard, Reuters, Singapore Government, Unilever and Virgin. He has served on the boards of three global agencies; Burson Marsteller, Lowe+Partners and WeberShandwick. During his time in the UK, he sat on the commercial advisory boards of both The Princes Trust and NSPCC.
David Bump Williams . Mr. Williams is the President and CEO of The BWC Company, a consulting company that works across the entire 6-tier network of beverages. Mr. Williams began his career at Procter & Gamble where he developed a National Sales Program (Publishers Clearing House) that incorporated all P&G brands being merchandised across the United State with key national retailers. In 1986 he left P&G to head up Analytics and National Accounts at the A.C. Nielsen Company where he developed the industrys first Beverage Vertical servicing a multitude of manufacturers, retailers and distributors. In 1994 he joined Information Resources, Inc. as the President of Global Consulting where he was responsible for the use of store-level data and consumer segmentation analyses that allowed the beverage industry to develop specific advertising, point of sale and new product launches at targeted consumers and specific demographic audiences. In 2008, Mr. Williams resigned his post at IRI and retired but has continued to provide consulting to several retailers to conduct analyses on the health of their beverage business and determine business plans and strategies designed to capitalize on changing consumer purchase behavior. He works on new product launches, pricing and promotion analytics, mergers and acquisitions, market expansion and strategic business planning. Mr. Williams serves on several boards of directors and advisors across the beverage alcohol and non-alcoholic beverage community.
There are no family relationships among any of our directors or executive officers.
Our board of directors is divided into two classes, Class 1 and Class 2. The Class 1 directors will hold office until the 2016 annual meeting of stockholders and the Class 2 directors will hold office until the 2017 annual meeting of stockholders. Thereafter, each director will hold office until the second succeeding annual meeting of stockholders after his or her election, or until his or her death, resignation, removal or the earlier termination of his or her term of office. Edward Hanson, Kerry Kennedy and Richard Y. Roberts are the Class 1 directors and Julian Davidson, Philip Thomas, Paul Vassilakos and Tom Cardella are the Class 2 directors.
In anticipation of our securities being listed on the NASDAQ Capital Market, we have elected to adhere to the rules of Nasdaq in determining whether a director is independent. Our board of directors consults with its counsel to ensure that the boards determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence of directors. Nasdaq requires that a majority of the board must be composed of independent directors, which is defined generally as a person other than an officer of a company, who does not have a relationship with the company that would interfere with the directors exercise of independent judgment in carrying out the responsibilities of a director. Consistent with these considerations, we have determined that each of Messrs. Hanson, Roberts and Cardella and Ms. Kennedy is an independent director.
We have separately standing audit, nomination and compensation committees.
The nominating committee consists of Edward Hanson and Kerry Kennedy, each of whom is an independent director under the Nasdaq listing standards. The nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors. The nominating committee will consider persons identified by its members, management, stockholders and others.
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The guidelines for selecting nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated:
| should have demonstrated notable or significant achievements in business, education or public service; |
| should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and |
| should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests of the stockholders. |
The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a persons candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes, such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee does not distinguish among nominees recommended by stockholders and other persons.
There have been no changes to the procedures by which security holders may recommend nominees to our board of directors since we became a reporting company in connection with the consummation of the Business Combination.
The parties to the Merger Agreement, including us, have agreed to take all necessary action so that Messrs. Thomas, Vassilakos, Hanson and Roberts and Ms. Kennedy are elected as directors for the three years following the consummation of the Business Combination.
The audit committee consists of Tom Cardella, Edward Hanson and Richard Y. Roberts, each of whom is independent as defined in Rule 10A-3 of the Exchange Act and the rules of the Nasdaq. The audit committees duties, which are specified in the audit committee charter, include, but are not limited to:
| reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending to the board whether the audited financial statements should be included in the Form 10-K; |
| discussing with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of our financial statements; |
| discussing with management major risk assessment and risk management policies; |
| monitoring the independence of the independent auditor; |
| verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit partner responsible for reviewing the audit as required by law; |
| inquiring and discussing with management our compliance with applicable laws and regulations; |
| pre-approving all audit services and permitted non-audit services to be performed by the independent auditor, including the fees and terms of the services to be performed; |
| appointing or replacing the independent auditor; |
| determining the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work; |
| establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and |
| reviewing and approving any related party transactions we may enter into. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, |
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including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related partys interest in the transaction. |
The audit committee will at all times be composed exclusively of independent directors who are financially literate as defined under the Nasdaq listing standards. The definition of financially literate generally means being able to read and understand fundamental financial statements, including a companys balance sheet, income statement and cash flow statement. We have determined that Edward Hanson qualifies as an audit committee financial expert, as defined under rules and regulations of the SEC.
The compensation committee consists of Tom Cardella and Richard Y. Roberts, each of whom is an independent director. The principal functions of the compensation committee are:
| evaluate the performance of our officers, |
| review any compensation payable to our directors and officers, |
| prepare compensation committee reports, and |
| administer the issuance of any common stock or other equity awards issued to our officers and directors. |
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The following table sets forth all compensation of our Chief Executive Officer and each of our two most highly compensated executive officers other than our Chief Executive Officer (who are sometimes referred to collectively as the Named Executive Officers) for the fiscal years ended December 31, 2015 and 2014.
Summary Compensation Table for 2015
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Name and principal position | Year |
Salary
($) |
Bonus
($) |
Option Awards
($) (1) |
All Other Compensation
($) |
Total
($) |
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Philip Thomas
(2)
Chief Executive Officer |
2015 | 99,300 | | 147,808 | 13,572 | (3) | 260,680 | |||||||||||||||||
2014 | 19,000 | | | | 19,000 | |||||||||||||||||||
Paul N. Vassilakos
(4)
Former Chief Executive Officer |
2015 | | | | | | ||||||||||||||||||
2014 | | | | | | |||||||||||||||||||
Peter Dydensborg
(5)
Chief Operating Officer |
2015 | 135,808 | | 108,394 | 21,211 | (6) | 265,413 | |||||||||||||||||
2014 | 169,846 | 50,500 | | 23,301 | (7) | 243,647 | ||||||||||||||||||
James Meehan
(8)
Chief Accounting Officer |
2015 | 120,462 | | 29,562 | 4,761 | (3) | 154,785 | |||||||||||||||||
2014 | 65,077 | 3,000 | | | 68,077 |
(1) | Represents the aggregate grant date fair value of awards computed in accordance with the Financial Accounting Standards Boards Accounting Standards Codification Topic 718. Assumptions used in the calculation of these amounts are disclosed in Note 9 to our audited consolidated financial statements for the year ended December 31, 2015 contained herein. |
(2) | The information in the table includes compensation to Mr. Thomas from LIBB prior to the consummation of the Business Combination on May 27, 2015. Mr. Thomas became our Chief Executive Officer on such date. |
(3) | This amount represents health insurance paid by us for the respective officers. |
(4) | The information in the table includes compensation paid to Mr. Vassilakos by Cullen prior to the consummation of the Business Combination on May 27, 2015, but excludes compensation paid to Mr. Vassilakos as a member of our board of directors after such date. Compensation paid to Mr. Vassilakos as a director is set forth under Director Compensation below. Mr. Vassilakos ceased to be our Chief Executive Officer on May 27, 2015. |
(5) | The information in the table includes compensation paid to Mr. Dydensborg by LIBB prior to the consummation of the Business Combination on May 27, 2015. Mr. Dydensborg became our Chief Operating Officer on such date. |
(6) | This amount represents reimbursement of COBRA expenses paid by Mr. Dydensborg, health insurance premiums paid by the Company for Mr. Dydensborg, and Mr. Dydensborgs travel allowance. |
(7) | This amount represents reimbursement of COBRA expenses paid by Mr. Dydensborg and Mr. Dydensborgs travel allowance. |
(8) | The information in the table includes compensation paid to Mr. Meehan by LIBB prior to the consummation of the Business Combination on May 27, 2015. Mr. Meehan became our Chief Accounting Officer on such date. |
Our policies with respect to the compensation of our executive officers are administered by our board in consultation with its compensation committee. Our compensation policies are intended to provide for compensation that is sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of stockholder value. To meet these goals, the compensation committee is charged with recommending executive compensation packages to our board of directors.
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Paul N. Vassilakos served as Cullens sole executive officer during the fiscal year ended December 31, 2014 and during the period from January 1, 2015 to May 27, 2015, the date the Business Combination was consummated. Based on Cullens level of operations, financial condition and results of operations, Cullens board, in consultation with its compensation committee, determined not to pay any compensation to Cullens officers during these periods. Mr. Vassilakos also served as our Chief Executive Officer from our inception through May 27, 2015. We did not pay him any compensation for such services.
Philip Thomas served as LIBBs Chief Executive Officer during the fiscal year ended December 31, 2014 and during the period from January 1, 2015 to May 27, 2015. In April 2014, LIBB began paying him $26,000 per year for such services. LIBB also reimbursed him for all out-of-pocket expenses he incurred on LIBBs behalf.
Peter Dydensborg and James Meehan served as LIBBs Chief Operating Officer and Chief Accounting Officer, respectively, during the fiscal year ended December 31, 2014 and during the period from January 1, 2015 to May 27, 2015, pursuant to written employment agreements. Such agreements provided for Messrs. Dydensborg and Meehan to receive base salaries of $170,000 and $120,000 per year, respectively. Additionally, each was entitled to an incentive bonus of not less than 15% and 5% of such individuals base salary, respectively. Each of the employment agreements with Messrs. Dydensborg and Meehan contained provisions for the protection of LIBBs intellectual property and for non-compete restrictions during employment and in the event of termination of the relevant individual (generally imposing restrictions on (i) employment or consultation with competing companies or customers, (ii) recruiting or hiring employees for a competing company and (iii) soliciting or accepting business from LIBBs customers for a period of one year following termination).
Upon consummation of the Business Combination, Mr. Vassilakos resigned as our Chief Executive Officer. Messrs. Thomas, Dydensborg and Meehan became our Chairman of the Board and Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer, respectively, and also retained their respective positions with LIBB.
In connection with the closing of the Business Combination, each of Messrs. Thomas, Dydensborg and Meehan entered into new employment agreements with us to serve as our Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer, respectively. Each employment agreement has a term of two years from the closing of the Business Combination, except that the agreements with Messrs. Dydensborg and Meehan provide that either we or the executive can terminate the agreement with six months advance notice (or three months advance notice, in the case of Mr. Meehan). The employment agreements provide for Messrs. Thomas, Dydensborg and Meehan to receive base salaries of $150,000, $130,000 and $120,000, respectively. Additionally, each is entitled to an incentive bonus of up to 50%, 40% and 25% of such individuals base salary, respectively.
Unless terminated by us without cause or by the executive with good reason (as such terms are defined in the employment agreements), upon termination the executives will be entitled only to their base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated by us without cause or by the executives with good reason, each executive is entitled to be paid severance (base salary for a period of six months for Messrs. Thomas and Dydensborg and base salary for a period of three months for Mr. Meehan), valid expense reimbursements and accrued but unused vacation pay.
Each of the employment agreements contain provisions for the protection of our intellectual property and confidentiality and non-competition restrictions for the executives (generally imposing restrictions during employment and for a period of two years following the consummation of the Business Combination on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from our customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).
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Pursuant to their employment agreements, Messrs. Thomas, Dydensborg and Meehan also received a five-year option to purchase 80,000 shares of our common stock, 58,667 shares of our common stock and 16,000 shares of our common stock, respectively, at an exercise price of $3.75 per share. The options vest quarterly in equal proportions over the two year employment term. If Mr. Thomas, Dydensborg or Meehans employment is terminated by us without cause or by such executive with good reason, then the option granted to him will become vested in full and will be exercisable for one year from the date of termination. In addition, the options will be accelerated upon the occurrence of certain non-negotiated change of control transactions. In the event of certain negotiated change of control transactions, the compensation committee may, (i) accelerate the vesting of the options, or (ii) require the executive to relinquish the option to us upon the tender by us to the executive of cash in an amount equal to the repurchase value of such award.
In connection with the Business Combination, we adopted the 2015 Plan, which is administered by our compensation committee. The committee may grant stock options, stock appreciation rights, restricted stock or other stock-based awards under the plan to our employees, officers, directors and consultants. Our board has reserved 466,667 shares of our common stock for issuance under the plan. No awards have been granted under the plan as of December 31, 2015.
On June 6, 2016, we entered into an employment agreement Richard Allen to serve as our Chief Financial Officer. The employment agreement has a term of three years, and automatically renews for additional one year periods thereafter unless either party provides notice of its decision not to renew. The employment agreements provides for Mr. Allen to receive a base salary of $170,000. If prior to December 31, 2016, we complete an equity offering with gross proceeds of at least $5,000,000 or we have net sales of at least $1,000,000 during any calendar month, Mr. Allens base salary will become $185,000 commencing on June 6, 2017, and $200,000 commencing on June 6, 2018. Additionally, he is entitled to an incentive bonus of up to 50% of his base salary. Furthermore, we will grant Mr. Allen 8,333 shares of our common stock on May 31, 2017 and a number of shares of the Companys common stock having a fair market value equal to $50,000 on each of May 31, 2018 and 2019.
Unless terminated by us without cause or by Mr. Allen with good reason (as such terms are defined in the employment agreements) or upon death or disability of Mr. Allen, upon termination Mr. Allen will be entitled only to his base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated upon death or disability of Mr. Allen, upon termination Mr. Allen will be entitled to his base salary through the date of termination, valid expense reimbursements and certain unused vacation pay, and all equity awards will vest to the extent they would have been vested at the next scheduled vesting date and will remain exercisable for at a certain period of time. If terminated by us without cause or by Mr. Allen with good reason, Mr. Allen is entitled to be paid severance equal to base salary for nine months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current year, valid expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and will remain exercisable for a certain period of time. If Mr. Allens agreement is not renewed, Mr. Allen is entitled to be paid severance equal to his base salary for five months, any previously granted but unpaid bonus, a pro rata portion of any bonus for the current year, valid expense reimbursements and accrued but unused vacation pay, and all equity awards held by him will vest in full and will remain exercisable for a certain period of time.
The employment agreement contains provisions for confidentiality and non-competition restrictions for Mr. Allen (generally imposing restrictions during employment and for a period of nine months after the term of the employment agreement, on (i) ownership or management of, or employment or consultation with, competing companies, (ii) soliciting employees to terminate their employment (iii) soliciting business from the Companys customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).
On June 6, 2016, we entered into a consulting agreement with Julian Davidson to serve as our Executive Chairman. Either Mr. Davidson or the Company may terminate the consulting agreement with 30 days prior written notice. Pursuant to the consulting agreement, we will (a) pay to Mr. Davidson $10,000 per month, and (b) grant to Mr. Davidson 1,667 shares of our common stock per month. The consulting agreement contains
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provisions for protection of our 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 our customers, and (iv) soliciting prospective acquisition and investment candidates for purposes of acquiring or investing in such entity).
Upon our completing an equity raise with gross proceeds of at least $10,000,000, the monthly cash fee to Mr. Davidson under the consulting agreement will increase to $20,000 per month, the monthly stock grant to Mr. Davidson will be eliminated and Mr. Davidson will receive a one-time cash bonus of $95,000 and a one-time grant of 50,000 shares of our common stock. In addition, upon completion of the aforementioned equity raise and Mr. Davidson obtaining a work visa, Mr. Davidson may enter into an amended consulting agreement or an employment agreement with us, pursuant to which, among other things, (a) Mr. Davidson will continue as Executive Chairman of the Company, (b) Mr. Davidson will receive a base salary or annual consulting fee of $250,000, (c) Mr. Davidson will be entitled to a cash bonus or fee of $75,000 upon entry into such agreement, a cash bonus or fee of $175,000 on the one year anniversary of entering into such agreement and stock bonus or fee of 35,000 shares of our common stock upon entry into such agreement, (d) Mr. Davidson will be eligible to receive a performance bonus or contingent fee of up to 50% of his base salary or annual consulting fee then in effect as determined by our compensation committee, and (e) Mr. Davidson will receive stock options to purchase a number of shares of our common stock equal to 5% of our fully-diluted common stock outstanding immediately after the aforementioned equity raise. Mr. Davidson may also enter into such an amendment to his consulting agreement if more than two months have elapsed since the equity raise and he has not obtained a work visa. The employment agreement or consulting agreement will otherwise have similar terms to Mr. Allens employment agreement.
The following table sets forth unexercised options, unvested stock and equity incentive plan awards outstanding for the Named Executive Officers as of December 31, 2015.
Outstanding Equity Awards at Fiscal Year-End for 2015
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Name |
Number of
securities underlying unexercised options (#) exercisable |
Option awards
Number of securities underlying unexercised options (#) unexercisable |
Option
exercise price ($) |
Option
expiration date |
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Philip Thomas | 20,000 | 60,000 | (1) | 3.75 | 5/27/2020 | |||||||||||
Peter Dydensborg | 14,667 | 44,000 | (1) | 3.75 | 5/27/2020 | |||||||||||
James Meehan | 4,000 | 12,000 | (1) | 3.75 | 5/27/2020 |
(1) | The options vest in six equal quarterly installments on February 27, 2016, May 27, 2016, August 27, 2016, November 27, 2016, February 27, 2017 and May 27, 2017. |
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The following table sets forth all compensation of our directors for the fiscal year ended December 31, 2015. The compensation for Mr. Thomas, who is our Chief Executive Officer, is fully reflected in the Summary Compensation Table above.
Director Compensation for 2015
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Name |
Fees earned
or paid in cash ($) |
Stock
awards ($) (1) |
Total
($) |
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Non-Employee Directors (2) | | $ | 30,000 | $ | 30,000 |
(1) | On January 26, 2016, each of Messrs. Vassilakos, Hanson and Roberts and Ms. Kennedy were granted 8,956 shares of our common stock for their service as directors in 2015. The stock awards are not subject to vesting or other contractual restrictions. The amounts reported in the stock awards column represent the aggregate grant date fair value of awards computed in accordance with the Financial Accounting Standards Boards Accounting Standards Codification Topic 718. Assumptions used in the calculation of these amounts are disclosed in Note 14 to our audited consolidated financial statements for the year ended December 31, 2015 contained herein. |
(2) | Each of our nonemployee directors, Paul Vassilakos, Edward Hanson, Kerry Kennedy and Richard Y. Roberts, received the compensation set forth in the table above. Messrs. Hanson and Roberts and Ms. Kennedy were appointed as directors on May 27, 2015. |
Each of Messrs. Vassilakos, Hanson and Roberts and Ms. Kennedy served as a director of Cullen prior to the consummation of the Business Combination. Cullens directors received no compensation for their services as such for the period from January 1, 2015 to May 27, 2015, the date the Business Combination was consummated. Mr. Vassilakos also served as our sole director prior to the Business Combination. We did not pay him any compensation for such services.
Mr. Thomas served as managing member of LIBB and Mr. Thomas and Thomas Panza served on the board of managers of LIBB prior to the consummation of the Business Combination. Neither the managing member nor any of the managers received any compensation for their services as such for the period from January 1, 2015 to May 27, 2015.
In connection with the consummation of the Business Combination on May 27, 2015, we adopted compensation arrangements for our nonemployee directors. For the period from July 1, 2015 to December 31, 2015, each non-employee director received an annual award of $30,000 in shares of our common stock, valued as of December 31, 2015, which was issued in January 2016. Thereafter, each non-employee director receives an annual cash fee of $30,000. In addition, each non-employee director receives an annual award of $35,000 in shares of our common stock, valued as of December 31 st of such year. The stock awards are not subject to vesting or other contractual restrictions.
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The following table sets forth information regarding the beneficial ownership of our shares of common stock as of June 7, 2016, by:
| each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock; |
| each of our officers and directors; and |
| all our officers and directors as a group. |
Shares of common stock that a person has the right to acquire or will have the right to acquire within 60 days of June 7, 2016 are considered beneficially owned by such person. Such shares are deemed outstanding for calculating the percentage of outstanding shares of the person holding such right, but are not deemed outstanding for calculating the percentage of any other person. To our knowledge, except as indicated in the footnotes to this table or as provided by applicable community property laws, the persons named in the table have sole investment and voting power with respect to the shares of common stock indicated.
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Pre-Offering | Post-Offering | |||||||||||||||||||
Name and Address of Beneficial Owner (1) | Amount and Nature of Beneficial Ownership | Percentage of Beneficial Ownership (2) | Amount and Nature of Beneficial Ownership | Percentage of Beneficial Ownership (3) | ||||||||||||||||
Current Directors and Officers:
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Paul N. Vassilakos (4) | 78,123 | 1.6 | % | 78,123 | 1.0 | % | ||||||||||||||
Kerry Kennedy (5) | 29,623 | * | 29,623 | * | ||||||||||||||||
Richard Y. Roberts (6) | 29,623 | * | 29,623 | * | ||||||||||||||||
Edward Hanson (7) | 29,623 | * | 29,623 | * | ||||||||||||||||
Tom Cardella | 57,500 | 1.2 | % | 57,500 | * | |||||||||||||||
Julian Davidson | | 0 | % | 50,000 | * | |||||||||||||||
Phil Thomas (8) | 774,141 | 15.4 | % | 774,141 | 10.3 | % | ||||||||||||||
Richard Allen | | 0 | % | 10,000 | * | |||||||||||||||
Peter Dydensborg (9) | 45,026 | * | 45,026 | * | ||||||||||||||||
James Meehan (10) | 8,000 | * | 8,000 | * | ||||||||||||||||
All directors and executive officers (8 persons) | 1,051,659 | 20.6 | % | 1,111,659 | 14.6 | % | ||||||||||||||
Five Percent Holders:
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Eric J. Watson (11) | 1,696,332 | 28.7 | % | 1,317,821 | 17.6 | % | ||||||||||||||
Thomas Panza (12) | 741,641 | 14.9 | % | 741,641 | 9.9 | % | ||||||||||||||
Ivory Castle Limited (13) | 875,243 | 17.5 | % | 875,243 | 11.7 | % | ||||||||||||||
KA#2 Ltd. (14) | 576,118 | 10.4 | % | 344,618 | 4.6 | % |
* | Less than one percent. |
(1) | Unless otherwise indicated, the business address of each of the individuals is 116 Charlotte Avenue, Hicksville, NY 11801. |
(2) | The percentage of beneficial ownership prior to completion of the offering is calculated based on 4,973,715 outstanding shares of common stock as of March 31, 2016. |
(3) | The percentage of beneficial ownership after completion of the offering is calculated based on 7,485,260 outstanding shares of common stock, assuming no exercise of the over-allotment option and the issuance of 908,083 shares of common stock in connection with the Recapitalization and 10,000 shares of common stock we intend to issue to Rich Allen, 5,000 shares of common stock we intend to issue to John Carson, and 50,000 shares of common stock to be issued to Julian Davidson in the event gross proceeds from the offering are at least $10,000,000. |
(4) | Includes 23,750 shares subject to warrants that are currently exercisable. |
(5) | Ms. Kennedys business address is c/o Robert F. Kennedy Center, Human Rights, 515 Madison Ave, Suite 718, New York, NY, 10022. |
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(6) | Mr. Roberts business address is Roberts, Raheb & Gradler, LLC, 1200 New Hampshire Avenue N.W., Suite 300, Washington, D.C. 20036. |
(7) | Mr. Hansons business address is 94 Draycott Ave, London SW3 3AD, United Kingdom. |
(8) | Includes (i) 6,250 shares subject to warrants that are currently exercisable, and (ii) 40,000 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 40,000 shares subject to stock options that will not become exercisable within 60 days. |
(9) | Includes 29,334 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 29,333 shares subject to stock options that will not become exercisable within 60 days. |
(10) | Includes 8,000 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 8,000 shares subject to stock option that will not become exercisable within 60 days. |
(11) | Mr. Watsons business address is Level 9, 68 Shortland Street, P.O. Box 91269, Auckland, New Zealand. Mr. Watson resigned from his positions as an officer and director of the Company in November 2013. Represents shares of common stock held by Cullen Holdings, an entity controlled by Mr. Watson, and Brentwood, an entity owned by Mr. Watson and KA#2 Ltd. The pre-offering amount does not give effect to the Recapitalization. This amount includes 689,444 shares subject to the Brentwood Warrant and 252,533 shares issuable upon the conversion of the Brentwood Note, as to which Brentwood has divested voting and dispositive control in favor of Mr. Watson. The post-offering amount gives effect to the Recapitalization. |
(12) | Includes 20,000 shares subject to stock options that are currently exercisable or will become exercisable within 60 days. Does not include 20,000 shares subject to stock options that will not become exercisable within 60 days. |
(13) | John Matthew Ashwood and Michael Raymond Shue have voting and dispositive control over the shares of common stock held by Ivory Castle Limited. The business address of Ivory Castle Limited and of Messrs. Ashwood and Shue is c/o Suite 5501, 55 th Floor, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong. Includes 22,500 shares subject to warrants that are currently exercisable. |
(14) | Tony Thomas has voting and dispositive control over the shares of common stock held by KA#2 Ltd. The business address of Mr. Thomas and of KA#2 Ltd. is 2 Pompallier Terrace, Ponsnoby, Auckland, New Zealand. Represents shares of common stock held by Brentwood, an entity owned by Mr. Watson and KA#2 Ltd. The pre-offering amount does not give effect to the Recapitalization. This amount includes 421,667 shares subject to the Brentwood Warrant and 154,451 shares issuable upon the conversion of the Brentwood Note, as to which Brentwood has divested voting and dispositive control in favor of KA#2 Ltd. The post-offering amount gives effect to the Recapitalization. |
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Other than compensation arrangements with our current executive officers (which we describe elsewhere in this prospectus), we describe below transactions and series of similar transactions, since our inception, to which we were a party or will be a party, in which:
| the amounts involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years; and |
| any of our directors, executive officers, or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
On November 23, 2015, we entered into a reimbursement agreement with Magnum, an entity managed by Philip Thomas, our Chief Executive Officer and a director of ours, and certain of his family members, and owned by Mr. Thomas father. In exchange for the exclusive right to stock vending machines owned by Magnum, we agreed to reimburse Magnum for certain costs that Magnum incurred to acquire the machines. The reimbursements will be made in 35 monthly payments, the first three in the amount of $14,544 and the remaining payments in the amount of $3,819. Upon completion of these payments, Magnum will transfer the vending machines to us. In addition, in exchange for the right to stock certain other vending machines that Magnum has the right to use, we agreed to purchase the products required to be displayed in those vending machines from Magnum, at a price equal to Magnums cost for such products. We may terminate the agreement and all obligations to make future payments on ten days written notice to Magnum.
We record revenue related to sales to Magnum. For the three months ended March 31, 2016 and 2015, sales to Magnum were $1,158 and $1,498, respectively. As of March 31, 2016, there was $1,610 due from Magnum. For the three months ended March 31, 2016, we purchased $8,258 of product from Magnum. As of March 31, 2016, the outstanding balance due to Magnum included in accounts payable was $2,724. For years ended December 31, 2015 and 2014, sales to Magnum were $4,800 and $6,430, respectively. As of December 31, 2015 and December 31, 2014, there was $518 and $1,326, respectively, due from Magnum which was included in accounts receivable in the consolidated balance sheets. We also purchase product to supplement certain vending sales from this entity. For the year ended December 31, 2015, we purchased $9,356 of product from Magnum. As of December 31, 2015, the outstanding balance due to Magnum included in accounts payable was $3,242.
Also on November 23, 2015, we entered into the Credit Agreement by and among LIBB, us and Brentwood. Brentwood is owned by Eric Watson, who currently beneficially owns approximately 28.7% of our outstanding common stock, and KA#2 Ltd., which currently beneficially owns approximately 10.4% of our outstanding common stock. The Available Amount under the Credit Facility may be increased from time to time, in increments of $500,000, up to the Facility Amount, and we may obtain further advances, subject to the approval of Brentwood. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. Brentwood has approved an Available Amount of $1,500,000 and has made to us in the same amount.
At the initial closing of the Credit Facility, we 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 bears interest at rate equal to the prime rate plus 7.5%, compounded quarterly, and matures on November 23, 2018. No principal or interest has been paid since the inception of the loans, except that $40,430 of interest was compounded by adding to the outstanding balance of the loans. The outstanding balance of the loans under the Credit Facility (including capitalized interest and fees) was approximately $1,091,571 as of December 31, 2015, was approximately $1,377,930 as of March 31, 2016 and is currently $1,627,930, which also is the largest amount outstanding since the inception of the loans.
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The loans under the Credit Agreement are evidenced by the Brentwood Note. Brentwood may elect to convert the outstanding principal and interest under the Brentwood Note into shares of our common stock at a conversion price of $4.00 per share. In addition, in connection with the establishment of the Credit Facility, we issued the Brentwood Warrant. The Brentwood Warrant entitles the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision.
In connection with the Recapitalization, Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock (assuming there are no further advances by Brentwood) at the closing of the offering. In addition, Brentwood will exchange the Brentwood Warrant for 486,111 shares of our common stock at such time. The Credit Facility will remain outstanding, except that the Facility Amount will be reduced to $3,500,000. The Recapitalization will occur only if the gross proceeds from this offering are at least $5 million.
On April 28, 2015, we received $150,000 as proceeds from a loan from Bass Properties, LLC, one of our stockholders. This note had an interest rate of 10% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued interest of $152,425 were converted into 38,107 shares of common stock.
On May 4, 2015, we received $400,000 as proceeds from a loan with Ivory Castle Limited, a stockholder of ours. This note has an interest rate of 6% per annum and was scheduled to mature on July 31, 2016. On June 30, 2015 the note and accrued interest of $403,485 were converted into 100,872 shares of common stock.
On June 30, 2015, a family member of Paul Vassilakos, a member of our board of directors, purchased 12,500 shares of common stock for $4.00 per share for an aggregate of $50,000. In addition, on June 30, 2015, family members of Philip Thomas, Chief Executive Officer and a member of our board of directors purchased 12,500 shares of common stock for $4.00 per share for an aggregate of $50,000.
On September 17, 2015, as part of our private placement that commenced on August 10, 2015, Paul Vassilakos, a member of our board of directors, purchased 6,250 units from us at a purchase price of $4.00 per unit, for an aggregate of $25,000. On September 30, 2015, as part of the same private placement, Philip Thomas, Chief Executive Officer and a member of our board of directors, purchased 6,250 units from us for a purchase price of $4.00 per unit, for an aggregate of $25,000; Ivory Castle Limited, a shareholder of ours, purchased 22,500 units from us for a purchase price of $4.00 per unit, for an aggregate of $90,000; and Bass Properties LLC, a shareholder of ours, purchased 15,000 units from us for a purchase price of $4.00 per unit, for an aggregate of $60,000. On November 30, 2015 and March 14, 2016, as part of our private placement that commenced on November 24, 2015, Mr. Vassilakos purchased 10,000 units and 7,500 units, respectively, in each case at a purchase price of $4.00 per unit, for an aggregate of $70,000. On March 14, 2016, as part of the same private placement, Tom Cardella, a member of our board of directors, purchased 25,000 units, at a purchase price of $4.00 per unit, for an aggregate of $100,000.
On March 31, 2016, a family member of Philip Thomas, Chief Executive Officer and a member of our board of directors, purchased 2,500 units, for a purchase price of $4.00 per unit, for an aggregate of $10,000. In addition, a family member of Thomas Panza, a greater than 10% owner of our stock, purchased 2,500 units, for a purchase price of $4.00 per unit, for an aggregate of $10,000.
In connection with the closing of the Business Combination, on May 27, 2015, Thomas Panza, who beneficially owns 14.9% of our outstanding common stock, entered into a new employment agreement with LIBB to serve as LIBBs Purchasing Manager. The agreement has a term of two years except that either LIBB or Mr. Panza can terminate the agreement with six months advance notice. Mr. Panza receives a base salary of $80,000 under the agreement. Additionally, Mr. Panza is entitled to an incentive bonus of up to 50% of his base salary. In addition, at the closing of the Business Combination, he received a five-year option to purchase 40,000 shares of our common stock at an exercise price of $3.75 per share, vesting quarterly in equal proportions over the two year employment term. Unless terminated by LIBB without cause or by Mr. Panza with good reason (as such terms are defined in the employment agreement), upon termination Mr. Panza will be entitled only to his base salary through the date of termination, valid expense reimbursements and certain unused vacation pay. If terminated by LIBB without cause or by Mr. Panza with good reason,
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Mr. Panza is entitled to be paid severance (base salary for a period of six months), valid expense reimbursements and accrued but unused vacation pay.
Philip Thomas, our Chief Executive Officer and a director of ours and the beneficial owner of 15.4% of our outstanding common stock, and Thomas Panza, the beneficial owner of 14.9% of our outstanding common stock, are parties to the Merger Agreement and certain related agreements, including a registration rights agreement. Pursuant to the Merger Agreement, upon consummation of the Business Combination on May 27, 2015, each of Messrs. Thomas and Panza was issued 721,641 shares of our common stock.
Pursuant to the registration rights agreement, the former LIBB members, including Messrs. Thomas and Panza, are entitled to demand that we register the shares issued to them pursuant to the Merger Agreement under the Securities Act of 1933, as amended. The former LIBB members can elect to exercise these registration rights at any time after the closing of the Business Combination. In addition, the former LIBB members have certain piggy-back registration rights with respect to registration statements filed subsequent to consummation of the Business Combination.
Cullen Investments Ltd., a company controlled by Eric Watson, who beneficially owns approximately 28.7% of our common stock, and Petrina Advisors, Inc., a company owned by Paul Vassilakos, a member of our board of directors, have paid certain expenses on our behalf. As of December 31, 2015, we owed Cullen Investments Ltd. and Petrina Advisors, Inc. $53,703 and $33,555, respectively, for such expenses. As of March 31, 2016, we owed Cullen Investments Ltd. and Petrina Advisors, Inc. $46,680 and $13,187, respectively, for such expenses.
On August 21, 2014, LIBB entered into a loan agreement with Philip Thomas, the Chief Executive Officer and managing member, for LIBB to borrow $30,000. The loan bore interest at 6% and had an original maturity date of August 31, 2014. On August 30, 2014, the loan was extended to October 15, 2014. On October 15, 2014, LIBB repaid the full amount of the loan together with accrued interest for a total amount of $30,266.
The holders of the majority of the Founders Shares (as defined below) are entitled to make up to two demands that we register such shares pursuant to a registration rights agreement entered into with Cullens predecessor in connection with the predecessors initial public offering. The Founders Shares are shares that were acquired from Cullens predecessor prior to such predecessors initial public offering. The holders of such Founders Shares became stockholders of Cullen upon consummation of Cullens business combination with the predecessor and became stockholders of ours upon consummation of the Business Combination between us, Cullen and LIBB. The holders of the majority of the Founders Shares can elect to exercise these registration rights at any time. In addition, these holders have certain piggy-back registration rights on registration statements filed by us. We will bear the expenses incurred in connection with the filing of any such registration statements.
On December 31, 2014, Cullen entered into a Sale and Purchase Agreement with Hart Acquisitions LLC, or Hart, an affiliate of Richard Watson, a former director of Cullen and the brother of Eric Watson, Cullens former Chief Executive Officer and current principal stockholder, pursuant to which, on January 31, 2015, Cullen sold to Hart certain assets and intellectual property related to Cullens former agricultural business for an aggregate of $125,000. The assets consisted of all of Cullens remaining equipment, including computer equipment, agricultural equipment, vehicles, a mower, and a tractor. The intellectual property consisted of Cullens proprietary farming system (including forage growth and yields, animal genetics and milking systems) that was developed by adapting established grazing science, processes, technology, and genetics to liquid milk production in the Southeastern United States. Additionally, in the event that Hart sells the intellectual property subject to the agreement or licenses the intellectual property to a third party at any time prior to January 31, 2020, Cullen will be entitled to 20% of the amount received from such sale or license.
Upon consummation of the Business Combination, we adopted a Related Person Policy that requires us (and our subsidiaries, including LIBB) to avoid, wherever possible, all related party transactions that could result in actual or potential conflicts of interests, except as approved by unconflicted executives, the board of directors,
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or audit committee in accordance with guidelines approved by the board of directors (or the audit committee). Related-party transactions are defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, (2) the Company or any of its subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director, (b) greater than 5% beneficial owner of our shares of common stock, or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director or a less than 10% beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position.
Our audit committee, pursuant to its written charter, will be responsible for reviewing and approving related-party transactions to the extent we enter into such transactions. The audit committee will consider all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related partys interest in the transaction. No director may participate in the approval of any transaction in which he is a related party, but that director is required to provide the audit committee with all material information concerning the transaction. Additionally, we will require each of its directors and executive officers to complete an annual directors and officers questionnaire that elicits information about related party transactions.
These procedures are intended to determine whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part of a director, employee or officer.
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In the discussion that follows, we have summarized selected provisions of our amended and restated certificate of incorporation, bylaws and the Delaware General Corporation Law relating to our capital stock. This summary is not complete. This discussion is subject to the relevant provisions of Delaware law and is qualified in its entirety by reference to our certificate of incorporation and our bylaws. You should read the provisions of our certificate of incorporation and our bylaws as currently in effect for provisions that may be important to you.
We are authorized to issue up to 36,000,000 shares of capital stock consisting of: 35,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000 shares of preferred stock, par value of $0.0001 per share. As of March 31, 2016, there were 4,973,715 shares of common stock were issued and outstanding and no shares of preferred stock were issued and outstanding. In addition, we intend to issue 10,000 shares of common stock to Richard Allen and 5,000 shares of common stock to John Carson. If the gross proceeds from the offering are at least $10,000,000, we also will issue 50,000 shares of common stock to Julian Davidson upon the closing of the offering and 35,000 shares subsequent to the closing.
The holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. Holders of our common stock do not have any conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable to the common stock.
Our amended and restated certificate of incorporation authorizes the issuance of 1,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board of directors will be empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock. In addition, the preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of our company.
We do not intend to pay cash dividends in the future. The payment of dividends will be entirely within the discretion of our then board of directors and will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of the mergers.
We presently have outstanding (i) warrants to purchase up to 404,475 shares of common stock at an exercise price of $6.00 per share that were issued in private placement offerings conducted by us and (ii) employee stock options to purchase 194,667 shares of common stock at an exercise price of $3.75 per share held by certain of our executive officers. In addition, warrants to purchase common stock totaling 34,573 were issued to the placement agent at an exercise price of $4.50 per share. If the gross proceeds from the offering are at least $10,000,000, we also will issue to Julian Davidson, subsequent to the closing of the offering, an option to purchase 5% of our fully-diluted common stock outstanding immediately after the offering.
We also have outstanding the Brentwood Note, which is convertible into shares of our common stock at $4.00 per share (344,483 shares based on the current outstanding amount of principal and interest of $1,377,930) and the Brentwood Warrant to purchase 1,111,111 shares of our common stock at $4.50 per share. In connection with the Recapitalization, Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock (assuming there are no further advances by Brentwood) at the closing of the offering. In addition, Brentwood will exchange the Brentwood
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Warrant for 486,111 shares of our common stock at such time. The Credit Facility will remain outstanding, except that the Facility Amount will be reduced to $3,500,000. The Recapitalization will occur only if the gross proceeds from this offering are at least $5 million.
Furthermore, we may issue additional equity awards covering up to 466,667 shares of common stock under our 2015 Plan. The 2015 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.
Our amended and restated certificate of incorporation provides that no director of ours will be personally liable to us or any of our stockholders for monetary damages arising from the directors breach of fiduciary duty as a director. However, this does not apply with respect to any action in which the director would be liable under Section 174 of the DGCL nor does it apply with respect to any liability in which the director (i) breached his duty of loyalty to Holdco or its stockholders; (ii) did not act in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) derived an improper personal benefit. This provision could have the effect of reducing the likelihood of derivative litigation against our directors and may discourage or deter our stockholders or management from bringing a lawsuit against our directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders.
Our amended and restated certificate of incorporation also provides that we will indemnify any director or officer of ours to the fullest extent permitted by law. Our bylaws further provide that we will indemnify to the fullest extent permitted by law any person who becomes party to a proceeding by reason of the fact that he is or was an director, officer, employee or agent of ours, or by reason of the fact that he is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, executive officers and other key employees, in addition to the indemnification provided for in our amended and restated certificate of incorporation and bylaws. We also maintain directors and officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or person controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Provisions of the DGCL and our amended and restated certificate of incorporation and bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and takeover bids that our board of directors may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in improved terms for our stockholders.
Delaware Anti-Takeover Statute. We were subject to Section 203 of the DGCL, an anti-takeover statute. In general, Section 203 of the DGCL prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years following the time the person became an interested stockholder, unless the business combination or the acquisition of shares that resulted in a stockholder becoming an interested stockholder is approved in a prescribed manner. Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. Generally, an interested stockholder is a person who, together with affiliates and associates, owns (or within three years prior to the determination of interested stockholder status did own) 15% or more of a corporations voting stock. The existence of this provision would be expected to
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have an anti-takeover effect with respect to transactions not approved in advance by the board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders.
We are not currently subject to Section 203 of the DGCL because we do not have a class of voting stock that is listed on a national securities exchange or held of record by more than 2,000 stockholders and we have not elected by a provision in our original certificate of incorporation to be governed by Section 203. Unless we adopt an amendment of our certificate of incorporation by action of our stockholders expressly electing not to be governed by Section 203, we would generally become subject to Section 203 of the DGCL at such time that we have a class of voting stock that is either listed on Nasdaq or another national securities exchange or held of record by more than 2,000 stockholders, except that the restrictions contained in Section 203 would not apply if the business combination is with an interested stockholder who became an interested stockholder before the time that we have a class of voting stock that is either listed on a national securities exchange or held of record by more than 2,000 stockholders. Accordingly, we expect to become subject to Section 203 of the DGCL upon consummation of this offering as we anticipate our common stock will be listed on NASDAQ at that time.
Amendments to Our Certificate of Incorporation. Under the DGCL, the affirmative vote of a majority of the outstanding shares entitled to vote thereon and a majority of the outstanding stock of each class entitled to vote thereon is required to amend a corporations certificate of incorporation. Under the DGCL, the holders of the outstanding shares of a class of our capital stock shall be entitled to vote as a class upon a proposed amendment, whether or not entitled to vote thereon by the certificate of incorporation, if the amendment would:
| increase or decrease the aggregate number of authorized shares of such class; |
| increase or decrease the par value of the shares of such class; or |
| alter or change the powers, preferences or special rights of the shares of such class so as to affect them adversely. |
If any proposed amendment would alter or change the powers, preferences or special rights of one or more series of any class of our capital stock so as to affect them adversely, but shall not so affect the entire class, then only the shares of the series so affected by the amendment shall be considered a separate class for the purposes of this provision.
Classified Board . Our board of directors is divided into two classes. The number of directors in each class is as nearly equal as possible. Commencing at the first annual meeting of stockholders, and at each annual meeting thereafter, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the second succeeding annual meeting of stockholders after their election. The classified board may extend the time required to make any change in control of the board when compared to a corporation with an unclassified board. It may take two annual meetings for Holdco stockholders to effect a change in control of the board, because in certain circumstances less than a majority of the members of the board will be elected at a given annual meeting. Because our board is classified and our amended and restated certificate of incorporation does not otherwise provide, under Delaware law, our directors may only be removed for cause.
Vacancies in the Board of Directors. Our amended and restated certificate of incorporation and bylaws provide that, subject to limitations, any vacancy occurring in our board of directors for any reason may be filled by a majority of the remaining members of our board of directors then in office, even if such majority is less than a quorum. Each director so elected shall hold office until the expiration of the term for the class for which such director is chosen. Each such directors shall hold office until his or her successor is elected and qualified, or until the earlier of his or her death, resignation or removal.
Special Meetings of Stockholders. Under our bylaws, special meetings of stockholders may be called by the directors, or the president or the chairman, and shall be called by the secretary at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote.
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No Cumulative Voting. The DGCL provides that stockholders are denied the right to cumulate votes in the election of directors unless our certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for cumulative voting.
Our common stock is currently quoted on the OTCQB, under the symbol LTEA. In conjunction with this offering, we have applied for listing on the NASDAQ but no assurances can be made that our application will be accepted or that we will ever list our securities on a national securities exchange.
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
The transfer agent and registrar for our common stock is Continental Stock Transfer & Trust Company, 17 Battery Place, New York, New York 10004.
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Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.
Upon the closing of this offering, 7,485,260 shares of common stock will be issued and outstanding, after giving effect to the Recapitalization and the issuance of 65,000 shares of our common stock to Julian Davidson (whose shares will be issued only if the gross proceeds from the offering are at least $10,000,000), Richard Allen and John Carson, and assuming no exercise of the underwriters over-allotment option. In addition, 633,715 shares of common stock will be issuable upon the exercise of our currently outstanding options and warrants (other than the Brentwood Warrant) and 466,667 shares of common stock will be reserved for issuance pursuant to our 2015 Plan. Furthermore, 35,000 shares of common stock and an option to purchase 5% of our fully-diluted common stock outstanding as of immediately after the offering will be issuable to Mr. Davidson subsequent to the offering, if the gross proceeds from the offering are at least $10,000,000. The Brentwood Warrant will be canceled and the principal and interest due under the Brentwood Note will be reduced to zero upon the closing of the offering in connection with the Recapitalization. However, the Brentwood Note will remain outstanding and, if we receive advances from Brentwood in the future, any amounts of principal and interest due under such note will be convertible into shares of our common stock. The Recapitalization will occur only if the gross proceeds from this offering are at least $5 million.
Of the outstanding shares upon the closing of the offering, 1,518,749 of our existing shares and all of the shares sold in this offering will be freely tradable, except that any such shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below. The remaining 3,454,966 of our existing shares are, and all 633,715 of the shares issuable upon exercise of our outstanding options and warrants (excluding the Brentwood Warrant) will be, restricted securities as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. In addition, certain of our shares are subject to lock-up restrictions as further described below.
In general, under Rule 144 as currently in effect, a person who has beneficially owned shares that are restricted securities for at least six months would be entitled to sell their shares provided that such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale. Persons who have beneficially owned shares that are restricted securities for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to volume restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:
| 1% of the number of shares of our common stock then outstanding, which will equal approximately 74,853 shares immediately after this offering assuming no exercise of the underwriters over-allotment option, based on the number of shares of common stock outstanding as of the date of this prospectus; or |
| the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; |
provided, in each case, that we have been subject to and are current with the Exchange Act periodic reporting requirements for at least 90 days before the sale. Sales by affiliates also must comply with the manner of sale and notice provisions of Rule 144. In addition, because our company was previously a shell company, holders
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of our restricted securities may not rely on Rule 144 to sell their securities until June 2, 2016, which is one year after we filed with the SEC a Current Report on Form 8-K containing Form 10 type information reflecting the business of LIBB.
We have granted registration rights to certain of the holders of our restricted securities.
| Pursuant to the subscription agreements with each of the investors in our August Private Placement, November Private Placement and March Private Placement, the investors in the offerings have certain piggyback registration rights covering the resale of the 404,475 shares of common stock and the 404,475 shares of common stock underlying the warrants sold to them in the offerings. |
| Pursuant to the registration rights agreement executed in connection with the Business Combination, the former LIBB members are entitled to demand that we register the 2,633,334 shares issued to them pursuant to the Merger Agreement, and the members also have certain piggy-back registration rights with respect to such shares. Notwithstanding such registration rights, the lock-up restrictions described below shall remain in effect until May 27, 2016. |
| Pursuant to the registration rights agreement executed in connection with the Credit Facility, Brentwood has certain piggyback registration rights, on customary terms, with respect to the 908,083 shares of common stock issuable in the Recapitalization and with respect to any shares of common stock in the future issuable upon conversion of the Brentwood Note. |
| Pursuant to the registration rights agreement entered into with a predecessor of ours in connection with the predecessors initial public offering, the holders of a majority of the Founders Shares can make up to two demands that we register such shares. In addition, these holders have certain piggy-back registration rights on registration statements filed by us. The Founders Shares are not restricted securities, and may be sold without restriction under Rule 144, except as to 12,000 of the shares that would be subject to the volume and other restrictions described above because they are held by affiliates of ours. |
If these registration rights are exercised, and a registration statement covering the sale of these restricted securities becomes effective, these securities will be eligible for public sale by their holders in accordance with the plan of distribution set forth in such registration statement without regard to the limitations in Rule 144.
Furthermore, we intend to file a registration statement on Form S-8 under the Securities Act covering all of the shares of common stock reserved for future issuance under the 2015 Plan. Once registered, all of the shares of our common stock issued in the future under the plan will be freely tradable, unless the recipients of the shares are affiliates as discussed above.
In connection with the offering, our directors and executive officers and certain of our shareholders have agreed not to sell or otherwise transfer any shares of our common stock for 180 days from the date of this prospectus.
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The following is a summary of material U.S. federal income tax consequences of the purchase, ownership and disposition of our common stock to a non-U.S. holder that purchases shares of our common stock in this offering. For purposes of this summary, a non-U.S. holder means a beneficial owner of our common stock that is, for U.S. federal income tax purposes:
| a nonresident alien individual; |
| a foreign corporation (or entity treated as a foreign corporation for U.S. federal income tax purposes); or |
| a foreign estate or foreign trust. |
In the case of a holder that is classified as a partnership for U.S. federal income tax purposes, the tax treatment of a partner in such partnership generally will depend upon the status of the partner and the activities of the partner and the partnership. If you are a partner in a partnership holding our common stock, then you should consult your own tax advisor.
This summary is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended, or the Code, the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those summarized below. We cannot assure you that a change in law, possibly with retroactive application, will not alter significantly the tax considerations that we describe in this summary. We have not sought and do not plan to seek any ruling from the U.S. Internal Revenue Service, which we refer to as the IRS, with respect to statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with our statements and conclusions.
This summary does not address all aspects of U.S. federal income taxes that may be relevant to non-U.S. holders in light of their personal circumstances, and does not deal with federal taxes other than the U.S. federal income tax including U.S. federal gift and estate taxes, except as to the limited extent set forth below, or with non-U.S., state or local tax considerations. Special rules, not discussed here, may apply to certain non-U.S. holders, including:
| U.S. expatriates; |
| former citizens or long-term residents of the United States; |
| controlled foreign corporations; |
| passive foreign investment companies; and |
| investors in pass-through entities that are subject to special treatment under the Code. |
Such non-U.S. holders should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.
This summary applies only to a non-U.S. holder that holds our common stock as a capital asset (within the meaning of Section 1221 of the Code).
If you are considering the purchase of our common stock, you should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of our common stock, as well as the consequences to you arising under U.S. tax laws other than the federal income tax law or under the laws of any other taxing jurisdiction.
As described in Dividends and Dividend Policy above, we do not currently anticipate paying dividends. If we do make a distribution of cash or property (other than certain stock distributions) with respect to our common stock (or certain redemptions that are treated as distributions with respect to common stock), any such distributions will be treated as a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles).
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Dividends paid to you generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade or business by you within the United States and, where a tax treaty applies, are generally attributable to a United States permanent establishment, are not subject to the withholding tax, but instead are subject to United States federal income tax on a net income basis at applicable graduated individual or corporate ordinary income tax rates. Certain certification and disclosure requirements, including delivery to the withholding agent of a properly executed IRS Form W-8ECI (or other applicable form), must be satisfied for effectively connected income to be exempt from withholding. Any such dividends received by a foreign corporation that are effectively connected with its conduct of a trade or business within the United States may be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.
If the amount of a distribution paid on our common stock exceeds our current and accumulated earnings and profits, such excess will be allocated ratably among each share of common stock with respect to which the distribution is paid and treated first as a tax-free return of capital to the extent of your adjusted tax basis in each such share, and thereafter as capital gain from a sale or other disposition of such share of common stock that is taxed to you as described below in Gain on Disposition of Common Stock. Your adjusted tax basis is generally the purchase price of such shares, reduced by the amount of any such tax-free returns of capital.
If you wish to claim the benefit of an applicable treaty rate to avoid or reduce withholding of U.S. federal income tax for dividends, then you must (a) provide the withholding agent with a properly completed IRS Form W-8BEN (or other applicable form) and certify under penalties of perjury that you are not a U.S. person and are eligible for treaty benefits, or (b) if our common stock is held through certain foreign intermediaries, satisfy the relevant certification requirements of applicable U.S. Treasury regulations. Special certification and other requirements apply to certain non-U.S. holders that act as intermediaries (including partnerships).
If you are eligible for a reduced rate of U.S. federal income tax pursuant to an income tax treaty, then you may obtain a refund or credit of any excess amounts withheld by filing timely an appropriate claim with the IRS.
You generally will not be subject to U.S. federal income tax with respect to gain realized on the sale or other taxable disposition of our common stock, unless:
| the gain is effectively connected with a trade or business you conduct in the United States, and, in cases in which certain tax treaties apply, is attributable to a United States permanent establishment; |
| you are an individual and you are present in the United States for 183 days or more in the taxable year of the sale or other taxable disposition, and certain other conditions are met; or |
| we are or have been during a specified testing period a U.S. real property holding corporation for U.S. federal income tax purposes, and certain other conditions are met. |
If you are an individual described in the first bullet point above, you will be subject to tax on the net gain derived from the sale under regular graduated United States federal income tax rates or such lower rate as specified by an applicable income tax treaty. If you are an individual described in the second bullet point above, you will be subject to a flat 30% tax on the gain derived from the sale, which may be offset by United States source capital losses (even though the individual is not considered a resident of the United States). If you are a foreign corporation described in the first bullet point above, you will be subject to tax on your gain under regular graduated United States federal income tax rates and, in addition, may be subject to the branch profits tax equal to 30% of your effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.
Generally, we will be a United States real property holding corporation if the fair market value of our U.S. real property interests equals or exceeds 50% of the sum of the fair market values of our worldwide real property interests and other assets used or held for use in a trade or business, all as determined under
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applicable U.S. Treasury regulations. We believe that we have not been and are not a U.S. real property holding corporation for U.S. federal income tax purposes. Although we do not anticipate it based on our current business plans and operations, we may become a U.S. real property holding corporation in the future. If we have been or were to become a U.S. real property holding corporation, you might be subject to U.S. federal income tax (but not the branch profits tax) with respect to gain realized on the disposition of our common stock. However, such gain would not be subject to U.S. federal income or withholding tax if (1) our common stock is regularly traded on an established securities market and (2) in disposing of our common stock you did not own, actually or constructively, at any time during the five-year period preceding the disposition, more than 5% of the value of our common stock.
The estate of a nonresident alien individual generally is subject to U.S. federal estate tax on property with a U.S. situs. Because we are a U.S. corporation, our common stock will be U.S. situs property and therefore will be included in the taxable estate of a nonresident alien decedent, unless an applicable estate tax treaty between the United States and the decedents country of residence provides otherwise.
We must report annually to the IRS and to you the amount of dividends paid to you and the amount of income tax, if any, withheld with respect to such dividends. The IRS may make this information available to the tax authorities in the country in which you are resident.
In addition, you may be subject to information reporting requirements and backup withholding tax (currently at a rate of 28%) with respect to dividends paid on, and the proceeds of disposition of, shares of our common stock, unless, generally, you certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person or you otherwise establish an exemption. Additional rules relating to information reporting requirements and backup withholding tax with respect to payments of the proceeds from the disposition of shares of our common stock are as follows:
| If the proceeds are paid to or through the U.S. office of a broker, the proceeds generally will be subject to backup withholding tax and information reporting, unless you certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person or you otherwise establish an exemption. |
| If the proceeds are paid to or through a non-U.S. office of a broker that is not a U.S. person and is not a foreign person with certain specified U.S. connections, or a U.S.-related person, information reporting and backup withholding tax generally will not apply. |
| If the proceeds are paid to or through a non-U.S. office of a broker that is a U.S. person or a U.S.-related person, the proceeds generally will be subject to information reporting (but not to backup withholding tax), unless you certify under penalties of perjury (usually on IRS Form W-8BEN) that you are not a U.S. person. |
Any amounts withheld under the backup withholding tax rules may be allowed as a refund or a credit against your U.S. federal income tax liability, provided the required information is timely furnished by you to the IRS.
A 30% withholding tax will be imposed on payments to certain foreign entities of U.S.-source dividends and the gross proceeds of dispositions of stock (including our securities) that can produce U.S.-source dividends, unless various U.S. information reporting and due diligence requirements (generally relating to ownership by U.S. persons of interests in or accounts with those entities) have been satisfied or an exemption has otherwise been established. This withholding tax will not apply, however, to payments of gross proceeds from dispositions of stock before January 1, 2017. Potential investors should consult their tax advisors regarding the possible implications of this withholding tax on their investment in our common stock.
THE SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES ABOVE IS INCLUDED FOR GENERAL INFORMATION PURPOSES ONLY. PROSPECTIVE PURCHASERS OF OUR COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSIDERATIONS OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK.
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We have entered into an underwriting agreement with Network 1 Securities, Inc., for itself and as sole representative (the Representative) of the underwriters named therein, with respect to the shares of our common stock we are selling in this offering. Subject to the terms and conditions set forth in an underwriting agreement between us and the Representative, we have agreed to sell to the underwriters named below, and each underwriter has severally agreed to purchase from us, the number of shares of common stock listed next to its name in the following table.
The underwriters are committed to purchase all the shares of common stock offered by us if they purchase any shares of common stock. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. The underwriters are not obligated to purchase the shares of common stock covered by the underwriters over-allotment option described below. The underwriters are offering the shares of common stock, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The public offering price was determined by negotiations between us and the Representative. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our revenues, earnings and certain other financial and operating information in recent periods, and certain financial and operating information of companies engaged in activities similar to ours.
The underwriters propose initially to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at those prices less a concession not in excess of $ per share of common stock. If all of the shares of common stock offered by us are not sold at the public offering price, the underwriters may change the offering price and other selling terms by means of a supplement to this prospectus.
The following table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us. The information assumes either no exercise or full exercise of the over-allotment option we granted to the Representative.
|
|
|
|
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Per Share
of Common Stock |
Total Without
Over-Allotment Option |
Maximum
Total With Over-Allotment Option |
||||||||||
Public offering price | $ | |||||||||||
Underwriting discounts and commissions | ||||||||||||
Non-accountable expense allowance | ||||||||||||
Proceeds, before expenses, to us | $ |
We have agreed to pay a non-accountable expense allowance to the Representative equal to 2% of the gross proceeds received at the closing of the offering. We have advanced $25,000 of the non-accountable expense allowance to the Representative.
We have also agreed to bear all accountable expenses relating to the offering, including the costs of preparing, printing, mailing and delivering the registration statement, the preliminary and final prospectus contained therein and amendments thereto, post-effective amendments and supplements thereto, the underwriting agreement and related documents (all in such quantities as the Representative may reasonably require);
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preparing and printing stock certificates and warrant certificates; the costs of any due diligence meetings; all reasonable and documented fees and expenses for conducting a net road show presentation; all filing fees (including SEC filing fees) and communication expenses relating to the registration of the shares offered hereby; FINRA filing fees; the reasonable and documented fees and disbursements of the Representatives counsel up to an amount of $40,000; preparation of bound volumes and mementos in such quantities as the Representative may reasonably request up to an amount of $2,500; transfer taxes, if any, payable upon the transfer of securities from us to the underwriters; and the fees and expenses of the transfer agent, clearing firm and registrar for the shares.
The total estimated expenses of the offering, excluding underwriting discounts, commissions, and non-accountable expense allowances are approximately $400,000 and are payable by us.
We have granted to the Representative an option to purchase up to 230,769 additional shares of common stock (15% of the shares of common stock sold in this offering) at the per share purchase price on the cover page hereof, which price reflects underwriting discounts and commissions. The Representative may exercise this option for 45 days from the date of the underwriting agreement solely to cover sales of shares of common stock by the underwriters in excess of the total number of shares of common stock set forth in the table above. We will pay the expenses associated with the exercise of the over-allotment option.
We have agreed to issue to the Representative warrants to purchase up to 76,923 shares of common stock (5% of the shares of common stock sold in this offering). The Representatives warrants are exercisable for cash or on a cashless basis at a per share exercise price equal to 125% of the public offering price per share of common stock in the offering, commencing six months after the date of this prospectus and expiring five years from the date of this prospectus. The Representatives warrants and the shares of common stock underlying the warrants have been deemed compensation by FINRA and are, therefore, subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The Representative (or permitted assignees under the Rule) will not sell, transfer, assign, pledge or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of these warrants or the underlying securities for a period of 180 days after the effective date. 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, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price. The warrants will provide for cashless exercise and will contain provisions for one demand registration of the sale of the underlying shares of common stock at our expense, an additional demand registration at the warrant holders expense, and unlimited piggyback registration rights for a period of five years after the closing of this offering at our expense.
We have agreed that, without the prior written consent of the Representative, we will not, for a period ending 180 days after the date of the underwriting agreement, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock; (ii) file or cause to be filed any registration statement with the SEC relating to the offering by us of any shares of our capital stock or any securities convertible into or exercisable or exchangeable for shares of our capital stock or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our capital stock. The above restrictions shall not apply to (i) the common stock sold in this offering, (ii) the issuance of common stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof or (iii) the issuance of any option to purchase or shares of our capital stock under any stock compensation plan of the Company outstanding on the date hereof.
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We, our officers and directors have agreed, subject to limited exceptions, for a period of 90 days after the date of the underwriting agreement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of the representatives. This 90-day period may be extended if (1) during the last 17 days of the 90-day period, we issue an earnings release or material news or a material event regarding us occurs or (2) prior to the expiration of the 90-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 90-day period, then the period of such extension will be 18 days, beginning on the issuance of the earnings release or the occurrence of the material news or material event. If after any announcement described in clause (2) of the preceding sentence, we announce that we will not release earnings results during the 16-day period, the lock-up period shall expire the later of the expiration of the 90-day period and the end of any extension of such period made pursuant to clause (1) of the preceding sentence. The Representative may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make for these liabilities.
We have applied for listing our shares of common stock for trading on The NASDAQ Capital Market under the symbol LTEA. No assurance can be given that such listing will be approved.
In order to facilitate the offering of our shares of common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our shares of common stock. In connection with the offering, the underwriters may purchase and sell our shares of common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters option to purchase additional shares of common stock in the offering pursuant to the exercise of their over-allotment option to purchase additional shares of common stock. The underwriters may close out any covered short position by either exercising the over-allotment option or purchasing shares of common stock in the open market. In determining the source of shares of common stock to close out the covered short position, the underwriters will consider, among other things, the price of shares of common stock available for purchase in the open market as compared to the price at which they may purchase shares of common stock through the over-allotment option. Naked short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares of common stock in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our shares of common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.
Similar to other purchase transactions, the underwriters purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As result, the price of our shares of common stock may be higher than the price that might otherwise exist in the open market.
The underwriters have advised us that, pursuant to Regulation M of the Securities Act, they may also engage in other activities that stabilize, maintain or otherwise affect the price of our shares of common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase
75
shares of common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares of common stock, as applicable as part of this offering to repay the underwriting discount received by them.
The underwriters make no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our shares of common stock. In addition, neither we nor the underwriters make any representation that the underwriters will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
A prospectus in electronic format may be made available on the websites maintained by one or more underwriters or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares of common stock to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the Representative to underwriters and selling group members that may make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on the underwriters websites and any information contained in any other website maintained by the underwriters is not part of this prospectus or the registration statement of which this prospectus forms a part.
From time to time, certain of the underwriters and their affiliates have provided, and may provide in the future, various advisory, investment and commercial banking and other services to us in the ordinary course of business, for which they have received and may continue to receive customary fees and commissions. However, except as disclosed in this prospectus, we have no present arrangements with any of the underwriters for any further services.
Alexander Capital, L.P. will act as a selling agent for the Representative.
During the year ended December 31, 2015 through March 31, 2016, the Company sold securities through the Representative. As a result, on March 29, 2016, 34,573 warrants were issued to the Representative. The warrants have an exercise price of $4.50 per share and expire on October 30, 2020.
76
The validity of the issuance of the shares of common stock offered hereby will be passed upon for Long Island Iced Tea Corp. by Graubard Miller, New York, New York. Graubard Miller owns 6,250 shares of our common stock. Legal counsel to the underwriters is Carmel, Milazzo & DiChiara LLP, New York, New York.
The consolidated financial statements as of and for the years ended December 31, 2015 and 2014 included in this registration statement, of which this prospectus forms a part, have been audited by Marcum LLP, an independent registered public accounting firm, as set forth in their report appearing elsewhere herein and are included in reliance of such report given on the authority of said firm as experts in auditing and accounting.
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to the company and its common stock, reference is made to the registration statement and the exhibits and any schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance, if such contract or document is filed as an exhibit, reference is made to the copy of such contract or document filed as an exhibit to the registration statement, each statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be read and copied at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov .
We are subject to the full informational requirements of the Exchange Act. We fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. We furnish our stockholders with annual reports containing consolidated financial statements certified by an independent public accounting firm. We also maintain a website at www.longislandicedtea.com . However, the information contained on or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and potential investors should not rely on such information in making a decision to purchase our common stock in this offering.
77
F-1
|
|
|
||||||
March 31, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash | $ | 362,854 | $ | 207,192 | ||||
Accounts receivable, net (including amounts due from related parties of $24,897 and $67,992, respectively) | 392,763 | 363,096 | ||||||
Inventories, net | 481,478 | 712,558 | ||||||
Restricted cash | | 127,580 | ||||||
Stock subscription receivable | 120,000 | | ||||||
Prepaid expenses and other current assets | 218,354 | 48,237 | ||||||
Total current assets | 1,575,449 | 1,458,663 | ||||||
Property and equipment, net | 322,226 | 360,920 | ||||||
Intangible assets | 26,243 | 27,494 | ||||||
Other assets (including amounts due from related parties of $38,270) | 103,600 | 67,438 | ||||||
Deferred offering costs | 53,383 | | ||||||
Deferred financing costs | 1,679,426 | 1,838,082 | ||||||
Total assets | $ | 3,760,327 | $ | 3,752,597 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable | $ | 401,929 | $ | 601,681 | ||||
Accrued expenses | 353,750 | 458,938 | ||||||
Current portion of automobile loans | 19,578 | 19,231 | ||||||
Current portion of equipment loan | 37,102 | 36,627 | ||||||
Total current liabilities | 812,359 | 1,116,477 | ||||||
Line of credit | 1,377,930 | 1,091,571 | ||||||
Other liabilities | 30,000 | 30,000 | ||||||
Deferred rent | 4,130 | 4,648 | ||||||
Long term portion of automobile loans | 31,837 | 36,864 | ||||||
Long term portion of equipment loan | 66,849 | 76,477 | ||||||
Total liabilities | 2,323,105 | 2,356,037 | ||||||
Commitments and contingencies, Note 8
|
||||||||
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; 4,973,715 and 4,635,783 shares issued and outstanding, as of March 31, 2016 and December 31, 2015, respectively | 497 | 463 | ||||||
Additional paid-in capital | 5,383,772 | 3,926,074 | ||||||
Accumulated deficit | (3,947,047 | ) | (2,529,977 | ) | ||||
Total stockholders' equity | 1,437,222 | 1,396,560 | ||||||
Total liabilities and stockholders' equity | $ | 3,760,327 | $ | 3,752,597 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
|
|
|
||||||
For the Three Months Ended
March 31, |
||||||||
2016 | 2015 | |||||||
Gross sales (including sales to related parties of $1,562 and $20,215, respectively) | $ | 553,334 | $ | 275,082 | ||||
Less: Sales rebates, discounts, and allowances | 45,165 | 10,360 | ||||||
Net sales | 508,169 | 264,722 | ||||||
Cost of goods sold | 467,618 | 193,309 | ||||||
Gross profit | 40,551 | 71,413 | ||||||
Operating expenses:
|
||||||||
General and administrative expenses | 777,665 | 219,423 | ||||||
Selling and marketing expenses | 486,543 | 207,781 | ||||||
Total operating expenses | 1,264,208 | 427,204 | ||||||
Operating Loss | (1,223,657 | ) | (355,791 | ) | ||||
Other expenses:
|
||||||||
Interest expense | (193,413 | ) | (22,875 | ) | ||||
Net loss | $ | (1,417,070 | ) | $ | (378,666 | ) | ||
Weighted average number of common shares outstanding basic and diluted | 4,720,929 | 2,633,334 | ||||||
Basic and diluted net loss per share | $ | (0.30 | ) | $ | (0.14 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
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|
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|
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Common Stock |
Additional
paid-in capital |
Accumulated
Deficit |
Total
Stockholders' Equity |
|||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at January 1, 2016 | 4,635,783 | $ | 463 | $ | 3,926,074 | $ | (2,529,977 | ) | $ | 1,396,560 | ||||||||||
Issuance of common stock to consultants, vendors, and customers | 34,133 | 3 | 136,529 | | 136,532 | |||||||||||||||
Issuance of common stock and warrants, net of costs | 230,475 | 23 | 861,767 | 861,790 | ||||||||||||||||
Issuance of warrants to placement agent | | | 38,056 | | 38,056 | |||||||||||||||
Issuance of common stock to the Advisory Board and Board of Directors | 65,824 | 7 | 239,993 | 240,000 | ||||||||||||||||
Stock based compensation | 7,500 | 1 | 181,353 | | 181,354 | |||||||||||||||
Net loss | | | | (1,417,070 | ) | (1,417,070 | ) | |||||||||||||
Balance at March 31, 2016 | 4,973,715 | $ | 497 | $ | 5,383,772 | $ | (3,947,047 | ) | $ | 1,437,222 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
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|
|
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For the three months ended March 31, | ||||||||
2016 | 2015 | |||||||
Cash Flows From Operating Activities
|
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Net loss | $ | (1,417,070 | ) | $ | (378,666 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
|
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Bad debt expense | 8,693 | 1,977 | ||||||
Depreciation and amortization expense | 39,945 | 25,670 | ||||||
Deferred rent | (518 | ) | (142 | ) | ||||
Stock based compensation | 181,354 | | ||||||
Issuance of common stock to consultants, vendors, and customers | 53,200 | |||||||
Amortization of deferred financing costs | 158,656 | | ||||||
Paid-in-kind interest | 36,359 | | ||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable | (38,360 | ) | (46,266 | ) | ||||
Inventory | 231,080 | (275,213 | ) | |||||
Restricted cash | 127,580 | | ||||||
Prepaid expenses and other current assets | (86,785 | ) | (62,346 | ) | ||||
Other assets | (36,162 | ) | | |||||
Accounts payable | (199,752 | ) | 214,066 | |||||
Accrued expenses | 172,868 | 110,641 | ||||||
Other liabilities | | (92,466 | ) | |||||
Total adjustments | 648,158 | (124,079 | ) | |||||
Net cash used in operating activities | (768,912 | ) | (502,745 | ) | ||||
Cash Flows From Investing Activities
|
||||||||
Purchases of property and equipment | | (5,850 | ) | |||||
Net cash used in investing activities | | (5,850 | ) | |||||
Cash Flows From Financing Activities
|
||||||||
Repayment of automobile loans | (4,680 | ) | (4,363 | ) | ||||
Repayment of equipment loans | (9,153 | ) | | |||||
Proceeds from line of credit | 250,000 | | ||||||
Proceeds from the reverse merger with Culen Agricultural Holding Corporation | | 250,000 | ||||||
Payment of deferred offering costs | (53,383 | ) | | |||||
Proceeds from the sale of common stock and warrants, net of costs | 741,790 | | ||||||
Net cash provided by financing activities | 924,574 | 245,637 | ||||||
Net increase (decrease) in cash | 155,662 | (262,958 | ) | |||||
Cash, beginning of period | 207,192 | 398,164 | ||||||
Cash, end of period | $ | 362,854 | $ | 135,206 | ||||
Cash paid for interest | $ | 3,643 | $ | 1,078 | ||||
Non-cash investing and financing activities:
|
||||||||
Issuance of warrants to placement agent | $ | 38,056 | $ | | ||||
Stock subscription receivable | $ | 120,000 | $ | | ||||
Issuance of common stock to the Board of Directors and Advisory Board | $ | 240,000 | $ | | ||||
Issuance of common stock to consultants included in prepaid expenses | $ | 83,332 | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
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 (LIBB) 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 Cullens wholly owned subsidiaries, Cullen Agricultural Technologies, Inc. and Natural Dairy, Inc. (collectively the Company).
For accounting purposes, the Mergers were treated as an acquisition of Cullen by LIBB and as a recapitalization of LIBB, as the former LIBB members hold a large percent of the LIITs shares and will exercise significant influence over the operating and financial policies of the consolidated entity and the Company was a public shell company at the time of the transaction. Pursuant to Accounting Standards Codification (ASC) 805-10-55-11 through 55-15, the merger or acquisition of a private operating company into a non-operating public shell with nominal assets is considered a capital transaction in substance rather than a business combination. As a result, the condensed consolidated statements of operations and statements of cash flows of LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical condensed consolidated financial statements of LIBB are now reflected as those of the Company.
The Company produces and distributes premium ready-to-drink iced tea, with a proprietary recipe and quality components. The Company produces a 100% brewed tea, using black tea leaves, purified water and natural cane sugar or sucralose. The Companys product, Long Island Iced Tea®, is targeted for sale to health conscious consumers on the go. Flavors change from time to time, and have included lemon, peach, raspberry, guava, mango, diet lemon, diet peach, sweet tea, green tea and honey and half tea and half lemonade. The Company also offers lower calorie iced tea in twelve (12) ounce bottles. The lower calorie flavor options include mango, raspberry, and peach. The Company has also introduced four of its flavors in gallon bottles in 2015. The flavors packaged in gallon bottles include lemon, preach, green tea and honey, and mango. In addition, the Company, in order to service certain vending contracts, sells snacks and other beverage products on a limited basis in 2015. During the first quarter of 2016, the Company explored opportunities with other products, such as juices.
The Company sells its products to a mix of independent mid-to-large range distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the Northeastern portion of the United States.
As of March 31, 2016, the Companys cash on hand was $362,854. The Company incurred net losses of $1,417,070 and $378,666 for the three months ended March 31, 2016 and 2015, respectively. At March 31, 2016, the Companys stockholders equity was $1,437,222. As of March 31, 2016, the Company had working capital of $763,090.
During the three months ended March 31, 2016, the Company raised net proceeds of $861,790 through the sale of 230,475 shares of common stock and 230,475 warrants. Included in the net proceeds were $120,000 of stock subscriptions receivable which were collected in April 2016.
F-6
On November 23, 2015, LIIT and LIBB, its wholly owned subsidiary, 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 (the Lender). The Lender is controlled by a related party, Eric Watson, who beneficially owned approximately 16% of the Company on November 23, 2015 and 28.2% as of March 31, 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 Lenders discretion as provided in the Credit Agreement (the Available Amount), up to a maximum amount of $5,000,000 (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. On March 24, 2016, LIBB obtained a $250,000 advance from the Lender and during May 2016, LIBB will obtain another $250,000 advance from the Lender, as a result of which the Available Amount will be borrowed in full.
The Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of debt, equity, and through utilizing trade credit with its vendors.
The Company believes that as a result of a commitment for financing from a stockholder and its working capital as of March 31, 2016 that its cash resources will be sufficient to fund the Companys net cash requirements for the next twelve months from the date the condensed consolidated financial statements are issued. However, in order to execute the Companys 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.
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 months ended March 31, 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 Companys Form 10-K filed with the SEC on March 22, 2016.
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 in the accompanying unaudited interim condensed consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (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.
F-7
Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to, assessing the collectability of accounts receivable, accrual of rebates to customers, the valuation of inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates, are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
Revenue 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 Companys customers.
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 months ended March 31, 2016, the Company issued 3,400 shares of common stock, at a fair value of $4.00 per share, to customers and the owners of customers. The costs of all these various programs that were included as a reduction in net sales, including the value of common stock of issued to customers of $13,600, totaled $45,165 and $10,360 for the three months ended March 31, 2016 and 2015, respectively.
Shipping and handling costs incurred to move finished goods from the Companys sales distribution centers to customer locations are included in selling and marketing expenses on the condensed consolidated statements of operations and totaled $40,152 and $11,114, for the three months ended March 31, 2016 and 2015, respectively.
The Company expenses advertising costs as incurred. For the three months ended March 31, 2016 and 2015, advertising expense was $9,631 and $9,653, respectively.
The Company expenses the costs of research and development as incurred. For the three months ended March 31, 2016, research and development expense related to new product initiatives were $46,667. 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. As of March 31, 2016, $50,000 was included in accrued expenses in the condensed consolidated balance sheets.
The Company records rent related to its operating leases on a straight line basis over the lease term.
F-8
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
Pursuant to the terms of the Credit Agreement with Brentwood LIIT Inc., the Company is required to utilize $150,000 of the $1,000,000 proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Companys cash on hand was restricted for the use in the development of the alcohol business. On March 17, 2016, the LIBB entered into an agreement with Brentwood LIIT Inc. whereby the restriction was lifted.
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 customers 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 Companys receivables are dependent on each individual customers 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 Companys efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
Accounts receivable, net, is as follows:
|
|
|
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As of | ||||||||
March 31,
2016 |
December 31,
2015 |
|||||||
Accounts receivable, gross | $ | 442,763 | $ | 405,096 | ||||
Allowance for doubtful accounts | (50,000 | ) | (42,000 | ) | ||||
Accounts receivable, net | $ | 392,763 | $ | 363,096 |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions and accounts receivable. At times, the Companys cash in banks is in excess of the 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 March 31, 2016, one customer accounted for 16% of the Companys trade receivables. As of December 31, 2015, two customers accounted for 14% and 30% of the Companys 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.
The Companys inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists of bottled and packaged iced tea.
F-9
The Company values its inventories at the lower of cost or market, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. During the three months ended March 31, 2016, the Company recorded an adjustment of $14,350 to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the dates presented:
|
|
|
||||||
As of | ||||||||
March 31,
2016 |
December 31,
2015 |
|||||||
Finished goods | $ | 284,238 | $ | 565,624 | ||||
Raw materials and supplies | 197,240 | 146,934 | ||||||
Total inventories | $ | 481,478 | $ | 712,558 |
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 Companys 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.
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 $6,243 and $7,494 as of March 31, 2016 and December 31, 2015, respectively. The estimated useful life of the capitalized costs of the Companys website is 3 years and is depreciated on a straight line basis. As of March 31, 2016, the cost of the website development was $15,000 and the accumulated amortization was $8,757. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. For the three months ended March 31, 2016 and 2015, amortization expense was $1,251 and $1,251, respectively.
The Company capitalizes issuance costs related to lines of credit as deferred financing costs. The Company amortizes the deferred financing costs over the term of the line of credit.
F-10
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 capital raising activities.
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 Companys net operating loss carryforward as a result of the historical losses of the Company.
Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liabilities. In managements 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 Companys 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.
The Company accounts for stock based compensation in accordance with ASC 718, Compensation Stock Compensation (ASC 718). ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, stock based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees requisite service period (generally the vesting period of the equity grant). The fair value of the Companys common stock options is estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options
F-11
are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. The Company expenses stock-based compensation by using the straight-line method.
The Company accounts for stock and other equity instruments granted to consultants using the accounting guidance included in ASC 505-50, Equity-Based Payments to Non-Employees. In accordance with ASC 505-50, the Company estimates the fair value of equity instruments using the fair value of the Companys stock or the fair value of the services based upon which measure represents a more reliable measure of the cost incurred.
Basic net earnings per common share is computed by dividing income/loss available to common stockholders 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. The computation of diluted earnings per share excludes those with an exercise price in excess of the average market price of the Companys 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. For the three months ended March 31, 2016, 194,667 options, 1,550,159 warrants, and 344,483 shares issuable upon conversion of the outstanding debt under Credit Agreement were excluded from the computation of earnings per share because they were anti-dilutive.
The carrying amounts of cash, accounts receivable, accrued expenses and notes payable approximate fair value due to the short-term nature of these instruments. In addition, for notes payable the Company believes that interest rates approximate prevailing rates.
Certain reclassifications have been made to the 2015 condensed consolidated financial statements to conform them to the 2016 presentation. These reclassifications had no impact on the Companys net loss for the periods presented.
The Companys business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales.
In January 2016, the FASB, issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.
F-12
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 lessees 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 lessees right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of the new guidance on the condensed consolidated financial statements.
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 described in Note 11 Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the condensed consolidated financial statements.
On November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp. (Magnum), an entity managed by Philip Thomas, the Companys 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 Magnums cost for such products (See Note 10). The Company may terminate the agreement and all obligations to make future payments on ten days written notice to Magnum. As of March 31, 2016, the outstanding balance on the equipment loan was $103,951. As of December 31, 2015, the outstanding balance on the equipment loan was $113,104.
On November 23, 2015, LIIT and LIBB, its wholly owned subsidiary, entered into the Credit Agreement by and among LIBB, as the borrower, LIIT and the Lender. The Lender is controlled by Eric Watson, a related party, who immediately prior to the transactions beneficially owned more than 16% of the Companys outstanding common stock. The Credit Agreement provides for a revolving credit facility in an initial Available Amount of up to $1,000,000, subject to increases as provided in the Credit Agreement, at the discretion of the Lender, up to a maximum Facility Amount of $5,000,000. 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. The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.
F-13
The credit facility bears interest at a rate equal to the prime rate (3.5% at December 31, 2015 and March 31, 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 LIBBs obligations under the credit facility. In addition, the credit facility will be guaranteed by Philip Thomas, the Companys Chief Executive Officer and a director of the Company, in certain limited circumstances up to a maximum amount of $200,000.
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 and warranties and covenants, including negative covenants with respect to the incurrence of indebtedness. As of March 31, 2016, the Company is in compliance with these covenants.
The Lender may elect to convert the outstanding principal and interest under the credit facility into shares of the Companys 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 the Companys common stock, or in the event of a fundamental transaction (as defined in the note evidencing the indebtedness under the credit facility).
In connection with the credit facility, the Company issued a warrant to the Lender. The warrant entitles the holder to purchase 1,111,111 shares of the Companys common stock at an exercise price of $4.50 and includes a cashless exercise provision. The exercise price and number of shares of the Companys common stock or property issuable on exercise of the warrants are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of the common stock, or in the event of a fundamental transaction (as defined in the warrant).
The Lender will have certain piggyback registration rights, on customary terms, with respect to the shares of the Companys common stock issuable upon conversion of the credit facility and upon exercise of the warrant.
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. On March 24, 2016, LIBB obtained a $250,000 advance from the Lender and during May 2016, LIBB will obtain another $250,000 advance from the Lender, as a result of which the Available Amount will be borrowed in full. On April 8, 2016, the agreement was amended further (See Note 11).
As of March 31, 2016, the outstanding balance on the line of credit was $1,377,930. The line of credit is convertible at $4.00 per share of common stock into 344,483 shares of common stock. As of December 31, 2015, the outstanding balance on the line of credit was $1,091,571.
F-14
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 March 31, 2016, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $224,453. As of December 31, 2015, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $65,797.
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 Companys Board of Directors, and 7,500 shares were sold to Paul Vassilakos, a member of the Board of Directors. The sales were part of a private placement of up to $3,000,000 of units (the Second Offering) conducted by the Company on a best efforts basis through a placement agent (the Placement Agent) that commenced on November 24, 2015. The Offering terminated on March 14, 2016.
The Placement Agent for the Second Offering was paid a commission equal to 10% of the aggregate purchase price from the Units sold to investors introduced to the Company by the Placement Agent. The Company also paid the Placement Agent a non-accountable expense allowance equal to 3% of the aggregate purchase price from the Units sold to (i) investors introduced to the Company by the Placement Agent and (ii) investors not introduced to the Company by the Placement Agent who purchase less than $500,000 of Units in the aggregate (together, the Covered Investors). From March 1, 2016 through March 14, 2016, the Placement Agent was only entitled to a 3% non-accountable allowance for investors introduced by our Company to the Placement Agent. In addition, the Placement Agent received warrants to purchase a number of shares of Common Stock equal to 10% of the total shares of Common Stock included in the Units sold in the Second Offering to the Covered Investors, with an exercise price of $4.50 per share.
Each warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Companys 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 holders warrant upon surrender of such warrant.
During the year ended December 31, 2015 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. As of March 31, 2016, subscriptions receivable related to these sales were $120,000. The proceeds from the subscriptions receivable were received during April 2016.
F-15
Each warrant issued in the March Sales entitles the holder to purchase one share of the Companys 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 holders 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.
In addition, on January 26, 2016, 35,824 shares of common stock were issued to the non-employee members of the Board of Directors in relation to their services with the Company during the year ended December 31, 2015.
On March 31, 2016, the Company issued 3,400 shares of common stock at $4.00 per share to customers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $13,600 as a reduction to net sales in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 1,200 shares of common stock at $4.00 per share to suppliers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $4,800 in cost of goods sold in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 2,000 shares of common stock at $4.00 per share to brokers of the Company. As a result, for the three months ended March 31, 2016, the Company recorded $8,000 in selling and marketing expenses in the accompanying condensed consolidated statements of operations.
On March 31, 2016, the Company issued 6,700 shares of common stock at $4.00 per share to consultants of the Company. For the three months ended March 31, 2016, the Company recorded $26,800 in general and administrative expenses in the condensed consolidated statements of operations.
On March 31, 2016, the Company issued 5,000 shares of common stock at $4.00 per share to a consultant pursuant to a consulting services agreement. The terms of the agreement require the consultant to perform services for the Company through February 23, 2017. As a result, $20,000 was included in prepaid expenses in the accompanying balance sheet as of March 31, 2016.
On March 31, 2016, the Company issued 15,833 shares of common stock at $4.00 per share to a consultant, who also became a member of the Companys Advisory Board on March 31, 2016. The shares were issued pursuant to a consulting agreement for future services. As a result, $63,332, was included in prepaid expenses in the accompanying balance sheet as of March 31, 2016. In addition, pursuant to the terms of the consulting agreement, the Company was required to make an advance payment of $20,000 which was made during April 2016. In addition the consultant will be paid an additional $30,000 in cash upon completion of their services.
On March 31, 2016, the Company issued 7,500 shares of common stock to an employee of the Company at $4.00 per share. During the three months ended, the $30,000 incurred was included in selling and marketing expenses in the accompanying condensed consolidated statements of operations related to this issuance.
F-16
On May 27, 2015, the Companys 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, 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. These options were not issued under the 2015 Stock Option Plan.
The following table summarizes the stock option activity of the Company:
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Shares |
Weighted
Average Exercise Price |
Weighted
Average Grant Date Fair Value |
Average
Remaining Contractual Term (Years) |
Aggregate
Intrinsic Value |
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Outstanding at January 1, 2016 | 194,667 | $ | 3.75 | $ | 6.22 | |||||||||||||||
Granted | | $ | | $ | | |||||||||||||||
Exercised | | $ | | $ | | |||||||||||||||
Expired, forfeited or cancelled | | $ | | $ | | |||||||||||||||
Outstanding at March 31, 2016 | 194,667 | $ | 3.75 | $ | 6.22 | 4.2 | $ | 48,667 | ||||||||||||
Exercisable at March 31, 2016 | 73,000 | $ | 3.75 | $ | 6.22 | 4.2 | $ | 18,250 |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Companys common stock.
As of March 31, 2016 there was a total of $699,807 of unrecognized compensation expense related to unvested options. The cost is expected to be recognized through 2017 over a weighted average period of 1.15 years.
The Company accounts for all stock based compensation as an expense in the financial statements and associated costs are measured at the fair value of the award. For the three months ended March 31, 2016, the Company recorded stock based compensation of $151,354 related to the issuance of these options.
The Black Scholes option pricing model was used to estimate fair value as of the date of grants during 2015 using the following assumptions: a stock price of $8.70, a dividend yield of 0%, expected volatility of 79%, a risk free interest rate of 0.99%, and an expected life of 3.25 years. The simplified method was used to determine the expected life as the granted options as the options were considered to be plain-vanilla options.
F-17
During the three months ended March 31, 2016, the Company issued 265,048 warrants (See Note 5), which are all exercisable.
The following table summarizes the stock warrant activity of the Company:
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Number
of shares |
Weighted
average exercise price |
Weighted
average contractual life (years) |
||||||||||
Outstanding January 1, 2016 | 1,285,111 | $ | 4.70 | | ||||||||
Issued | 265,048 | $ | 5.80 | | ||||||||
Expired | | $ | | | ||||||||
Forfeited | | $ | | | ||||||||
Outstanding March 31, 2016 | 1,550,159 | $ | 4.89 | 2.69 |
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 Companys 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 LIBBs 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 Companys management and legal counsel believe it is too early to determine the probable outcome of this matter.
On October 3, 2014, an action was filed by Madwell LLC in the Supreme Court of New York entitled Madwell LLC v. Long Island Brand Beverages LLC, Philip Thomas, its Chief Executive Officer, and Paul Vassilakos, Cullens former Chief Executive Officer and one of the Companys directors. Madwell was seeking $940,000, which included $440,000 for breach of contract and payment of services as well as punitive damages of $500,000. On July 31, 2015, the Company entered into a settlement agreement with Madwell. Pursuant to the settlement agreement, the Company agreed to pay Madwell $440,000 in six installments with the last installment due no later than December 31, 2015. In addition, Madwell agreed to discontinue its lawsuit and the parties agreed to mutual releases of liability related to fees for advertising, marketing and design services or any matter relating to the lawsuit. As of the date of this filing, the full amount has been paid to Madwell. In addition, the Company indemnified Mr. Vassilakos for a de minimis amount of expenses incurred by him in connection with this litigation. During January 2016, we made the final installment payment of $80,000 in settlement of the matter.
F-18
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%.
On May 27, 2015, the Company entered into employment agreements with Messrs. Thomas, Dydensborg and Meehan to serve as Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer, respectively. Each has a term of two years except the agreements with Messrs. Dydensborg and Meehan provide that either the Companys or the executive can terminate the agreement with six months advance notice (or three months advance notice, in the case of Mr. Meehan). The employment agreements will provide for Messrs. Thomas, Dydensborg and Meehan to receive base salaries of $150,000, $130,000 and $120,000. Additionally, each is entitled to an incentive bonus at the discretion of the Board of Directors of up to 50%, 40% and 25% of such individuals base salary, respectively.
On May 27, 2015, the Company entered into an employment agreement with Thomas Panza, a stockholder of the Company to serve as LIBBs Purchasing Manager. The agreement has a term of two years except that either LILBB or Mr. Panza can terminate the agreement with six months advance notice. Mr. Panza will receive a base salary of $80,000 and an incentive bonus of up to 50% of his base salary at the discretion of the Board of Directors.
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 employees base salary, with the amount above 20% to be determined at the discretion of the board.
On June 17, 2015, the Company announced that it had determined to explore potential opportunities in expanding the business into alcoholic beverages. In connection with the proposed expansion, the Company engaged Julian Davidson as a consultant to spearhead this new initiative. The Company will reimburse Julian Davidson for reasonable business expenses. In the event the Company raises $10,000,000, Julian Davidson would become an employee of the Company.
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 to be paid at December 31, 2015. These shares were issued on January 26, 2016. For each year of service after December 31, 2015, the Advisory Board members will be entitled to receive $30,000 worth of common stock and $12,000 in cash on an annual basis. In addition, the members will be entitled to reimbursement of expenses and $1,000 for each meeting attended. The agreements can be terminated by either party with 30 days notice. On March 31, 2016, the Company added one member to the Advisory Board. In addition, one member of the Advisory Board became a member of the Companys Board of Directors. During the three months ended March 31, 2016, the Company incurred $45,000 in costs which are included in general and administrative expenses in the condensed consolidated statements of operations.
F-19
For the three months ended March 31, 2016, two customers accounted for 16% and 12% of net sales, respectively. In addition, the Company collects vending proceeds based on contracts in certain school districts. Sales within one school district accounted for 13% of our net sales during the three months ended March 31, 2016. For the three months ended March 31, 2015, one customer accounted for 12% of net sales.
For the three months ended March 31, 2016 and March 31, 2015, the largest vendors represented approximately 71% (four vendors) and 81% (three vendors) of purchases, respectively. As of March 31, 2016 one supplier accounted for 10% of accounts payable.
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 March 31, 2016 and 2015, sales to these related parties were $- and $7,959, respectively. As of March 31, 2016, accounts receivable from these customers were $11,287. 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 March 31, 2016 and March 31, 2015, sales to this related party were $404 and $10,758, respectively. As of March 31, 2016, the amount due from this customer was $50,270, with $12,000 included in accounts receivable and $38,270 included in other assets due to the expected timing of collection. As of December 31, 2015, accounts receivable from this customer were $51,961.
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 March 31, 2016 and 2015, sales to this related party were $1,158 and $1,498, respectively. As of March 31, 2016 and December 31, 2015, there was $1,610 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 months ended March 31, 2016, the Company purchased $8,258 of product from this vendor. As of March 31, 2016, the outstanding balance due to this entity included in accounts payable was $2,724. As of December 31, 2015, the outstanding balance due to this entity included in accounts payable was $3,242.
During the three months ended March 31, 2016, the Company accrued $65,000 in expenses related to fees payable to the Companys Board of Directors which were included in general and administrative expenses in the condensed consolidated statements of operations. The non-employee members of the Board of Directors will receive $35,000 worth of stock for their services and $30,000 in cash for their services through 2016.
A stockholder and a company owned by member of the Board of Directors of the Company has paid certain expenses on behalf of the Company. As of March 31, 2016, the accounts payable and accrued expenses due to these parties were $59,867. As of December 31, 2015 accounts payable and accrued expenses to these parties were $87,258.
F-20
On April 8, 2016 the Company filed a registration statement on Form S-1 with the SEC to raise additional capital. No assurance can be given that such offering will be consummated, or if consummated, will raise the maximum amount contemplated thereunder.
During April 2016, the Company entered into an agreement with the Lender (See Note 4). Upon a capital raise of at least $5,000,000, the Lender has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our 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 will exchange its 1,111,111 warrants for 486,111 shares of common stock at such time. The Credit Facility will remain outstanding except that the Facility Amount will be reduced to $3,500,000. The Recapitalization will occur only if the gross proceeds from the offering are at least $5,000,000 (A Qualified Public 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 Amendment), 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.
F-21
To the Audit Committee of the Board of Directors and Stockholders of Long Island Iced Tea Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Long Island Iced Tea Corp. and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders equity (deficiency) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Long Island Iced Tea Corp. and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Marcum LLP
Melville, New York
March 22, 2016
F-22
|
|
|
||||||
December 31,
2015 |
December 31,
2014 |
|||||||
ASSETS
|
||||||||
Current Assets:
|
||||||||
Cash | $ | 207,192 | $ | 398,164 | ||||
Accounts receivable, net (including amounts due from related parties of $67,992 and $27,155, respectively) | 363,096 | 174,637 | ||||||
Inventories, net | 712,558 | 561,107 | ||||||
Restricted cash | 127,580 | | ||||||
Prepaid expenses and other current assets | 48,237 | 9,573 | ||||||
Total current assets | 1,458,663 | 1,143,481 | ||||||
Property and equipment, net | 360,920 | 242,123 | ||||||
Intangible assets | 27,494 | 32,498 | ||||||
Other assets | 67,438 | 11,706 | ||||||
Deferred financing costs | 1,838,082 | | ||||||
Total assets | $ | 3,752,597 | $ | 1,429,808 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY
|
||||||||
Current Liabilities:
|
||||||||
Accounts payable | $ | 601,681 | $ | 825,044 | ||||
Accrued expenses | 458,938 | 112,819 | ||||||
Current portion of automobile loans | 19,231 | 17,915 | ||||||
Current portion of equipment loan | 36,627 | | ||||||
Total current liabilities | 1,116,477 | 955,778 | ||||||
Loans payable | | 1,500,000 | ||||||
Line of credit | 1,091,571 | | ||||||
Other liabilities | 30,000 | 92,466 | ||||||
Deferred rent | 4,648 | 5,966 | ||||||
Long term portion of automobile loans | 36,864 | 56,096 | ||||||
Long term portion of equipment loan | 76,477 | | ||||||
Total liabilities | 2,356,037 | 2,610,306 | ||||||
Commitments and contingencies, Note 12
|
||||||||
Stockholders Equity (Deficiency)
|
||||||||
Preferred stock, par value $0.0001; authorized 1,000,000 shares; no shares issued and outstanding | | | ||||||
Common stock, par value $0.0001; authorized 35,000,000 shares; 4,635,783 and 2,633,334 shares issued and outstanding, as of December 31, 2015 and December 31, 2014, respectively | 463 | 263 | ||||||
Additional paid-in capital | 3,926,074 | 3,184,574 | ||||||
Accumulated deficit | (2,529,977 | ) | (4,365,335 | ) | ||||
Total stockholders equity (deficiency) | 1,396,560 | (1,180,498 | ) | |||||
Total liabilities and stockholders equity (deficiency) | $ | 3,752,597 | $ | 1,429,808 |
The accompanying notes are an integral part of these consolidated financial statements
F-23
|
|
|
||||||
For the Years Ended
December 31, |
||||||||
2015 | 2014 | |||||||
Gross sales (including sales to related parties of $54,849 and $82,427, respectively) | $ | 2,023,352 | $ | 1,847,702 | ||||
Less: Sales rebates, discounts, and allowances | 124,122 | 103,262 | ||||||
Net sales | 1,899,230 | 1,744,440 | ||||||
Cost of goods sold | 1,556,140 | 1,504,146 | ||||||
Gross profit | 343,090 | 240,294 | ||||||
Operating expenses:
|
||||||||
General and administrative expenses | 1,946,270 | 1,073,867 | ||||||
Selling and marketing expenses | 1,449,049 | 2,207,510 | ||||||
Total operating expenses | 3,395,319 | 3,281,377 | ||||||
Operating Loss | (3,052,229 | ) | (3,041,083 | ) | ||||
Other expenses:
|
||||||||
Other expense | (3,327 | ) | | |||||
Interest expense | (124,713 | ) | (110,298 | ) | ||||
Total other expenses | (128,040 | ) | (110,298 | ) | ||||
Net loss | $ | (3,180,269 | ) | $ | (3,151,381 | ) | ||
Weighted average number of common shares outstanding basic and diluted | 3,744,931 | 2,633,334 | ||||||
Basic and diluted net loss per share | $ | (0.85 | ) | $ | (1.20 | ) |
The accompanying notes are an integral part of these consolidated financial statements
F-24
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|
|
|
|
|
|||||||||||||||
Common Stock |
Additional
paid-in capital |
Accumulated
Deficit |
Total
Stockholders Equity (Deficiency) |
|||||||||||||||||
Shares | Amount | |||||||||||||||||||
Balance at January 1, 2014 | 2,633,334 | $ | 263 | $ | 761,006 | $ | (1,213,954 | ) | $ | (452,685 | ) | |||||||||
Proceeds from sale of membership interest, net | | | 896,510 | | 896,510 | |||||||||||||||
Conversion of loans payable to membership interest | | | 1,527,058 | | 1,527,058 | |||||||||||||||
Net loss | | | | (3,151,381 | ) | (3,151,381 | ) | |||||||||||||
Balance at December 31, 2014 | 2,633,334 | 263 | 3,184,574 | (4,365,335 | ) | (1,180,498 | ) | |||||||||||||
Reverse Merger with Cullen Agricultural Holding Corp. | 1,518,749 | 152 | 1,872,344 | | 1,872,496 | |||||||||||||||
Common stock issued as payments to
vendors |
28,085 | 3 | 134,267 | | 134,270 | |||||||||||||||
Conversion of loans payable and accrued interest to stockholders equity | 138,979 | 14 | 555,896 | | 555,910 | |||||||||||||||
Issuance of common stock, net of costs | 142,636 | 14 | 568,454 | | 568,468 | |||||||||||||||
Issuance of common stock and warrants, net of costs | 174,000 | 17 | 540,929 | 540,946 | ||||||||||||||||
Issuance of warrants to lenders | | | 1,725,934 | | 1,725,934 | |||||||||||||||
Stock based compensation | | | 359,303 | | 359,303 | |||||||||||||||
Reclassification of the historical losses of Long Island Brand Beverages LLC to additional paid in capital upon the date of the reverse merger with Cullen Agricultural Holding Corp. | | | (5,015,627 | ) | 5,015,627 | | ||||||||||||||
Net loss | | | | (3,180,269 | ) | (3,180,269 | ) | |||||||||||||
Balance at December 31, 2015 | 4,635,783 | $ | 463 | $ | 3,926,074 | $ | (2,529,977 | ) | $ | 1,396,560 |
The accompanying notes are an integral part of these consolidated financial statements
F-25
|
|
|
||||||
For the years ended
December 31, |
||||||||
2015 | 2014 | |||||||
Cash Flows From Operating Activities
|
||||||||
Net loss | $ | (3,180,269 | ) | $ | (3,151,381 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
Bad debt expense | 22,279 | 8,601 | ||||||
Depreciation and amortization expense | 114,467 | 74,986 | ||||||
Deferred rent | (1,318 | ) | 5,966 | |||||
Stock based compensation | 359,303 | | ||||||
Amortization of deferred financing costs | 65,797 | | ||||||
Paid-in-kind interest | 4,071 | | ||||||
Loss on disposal of property and equipment | 3,327 | | ||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable | (220,238 | ) | (65,136 | ) | ||||
Inventory | (151,451 | ) | (395,200 | ) | ||||
Restricted cash | (127,580 | ) | | |||||
Prepaid expenses and other current assets | (18,163 | ) | 68,135 | |||||
Other assets | (55,732 | ) | 444 | |||||
Accounts payable | (240,088 | ) | 825,044 | |||||
Accrued expenses | 433,305 | 54,767 | ||||||
Other liabilities | (92,466 | ) | 92,466 | |||||
Total adjustments | 95,513 | 670,073 | ||||||
Net cash used in operating activities | (3,084,756 | ) | (2,481,308 | ) | ||||
Cash Flows From Investing Activities
|
||||||||
Purchases of property and equipment | (100,843 | ) | (196,095 | ) | ||||
Purchases of intangible assets | | (15,000 | ) | |||||
Net cash used in investing activities | (100,843 | ) | (211,095 | ) | ||||
Cash Flows From Financing Activities
|
||||||||
Repayment of automobile loans | (17,916 | ) | (10,784 | ) | ||||
Repayment of equipment loans | (4,813 | ) | | |||||
Contributions from members, net of costs | | 896,510 | ||||||
Proceeds from loan payable member | | 30,000 | ||||||
Repayments of loan payable member | | (30,000 | ) | |||||
Proceeds from line of credit | 1,000,000 | |||||||
Payments of deferred financing costs | (60,445 | ) | ||||||
Proceeds from the reverse merger with Culen 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 | 588,492 | | ||||||
Proceeds from Bass Properties LLC loan | 150,000 | | ||||||
Proceeds from Cullen Agricultural Holding Corporation loan | 250,000 | 300,000 | ||||||
Proceeds from Ivory Castle Limited loan | 400,000 | 1,300,000 | ||||||
Net cash provided by financing activities | 2,994,627 | 2,485,726 | ||||||
Net decrease in cash | (190,972 | ) | (206,677 | ) | ||||
Cash, beginning of period | 398,164 | 604,841 | ||||||
Cash, end of period | $ | 207,192 | $ | 398,164 | ||||
Cash paid for interest | $ | 5,496 | $ | 3,349 |
The accompanying notes are an integral part of these consolidated financial statements
F-26
|
|
|
||||||
For the years ended
December 31, |
||||||||
2015 | 2014 | |||||||
Non-cash investing and financing activities:
|
||||||||
Conversion of loans payable and accrued interest to stockholders equity | $ | 555,910 | $ | | ||||
Conversion of loans payable and accrued interest to members equity | $ | | $ | 1,527,058 | ||||
Purchase of automobiles with loans payable | $ | | $ | 84,795 | ||||
Purchase of equipment with loan payable | $ | 117,917 | $ | | ||||
Costs due to related to issuance of common stock and warrants included in accrued expenses | $ | 47,546 | ||||||
Purchase of a truck in exchange for accounts receivable | $ | 9,500 | $ | | ||||
Net assets acquired in reverse merger | $ | 1,751,655 | $ | | ||||
Warrants issued to Brentwood LIIT Inc. | $ | 1,725,934 | $ | | ||||
Deferred financing costs incurred with other liabilities and debt | $ | 117,500 | $ | | ||||
Payment of accounts payable through the issuance of common stock | $ | 134,270 | $ | |
The accompanying notes are an integral part of these consolidated financial statements
F-27
Long Island Iced Tea Corp, a Delaware C-Corporation, was formed on December 23, 2014. Long Island Iced Tea Corp. was formed in order to allow for the completion of mergers between Cullen Agricultural Holding Corp. (Cullen) and Long Island Brand Beverages LLC (LIBB). As a result of the merger which was consummated on May 27, 2015, Long Island Iced Tea Corp. consisted of its wholly owned subsidiaries, Long Island Brand Beverages LLC (its operating subsidiary) and Cullen Agricultural Corp. and its wholly owned subsidiaries, Cullen Agricultural Technologies, Inc. and Natural Dairy, Inc. (collectively the Company).
On December 31, 2014, the Company entered into a merger agreement (the Merger Agreement), as amended as of April 23, 2015, with Cullen, a public company, LIBB, Cullen Merger Sub, Inc. (Cullen Merger Sub), LIBB Acquisition Sub, LLC (LIBB Merger Sub), 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 Long Island Iced Tea Corp. and (b) LIBB Merger Sub was to be merged with and into LIBB, with LIBB surviving and becoming a wholly-owned subsidiary of Long Island Iced Tea Corp. (the Mergers).
Under the merger agreement, upon consummation of the company merger, the holders of the LIBB membership interests (the LIBB members) would receive 2,633,334 shares of common stock of Holdco (or approximately 63%), subject to adjustment based on LIBBs and Cullens net working capital at closing.
If LIBBs estimated net working capital at the closing was less than its net working capital target, the number of shares of Long Island Iced Tea Corp.s common stock to be received by the LIBB members at the closing was to be reduced by a number of shares, allocated among the LIBB members pro rata, equal to such deficiency divided by $3.00. If LIBBs estimated net working capital at the closing was more than its net working capital target, the number of shares of Long Island Iced Tea Corp.s common stock to be received by the LIBB members at the closing was to be increased by a number of shares, allocated among the LIBB members pro rata, equal to such excess divided by $3.00. LIBBs net working capital target was $70,069, except that for each day after February 15, 2015, the target was reduced by $3,333 for each day after such date through and including the closing date.
If Cullens estimated net working capital at the closing was more than its net working capital target, the number of shares of Long Island Iced Tea Corp.s common stock to be received by the LIBB members at the closing was to be reduced by a number of shares, allocated among the LIBB members pro rata, equal to such excess divided by $3.00. If Cullens estimated net working capital at the closing was less than its net working capital target, the number of shares of Long Island Iced Tea Corp.s common stock to be received by the LIBB members at the closing was to be increased by a number of shares, allocated among the LIBB members pro rata, equal to such deficiency divided by $3.00. Cullens net working capital target was $786,985, except that for each day after February 15, 2015, the target was reduced by $667 for each day after such date through and including the closing date.
On May 27, 2015, the Mergers were consummated.
On July 16, 2015, the parties to the Mergers agreed to waive the provisions of the working capital adjustment.
To provide a fund for satisfaction of Cullen, Long Island Iced Tea Corp.s and LIBBs post-Closing rights to indemnification under the Merger Agreement, an aggregate of 500,000 of the Merger Shares (Indemnity Shares) were placed in escrow, in accordance with an escrow agreement (the Escrow Agreement) executed by Long Island Iced Tea Corp., Philip Thomas, as the representative of the LIBB members under the Merger Agreement (the LIBB Representative), and Continental Stock Transfer & Trust Company, as escrow agent (the Escrow Agent). The escrow is the sole remedy for Cullen, Long Island Iced Tea Corp. and LIBB for their rights to indemnification under the Merger Agreement. The Members right to indemnification will be satisfied through the issuance by Long Island Iced Tea Corp. of up to 500,000 additional shares of Long Island Iced Tea Corp.s Common Stock.
F-28
On the date on which Long Island Iced Tea Corp.s independent registered public accounting firm has issued its report relating to its financial statement for its fiscal year ending December 31, 2015, the Indemnity Shares remaining in escrow will be released to the former LIBB Members except for any shares subject to pending indemnification claims.
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 Long Island Iced Tea Corp.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 consolidated balance sheets, statements of operations, and statements of cash flows of LIBB have been retroactively updated to reflect the recapitalization. Additionally, the historical consolidated financial statements of LIBB are now reflected as those of the Company.
The Company produces and distributes premium ready-to-drink iced tea, with a proprietary recipe and quality components. The Company produces a 100% brewed tea, using black tea leaves, purified water and natural cane sugar or sucralose. The Companys product, Long Island Iced Tea®, is targeted for sale to health conscious consumers on the go. Flavors change from time to time, and have included lemon, peach, raspberry, guava, mango, diet lemon, diet peach, sweet tea, green tea and honey and half tea and half lemonade. The Company also offers lower calorie iced tea in twelve (12) ounce bottles. The lower calorie flavor options include mango, raspberry, and peach. The Company has also introduced four of its flavors in gallon bottles in 2015. The flavors packaged in gallon bottles include lemon, preach, green tea and honey, and mango. In addition, the Company, in order to service certain vending contracts, sells snacks and other beverage products on a limited basis in 2015.
The Company sells its products to a mix of independent mid-to-large range distributors who in turn sell to retail outlets, such as big chain supermarkets, mass merchants, convenience stores, restaurants and hotels principally in the Northeastern portion of the United States.
As of December 31, 2015, the Companys cash on hand was $207,192. The Company incurred net losses of $3,180,269 and $3,151,381 for the years ended December 31, 2015 and 2014, respectively. At December 31, 2015, the Companys stockholders equity was $1,396,560. As of December 31, 2015, the Company had working capital of $342,186.
During 2015, the Company raised capital through the sale of its common stock. Net proceeds from the sale of 142,636 shares of common stock were $568,468 during the year ended December 31, 2015. Net proceeds from the sale of 174,000 shares of common stock and 174,000 warrants were $540,946 during the year ended December 31, 2015. In addition, the Company converted $555,910 of debt into common stock. (See Note 6)
During 2016, the Company raised gross proceeds of $686,900 through the sale of 171,725 shares of common stock and 171,725 warrants.
On November 23, 2015, Long Island Iced Tea Corp. and Long Island Brand Beverages LLC, its wholly owned subsidiary, entered into a Credit and Security Agreement (the Credit Agreement), by and among LIBB, as the borrower, the Company and Brentwood LIIT Inc., as the lender (the Lender). The Lender is controlled by a related party, Eric Watson, who beneficially owned approximately 16% of the Company on November 23, 2015. The Credit Agreement provides for a revolving credit facility in an initial amount of up to $1,000,000, subject to increases at the Lenders discretion as provided in the Credit Agreement (the Available Amount), up to a maximum amount of $5,000,000 (the Facility Amount). The Available
F-29
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 March 17, 2016, LIBB and the Lender agreed to increase the Available Amount. No later than March 24, 2016, LIBB, a wholly owned subsidiary of Long Island Iced Tea Corp., will obtain a $250,000 the March Advance from the Lender under the previously Credit Agreement, dated as of November 23, 2015 and amended as of January 10, 2016, by and among LIBB, the Company and the Lender. No later than April 22, 2016, LIBB will obtain another $250,000 advance from the Lender under the Credit Agreement (together with the March Advance, the Advances ). In connection with the Advances, in accordance with the terms of the Credit Agreement, the Available Amount was increased by $500,000 to $1,500,000, which will be borrowed in full upon completion of the Advances.
The Company has been focused on the development of its brand and its infrastructure, as well as in the establishment of a network of distributors and qualified direct accounts. From inception, the Company has financed its operations through the issuance of debt, equity, and through utilizing trade credit with its vendors.
The Company believes that as a result of a commitment for financing from a stockholder and its working capital as of December 31, 2015 that its cash resources will be sufficient to fund the Companys net cash requirements through the date of this report. However, in order to execute the Companys 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.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated in the accompanying audited consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various other estimates, including but not limited to, assessing the collectability of accounts receivable, accrual of rebates to customers, the valuation of inventory, determining the estimated lives of long-lived assets, determining the potential impairment of intangibles, the fair value of warrants issued, the fair value of stock options, and other legal claims and contingencies. The results of any changes in accounting estimates, are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.
Revenue 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 Companys customers.
F-30
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. The costs of all these various programs that were included as a reduction in net sales, totaled $124,122 and $103,262 for the years ended December 31, 2015 and 2014, respectively.
Shipping and handling costs incurred to move finished goods from the Companys sales distribution centers to customer locations are included in selling and marketing expenses on the consolidated statements of operations and totaled $126,955, and $37,594, for the years ended December 31, 2015 and 2014, respectively.
The Company expenses advertising costs as incurred. For the years ended December 31, 2015 and 2014, advertising expense was $246,997 and $697,146, respectively.
The Company expenses the costs of research and development as incurred. For the year ended December 31, 2015, research and development expense related to new product initiatives was $13,333. 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.
The Company records rent related to its operating leases on a straight line basis over the lease term.
The Company considers all highly liquid instruments with an original maturity of three months or less when acquired to be cash equivalents.
Pursuant to the terms of the Credit Agreement with Brentwood LIIT Inc., the Company is required to utilize $150,000 of the $1,000,000 proceeds from the Credit Agreement for initiatives related to the development of an alcohol business. As of December 31, 2015, $127,580 of the Companys cash on hand was restricted for the use in the development of the alcohol business. During the year ended December 31, 2015, the Company spent $22,420 primarily related to product development and costs of attending conferences.
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 customers 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 Companys receivables are dependent on each individual customers 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 Companys efforts have been unsuccessful in collecting the amount due. Accounts receivable are stated at the amounts management expects to collect.
F-31
Accounts receivable, net, is as follows:
|
|
|
||||||
As of | ||||||||
December 31,
2015 |
December 31,
2014 |
|||||||
Accounts receivable, gross | $ | 405,096 | $ | 198,637 | ||||
Allowance for doubtful accounts | (42,000 | ) | (24,000 | ) | ||||
Accounts receivable, net | $ | 363,096 | $ | 174,637 |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with financial institutions and accounts receivable. At times, the Companys cash in banks is in excess of the 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 December 31, 2015, two customers accounted for 14% and 30% of the Companys trade receivables. As of December 31, 2014, two customers accounted for 36% and 13%, of the Companys 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.
The Companys inventory includes raw materials such as bottles, sweeteners, labels, flavors and packaging. Finished goods inventory consists of bottled and packaged iced tea.
The Company values its inventories at the lower of cost or market, net of reserves. Cost is determined using the first-in, first-out (FIFO) method. During the year ended December 31, 2015, the Company recorded an adjustment of $41,790 to reduce the cost of certain products to estimated net realizable value. The following table summarizes inventories as of the dates presented:
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|
|
||||||
As of | ||||||||
December 31,
2015 |
December 31,
2014 |
|||||||
Finished goods | $ | 565,624 | $ | 433,478 | ||||
Raw materials and supplies | 146,934 | 127,629 | ||||||
Total inventories | $ | 712,558 | $ | 561,107 |
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 Companys 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.
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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. As of December 31, 2015 and 2014, the Company tested the domain name utilizing the qualitative method. Based on this analysis, it was determined that there was no indicators of impairment as of December 31, 2015 and 2014.
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 $7,494 and $12,498 as of December 31, 2015 and December 31, 2014, respectively. The estimated useful life of the capitalized costs of the Companys website is 3 years and is depreciated on a straight line basis. As of December 31, 2015, the cost of the website development was $15,000 and the accumulated amortization was $7,506. As of December 31, 2014, the cost of the website development was $15,000 and the accumulated amortization was $2,502. For the years ended December 31, 2015 and 2014, amortization expense was $5,004 and $2,502, respectively. Expected future amortization of website development costs is $5,000 and $2,494 for the years ended December 31, 2016 and 2017, respectively.
The Company capitalizes issuance costs related to lines of credit as deferred financing costs. The Company amortizes the deferred financing costs over the term of the line of credit.
Effective May 27, 2015, the Company completed the Mergers, whereby LIBB was deemed to be the accounting acquirer of Cullen. The historical financial statements were those of LIBB. From the date of the Mergers, the Companys results of operations began to be taxed as a C corporation. Prior to the Mergers, the Companys operations were taxed as a limited liability company, whereby the Company elected to be taxed as a partnership and the income or loss was required to be reported by each respective member on their separate income tax returns. Therefore, no provision for income taxes has been provided in the accompanying consolidated financial statements for operating results prior to May 27, 2015.
The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes (ASC 740). ASC 740 requires an asset and liability approach for financial accounting and reporting for income taxes and established for all the entities a minimum threshold for financial statement recognition of the benefit of tax positions, and requires certain expanded disclosures. The provision for income taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of the Companys assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In managements opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Based on the Companys evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Companys consolidated financial statements. The evaluation was performed for
F-33
the 2015 tax year, which is the first year for which the Company is subject to corporate income taxes. The Company believes that its income tax positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position or results of operations.
The Companys policy for recording interest and penalties associated with tax audits is to record such items as a component of income tax expense. There were no amounts accrued for penalties and interest for years ended December 31, 2015 and December 31, 2014. The Company does not expect its uncertain tax position to change during the next twelve months. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
The Company accounts for stock based compensation in accordance with ASC 718, Compensation Stock Compensation (ASC 718). ASC 718 establishes accounting for stock-based awards exchanged for employee services. Under the provisions of ASC 718, stock based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the employees requisite service period (generally the vesting period of the equity grant). The fair value of the Companys common stock options is estimated using the Black Scholes option-pricing model with the following assumptions: expected volatility, dividend rate, risk free interest rate and the expected life. The Company calculates the expected volatility using the historical volatility of comparable companies over the most recent period equal to the expected term and evaluates the extent to which available information indicates that future volatility may differ from historical volatility. The expected dividend rate is zero as the Company does not expect to pay or declare any cash dividends on common stock. The risk-free rates for the expected terms of the stock options are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company has not experienced significant exercise activity on stock options. Due to the lack of historical information, the Company determined the expected term of its stock option awards issued using the simplified method. The simplified method assumes each vesting tranche of the award has a term equal to the midpoint between when the award vests and when the award expires. The Company expenses stock-based compensation by using the straight-line method.
The Company accounts for stock and other equity instruments granted to consultants using the accounting guidance included in ASC 505-50, Equity-Based Payments to Non-Employees. In accordance with ASC 505-50, the Company estimates the fair value of equity instruments using the fair value of the Companys stock or the fair value of the services based upon which measure represents a more reliable measure of the cost incurred.
Basic net earnings per common share is computed by dividing income/loss available to common stockholders 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. The computation of diluted earnings per share excludes those with an exercise price in excess of the average market price of the Companys 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. For the year ended December 31, 2015, 194,667 options, 1,285,111 warrants, and 272,893 shares issuable upon conversion of the outstanding debt under Credit Agreement were excluded from the computation of earnings per share because they were anti-dilutive.
The carrying amounts of cash, accounts receivable, accrued expenses and notes payable approximate fair value due to the short-term nature of these instruments. In addition, for notes payable the Company believes that interest rates approximate prevailing rates.
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The Companys business is seasonal with the summer months in the second and third quarter of the fiscal year typically generating the largest net sales.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers (ASU 2014-09). It outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes 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. ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods, for public companies, and for annual periods beginning after December 15, 2018 and interim periods within those annual periods, for private companies. The Company is currently in the process of evaluating the impact of adoption of this ASU on the Companys financial statements.
In June 2014, the FASB issued Accounting Standards Update 2014-12, Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period, (ASU 2014-12) which requires performance-based awards with a performance target that affects vesting and that could be achieved after an employee completes the requisite service period to be accounted for as a performance condition. If performance targets are clearly defined and it is probable that the performance condition will be achieved, stock-based expense should be recognized over the remaining requisite service period. This guidance will be effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2015. Early adoption is permitted. The Company is in the process of evaluating the provisions of the ASU and assessing the potential effect on the Companys financial position or results of operations.
In August 2014, the FASB issued Accounting Standard Update 2014-15, Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern related to disclosure of uncertainties about an entitys ability to continue as a going concern. The new standard provides guidance on determining when and how reporting entities must disclose going concern uncertainties in their financial statements. The new standard requires management to perform interim and annual assessments of an entitys ability to continue as a going concern within one year of the date of issuance of the entitys financial statements. Additionally, an entity must provide certain disclosures if there is substantial doubt about the entitys ability to continue as a going concern. The new standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company is in the process of evaluating the impact of adoption on the Companys financial statements.
In April 2015, the FASB issued ASU 2015-03 which requires entities to present debt issuance costs related to a debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet as opposed to being presented as a deferred charge. ASU 2015-03 does not contain guidance for debt issuance costs related to line-of-credit arrangements. Consequently, in August 2015, the FASB issued ASU 2015-15 to add paragraphs indicating that the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The effective date of these pronouncements is for fiscal years beginning after December 15, 2015, with early adoption permitted. The Company does not expect this new guidance to have a material impact on the Companys consolidated financial statements. The Company currently capitalizes debt issuance costs related to its line of credit agreement as an asset in accordance with ASU 2015-03.
F-35
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory, which changed the subsequent measurement guidance from the lower of cost or market to the lower of cost or net realizable value, with net realizable value defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. The Company is currently evaluating the impact of this standard on its financial statements.
In November 2015, the FASB issued ASU 2015-17 which simplifies the presentation of deferred income taxes in a classified statement of financial position. Current GAAP require an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. ASU 2015-17 amends current GAAP to require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods with earlier application permitted as of the beginning of an interim or annual reporting period. The Company does not expect this new guidance to have a material impact on the Companys consolidated financial statements.
In January 2016, the FASB, issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and are to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard.
In February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02, Leases). Under the new guidance, at the commencement date, lessees will be required to recognize a lease liability, which is a lessees 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 lessees right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.
The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the review, other than described in Note 1 Business Organization, Liquidity, and Managements Plans, Note 7 Line of Credit and Note 15 Subsequent Events, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the financial statements.
F-36
Property and equipment are as follows:
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|
|
||||||
December 31,
2015 |
December 31,
2014 |
|||||||
Displays racks | $ | 184,523 | $ | 166,280 | ||||
Trucks and automobiles | 136,092 | 108,592 | ||||||
Vending machines | 166,271 | | ||||||
Cold drink store fixtures and equipment | 72,851 | 60,996 | ||||||
Furniture and equipment | 18,168 | 13,777 | ||||||
577,905 | 349,645 | |||||||
Less accumulated depreciation | (216,985 | ) | (107,522 | ) | ||||
Total, net | $ | 360,920 | $ | 242,123 |
For the years ended December 31, 2015 and 2014, depreciation expense was $109,463 and $72,484, respectively. The Companys property and equipment does not relate to the production of inventory as the Company produces its inventory at third party locations. As a result, depreciation expense was included in general and administrative expenses during the years ended December 31, 2015 and 2014.
During 2014, the Company financed the purchase of four vehicles with loans payable. As of December 31, 2015 and December 31, 2014, the Companys automobile loans consisted of the following:
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|
|
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As of | ||||||||
December 31, 2015 | December 31, 2014 | |||||||
Loan dated February 17, 2014 for $31,681 bearing interest at 3.59%. The loan requires 72 monthly payments of principal and interest of $490 and matures on March 3, 2020. | $ | 23,143 | $ | 28,088 | ||||
Loan dated April 3, 2014 for $23,206 bearing interest at 10.74%. The loan requires 36 monthly payments of principal and interest of $758 and matures on April 10, 2017. The loan is guaranteed by a stockholder and CEO of the Company. | 11,248 | 18,681 | ||||||
Loan dated June 3, 2014 for $14,954 bearing interest at 4.99%. The loan requires 60 monthly payments of principal and interest of $282 and matures on June 3, 2019. | 10,852 | 13,621 | ||||||
Loan dated June 3, 2014 for $14,954 bearing interest at 4.99%. The loan requires 60 monthly payments of principal and interest of $282 and matures on June 3, 2019. | 10,852 | 13,621 | ||||||
Total automobile loans | 56,095 | 74,011 | ||||||
Current portion of automobile loans | 19,231 | 17,915 | ||||||
Long term portion of automobile loans | $ | 36,864 | $ | 56,096 |
As of December 31, 2015, the gross carrying amount of fixed assets and accumulated depreciation of trucks and automobiles related to these loans were $108,592 and $37,577, respectively.
F-37
Future payments of the principal amount of automobile loans are as follows:
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For the years
the ended December 31, |
||||
2016 | $ | 19,231 | ||
2017 | 14,401 | |||
2018 | 11,944 | |||
2019 | 9,056 | |||
2020 | 1,463 | |||
Total | $ | 56,095 |
On November 23, 2015, the Company entered into a reimbursement agreement with Magnum Vending Corp. (Magnum), an entity managed by Philip Thomas, the Companys 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 Magnums cost for such products (See Note 14). The Company may terminate the agreement and all obligations to make future payments on ten days written notice to Magnum. As of December 31, 2015, the outstanding balance on the equipment loan was $113,104. Future payments of the principal amount under the expense reimbursement agreement are $36,627, $39,979, and $36,498 for the years ended December 31, 2016, 2017, and 2018, respectively. As of December 31, 2015, the cost of vending machines under this agreement was $117,917 with accumulated depreciation of $4,913.
On November 19, 2013 the Company and Cullen entered into a loan agreement (the Cullen Loan Agreement). Pursuant to the Cullen Loan Agreement, Cullen loaned the Company $600,000, bearing interest at 6% per annum with principal and accrued interest due on August 31, 2014. The Cullen Loan Agreement provided Cullen with the option to loan the Company an additional $600,000. The Cullen Loan Agreement also required that the Company utilize $450,000 of the loan to repay the Line of Credit Member. On December 5, 2013, Cullen exercised its option and extended to the Company an additional loan in the amount of $600,000 also bearing interest at 6% per annum with principal and accrued interest due on August 31, 2014. On April 1, 2014, the Company received $300,000 as proceeds from an additional loan from Cullen with interest at 6% per annum and a maturity of August 31, 2014. The maturity date of the Cullen Loans have been extended until March 15, 2016. These Cullen loans are secured by the accounts receivable and inventory of the Company. On March 26, 2015, the Company 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. On May 27, 2015, the Company consummated the Mergers. In connection with the Mergers, $1,500,000 principal amount of the intercompany loans were forgiven and the remaining $250,000 principal amount of the loans eliminate upon consolidation.
F-38
On August 26, 2013, the Company and Nortle Holdings Limited (Nortle) entered into a loan (Nortle Loan) and option agreement (Nortle Option Agreement). The Nortle Loan was secured by the inventory and accounts receivable of the Company. The Nortle Loan provided for Nortle to lend the Company an aggregate of $200,000, bearing interest at 6% per annum. The Nortle Loan and all accrued interest thereon, was due and payable on August 31, 2014. The Nortle Option Agreement provided that through October 18, 2013, Nortle had the option to loan the Company an additional $300,000, on the same terms as the Nortle Loan (Nortle Option). In the event that Nortle did not exercise the Nortle Option by October 18, 2013, then on such date, the interest rate on the existing loan with Nortle would increase to 12% per annum for the remaining term. Due to the fact that the Nortle Option to advance additional funds was not exercised, the interest rate was increased to 12% per annum. On June 25, 2014, Nortle converted its loan and accrued interest of $217,951 into 9,103 voting units in LIBB prior to the reverse merger.
On April 22, 2014, the Company and Ivory Castle Limited (Ivory Castle) entered into a loan (Ivory Castle Loan). The Ivory Castle Loan provided for Ivory Castle to lend the Company an aggregate of $1,300,000 bearing interest at 6%. The Ivory Castle Loan, together with accrued interest, was due and payable on August 31, 2014. On June 25, 2014, Ivory Castles loan and accrued interest of $1,309,107 was converted into 54,675 voting units in LIBB prior to the reverse merger.
In addition, as a condition of the conversion, the Company was required to obtain Ivory Castles approval in the event of a proposed business combination or in the event that the Company seeks equity financing in excess of $1,000,000 prior to June 25, 2015. On May 4, 2015, the Company received $400,000 as proceeds from a loan with Ivory Castle Limited, a stockholder of the Company. This note bears interest at 6% per annum and matures on July 31, 2016. On June 30, 2015 the note and accrued interest of $403,485 were converted into 100,872 shares of common stock.
On April 28, 2015, the Company received $150,000 as proceeds from a loan from Bass Properties, LLC, a stockholder of the Company. This note bears interest at 10% per annum and matures on July 31, 2016. On June 30, 2015 the note and accrued interest of $152,425 were converted into 38,107 shares of common stock.
On November 23, 2015, Long Island Iced Tea Corp. and Long Island Brand Beverages LLC, its wholly owned subsidiary, entered into a Credit and Security Agreement, by and among LIBB, as the borrower, the Company and Brentwood LIIT Inc., as the lender (the Lender). The Lender is controlled by Eric Watson, a related party, who immediately prior to the transactions beneficially owned more than 16% of the Companys outstanding common stock. The Credit Agreement provides for a revolving credit facility in an initial amount of up to $1,000,000, subject to increases as provided in the Credit Agreement, at the discretion of the Lender, up to a maximum amount of $5,000,000. 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. The proceeds of the credit facility may be used for purposes disclosed in writing to the Lender in connection with each advance.
The credit facility bears interest at a rate equal to the prime rate (3.5% at December 31, 2015) plus 7.5%, compounded monthly, and matures on November 23, 2018. Effective January 10, 2016, the line of 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
F-39
expenses at the maturity date. The credit facility is secured by a first priority security interest in all of the substantially all of the assets of the Company and LIBB, including the membership interests in LIBB held by the Company. The Company also has guaranteed the repayment of LIBBs obligations under the credit facility. In addition, the credit facility will be guaranteed by Philip Thomas, the Companys Chief Executive Officer and a director of the Company, in certain limited circumstances up to a maximum amount of $200,000.
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 and warranties and covenants, including negative covenants with respect to the incurrence of indebtedness.
The Lender may elect to convert the outstanding principal and interest under the credit facility into shares of the Companys 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 the Companys common stock, or in the event of a fundamental transaction (as defined in the note evidencing the indebtedness under the credit facility).
In connection with the credit facility, the Company issued a warrant to the Lender. The warrant entitles the holder to purchase 1,111,111 shares of the Companys common stock at an exercise price of $4.50 and includes a cashless exercise provision. The exercise price and number of shares of the Companys common stock or property issuable on exercise of the warrants are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of the common stock, or in the event of a fundamental transaction (as defined in the warrant).
The Lender will have certain piggyback registration rights, on customary terms, with respect to the shares of the Companys common stock issuable upon conversion of the credit facility and upon exercise of the warrant.
As of December 31, 2015, the outstanding balance on the line of credit was $1,091,571. The line of credit is convertible at $4.00 per share of common stock into 272,893 shares of common stock.
The 1,111,111 warrants issued in conjunction with the line of credit were initially valued at $1,725,934. The Black Scholes option pricing model was used to estimate fair value as of the date of issuance using the following assumptions: a stock price of $4.00, a dividend yield of 0%, expected volatility of 63%, a risk free interest rate of 1.26%, and a contractual life of 3 years.
The value of the warrants was included as a component of deferred financing costs in the consolidated balance sheet. Deferred financing costs are amortized over the three year term of the line of credit agreement. As of December 31, 2015, the gross carrying amount of deferred financing costs were $1,903,879 with accumulated amortization of $65,797. Future amortization of deferred financing costs are $634,627, $634,627, and $568,828 for the years ended December 31, 2016, 2017, and 2018.
In connection with the Mergers, on May 27, 2015 2,633,334 shares of common stock were issued to the former members of LIBB and 1,518,749 shares of common stock were issued to the former stockholders of Cullen.
On May 27, 2015, the Company issued 19,047 shares of common stock to a vendor in payment of its accounts payable balance of $98,120.
F-40
On June 30, 2015, loans from Ivory Castle Limited and Bass Properties LLC, together with accrued interest, of $555,910 were converted into 138,979 shares of common stock.
On June 30, 2015, the Company received gross proceeds of $50,000 through the issuance of 12,500 shares of common stock to family members of a director and Chief Executive Officer of the Company.
On June 30, 2015, the Company received gross proceeds of $50,000 through the issuance of 12,500 shares of common stock to a family member of a director of the Company.
On June 30, 2015, the Company received gross proceeds of $370,544 through the issuance of 92,636 shares of common stock Bass Properties LLC.
On June 30, 2015 the Company issued 9,038 shares of common stock to vendors in payment of accounts payable balances of $36,150.
On July 8, 2015, the Company received proceeds of $100,000 through the issuance of 25,000 shares of common stock.
On September 30, 2015, the Company sold an aggregate of 72,750 units at a price of $4.00 per unit. The sale was part of a private placement of up to $3,000,000 of units (the Offering) being conducted by the Company on a best efforts basis through a placement agent (the Placement Agent). The Offering will terminate on the earlier of the sale of the full $3,000,000 and October 30, 2015. The Company sold an aggregate of 65,500 units in the Offering on September 17, 2015. Accordingly, the Company has received gross proceeds of $553,000. Included in the raise were 6,250 units issued to a member of the Board of Directors, 6,250 units issued to the CEO and member of the Board of Directors, 22,500 units issued to Ivory Castle Limited, and 15,000 units issued to Bass Properties LLC. The units consist of one share of the Companys common stock and one warrant. The units are separable immediately upon issuance and are issued separately as shares of common stock and warrants. During October 2015, the Company sold an additional 17,500 units for gross proceeds $70,000 at a price per unit of $4.00 per unit pursuant to the Offering.
Each warrant entitles the holder to purchase one share of the Companys common stock at an exercise price of $6.00 per share, commencing immediately and expiring on September 17, 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 holders warrant upon surrender of such warrant.
For sales prior to October 31, 2015 the Placement Agent was entitled to a commission equal to (a) 10% of the aggregate purchase price from the units sold to investors introduced to the Company by the Placement Agent, and (b) 5% of the aggregate purchase price from the units sold to investors that were not introduced to the Company by the Placement Agent. In addition, the Company paid the Placement Agent a non-accountable expense allowance equal to 3% of the aggregate purchase price from the units sold to investors introduced to the Company by the Placement Agent. At the final closing, the Placement Agent also will receive warrants to purchase a number of shares of the Companys common stock equal to 10% of the total shares included in the units sold in the Placement, with an exercise price of $4.50 per share. Furthermore, if the Company sells the full $3,000,000 of units in the Placement, for the 12 month period commencing on the final closing of the Placement, the Placement Agent will have a right of first refusal to act as passive bookrunner with respect to
F-41
any proposed underwritten public distribution or private placement of the Companys securities. The Company also previously paid the Placement Agent a $15,000 commitment fee.
On November 30, 2015 and December 14, 2015, the Company sold an additional 18,250 units for gross proceeds of $73,000 at a price per unit of $4.00 per unit, including 10,000 units issued to 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) being conducted by the Company on a best efforts basis through a placement agent (the Placement Agent). The Offering will terminate on the earlier of the sale of the full $3,000,000 and March 14, 2016.
For sales occurring subsequent to November 24, 2015 through March 1, 2016, the Placement Agent for the Second Offering will be 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 will pay 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 will only be entitled to a 3% non-accountable allowance for investors introduced by our Company to the Placement Agent. In addition, the Placement Agent will receive 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. Furthermore, if the Company sells the full $3,000,000 of Units, for the 12 month period commencing on the final closing of the Second Offering, the Placement Agent will have a right of first refusal to act as passive bookrunner with respect to any proposed underwritten public distribution or private placement of the Companys securities.
Each warrant issued pursuant to the Second Offering entitles the holder to purchase one share of the Companys 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 holders warrant upon surrender of such warrant.
The gross proceeds from the Offering and the Second Offering were $696,000. The direct costs related to the First and Second Offering were $155,054. These direct costs include the value of 17,400 warrants to be issued to the Placement Agent. The 17,400 warrants to be issued were valued at $38,056. The Black Scholes option pricing model was used to estimate fair value as of the date of issuance using the following assumptions: a stock price of $4.00, a dividend yield of 0%, expected volatility of 68%, a risk free interest rate of 1.76%, and a contractual life of 5 years.
On May 27, 2015, the Companys 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.
F-42
On May 27, 2015, as part of their employment agreements, 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. These options were not issued under the 2015 Stock Option Plan.
The following table summarizes the stock option activity of the Company:
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|
|
|
|
|
|||||||||||||||
Shares |
Weighted
Average Exercise Price |
Weighted
Average Grant Date Fair Value |
Average
Remaining Contractual Term (Years) |
Aggregate
Intrinsic Value |
||||||||||||||||
Outstanding at January 1, 2015 | | $ | | $ | | |||||||||||||||
Granted | 194,667 | $ | 3.75 | $ | 6.22 | |||||||||||||||
Exercised | | $ | | $ | | |||||||||||||||
Expired, forfeited or cancelled | | $ | | $ | | |||||||||||||||
Outstanding at December 31, 2015 | 194,667 | $ | 3.75 | $ | 6.22 | 4.4 | $ | 48,667 | ||||||||||||
Exercisable at December 31, 2015 | 48,667 | $ | 3.75 | $ | 6.22 | 4.4 | $ | 12,167 |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Companys common stock.
As of December 31, 2015 there was a total of $851,161 of unrecognized compensation expense related to unvested options. The cost is expected to be recognized through 2017 over a weighted average period of 1.40 years.
The Company accounts for all stock based compensation as an expense in the financial statements and associated costs are measured at the fair value of the award. For the year ended December 31, 2015 the Company recorded stock based compensation of $359,303.
The Black Scholes option pricing model was used to estimate fair value as of the date of grants during 2015 using the following assumptions: a stock price of $8.70, a dividend yield of 0%, expected volatility of 79%, a risk free interest rate of 0.99%, and an expected life of 3.25 years. The simplified method was used to determine the expected life as the granted options as the options were considered to be plain-vanilla options.
During the year ended December 31, 2015, the Company issued 1,285,111 warrants (See Note 7 and Note 8), which are all exercisable.
The following table summarizes the stock warrant activity of the Company:
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|
|
|
|||||||||
Number of
shares |
Weighted
average exercise price |
Weighted
average contractual life (years) |
||||||||||
Outstanding January 1, 2015 | | $ | | | ||||||||
Issued | 1,285,111 | $ | 4.70 | 2.9 | ||||||||
Expired | | $ | | | ||||||||
Forfeited | | $ | | | ||||||||
Outstanding December 31, 2015 | 1,285,111 | $ | 4.70 | 2.9 |
F-43
Deferred income taxes, if applicable, are provided for the differences between the basis of assets and liabilities for financial reporting and income tax purposes. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
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|
|||
As of
December 31, 2015 |
||||
Deferred tax assets:
|
||||
Net operating loss carry forwards | $ | 713,603 | ||
Allowance for uncollectible accounts | 16,632 | |||
Stock-based compensation | 142,284 | |||
Other accruals | 95,040 | |||
Charitable contributions | 7,715 | |||
Compensation costs | 11,286 | |||
Valuation allowance | (986,560 | ) | ||
Net deferred tax asset | $ | |
A reconciliation of the provision for income taxes with the amounts computed by applying the statutory Federal income tax to income from operations before provision for income taxes is as follows:
|
|
|||
For the
year ended December 31, 2015 |
||||
Statutory federal tax rate | (34.0 | )% | ||
State, taxes, net of federal benefit | (5.6 | )% | ||
Permanent differences:
|
||||
Financing costs Warrant amortization | 0.8 | % | ||
LIBB earnings before merger with Cullen | 8.1 | % | ||
Valuation allowance | 30.7 | % | ||
Effective tax rate | | % |
Internal Revenue Code Section 382 imposes limitations on the use of net operating loss carryovers (NOLs) when the stock ownership of one or more 5% shareholders (shareholders owning 5% or more of the Companys outstanding capital stock) has increased on a cumulative basis by more than 50 percentage points.
On May 27, 2015, the Mergers represented a more than 50 percentage point change in ownership of Cullen, with the result that Cullens NOLs are subject to a limitation under Section 382. Upon a change of ownership under Section 382, such losses, provided that certain requirements for business continuity are met, would be subject to an annual limitation based upon the fair value of Cullen multiplied by the long-term tax exempt bond rate. The company determined that it did not meet the business continuity requirements, and as such, Cullens NOLs in the aggregate gross amount of approximately $5,327,000 were not eligible to be carried forward past the date of the Mergers.
The Company recorded gross deferred tax assets of $986,560, and net deferred tax assets of $0, after consideration of a full valuation allowance of $986,560.
Based on a history of cumulative losses at the Company and the results of operations for the year ended December 31, 2015, the Company determined that it is more likely than not it will not realize benefits from
F-44
the deferred tax assets. The Company will not record income tax benefits in the consolidated financial statements until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As a result of the analysis, the Company determined that a full valuation allowance against the deferred tax assets is required. As of December 31, 2015, the Company has recorded a valuation allowance of $986,560.
As of December 31, 2015, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $1,802,000 and $1,802,000, respectively.
The Company has identified its federal tax return and its state returns in New York, New Jersey, and Pennsylvania as its major tax jurisdictions.
As of December 31, 2015, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.
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 Companys 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 LIBBs complaint. LIBB filed papers in opposition and the motion was submitted by March 9, 2015. In addition, Revolution has filed a motion to amend its answer to include cross-claims against Ascent which were not asserted in its original answer of record. On February 5, 2016, the Court rendered a decision. The motion to dismiss was denied with the exception of two claims which the Court dismissed. In the same decision, the Court granted a separate motion filed by Revolution to amend its answer to include cross-claims against Ascent. The Companys management and legal counsel believes it is too early to determine the probable outcome of this matter.
On October 3, 2014, an action was filed by Madwell LLC (Madwell) in the Supreme Court of New York entitled Madwell LLC v. Long Island Brand Beverages LLC, Philip Thomas, its Chief Executive Officer, and Paul Vassilakos, Cullens former Chief Executive Officer and one of our directors. Madwell was seeking $940,000, which included $440,000 for breach of contract and payment of services as well as punitive damages of $500,000. On July 31, 2015, we entered into a settlement agreement with Madwell. Pursuant to the settlement agreement, we agreed to pay Madwell $440,000 in six installments with the last installment due no later than December 31, 2015. In addition, Madwell agreed to discontinue its lawsuit and the parties agreed to mutual releases of liability related to fees for advertising, marketing and design services or any matter relating to the lawsuit. The full amount has been paid to Madwell. In addition, the Company indemnified Mr. Vassilakos for a de minimis amount of expenses incurred by him in connection with this litigation. During January 2016, the Company made the final installment payment of $80,000 in settlement of the matter.
F-45
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%.
On May 27, 2015, the Company entered into employment agreements with Messrs. Thomas, Dydensborg and Meehan to serve as Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer, respectively. Each has a term of two years except the agreements with Messrs. Dydensborg and Meehan provide that either the Companys or the executive can terminate the agreement with six months advance notice (or three months advance notice, in the case of Mr. Meehan). The employment agreements will provide for Messrs. Thomas, Dydensborg and Meehan to receive base salaries of $150,000, $130,000 and $120,000. Additionally, each is entitled to an incentive bonus at the discretion of the Board of Directors of up to 50%, 40% and 25% of such individuals base salary, respectively.
On May 27, 2015, the Company entered into an employment agreement with Thomas Panza, a stockholder of the Company to serve as LIBBs Purchasing Manager. The agreement has a term of two years except that either LILBB or Mr. Panza can terminate the agreement with six months advance notice. Mr. Panza will receive a base salary of $80,000 and an incentive bonus of up to 50% of his base salary at the discretion of the Board of Directors.
On June 17, 2015, the Company announced that it had determined to explore potential opportunities in expanding the business into alcoholic beverages. In connection with the proposed expansion, the Company engaged Julian Davidson as a consultant to spearhead this new initiative. The Company will reimburse Julian Davidson for reasonable business expenses. In the event the Company raises $10,000,000, Julian Davidson would become an employee of the Company.
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. For each year of service after December 31, 2015, the Advisory Board members will be entitled to receive $30,000 worth of common stock and $12,000 in cash on an annual basis. In addition, the members will be entitled to reimbursement of expenses and $1,000 for each meeting attended. The agreements can be terminated by either party with 30 days notice. During the year ended December 31, 2015, the Company incurred $120,000 in costs which are included in general and administrative expenses in the consolidated statements of operations.
As per the terms of the Credit Agreement, the Company is required to reserve $150,000 for expenditures related to exploring the alcohol market. As of December 31, 2015, the Company spent $22,420 on alcohol related expenditures. As a result, the restricted cash was $127,580 as of December 31, 2015.
Effective May 15, 2012, the Company entered into a month to month agreement to lease its operating facilities. Pursuant to such agreement, the Company leases 1,750 square feet of warehouse space for a fee of $2,450 per month. The lease expired in September 2014.
On June 6, 2014, the Company entered into a lease agreement. The lease commenced on July 1, 2014 and extends through June 30, 2017 and includes a two year extension option.
Rent expense for the years ended December 31, 2015 and 2014 was $46,459 and $56,317, respectively.
F-46
Future minimum payments under the Companys leases are as follows:
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For the years
the ended December 31, |
||||
2016 | $ | 52,273 | ||
2017 | 26,523 | |||
Total | $ | 78,796 |
In addition, the Company utilizes public warehouse space for its inventory. Public storage expense for the year ended December 31, 2015 and 2014 was $50,236 and $28,530, respectively.
For the year ended December 31, 2015, one customer accounted for 10% of net sales. For the year ended December 31, 2014, three customers accounted for 32%, 16%, and 14% of the Companys net sales.
For the years ended December 31, 2015 and 2014, the largest vendors represented approximately 80% (four vendors) and 70% (three vendors) of purchases, respectively.
During the year ended December 31, 2015, the Company entered into a Credit Agreement with Brentwood LIIT Inc., a related party (see Note 7.).
The Company recorded revenue related to sales to two entities, whose owners became employees of the Company during 2014. For the year ended December 31, 2015 and 2014, sales to these related parties were $35,523 and $75,997, respectively. As of December 31, 2015, accounts receivable from these customers were $15,513. As of December 31, 2014, accounts receivable from these customers were $25,829.
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 year ended December 31, 2015, sales to this related party were $14,527. As of December 31, 2015, accounts receivable from this customer were $51,961.
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 years ended December 31, 2015 and 2014, sales to this related party were $4,800 and $6,430, respectively. As of December 31, 2015 and December 31, 2014, there was $518 and $1,326, respectively, due from this related party which was included in accounts receivable in the consolidated balance sheets. The Company also purchases product to supplement certain vending sales from this entity. For the year ended December 31, 2015, the Company purchased $9,356 of product from this entity. As of December 31, 2015, the outstanding balance due to this entity included in accounts payable was $3,242.
During the year ended December 31, 2015, the Company accrued $120,000 in expenses related to fees payable to the Companys Board of Directors which were included in general and administrative expenses in the statements of operations. The non-employee members of the Board of Directors will receive $30,000 worth of stock for their services. These shares were issued on January 27, 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 December 31, 2015 accounts payable and accrued expenses to these parties were $87,258.
F-47
On August 21, 2014, the Company entered into a loan agreement with Philip Thomas for $30,000. The loan bears interest at 6% and had an original maturity date of August 31, 2014. On August 30, 2014, the loan was extended to October 15, 2014. On October 15, 2014, the Company repaid the full amount of the loan together with accrued interest in the total amount of $30,266.
Subsequent to year end, the Company raised gross proceeds of $686,900 through the sale of 171,725 units, including the sale of 7,500 units to a member of the Board of Directors. Each unit consists of one share of common stock and one warrant.
On March 17, 2016, LIBB and the Lender agreed to increase the Available Amount. (See Note 7) No later than March 24, 2016, LIBB, a wholly owned subsidiary of Long Island Iced Tea Corp., will obtain a $250,000 advance from the Lender under the previously Credit Agreement, dated as of November 23, 2015 and amended as of January 10, 2016, by and among LIBB, the Company and the Lender. No later than April 22, 2016, LIBB will obtain another $250,000 advance from the Lender under the Credit Agreement. In connection with the Advances, in accordance with the terms of the Credit Agreement, the Available Amount was increased by $500,000 to $1,500,000, which will be borrowed in full upon completion of the Advances.
The loans under the Credit Agreement are evidenced by a promissory note (the Note ). The Lender may elect to convert the outstanding principal and interest under the Note into shares of the Companys common stock at a conversion price of $4.00 per share. Accordingly, as a result of the Advances the Lender will be able to convert the Note into an additional 125,000 shares of the Companys common stock.
F-48
The following table sets forth the fees and expenses, other than underwriting discounts and commissions, payable by us in connection with the offering described in this Registration Statement. All amounts shown are estimates other than the SEC registration fee, the FINRA filing fee and the NASDAQ listing fee.
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|
|||
Amount | ||||
SEC registration fee | $ | 1,160 | ||
FINRA filing fee | 2,225 | |||
NASDAQ listing fee | 50,000 | |||
Printing and mailing expenses | 50,000 | |||
Accounting fees and expenses | 50,000 | |||
Legal fees and expenses | 150,000 | |||
Transfer agent fees and expenses | 10,000 | |||
Miscellaneous | 86,615 | |||
Total expenses | $ | 400,000 |
Our amended and restated certificate of incorporation provides that no director of ours will be personally liable to us or any of its stockholders for monetary damages arising from the directors breach of fiduciary duty as a director. However, this does not apply with respect to any action in which the director would be liable under Section 174 of the DGCL nor does it apply with respect to any liability in which the director (i) breached his duty of loyalty to Holdco or its stockholders; (ii) did not act in good faith or, in failing to act, did not act in good faith; (iii) acted in a manner involving intentional misconduct or a knowing violation of law or, in failing to act, shall have acted in a manner involving intentional misconduct or a knowing violation of law; or (iv) derived an improper personal benefit. This provision could have the effect of reducing the likelihood of derivative litigation against our directors and may discourage or deter our stockholders or management from bringing a lawsuit against our directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our stockholders.
Our amended and restated certificate of incorporation also provides that we will indemnify any director or officer of ours to the fullest extent permitted by law. Our bylaws further provide that we will indemnify to the fullest extent permitted by law any person who becomes party to a proceeding by reason of the fact that he is or was an director, officer, employee or agent of ours, or by reason of the fact that he is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. We have entered, and intend to continue to enter, into separate indemnification agreements with our directors, executive officers and other key employees, in addition to the indemnification provided for in our amended and restated certificate of incorporation and bylaws. We also maintain directors and officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the Securities Act), may be permitted to directors, officers or person controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is therefore unenforceable.
Effective May 27, 2015, we consummated the transactions contemplated by the Merger Agreement and Plan of Reorganization (the Merger Agreement), dated as of December 31, 2015 and amended April 23, 2015, by and among us, Cullen Agricultural Holding Corp. (Cullen), Cullen Merger Sub, Inc., a wholly owned subsidiary of ours (Parent Merger Sub), LIIT Acquisition Sub, LLC, a wholly owned subsidiary of ours (LIBB Merger Sub), Long Island Brand Beverages, LLC (LIBB), Phil Thomas and Thomas Panza, and the other members of LIBB who signed joinder agreements to become parties to the Merger Agreement.
II-1
Upon the closing of the transactions contemplated by the Merger Agreement, (i) Parent Merger Sub merged with and into Cullen, with Cullen surviving as a wholly owned subsidiary of ours (the Parent Merger), and (ii) LIBB Merger Sub merged with and into LIBB, with LIBB surviving as a wholly owned subsidiary of ours (the Company Merger). Upon the closing of the Parent Merger, every fifteen shares of common stock of Cullen were automatically converted into one share of our common stock. Upon consummation of Company Merger, we issued an aggregate of 2,633,334 shares of our common stock to the former members of LIBB (Members), in exchange for all of the membership interests of LIBB. As a result of the Parent Merger and the Company Merger, we became a public company, the stockholders of Cullen and the Members became our stockholders and Cullen and LIBB became wholly owned subsidiaries of ours.
The issuances to the Members were made in reliance upon the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the Securities Act), and Rule 506 thereunder, for the offer and sale of securities not involving a public offering.
On June 30, 2015, we sold an aggregate of 256,615 shares of our common stock to certain accredited investors at a purchase price of $4.00 per share, for an aggregate purchase price of approximately $1,027,000, including through the cancellation of an aggregate of approximately $556,000 in outstanding debt, including accrued interest, owed by the Company to certain of the investors. The shares were sold in a private placement pursuant to the terms of subscription agreements executed by each of the investors. Family members of Philip Thomas, the Companys Chief Executive Officer and a member of its board of directors, and family members of Paul N. Vassilakos, a member of the Companys board of directors, each purchased $50,000 worth of shares in the private placement.
On July 8, 2015, we sold an aggregate of 25,000 shares of our common stock to certain accredited investors at a purchase price of $4.00 per share, for an aggregate purchase price of approximately $100,000. The shares were sold in a private placement pursuant to the terms of subscription agreements executed by each of the investors.
The private placements were conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act. The offerings were made solely to accredited investors without the use of any general solicitation or general advertising.
Commencing on August 10, 2015 and ending on October 30, 2015, we conducted a best efforts private placement of up to $3,000,000 of units (the August Private Placement), at a price of $4.00 per unit, through Network 1 Financial Securities, Inc., as placement agent (the Placement Agent). During the August Private Placement, we sold an aggregate of 155,750 units for total gross proceeds of $623,000. The units consisted of one share of our common stock (or an aggregate of 155,750 shares) and one warrant (or an aggregate of 155,750 warrants). The units were separable immediately upon issuance and were issued separately as shares of common stock and warrants.
Each warrant entitles the holder to purchase one share of our common stock at an exercise price of $6.00 per share, commencing immediately and expiring on September 17, 2018. The exercise price and number of shares of common stock issuable on exercise of the warrants are subject to standard anti-dilution provisions. We may call the warrants for redemption, at our option, 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 holders warrant upon surrender of such warrant.
Pursuant to the subscription agreement entered into with each of the investors in the August Private Placement, the investors have certain piggyback registration rights covering the resale of the shares of common stock included in the units and the shares of common stock underlying the warrants.
II-2
We incurred fees paid or to be paid in cash to the Placement Agent in connection with the August Private Placement of $15,000 as a commitment fee, $51,800 in commissions and $16,890 as a non-accountable expense allowance. As additional compensation, we issued the Placement Agent a warrant to purchase 15,575 shares of our common stock at an exercise price of $4.50 per share.
The August Private Placement was conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder. The offering was made solely to accredited investors without the use of any general solicitation or general advertising.
On November 23, 2015, we entered into a Credit and Security Agreement (the Credit Agreement), as amended as of January 10, 2016 and April 7, 2016, with Brentwood LIIT Inc. (Brentwood), as the lender. Brentwood is owned by Eric Watson, who immediately prior to the entering into the Credit Agreement beneficially owned more than 16% of our outstanding common stock, and KA#2 Ltd. The Credit Agreement provides for a revolving credit facility (the Credit Facility). 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 maximum of $5,000,000 (the Facility Amount), and we may obtain further advances, subject to the approval of Brentwood. The proceeds of the Credit Facility are to be used for the purposes disclosed in writing to Brentwood in connection with each advance. Brentwood has approved an Available Amount of $1,500,000 and has made advances to us in the same amount. Upon the completion of all approved advances, 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 $1,627,930.
The loans under the Credit Agreement are evidenced by a promissory note (the Brentwood Note). Brentwood may elect to convert the outstanding principal and interest under the Brentwood 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 a warrant to Brentwood (the Brentwood Warrant). The Brentwood Warrant entitles the holder to purchase 1,111,111 shares of common stock at an exercise price of $4.50 and includes a cashless exercise provision. The exercise price and number of shares of our common stock or property issuable on exercise of the Brentwood Warrant are subject to adjustment in the event of any stock split, stock combination, stock dividend or reclassification of the common stock, or in the event of a fundamental transaction.
Brentwood has agreed to convert all of the outstanding principal and interest under the Brentwood Note into 421,972 shares of our common stock at the closing of the offering. In addition, Brentwood will exchange the Brentwood Warrant for 486,111 shares of our common stock at such time. The Credit Facility will remain outstanding, except that the Facility Amount will be reduced to $3,500,000.
The securities issuable under the Credit Agreement, including the shares of the Companys common stock issuable upon conversion of the Note and exercise of the Warrant, are being offered pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act, for the offer and sale of securities not involving a public offering.
Commencing on November 24, 2015 and ending on March 14, 2016, we conducted another best efforts private placement of up to $3,000,000 of units (the November Private Placement), at a price of $4.00 per unit, through the Placement Agent. During the November Private Placement, we sold an aggregate of 189,975 units for total gross proceeds of $759,900. The units consisted of one share of our common stock (or an aggregate of 189,975 shares) and one warrant (or an aggregate of 189,975 warrants). The units were separable immediately upon issuance and were issued separately as shares of common stock and warrants.
Each warrant entitles the holder to purchase one share of 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.
II-3
We may call the warrants for redemption, at our option, 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 warrants will have no further rights except to receive the redemption price for such holders warrant upon surrender of such warrant.
Pursuant to the subscription agreement entered into with each of the investors in the November Private Placement, the investors have certain piggyback registration rights covering the resale of the shares of common stock included in the units and the shares of common stock underlying the warrants.
We incurred fees paid or to be paid in cash to the placement agent in connection with the November Private Placement of $42,990 in commissions and $22,797 as a non-accountable expense allowance. As additional compensation, we issued a warrant to the placement agent to purchase 18,998 shares of common stock at an exercise price of $4.50 per share.
The November Private Placement was conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder. The offering was made solely to accredited investors without the use of any general solicitation or general advertising.
On March 29 and 31, 2016, we sold an additional 58,750 units on a private placement basis, or the March Private Placement, directly to various accredited investors, at a price of $4.00 per unit, for aggregate gross proceeds of $235,000. The units consisted of one share of common stock (for an aggregate of 58,750 shares) and one warrant (for an aggregate of 58,750 warrants). Each warrant entitles the holder to purchase one share of common stock at an exercise price of $6.00 per share, expiring on March 29, 2019.
The March Private Placement was conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder. The offering was made solely to accredited investors without the use of any general solicitation or general advertising.
On January 26, 2016, the Company granted 8,956 shares of its common stock to each of its nonemployee directors, Kerry Kennedy, Paul Vassilakos, Edward Hanson and Richard Roberts, for an aggregate of 35,824 shares, as compensation for their services as directors. On the same day, the Company also granted 7,500 shares of its common stock to each of the members of its advisory board, John Carson, Tom Cardella, Dan Holland and David Williams, for an aggregate of 30,000 shares of its common stock, as compensation for their advisory services.
On March 31, 2016, we granted 7,500 shares of our common stock to our Vice President of National Sales & Marketing, Joseph Caramele, and we granted an aggregate of 34,133 shares of common stock to several consultants, vendors and advisors, which includes 15,833 shares issued to Bert Moore, a member of our Advisory Board, related to a consumer marketing project.
The January stock grants were conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and the March stock grants were conducted pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D thereunder, for the offer and sale of securities not involving a public offering.
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(a) | The following exhibits are filed as part of this Registration Statement: |
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Exhibit
No. |
Description | |
1.1 | Form of Underwriting Agreement. | |
3.1 | Amended and Restated Certificate of Incorporation (incorporated by reference from Annex C of the proxy statement/prospectus that forms a part of the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
3.2 | Bylaws (incorporated from Annex D of the proxy statement/prospectus that forms a part of the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
4.1 | Specimen common stock Certificate of Long Island Iced Tea Corp (incorporated by reference from Exhibit 4.1 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
4.2 | Form of Underwriters Warrant. | |
5.1 | Opinion of Graubard Miller. | |
10.1 | Form of Registration Rights Agreement among Triplecrown Acquisition Corp. and the Triplecrown Founders (incorporated by reference from Triplecrown Acquisition Corp.s Registration Statement on Form S-1 (File Nos. 333-144523 and 333-146850) originally filed on July 12, 2007). | |
10.2 | Sale and Purchase Agreement, dated as of December 31, 2014, by and between Cullen Agricultural Holding Corp. and Hart Acquisitions, LLC (incorporated by reference from Exhibit 10.5 to Cullens Annual Report on Form 10-K filed on March 4, 2015). | |
10.3 | Form of Lock-Up Agreement (incorporated from Exhibit 10.1 to Cullens Current Report on Form 8-K filed on January 6, 2015). | |
10.4 | Form of Escrow Agreement (incorporated by reference from Exhibit 10.4 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.5 | Form of Registration Rights Agreement (incorporated from Exhibit 10.3 to Cullens Current Report on Form 8-K filed on January 6, 2015). | |
10.6 | Form of Employment Agreement between Long Island Iced Tea Corp. and Philip Thomas (incorporated by reference from Exhibit 10.9 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.7 | Form of Employment Agreement between Long Island Iced Tea Corp. and Peter Dydensborg (incorporated by reference from Exhibit 10.10 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.8 | Form of Employment Agreement between Long Island Iced Tea Corp. and James Meehan (incorporated by reference from Exhibit 10.11 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.9 | Form of Employment Agreement between Long Island Brand Beverages LLC. and Thomas Panza (incorporated by reference from Exhibit 10.12 to the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.10 | 2015 Long-Term Incentive Equity Plan (incorporated by reference from Annex G of the proxy statement/prospectus that forms a part of the Companys Registration Statement on Form S-4 (File No. 333-201527), originally filed on January 15, 2015). | |
10.11 | Form of Executive Stock Option Agreement (incorporated by from Exhibit 10.11 to the Companys Annual Report on Form 10-K filed on March 23, 2016). | |
10.12 | Form of Subscription Agreement (incorporated by reference from Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q filed on November 13, 2015). | |
10.13 | Form of Warrant (incorporated by reference from Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q filed on November 13, 2015). |
II-5
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Exhibit
No. |
Description | |
10.14 | Expense Reimbursement Agreement, dated as of November 23, 2015, by and between Long Island Iced Tea Corp. and Magnum Vending Corp. (incorporated from Exhibit 10.5 to the Companys Current Report on Form 8-K filed on November 24, 2015). | |
10.15 | Credit and Security Agreement, dated as of November 23, 2015, by and among Long Island Brand Beverages, LLC, Long Island Iced Tea Corp. and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Companys Current Report on Form 8-K filed on November 24, 2015). | |
10.16 | Form of Secured Convertible Promissory Note (incorporated from Exhibit 10.2 to the Companys Current Report on Form 8-K filed on November 24, 2015). | |
10.17 | Form of Brentwood Warrant (incorporated from Exhibit C to the Credit and Security Agreement). (incorporated from Exhibit 10.3 to the Companys Current Report on Form 8-K filed on November 24, 2015). | |
10.18 | Form of Parent Guaranty (incorporated from Exhibit D to the Credit and Security Agreement). (incorporated from Exhibit 10.4 to the Companys Current Report on Form 8-K filed on November 24, 2015). | |
10.19 | Registration Rights Agreement, dated as of December 3, 2015, by and among Long Island Brand Beverages, LLC, Long Island Iced Tea Corp. and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 16, 2015). | |
10.20 | Pledge and Escrow Agreement, dated as of December 3, 2015, by and among Long Island Iced Tea Corp., Brentwood LIIT Inc. and Graubard Miller (incorporated from Exhibit 10.2 to the Companys Current Report on Form 8-K filed on December 16, 2015). | |
10.21 | First Amendment to Credit and Security Agreement, effective as of January 10, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp., and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Companys Current Report on Form 8-K filed on January 20, 2016). | |
10.22 | Second Amendment to Credit and Security Agreement, effective as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp., and Brentwood LIIT Inc. (incorporated from Exhibit 10.1 to the Companys Current Report on Form 8-K filed on April 8, 2016). | |
10.23 | Amendment No. 1 to Registration Rights Agreement, dated as of April 7, 2016, by and among Long Island Brand Beverages LLC, Long Island Iced Tea Corp. and Brentwood LIIT Inc. (incorporated from Exhibit 10.2 to the Companys Current Report on Form 8-K filed on April 8, 2016). | |
21.1 | List of subsidiaries (incorporated by from Exhibit 21.1 to the Companys Annual Report on Form 10-K filed on March 23, 2016). | |
23.1 | Consent of Marcum LLP. | |
23.2 | Consent of Graubard Miller (incorporated from Exhibit 5.1). | |
24.1 | Power of Attorney (set forth on the signature page of the initial filing of the Registration Statement). | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Scheme. | |
101.CAL | XBRL Taxonomy Calculation Linkbase. | |
101.DEF | XBRL Taxonomy Definition Linkbase. | |
101.LAB | XBRL Taxonomy Label Linkbase. | |
101.PRE | XBRL Taxonomy Presentation Linkbase. |
| To be filed by amendment. |
(b) | No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto. |
II-6
The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting certificates in such denominations and registered in such names as required by underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referenced in Item 14 of this Registration Statement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
(2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
(3) | For purposes of determining any liability under the Securities Act, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A (§230.430A of this chapter), shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
II-7
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized on this 9th day of June, 2016.
By: |
/s/ Philip Thomas
Name: Philip Thomas Title: Chief Executive Officer |
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints Philip Thomas, his or her true and lawful attorney-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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Name | Title | Date | ||
/s/ Philip Thomas
Philip Thomas |
Chief Executive Officer (Principal Executive Officer) | June 9, 2016 | ||
/s/ Richard Allen
Richard Allen |
Chief Financial Officer (Principal Financial Officer) | June 9, 2016 | ||
/s/ James Meehan
James Meehan |
Chief Accounting Officer (Principal Accounting Officer) | June 9, 2016 | ||
/s/ Julian Davidson
Julian Davidson |
Executive Chairman | June 9, 2016 | ||
*
Edward Hanson |
Director | June 9, 2016 | ||
*
Kerry Kennedy |
Director | June 9, 2016 | ||
*
Richard Roberts |
Director | June 9, 2016 | ||
*
Paul Vassilakos |
Director | June 9, 2016 | ||
*
Tom Cardella |
Director | June 9, 2016 |
*By: |
/s/ Philip Thomas
Philip Thomas, attorney-in-fact |
II-8
Exhibit 1.1
LONG ISLAND ICED TEA CORP.
UNDERWRITING AGREEMENT
June____, 2016
NETWORK 1 FINANCIAL SECURITIES, INC.
Galleria, Suite 241
2 Bridge Avenue
Red Bank, N.J. 07701
As Representative of the Underwriters
named on Schedule A hereto
Ladies and Gentlemen:
1. Representative .
Long Island Iced Tea Corp., a corporation organized and existing under the laws of State of Delaware (the “ Company ”), confirms its agreement, subject to the terms and conditions set forth herein, with each of the underwriters listed on Schedule A hereto (collectively, the “ Underwriters ”), for whom Network 1 Financial Securities, Inc. is acting as representative (in such capacity, the “ Representative ”), to sell and issue to the Underwriters an aggregate of [*] shares of common stock (the “ Shares ”), $0.0001 par value per share (the “Common Stock”), of the Company (the “ Firm Shares ”). The Firm Shares are more fully described in the Registration Statement and Prospectus referred to below.
The offering and sale of the Shares contemplated by this underwriting agreement (this “ Agreement ”) is referred to herein as the “ Offering .”
2. Purchase and Sale of Securities .
2.1 Firm Securities .
2.1.1 Nature and Purchase of Firm Securities .
The Underwriters agree to purchase from the Company the Firm Shares at a purchase price of $[*] per Share ([93]% of the per Share public offering price). The Firm Shares are to be offered initially to the public in the Offering at $[*] per Share, the offering price set forth on the cover page of the Prospectus (as defined in Section 3.1.1 hereof).
2.1.2 Shares Payment and Delivery .
(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the third (3 rd ) Business Day following the effective date (the “ Effective Date ”) of the Registration Statement (as defined in Section 3.1.1 below) (or the fourth (4 th ) Business Day following the Effective Date, if the Registration Statement is declared effective after 4:00 p.m. Eastern Time) or at such earlier time as shall be agreed upon by the Representative and the Company at such place (or remotely by facsimile or other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “ Closing Date .”
(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery of the certificates (in form and substance reasonably satisfactory to the Representative) representing the Firm Shares (or through the facilities of the Depository Trust Company (“ DTC ”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Underwriters may request in writing at least two (2) full Business Days (defined below) prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Underwriters for all the Firm Shares. The term “ Business Day ” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
2.2 Over-allotment Option .
2.2.1 Option Shares . For the purposes of covering any over-allotments made by the Underwriters in connection with the distribution and sale of the Firm Shares, the Underwriters are hereby granted an option to purchase from the Company up to [ * ] shares (the “ Option Shares ”) of Common Stock representing fifteen percent (15%) of the Firm Shares sold in the Offering (the “ Over-allotment Option ”). The purchase price to be paid for the Option Shares will be the same price per Option Share as the price per Firm Share set forth in Section 2.1.1 hereof. The Firm Shares and the Option Shares are hereinafter referred to collectively as the “ Securities .”
2.2.2 Exercise of Option . The Over-allotment Option granted pursuant to Section 2.2.1 hereof may be exercised by the Underwriters as to all (at any time) or any part (from time to time but no more than two times) of the Option Shares within forty-five (45) days after the Effective Date. The Underwriters will not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in accordance with Section 10.1 herein setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares if other than the Closing Date (the “ Option Closing Date ”), which will not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at such place (including remotely by facsimile or other electronic transmission) as shall be agreed upon by the Company and the Representative. Upon exercise of the Over-allotment Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Option Shares specified in such notice.
2.2.3 Payment and Delivery . Payment for the Option Shares will be made on the Option Closing Date by wire transfer in Federal (same day) funds as follows: $[*] per Option Share ([93]% of the per Share public offering price), payable to the order of the Company upon delivery to you of certificates (in form and substance reasonably satisfactory to the Representative) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Underwriters may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Underwriters for applicable Option Shares.
2.3 Underwriters’ Warrants . The Company hereby agrees to issue and sell to the Underwriters (and/or their designees) on the Closing Date warrants to purchase that number of shares of Common Stock equal to an aggregate of 5% of the amount of Securities sold in the Offering, including all Option Shares (the “ Underwriters’ Warrants ”). The Underwriters’ Warrants as evidenced by the form of agreement attached hereto as Exhibit A (the “ Underwriters’ Warrant Agreement ”) , shall be exercisable, in whole or in part, commencing one hundred eighty (180) days after the Effective Date and expiring five (5) years after the Effective Date at an initial exercise price per share of Common Stock of $[*] ([125]% of the public offering price of the Securities). The Underwriters’ Warrants and the shares of Common Stock of the Company issuable upon exercise thereof (“ Warrant Shares ”) are sometimes referred to herein collectively as the “ Warrant Securities .” Each Underwriter understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Warrant Securities and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Warrant Securities, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities other than in accordance with FINRA Rule 5110.
3. Representations and Warranties of the Company . The Company represents and warrants in respect of itself and in respect of its subsidiaries as the context would reasonably include the representation and warranty to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:
3.1 Filing of Registration Statement .
3.1.1 Pursuant to the Act . The Company has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement and an amendment or amendments thereto, on Form S-1 (File No. 333-210669), including any related preliminary prospectus (which for purposes of this Agreement, includes any prospectus that is included in the Registration Statement immediately prior to the effectiveness of the Registration Statement for the registration of the Securities under the Securities Act of 1933, as amended (the “ Act ”), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations (the “ Regulations ”) of the Commission under the Act. The conditions for use of Form S-1 to register the Securities under the Act, as set forth in the General Instructions to such Form, have been satisfied. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to Rule 430A of the Regulations) is hereinafter called the “ Registration Statement ,” and the form of the final prospectus dated the Effective Date included in the Registration Statement (or, if applicable, the form of final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Regulations filed with the Commission pursuant to Rule 424 of the Regulations) is hereinafter called the “ Prospectus .” For purposes of this Agreement, “ Applicable Time ”, as used in the Act, means :00 p.m., New York City time, on the date of this Agreement. Prior to the Applicable Time, the Company prepared a preliminary prospectus, dated [ ,] for distribution by the Underwriters (taken together the “ Statutory Prospectus ”). If the Company has filed, or is required pursuant to the terms hereof to file, a registration statement pursuant to Rule 462(b) of the Regulations registering the Securities (a “ Rule 462(b) Registration Statement ”), then, unless otherwise specified, any reference herein to the term “ Registration Statement ” shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which, if filed, becomes effective upon filing, no other document with respect to the Registration Statement has heretofore been filed under the Act with the Commission. All of the Securities have been registered under the Securities Act pursuant to the Registration Statement or, if any Rule 462(b) Registration Statement is filed, will be duly registered under the Securities Act with the filing of such Rule 462(b) Registration Statement. The Registration Statement has been declared effective by the Commission on the date hereof. If, subsequent to the date of this Agreement, the Company or the Underwriters have determined that at the Applicable Time the Statutory Prospectus included an untrue statement of a material fact or omitted a statement of material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and have agreed to provide an opportunity to purchasers of the Securities to terminate their old purchase contracts and enter into new purchase contracts, then the Statutory Prospectus will be deemed to include any additional information available to purchasers at the time of entry into the first such new purchase contract.
3.1.2 Registration under the Exchange Act and Stock Exchange Listing . The Company has filed with the Commission a Form 8-A12B (File Number 001- ), as amended, providing for the registration under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), of the Common Stock. The registration of the Securities under the Exchange Act is effective. The Common Stock is registered pursuant to Section 12(b) of the Exchange Act and has been approved for listing on The NASDAQ Capital Market (“ NASDAQ ”), subject to official notice of issuance and evidence of satisfactory distribution, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from NASDAQ, nor has the Company received any notification that the Commission or NASDAQ is contemplating terminating such registration or listing except as described in the Registration Statement and Prospectus.
3.2 No Stop Orders, etc . Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Statutory Prospectus, Prospectus or the Registration Statement or has instituted or, to the Company’s knowledge, threatened to institute any proceedings with respect to such an order.
3.3 Disclosures in Registration Statement .
3.3.1 10b-5 Representation . At the time of effectiveness of the Registration Statement (or at the effective time of any post-effective amendment to the Registration Statement) and at all times subsequent thereto up to the Closing Date and the Option Closing Date, if any, the Registration Statement, the Statutory Prospectus and the Prospectus contained or will contain all material statements that are required to be stated therein in accordance with the Act and the Regulations, and did or will, in all material respects, conform to the requirements of the Act and the Regulations. On the Effective Date, the Registration Statement did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. As of the Closing Date and the Option Closing Date, if any, the Prospectus (together with any supplement thereto) did not and will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. As of the Applicable Time, the Statutory Prospectus did not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The representations and warranties made in this Section 3.3.1 do not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Underwriters expressly for use in the Registration Statement, the Statutory Prospectus or Prospectus or any amendment thereof or supplement thereto, which information, it is agreed, shall consist solely of (i) the names of the Underwriters appearing under “Underwriting” and (v) information under “Underwriting—Price Stabilization, Short Positions and Penalty Bids.” (“ Underwriters’ Information ”).
3.3.2 Disclosure of Agreements . The agreements and documents described in the Registration Statement, the Statutory Prospectus and the Prospectus conform to the descriptions thereof contained therein and there are no agreements or other documents required to be described in the Registration Statement, the Statutory Prospectus or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and (i) that is referred to in the Registration Statement or attached as an exhibit thereto, or (ii) is material to the Company’s business, has been duly and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefore may be brought, and none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in material breach or default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a material breach or default thereunder. To the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a material violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to environmental laws and regulations.
3.3.3 Regulations . The disclosures in the Registration Statement, the Statutory Prospectus and the Prospectus concerning the effects of Federal, state and local regulation on the Company’s business as currently contemplated fairly summarize, to the Company’s knowledge, such effects and do not omit to state a material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading.
3.3.5 [Intentionally omitted.]
3.3.6 Issuer Free Writing Prospectuses . The Company has not made any offer relating to the Securities that would constitute an “issuer free writing prospectus” (as defined in Rule 433 of the Regulations) or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433 of the Regulations.
3.3.8 Forward-Looking Statements . No forward-looking statement (within the meaning of Section 27A of the Act and Section 21E of the Exchange Act) contained in the Registration Statement, the Statutory Prospectus and the Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
3.4 Changes after Dates in Registration Statement .
3.4.1 No Material Adverse Change . Since the respective dates as of which information is given in the Registration Statement, the Statutory Prospectus and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the condition, financial or otherwise, of the Company (a “ Material Adverse Effect ”); (ii) there have been no material transactions entered into by the Company, other than as contemplated pursuant to this Agreement; (iii) no member of the Company’s board of directors or management has resigned from any position with the Company; and (iv) no event or occurrence has taken place which materially impairs, or would likely materially impair, with the passage of time, the ability of the members of the Company’s board of directors or management to act in their capacities with the Company as described in the Registration Statement, the Statutory Prospectus and the Prospectus.
3.4.2 Recent Securities Transactions, etc . Subsequent to the respective dates as of which information is given in the Registration Statement, the Statutory Prospectus and the Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not: (i) issued any securities (other than shares of Common Stock that may be issued upon conversion of the Company’s outstanding indebtedness) or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.
3.5 Independent Accountants . To the knowledge of the Company, Marcum LLP (“ Marcum ”), whose report is filed with the Commission as part of the Registration Statement, the Statutory Prospectus and the Prospectus, are independent registered public accountants as required by the Act and the Regulations. To the knowledge of the Company, Marcum is registered with and in good standing with the PCAOB. Except for the preparation of federal tax returns and services provided to the Company in relation to the preparation of the Cold Comfort Letter described in Section 5.3, Marcum has not, during the periods covered by the financial statements included in the Registration Statement, the Statutory Prospectus and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
3.6 Financial Statements, Statistical Data .
3.6.1 Financial Statements . Excluding the pro forma information and the notes and assumptions thereto, the financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Statutory Prospectus and the Prospectus fairly present in all material respects the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with United States generally accepted accounting principles (“ GAAP ”), consistently applied throughout the periods involved. The Registration Statement, the Statutory Prospectus and the Prospectus disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Statutory Prospectus and the Prospectus, (a) the Company has not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, except as disclosed in Section 3.4.2; (c) there has not been any change in the capital stock of the Company or any material additional grants under any stock compensation plan and, (d) there has not been any material adverse change in the Company’s long-term or short-term debt.
3.6.2 Statistical Data . The statistical, industry-related and market-related data included in the Registration Statement, the Statutory Prospectus and the Prospectus are based on or derived from sources which the Company reasonably and in good faith believes are reliable and accurate, and such data agree with the sources from which they are derived.
3.7 Authorized Capital; Options, etc . The Company had at the date or dates indicated in each of the Registration Statement, the Statutory Prospectus and the Prospectus, as the case may be, duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Statutory Prospectus and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Other than as disclosed in the Registration Statement, the Statutory Prospectus and the Prospectus on the Effective Date and the Closing Date and the Option Closing Date, if any, there will be no material increase in the options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued Common Stock of the Company or any security convertible into Common Stock of the Company, or any contracts or commitments to issue or sell Common Stock or any such options, warrants, rights or convertible securities.
3.8 Valid Issuance of Securities, etc .
3.8.1 Outstanding Securities . All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and, with respect to all issued and outstanding shares of capital stock of the Company, are fully paid and non-assessable; to the Company’s knowledge, the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Statutory Prospectus and the Prospectus. The offers and sales of the outstanding securities were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or, based in part on the representations and warranties of the purchasers of such securities, exempt from such registration requirements.
3.8.2 Securities Sold Pursuant to this Agreement . The Securities have been duly authorized and reserved for issuance and when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. The Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Statutory Prospectus and the Prospectus, as the case may be. The Warrant Shares issuable upon exercise of the Underwriters’ Warrant Agreement have been reserved for issuance upon the exercise thereof and, when issued in accordance with the terms of such securities, will be duly and validly authorized, validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders. The Warrant Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Statutory Prospectus and the Prospectus, as the case may be.
3.8.3 No Integration . Neither the Company nor any of its affiliates has, prior to the date hereof, made any offer or sale of any securities which are required to be “integrated” pursuant to the Act or the Regulations with the offer and sale of the Securities pursuant to the Registration Statement.
3.9 Registration Rights of Third Parties . Except as set forth in the Registration Statement, the Statutory Prospectus or the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Act or to include any such securities in a registration statement to be filed by the Company.
3.10 Validity and Binding Effect of Agreements . This Agreement and the Underwriters’ Warrant Agreement have been duly and validly authorized by the Company, and, when executed and delivered by the Company and the other parties thereto, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefore may be brought.
3.11 No Conflicts, etc . The execution, delivery, and performance by the Company of this Agreement and the Underwriters’ Warrant Agreement, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or conflict with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Certificate of Incorporation (as the same may be amended from time to time, the “ Certificate of Incorporation ”); or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or any of its properties or business constituted as of the date hereof.
3.12 No Defaults; Violations . No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in material violation of any term or provision of its Certificate of Incorporation, or in material violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or any of its properties or businesses.
3.13 Corporate Power; Licenses; Consents .
3.13.1 Conduct of Business . The Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Statutory Prospectus and the Prospectus (the “ Authorization ”), except where the absence of the Authorization would not have a Material Adverse Effect. To the knowledge of the Company, the disclosures in the Registration Statement, the Statutory Prospectus and the Prospectus concerning the effects of foreign, federal, state and local regulation on this Offering and the Company’s business purpose as currently contemplated are correct in all material respects and do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
3.13.2 Transactions Contemplated Herein . The Company has all corporate power and authority to enter into this Agreement and the Underwriters’ Warrant Agreement and to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Underwriters’ Warrant Agreement, except with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“ FINRA ”).
3.14 D&O Questionnaires . To the knowledge of the Company, all information contained in the questionnaires (the “ Questionnaires ”) completed by each of the Company’s directors and officers and 5% and greater shareholders (the “ Insiders ”) is true and correct in all material respects, and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires completed by each Insider to become inaccurate and incorrect. To the extent that information in the Registration Statement, the Statutory Prospectus and the Prospectus differs from the information provided in a Questionnaire, the information in the Registration Statement, the Statutory Prospectus and the Prospectus will be deemed to supersede and replace the information in the Questionnaires.
3.15 Litigation; Governmental Proceedings . There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any Insider which has not been disclosed in the Registration Statement, the Statutory Prospectus and the Prospectus. There is no proceeding, inquiry or investigation, other than the listing application of the Company, pending, or, to the Company’s knowledge, threatened against or involving the Company or, to the Company’s knowledge, any Insider.
3.16 Good Standing . The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Delaware as of the date hereof, and is duly qualified to do business and is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a Material Adverse Effect on the assets, business or operations of the Company.
3.17 Transactions Affecting Disclosure to FINRA .
3.17.1 Finder’s Fees . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its stockholders that may affect the Underwriters’ compensation, as determined by FINRA.
3.17.2 Payments Within 180 Days . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) to any FINRA member; or (iii) to the knowledge of the Company, to any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the 180-day period prior to the initial filing of the Registration Statement, other then, in each case, payments to the Underwriters. Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, no officer, director, or beneficial owner of 5% or more of any class of the Company’s securities (whether debt or equity, registered or unregistered, regardless of the time acquired or the source from which derived) (any such individual or entity, a “ Company Affiliate ”) is a member, a person associated, or affiliated with a member of FINRA. For purposes of the meaning of “beneficial owner” as used in this Section, the definition of Rule 13d-3, promulgated by the SEC under the Exchange Act shall apply.
3.17.3 Company Affiliate Membership . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, to the knowledge of the Company, no Company Affiliate is an owner (of record or beneficially) of stock or other securities of any member of the FINRA (other than securities purchased on the open market).
3.17.4 Subordinated Loans . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, to the knowledge of the Company, no Company Affiliate has made a subordinated loan to any member of the FINRA.
3.17.5 Use of Proceeds . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, no proceeds from the sale of the Securities (excluding underwriting compensation) will be paid to any FINRA member or to any persons associated or affiliated with a member of FINRA, except as specifically authorized herein.
3.17.6 No other Options, etc . Except with respect to the Underwriters’ Warrant Agreement and 34,573 warrants issued to the Representative on October __, 2016, the Company has not issued any warrants or other securities, or granted any options, directly or indirectly to anyone who is a potential underwriter in the Offering or a related person (as defined by FINRA rules) of such an underwriter within the 180-day period prior to the initial filing date of the Registration Statement, other than such issuances to the Underwriters.
3.17.7 FINRA Relationship . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, to the knowledge of the Company, no person to whom securities of the Company have been privately issued within the 180-day period prior to the initial filing date of the Registration Statement has any relationship or affiliation or association with any member of FINRA, other than such issuances to the Underwriters.
3.17.8 FINRA Conflicts . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, no FINRA member intending to participate in the Offering has a conflict of interest with the Company. For this purpose, a “conflict of interest” exists when a member of the FINRA and its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the Company’s outstanding subordinated debt or common equity, or 10% or more of the Company’s preferred equity. “Members participating in the Offering” include managing agents, syndicate group members and all dealers which are members of the FINRA.
3.17.9 Other Arrangements . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus and except with respect to the Underwriters in connection with the Offering, the Company has not entered into any agreement or arrangement (including, without limitation, any consulting agreement or any other type of agreement) during the 180-day period prior to the initial filing date of the Registration Statement, which arrangement or agreement provides for the receipt of any item of value and/or the transfer of any warrants, options, or other securities from the Company to a FINRA member or, the knowledge of the Company, any person associated with a member (as defined by FINRA rules), any potential underwriters in the Offering and any related persons, other than such arrangements with the Underwriters.
3.18 Foreign Corrupt Practices Act . Neither the Company, nor to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company, is aware of or has taken any action directly or indirectly, that would result in a material violation by such persons of the FCPA (as defined below), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company has conducted its business in compliance in all material respects with the FCPA and instituted and maintained policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance in all material respects therewith. “ FCPA ” means the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder.
3.19 Money Laundering Laws . Neither the Company nor to the knowledge of the Company, any director, officer, agent, employee or affiliate of the Company has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation relating to the “know your customer” and anti-money laundering laws of any United States or non-United States jurisdiction (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any governmental agency or body involving the Company with respect to the Money Laundering Laws is pending or, to the Company’s knowledge, threatened.
3.20 OFAC . Neither the Company nor to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company is currently the target of or reasonably likely to become the target of any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“ OFAC ”); and the Company will not directly or indirectly use the proceeds of the Offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently the target of any U.S. sanctions administered by OFAC.
3.21 Officers’ Certificate . Any certificate signed by any duly authorized officer of the Company and delivered to you shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
3.22 Lock-Up Period . Each of the Company’s officers and directors and each beneficial owner of the Company’s outstanding Common Stock (or securities convertible into Common Stock at any time) listed on Schedule B (together the “ Lock-Up Parties ”) have agreed pursuant to executed Lock-Up Agreements (in the form of Exhibit B ) that for a period of one hundred eighty (180) days from the date of this Agreement (the “ Lock-Up Period ”), such persons and their affiliated parties shall not offer, pledge, sell, contract to sell, grant, lend or otherwise transfer or dispose of, directly or indirectly, any Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock, without the consent of the Representative, except for the exercise or conversion of currently outstanding warrants, options and convertible debentures, as applicable and the exercise of options under an acceptable stock incentive plan. The Representative may consent to an early release from the applicable Lock-Up Period. The Company has caused each of the Lock-Up Parties to deliver to the Representative the agreements of each of the Lock-Up Parties to the foregoing effect prior to the date that the Company requests that the Commission declare the Registration Statement effective under the Act.
3.23 Subsidiaries . Except as described in the Registration Statement, Statutory Prospectus and Prospectus, the Company does not have any significant direct or indirect subsidiary.
3.24 Related Party Transactions . There is no relationship, direct or indirect, exists between or among any of the Company or any Company Affiliate, on the one hand, and any director, officer, shareholder, customer or supplier of the Company or any Company Affiliate, on the other hand, which is required by the Act, the Exchange Act or the Regulations to be described in the Registration Statement, the Statutory Prospectus and the Prospectus that is not so described and described as required. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business), credit arrangements, or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of their respective family members.
3.25 Board of Directors . The Board of Directors of the Company is comprised of the persons set forth in the Statutory Prospectus and Prospectus under the heading captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder applicable to the Company and the rules of NASDAQ. At least one member of the Board of Directors of the Company qualifies as a “financial expert” as such term is defined under the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder and the rules of NASDAQ. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent” as defined under the rules of NASDAQ.
3.26 Sarbanes-Oxley Compliance .
3.26.1 Disclosure Controls . The Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 of the Exchange Act, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
3.26.2 Compliance . The Company is, or on the Effective Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act of 2002 applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefore) with all the provisions of the Sarbanes-Oxley Act of 2002.
3.27 No Investment Company Status . The Company is not and, after giving effect to the Offering and sale of the Securities and the application of the proceeds thereof, will not be, an “investment company” as defined in the Investment Company Act of 1940, as amended.
3.28 No Labor Disputes . No labor dispute with the employees of the Company exists or, to the knowledge of the Company, is imminent.
3.29 Employment Laws Compliance . The Company has not violated, or received notice of any violation with respect to, any law, rule, regulation, order, decree or judgment applicable to it and its business, including those relating to transactions with affiliates, environmental, safety or similar laws, federal or state laws relating to discrimination in the hiring, promotion or pay of employees, federal or state wages and hours law, the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations promulgated thereunder, except for those violations that would not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect.
3.30 Intellectual Property . Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus, none of the Intellectual Property (defined below) necessary for the conduct of the business of the Company as currently carried on and as contemplated by the Company, as described in the Registration Statement, the Statutory Prospectus and the Prospectus, are in dispute or are in any conflict with the rights of any other person or entity. The Company (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all of its Intellectual Property and the licenses and rights with respect to the foregoing, used in the conduct of the business of the Company as currently carried on and contemplated by the Company, as described in the Registration Statement, the Statutory Prospectus and the Prospectus, without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing, and (ii) except as provided in the material license agreements filed as exhibits to the Registration Statement, is not obligated or under any liability whatsoever to make any payment by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any Intellectual Property with respect to the use thereof or in connection therewith for the conduct of its business or otherwise. For the purposes of this Section and this Agreement, the term “ Intellectual Property ” means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations in part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, diagrams, specifications, customer and supplier lists, catalogs, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation) (whether purchased or internally developed), (g) all information systems and management procedures, (h) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium).
3.31 Trade Secrets, etc . The Company owns or has the right to use all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, designs, processes, works of authorship, computer programs and technical data and information that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees.
3.32 Taxes . The Company has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. The Company has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. The term “ taxes ” mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term “ returns ” means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes.
4. Covenants of the Company . The Company covenants and agrees as follows:
4.1 Amendments to Registration Statement . The Company will deliver to the Underwriters, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.
4.2 Federal Securities Laws .
4.2.1 Compliance . During the time when a Prospectus is required to be delivered under the Act, the Company will use its reasonable efforts to comply with all requirements imposed upon it by the Act, the Regulations and the Exchange Act and by the regulations under the Exchange Act, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus. If at any time when a Prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Representative’s counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Representative promptly and prepare and file with the Commission, subject to Section 4.1 hereof, an appropriate amendment or supplement in accordance with Section 10 of the Act.
4.2.2 Filing of Final Prospectus . The Company will file the Prospectus (in form and substance satisfactory to the Underwriters) with the Commission pursuant to the requirements of Rule 424 of the Regulations.
4.2.3 Exchange Act Registration . For a period of five (5) years from the Effective Date, the Company will use its commercially reasonable efforts to maintain the registration of the Common Stock under the Exchange Act.
4.2.4 Sarbanes-Oxley Compliance . The Company shall take all actions necessary to maintain material compliance with each applicable provision of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder and related or similar rules and regulations promulgated by any other governmental or self-regulatory entity or agency with jurisdiction over the Company, including maintenance of a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
4.2.5 Issuer Free Writing Prospectuses . The Company agrees that it will not make any offer relating to the Securities that would constitute an issuer free writing prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433 of the Regulations.
4.3 Delivery to the Underwriters of Prospectuses . The Company will deliver to the Underwriters, without charge, from time to time during the period when the Prospectus is required to be delivered under the Act or the Exchange Act such number of copies of each Statutory Prospectus and Prospectus as the Underwriters may reasonably request and, as soon as the Registration Statement or any amendment or supplement thereto becomes effective, deliver to the Representative two original executed Registration Statements, including exhibits, and all post-effective amendments thereto and copies of all exhibits filed therewith or incorporated therein by reference and all original executed consents of certified experts.
4.4 Effectiveness and Events Requiring Notice to the Representative . The Company will use its reasonable commercial efforts to cause the Registration Statement to remain effective with a current prospectus for at least forty-five (45) days from the Applicable Time and will promptly notify the Representative and confirm the notice in writing: (i) of the effectiveness of the Registration Statement and any amendment thereto; (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose; (iii) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (v) of the receipt of any comments or request for any additional information from the Commission; and (vi) of the happening of any event during the period described in this Section 4.4 hereof that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Statutory Prospectus or the Prospectus untrue or that requires the making of any changes in the Registration Statement, the Statutory Prospectus or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company will make every reasonable effort to obtain promptly the lifting of such order.
4.5 Reports to the Representative .
4.5.1 Periodic Reports, etc . For a period of five (5) years from the Effective Date, the Company will furnish to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K prepared and filed by the Company; (iv) a copy of each registration statement filed by the Company under the Act; (v) such additional documents and information with respect to the Company and the affairs of any future Subsidiaries of the Company as the Representative may from time to time reasonably request. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 4.5.1.
4.5.2 Transfer Agent . For a period of five (5) years from the Effective Date, the Company shall retain a transfer and registrar agent reasonably acceptable to the Representative (the “ Transfer Agent ”).
4.6 Payment of General Expenses Related to the Offering .
4.6.1 Accountable Expenses . The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all accountable expenses relating to the offering, including the costs of preparing, printing, mailing and delivering the registration statement, the preliminary and final prospectus contained therein and amendments thereto, post-effective amendments and supplements thereto, the underwriting agreement and related documents (all in such quantities as the Representative may reasonably require); preparing and printing stock certificates; the costs of any “due diligence” meetings; all reasonable and documented fees and expenses for conducting a net road show presentation; all filing fees (including SEC filing fees) and communication expenses relating to the registration of the shares offered hereby; FINRA filing fees; the reasonable and documented fees and disbursements of the Representative’s counsel up to an amount of $40,000; background checks of the Company’s officers and directors described in Section 4.4; preparation of bound volumes and mementos in such quantities as the Representative may reasonably request up to an amount of $2,500; transfer taxes, if any, payable upon the transfer of securities from us to the underwriters; and the fees and expenses of the transfer agent, clearing firm and registrar for the shares; provided that the actual accountable expenses of the underwriter shall not exceed $100,000.
4.6.2 Non-Accountable Expenses . The Company further agrees that, in addition to the expenses payable pursuant to Section 4.6.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the offering contemplated herein, a non-accountable expense allowance equal to two percent (2.0%) of the gross proceeds received by the Company from the sale of Shares in the Offering (excluding gross proceeds from the sale of the Option Shares).
4.7 Application of Net Proceeds . The section of the Prospectus, “Use of Proceeds,” will indicate the intended uses of the net proceeds from the Offering. The Company will apply the net proceeds from the Offering received by it in a manner consistent with the application described under the caption “Use of Proceeds” in the Prospectus.
4.8 Delivery of Earnings Statements to Security Holders . The Company will make generally available to its security holders as soon as practicable, but not later than the first day of the sixteenth full calendar month following the Effective Date, an earnings statement (which need not be certified by independent public or independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Rule 158(a) of the Regulations) covering a period of at least twelve consecutive months beginning after the Effective Date.
4.9 Background Searches . Not later than the Effective Date, at the expense of the Company which shall not exceed $15,000, the Representative will have obtained a background search, that is reasonably acceptable to the Representative, of each Company person as designated the Representative, including the senior officers and directors, and of the Company as determined between the Company and the Representative, giving a report of the person’s or entities, employment, education, business endeavors, and credit history among other things.
4.10 Stabilization . Neither the Company, nor, to its knowledge, any of its employees, directors or stockholders (without the consent of the Representative) has taken or will take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Firm Shares.
4.11 Accountants . The Company shall retain a nationally recognized independent certified public accounting firm after the Effective Date. The Representative acknowledges that Marcum is acceptable to the Underwriters.
4.12 Director and Officer Insurance . As of the Closing Date, the Company will have obtained director and officer insurance in an aggregate coverage amount of not less than $[ 5,000,000 ], to be effective as of the Closing Date, under a form of insurance policy that is reasonably acceptable to the Representative.
4.13 FINRA . The Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it becomes aware that any 5% or greater stockholder of the Company becomes an affiliate or associated person of a FINRA member participating in the distribution of the Securities.
4.14 Electronic Prospectus . The Company shall cause to be prepared and delivered to the Representative, at the Company’s expense, promptly, but in no event later than one (1) Business Day from the effective date of this Agreement, an Electronic Prospectus to be used by the Underwriters in connection with the Offering. As used herein, the term “Electronic Prospectus” means a form of prospectus, and any amendment or supplement thereto, that meets each of the following conditions: (i) it shall be encoded in an electronic format, satisfactory to the Representative, that may be transmitted electronically by the other Underwriters to offerees and purchasers of the Securities for at least the period during which a prospectus relating to the Securities is required to be delivered under the Act; (ii) it shall disclose the same information as the paper prospectus and prospectus filed pursuant to EDGAR, except to the extent that graphic and image material cannot be disseminated electronically, in which case such graphic and image material shall be replaced in the electronic prospectus with a fair and accurate narrative description or tabular representation of such material, as appropriate; and (iii) it shall be in or convertible into a paper format or an electronic format, satisfactory to the Representative, that will allow recipients thereof to store and have continuously ready access to the prospectus at any future time, without charge to such recipients (other than any fee charged for subscription to the Internet as a whole and for on-line time). The Company hereby confirms that it has included or will include in the Prospectus filed pursuant to EDGAR or otherwise with the Commission and in the Registration Statement at the time it was declared effective an undertaking that, upon receipt of a request by an investor or his or her representative within the period when a prospectus relating to the Securities is required to be delivered under the Act, the Company shall transmit or cause to be transmitted promptly, without charge, a paper copy of the Prospectus.
4.15 Reservation of Shares . The Company will reserve and keep available that maximum number of its authorized but unissued securities which are issuable upon exercise of the Underwriters’ Warrants outstanding from time to time.
5. Conditions of Underwriters’ Obligations . The several obligations of the Underwriters, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and, as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder, and (iv) the following conditions:
5.1 Regulatory Matters .
5.1.1 Effectiveness of Registration Statement . The Registration Statement shall have become effective not later than 5:00 P.M., Eastern time, on the date of this Agreement, and, at each of the Closing Date and the Option Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with.
5.1.2 FINRA Clearance . By the Effective Date, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.
5.1.3 Exchange Stock Market Clearance . On the Closing Date, the Common Stock, including the Firm Shares, shall have been approved for listing on NASDAQ, subject to official notice of issuance and evidence of satisfactory distribution.
5.2 Company Counsel Matters .
5.2.1 Closing Date Opinion of Counsel . On the Closing Date, the Representative shall have received the opinion of Graubard Miller, counsel to the Company, and letter of negative assurance, in each case addressed to the Representative on its own behalf and on behalf of the Underwriters, dated the Closing Date and in form and substance reasonably satisfactory to the Representative.
5.2.2 Option Closing Date Opinion of Counsel . On the Option Closing Date, if any, the Representative shall have received the opinion of Graubard Miller and letter of negative assurance listed in Section 5.2.1, in each case dated the Option Closing Date addressed to the Representative on its own behalf and on behalf of the Underwriters and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsel in its respective opinion and letter of negative assurance delivered on the Closing Date.
5.2.3 Reliance . In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdiction having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative’s counsel if requested. The opinion of Graubard Miller shall include a statement to the effect that it may be relied upon by Representative’s counsel in its opinion delivered to the Underwriter.
5.3 Cold Comfort Letter . At the time this Agreement is executed, and at each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a cold comfort letter, addressed to them, and in form and substance reasonably satisfactory in all respects to the Representative from Marcum LLP dated, respectively, as of the date of this Agreement and as of the Closing Date and the Option Closing Date, if any.
5.4 Officers’ Certificates .
5.4.1 Officers’ Certificate . At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Chairman of the Board and Chief Executive Officer of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, to the effect that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to and as of the Closing Date, or the Option Closing Date, as the case may be, and that the conditions set forth in Section 5.5 hereof have been satisfied as of such date and that, as of the Closing Date and the Option Closing Date, as the case may be, the representations and warranties of the Company set forth in Section 3 hereof are true and correct. In addition, the Representative will have received such other and further certificates of officers of the Company as the Representative may reasonably request.
5.4.2 Secretary’s Certificate . At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary or Assistant Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying: (i) that the Certificate of Incorporation are true and complete, have not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering contemplated by this Agreement are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
5.5 No Material Changes . Prior to and on each of the Closing Date and the Option Closing Date, if any: (i) there shall have been no material adverse change or development involving a prospective material adverse change in the condition or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Statutory Prospectus and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or, to the knowledge of the Company, threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations or financial condition or income of the Company, except as set forth in the Registration Statement, the Statutory Prospectus and the Prospectus; (iii) no stop order shall have been issued under the Act and no proceedings therefore shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Statutory Prospectus and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and shall conform in all material respects to the requirements of the Act and the Regulations, and the Registration Statement, the Statutory Prospectus or the Prospectus and any amendment or supplement thereto shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (in the case of the Statutory Prospectus and Prospectus, in light of the circumstances under which they were made) not misleading.
5.6 Delivery of Agreements .
5.6.1 Effective Date Deliveries . On or prior to the Effective Date, the Company shall have delivered to the Representative executed copies of this Agreement and the Lock-Up Agreements.
5.6.2 Closing Date Deliveries . On the Closing Date, the Company shall have delivered to the Representative an executed copy of the Underwriters’ Warrant Agreement.
6. Indemnification .
6.1 Indemnification of the Underwriters .
6.1.1 General . Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter and each dealer selected by such Underwriter that participates in the offer and sale of the Securities (each a “ Selected Dealer ”) and each of their respective directors, officers and employees and each person, if any, who controls within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (“ Controlling Person ”), such Underwriter and the dealer, and the successors and assigns of all of the foregoing persons, against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between such Underwriter and the Company or between such Underwriter and any third party or otherwise) to which they or any of them may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Statutory Prospectus or the Prospectus (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering of the Securities, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 6, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, NASDAQ or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon and in strict conformity with “Underwriters’ Information” (as described in Section 3.3.1) furnished to the Company by the Underwriters. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or Controlling Persons in connection with the issue and sale of the Securities or in connection with the Registration Statement, the Statutory Prospectus or the Prospectus.
6.1.3 Procedure . If any action is brought against an Underwriter, a Selected Dealer, or a Controlling Person in respect of which indemnity may be sought against the Company pursuant to Section 6.1.1 or 6.1.2, such Underwriter, such Selected Dealer or Controlling Person, as the case may be, shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter, such Selected Dealer or Controlling Person, as the case may be) and payment of actual expenses. Any delay in notice will not relieve the Company of any liability to an indemnified party, except to the extent that the Company demonstrates that the delay prejudiced the defense of the action. Any indemnified person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel which are incurred after the Company assumes the defense of the action shall be at the expense of such Underwriter, such Selected Dealer or Controlling Person unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company fails to assume the defense or to employ counsel to have charge of the defense of such action within a reasonable time after notice of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys (in addition to local counsel) selected by such Underwriter, such Selected Dealer and/or Controlling Person in their sole discretion shall be borne by the Company and paid as incurred or, at the option of the indemnified party, advanced pursuant to Section 6.1.6.
6.1.4 Settlement . The Company will not effect any settlement of a proceeding in respect of which indemnification may be sought hereunder (whether or not any indemnified person is a party therein) unless the Company has given an Underwriter, a Selected Dealer or Controlling Person, as the case may be, reasonable prior written notice thereof and such settlement, compromise, consent or termination includes an unconditional release of each indemnified party from any liabilities arising out of such proceeding. The Company will not permit any such settlement, compromise, consent or termination to include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of any indemnified party, without that party’s prior written consent. Notwithstanding anything to the contrary contained herein, if an Underwriter, a Selected Dealer or Controlling Person shall conduct the defense of an action as provided in Section 6.1.3, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld, except that if the Company is required to and nonetheless fails to reimburse or advance the expenses of such defense, then the Company shall be bound by any determination made in the action or by any compromise or settlement made by the indemnified party without the Company’s written consent, subject to the requirements of Section 6.1.5.
6.1.5 Settlement without Consent if Failure to Reimburse or Advance . If at any time an Underwriter, a Selected Dealer or a Controlling Person shall have requested the Company to reimburse or advance to the indemnified party its fees and expenses, including those of counsel, the Company agrees that it shall be liable for any settlement of the nature contemplated by Section 6.1.4 effected without its written consent if (i) such settlement is entered into more than 60 days after receipt by the Company of the aforesaid request, (ii) the Company shall have received notice of the terms of such settlement at least 45 days prior to such settlement being entered into, and (iii) the Company shall not have reimbursed or advanced to such Underwriter, such Selected Dealer or Controlling Person in accordance with such request prior to the date of such settlement, unless such failure to reimburse or advance to such Underwriter, such Selected Dealer or Controlling Person is based on a dispute with a good faith basis as to either the obligation of the Company arising under this Section 6 to indemnify such Underwriter, such Selected Dealer or Controlling Person or the amount of such obligation, and the Company shall have notified such Underwriter, such Selected Dealer or Controlling Person of such good faith dispute prior to the date of such settlement.
6.1.6 Advances . Notwithstanding any other provision hereof, the Company shall advance, to the extent not prohibited by law, all expenses reasonably anticipated to be incurred by or on behalf of an Underwriter, a Selected Dealer or Controlling Person in connection with any proceeding, whether pending or threatened, within fifteen (15) days of receipt of a statement or statements from such indemnified parties, or any of them, requesting such advances from time to time. This advancement obligation shall include any retainers of counsel engaged by indemnified parties. Any statement requesting advances shall evidence the expenses anticipated or incurred by the indemnified party with reasonable particularity and may include only those expenses reasonably expected to be incurred within the 90-day period following each statement. In the event some portion of the amounts advanced are unused, or in the event a court of ultimate jurisdiction determines that the indemnified parties are not entitled to be indemnified against certain expenses, the recipient shall return the unused or disallowed portion of any advances within thirty (30) days of the final disposition of any proceeding to which such advances pertain.
6.2 Indemnification of the Company . Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, officers and employees and agents who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the Underwriters, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions made in any Preliminary Prospectus, the Registration Statement, Statutory Prospectus or Prospectus or any amendment or supplement thereto or in any application, made in reliance upon and in strict conformity with the “Underwriters’ Information” furnished by the Underwriters to the Company expressly for use in such Preliminary Prospectus, the Registration Statement, the Statutory Prospectus or the Prospectus or any amendment or supplement thereto or in any such application. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Statutory Prospectus or the Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against an Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to such Underwriter, by the provisions of Section 6.1.3.
6.3 Contribution .
6.3.1 Contribution Rights . In order to provide for just and equitable contribution under the Act in any case in which (i) any person entitled to indemnification under this Section 6 makes claim for indemnification pursuant hereto but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 6 provides for indemnification in such case, or (ii) contribution under the Act, the Exchange Act or otherwise may be required on the part of any such person in circumstances for which indemnification is provided under this Section 6 but is unavailable, then, and in each such case, the Company and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and the Underwriters, as incurred, in such proportions that the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial offering price appearing thereon and the Company is responsible for the balance; provided, that, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 6.3.1, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. For purposes of this Section, each director, officer and employee of the Underwriters or the Company, as applicable, and each person, if any, who controls the Underwriter or the Company, as applicable, within the meaning of Section 15 of the Act shall have the same rights to contribution as the Underwriters or the Company, as applicable.
6.3.2 Contribution Procedure . Within fifteen days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“ contributing party ”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid fifteen days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 6.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Act, the Exchange Act or otherwise available.
7. Default by an Underwriter .
7.1 Default Not Exceeding 10% of Firm Shares or Option Shares . If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.
7.2 Default Exceeding 10% of Firm Shares or Option Shares . In the event that the default addressed in Section 7.1 relates to more than 10% of the Firm Shares or Option Shares, the non-defaulting Underwriters may in their discretion arrange for themselves or for another party or parties to purchase such Firm Shares or Option Shares on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, the non-defaulting Underwriters do not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties satisfactory to the non-defaulting Underwriters to purchase said Firm Shares or Option Shares on such terms. In the event that neither the non-defaulting Underwriters nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 7, this Agreement will automatically be terminated by the non-defaulting Underwriters or the Company without liability on the part of the Company (except as provided in Sections 4.6 and 6 hereof) or the non-defaulting Underwriters (except as provided in Section 6 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.
7.3 Postponement of Closing Date . In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the non-defaulting Underwriters or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement and/or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement and/or the Prospectus that in the opinion of the Representative’s counsel may thereby be made necessary. The term “ Underwriter ” as used in this Agreement shall include any party substituted under this Section 7 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares or Option Shares.
8. Additional Covenants .
8.1 Board Composition and Board Designations . The Company shall ensure that: (i) the qualifications of the persons serving as board members and the overall composition of the board comply with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder and with the listing requirements of NASDAQ or any other national securities exchange or national securities association, as the case may be, in the event the Company seeks to have its Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the board of directors qualifies as a “financial expert” as such term is defined under the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.
8.2 Offerings with 180 Days . The Company, on behalf of itself and any successor entity, has agreed that, without the prior written consent of the Underwriter, it will not, for a period ending 180 days after the Effective Date, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of its capital stock or any securities convertible into or exercisable or exchangeable for shares of its capital stock; (ii) file or cause to be filed any registration statement with the SEC relating to the offering by the Company of any shares of its capital stock or any securities convertible into or exercisable or exchangeable for shares of its capital stock or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of its capital stock. The restrictions contained in this Section 8.2 shall not apply to (i) the Securities sold in this offering, (ii) the issuance of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof or (iii) the issuance of any option to purchase or shares of the Company’s capital stock under any stock compensation plan of the Company outstanding on the date hereof. For purposes of this Section 8.2, the Underwriter acknowledges that disclosure in the Registration Statement filed prior to the date hereof of any outstanding option or warrant shall be deemed to constitute prior written notice to the Underwriter.
9. Effective Date of this Agreement and Termination Thereof .
9.1 Effective Date . This Agreement shall become effective when the Company, the Representative have executed the same and delivered counterparts of such signatures to the other parties.
9.2 Termination . You shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange, the NASDAQ Global Market or the NASDAQ Capital Market or NYSE MKT shall have been noticed for or actually suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction, or (iii) if the United States shall have become involved in a new war or a substantial increase in existing major hostilities occurs, or (iv) if a banking moratorium has been declared by a New York State or federal authority or foreign authority which has a substantial disruptive effect on or adversely impacts the United States securities markets, or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets, or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares, or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder, or (viii) if the Representative shall have become aware after the date hereof of such a Material Adverse Effect on the Company, or such adverse material change in general market conditions as in the Representative’s good faith judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Underwriters for the sale of the Firm Shares or Option Shares.
9.3 Expenses . In the event that this Agreement shall not be carried out for any reason, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the actual and accountable reasonable out-of-pocket expenses related to its legal counsel, Representative’s counsel), up to $[100,000] minus the advances made by the Company; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement.
9.4 Indemnification . Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 6 shall not be in any way effected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
10. Miscellaneous .
10.1 Notices . All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission and confirmed, or by electronic transmission via PDF, and shall be deemed given when so delivered or faxed and confirmed or transmitted or if mailed, two days after such mailing.
If to the Representative:
Network 1 Financial Securities, Inc.
Galleria, Suite 241
2 Bridge Avenue
Red Bank, N.J. 07701
Attention:
Fax No.: (732) 758-6671
Copy to (which shall not constitute notice):
Carmel, Milazzo & DiChiara, LLP
261 Madison Avenue, 9 th Floor
New York, New York 10016
Attn: Peter DiChiara, Esq.
Fax: (646) 838-1314
If to the Company:
Long Island Iced Tea Corp.
116 Charlotte Avenue
Hicksville, NY 11801
Attn: Chief Executive Officer
Fax No.:
Copy to (which shall not constitute notice):
Graubard Miller
405 Lexington Avenue
New York, NY 10174-1101
Attn: David Alan Miller, Esq.; Jeffrey M. Gallant, Esq.
Fax No. (888) 225-6955; (888) 225-1565
10.2 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
10.3 Amendment . This Agreement may only be amended by a written instrument executed by each of the parties hereto.
10.4 Entire Agreement . This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
10.5 Binding Effect . This Agreement shall inure solely to the benefit of and shall be binding upon the Underwriters, the Company and the directors, officers and Controlling Persons referred to in Section 6 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from the Underwriters.
10.6 Governing Law . This Agreement shall be deemed to have been executed and delivered in New York and both this Agreement and the transactions contemplated hereby shall be governed as to validity, interpretation, construction, effect, and in all other respects by the laws of the State of New York, without regard to the conflicts of laws principals thereof (other than Section 5-1401 of The New York General Obligations Law). Each of the Underwriters and the Company: (a) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement and/or the transactions contemplated hereby shall be instituted exclusively in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, (b) waives any objection which it may have or hereafter to the venue of any such suit, action or proceeding, and (c) irrevocably consents to the jurisdiction of Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York in any such suit, action or proceeding. Each of the Underwriters and the Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company’s address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service of process upon the Company, in any such suit, action or proceeding, and service of process upon the Underwriters mailed by certified mail to the Underwriters’ address or delivered by Federal Express via overnight delivery shall be deemed in every respect effective service process upon the Underwriters, in any such suit, action or proceeding. THE COMPANY (ON BEHALF OF ITSELF, THE SUBSIDIARIES AND, TO THE FULLEST EXTENT PERMITTED BY LAW, ON BEHALF OF ITS RESPECTIVE EQUITY HOLDERS AND CREDITORS) HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE REGISTRATION STATEMENT AND THE PROSPECTUS.
10.7 Execution in Counterparts . This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.
10.8 Waiver, etc . The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
10.9 No Fiduciary Relationship . The Company hereby acknowledges that each Underwriter is acting solely as an underwriter in connection with the Offering of the Securities. The Company further acknowledges that the Underwriters are acting pursuant to a contractual relationship created solely by this Agreement entered into on an arm’s length basis and in no event do the parties intend that the Underwriters act or be responsible as a fiduciary to the Company, its management, shareholders, creditors or any other person in connection with any activity that the Underwriters may undertake or have undertaken in furtherance of the Offering of the Securities, either before or after the date hereof. The Representative on its own behalf and on behalf of the Underwriters, hereby each expressly disclaims any fiduciary or similar obligations to the Company, either in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions, and the Company hereby confirms its understanding and agreement to that effect. The Company, the Representative on its own behalf and on behalf of the Underwriters, agree that they are each responsible for making their own independent judgments with respect to any such transactions, and that any opinions or views expressed by the Underwriters to the Company regarding such transactions, including but not limited to any opinions or views with respect to the price or market for the Company’s securities, do not constitute advice or recommendations to the Company. The Company hereby waives and releases, to the fullest extent permitted by law, any claims that the Company may have against the Underwriters with respect to any breach or alleged breach of any fiduciary or similar duty to the Company in connection with the transactions contemplated by this Agreement or any matters leading up to such transactions.
10.10 Enforcement of Agreement. The Company acknowledges and agrees that the Underwriters would be irreparably damaged if any of the Company’s covenants hereunder, including without limitations those set forth in Section 4, is not performed in accordance with its specific terms and that any such breach of covenant could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which the Underwriters may be entitled, at law or in equity, it shall be entitled to enforce any covenant of the Company hereunder by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent a breach or threatened breach by the Company of any such covenant, without posting any bond or other undertaking.
[SIGNATURE PAGE FOLLOWS]
If the foregoing correctly sets forth the understanding among the Underwriter and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
Very truly yours, | |
LONG ISLAND ICED TEA CORP. |
By: | ||
Name:Philip Thomas | ||
Title: Chief Executive Officer |
Accepted on the date first above written. | |
NETWORK 1 FINANCIAL SECURITIES, INC. | |
as Representative of the Underwriters named on Schedule A hereto |
By: | ||
Name: | ||
Title: |
SCHEDULE A
Underwriters
Underwriter |
Number of
Firm Shares |
|
Network 1 Financial Securities, Inc. | ||
Total |
SCHEDULE B
Lock-Up Parties
Exhibit 4.2
Form of Underwriter’s Warrant Agreement
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT FOR A PERIOD OF ONE HUNDRED EIGHTY DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF ANY SUCH UNDERWRITER OR SELECTED DEALER.
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [________________] [ DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING ]. VOID AFTER 5:00 P.M., EASTERN TIME, [___________________] [ DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING ].
COMMON STOCK PURCHASE WARRANT
For the Purchase of [_____] Shares of Common Stock
of
LONG ISLAND ICED TEA CORP
1. Purchase Warrant . THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of _________ (“ Holder ”), as registered owner of this Purchase Warrant, to Long Island Iced Tea Corp., a Delaware corporation (the “ Company ”), Holder is entitled, at any time or from time to time from [________________] [ DATE THAT IS SIX MONTHS FROM THE EFFECTIVE DATE OF THE OFFERING ] (the “ Commencement Date ”), and at or before 5:00 p.m., Eastern time, [____________] [ DATE THAT IS FIVE YEARS FROM THE EFFECTIVE DATE OF THE OFFERING ] (the ” Expiration Date ”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [____] shares (the “ Shares ”) of common stock of the Company, par value $0.0001 per share (“ Common Stock ”), subject to adjustment as provided in Section 6 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[___] per Share [ 125% of the price of the Shares sold in the Offering ]; provided , however , that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. The term “ Exercise Price ” shall mean the initial exercise price or the adjusted exercise price, depending on the context. Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Underwriting Agreement, dated as of [●], 2016, by and between the Company and Network 1 Financial Services, Inc.
2. Exercise .
2.1. Exercise Form . In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
2.2 Cashless Exercise . In lieu of exercising this Purchase Warrant by payment of cash by wire transfer or check payable to the order of the Company pursuant to Section 2.1 above, Holder may elect to exercise this Purchase Warrant on a “cashless” basis and receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the issue to Holder, Shares in accordance with the following formula:
X | = | Y(A-B) | |
A |
Where, | |||
X | = | The number of Shares to be issued to Holder; | |
Y | = | The number of Shares for which the Purchase Warrant is being exercised; | |
A | = | The fair market value of one Share; and | |
B | = | The Exercise Price. |
For purposes of this Section 2.2, the fair market value of a Share shall be the average VWAP per share of Common Stock (as reported by Bloomberg) for the ten trading days immediately preceding the date of exercise; provided, however, if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors. “ VWAP ” shall mean, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a national securities exchange, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the exchange on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a trading day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), or (b) if the Common Stock is not then listed or quoted for trading on a national securities exchange and if prices for the Common Stock are then reported by OTC Markets, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the closing bid price per share of the Common Stock so reported.
2.3 Legend . Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “ Act ”):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “ Act ”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.”
3. Transfer .
3.1 General Restrictions . The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) an underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). On and after 180 days after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
3.2 Restrictions Imposed by the Securities Act . The securities evidenced by this Purchase Warrant and the Shares issuable upon exercise hereof shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Carmel, Milazzo & DiChiara LLP shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the ” Commission ”) and compliance with applicable state securities law has been established.
4. Registration Rights .
4.1 Demand Registration .
4.1.1 Grant of Right . The Company, upon written demand (a “ Demand Notice ”) of the Holder(s) of at least 51% of the Purchase Warrants and/or the underlying Shares (“Majority Holders”), agrees to register, on one occasion, all or any portion of the Shares underlying the Purchase Warrants (collectively, the “ Registrable Securities ”). On such occasion, the Company will file a registration statement with the Commission covering the Registrable Securities within sixty (60) days after receipt of a Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter, subject to compliance with review by the Commission; provided , however , that the Company shall not be required to comply with a Demand Notice if the Company has filed a registration statement with respect to which the Holder is entitled to piggyback registration rights pursuant to Section 4.2 hereof and either: (i) the Holder has elected to participate in the offering covered by such registration statement or (ii) if such registration statement relates to an underwritten primary offering of securities of the Company, until the offering covered by such registration statement has been withdrawn or until thirty (30) days after such offering is consummated. The Company covenants and agrees to give written notice of its receipt of any Demand Notice by any Holder(s) to all other registered Holders of the Purchase Warrants and/or the Registrable Securities within ten (10) days after the date of the receipt of any such Demand Notice.
4.1.2 Terms . The Company shall bear all fees and expenses attendant to the registration of the Registrable Securities pursuant to Section 4.1.1, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such States as are reasonably requested by the Holder(s); provided , however , that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause: (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal shareholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 4.1.1 to remain effective for a period of at least twelve (12) consecutive months after the date that the Holders of the Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities. The Holders shall only use the prospectuses provided by the Company to sell the shares covered by such registration statement, and will immediately cease to use any prospectus furnished by the Company if the Company advises the Holder that such prospectus may no longer be used due to a material misstatement or omission. Notwithstanding the provisions of this Section 4.1.2, the Holder shall be entitled to a demand registration under this Section 4.1.2 on only one (1) occasion and such demand registration right shall terminate on the fifth anniversary of the effectiveness of the registration statement in accordance with FINRA Rule 5110(f)(2)(G)(iv).
4.2 “Piggy-Back” Registration .
4.2.1 Grant of Right . In addition to the demand right of registration described in Section 4.1 hereof, the Holder shall have the right, for a period of no more than five (5) years from the date of effectiveness of the registration statement in accordance with FINRA Rule 5110(f)(2)(G)(v), to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided , however , that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of Common Stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided , however , that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.
4.2.2 Terms . The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 4.2.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company during the two (2) year period following the Commencement Date until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 4.2.2; provided , however , that such registration rights shall terminate on the [sixth] anniversary of the Commencement Date.
4.3 General Terms .
4.3.1 Indemnification . The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20 (a) of the Securities Exchange Act of 1934, as amended (“ Exchange Act ”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in the Underwriting Agreement between the Underwriters and the Company, dated as of [___________], 2016. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.
4.3.2 Exercise of Purchase Warrants . Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
4.3.3 Documents Delivered to Holders . The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.
4.3.4 Underwriting Agreement . The Company shall enter into an underwriting agreement with the managing underwriter(s), if any, selected by any Holders whose Registrable Securities are being registered pursuant to this Section 4, which managing underwriter shall be reasonably satisfactory to the Company. Such agreement shall be reasonably satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.
4.3.5 Documents to be Delivered by Holder(s) . Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
4.3.6 Damages . Should the registration or the effectiveness thereof required by Sections 4.1 and 4.2 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to obtain specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
5. New Purchase Warrants to be Issued .
5.1 Partial Exercise or Transfer . Subject to the restrictions in Section 3 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 2.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
5.2 Lost Certificate . Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
6. Adjustments .
6.1 Adjustments to Exercise Price and Number of Securities . The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
6.1.1 Share Dividends; Split Ups . If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.
6.1.2 Aggregation of Shares . If, after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding Shares is decreased by a reverse stock split, consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.
6.1.3 Replacement of Securities upon Reorganization, etc . In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 6.1.1 or 6.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 6.1.1 or 6.1.2, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.2 and this Section 6.1.3. The provisions of this Section 6.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
6.1.4 Changes in Form of Purchase Warrant . This form of Purchase Warrant need not be changed because of any change pursuant to this Section 6.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in the Purchase Warrants initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
6.2 Substitute Purchase Warrant . In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 6. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.
6.3 Elimination of Fractional Interests . The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
7. Reservation and Listing . The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.
8. Certain Notice Requirements .
8.1 Holder’s Right to Receive Notice . Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.
8.2 Events Requiring Notice . The Company shall be required to give the notice described in this Section 8 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
8.3 Notice of Change in Exercise Price . The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change (“ Price Notice ”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
8.4 Transmittal of Notices . All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:
If to the Holder:
Attn:
Fax No.:
with a copy (which shall not constitute notice) to:
If to the Company:
Long Island Iced Tea Corp.
116 Charlotte Avenue
Hicksville, NY 11801
Attn: Chief Executive Officer
Fax No.:
Copy to (which shall not constitute notice):
Graubard Miller
405 Lexington Avenue
New York, NY 10174-1101
Attn: David Alan Miller, Esq.; Jeffrey M. Gallant, Esq.
Fax No. (888) 225-6955; (888) 225-1565
9. Miscellaneous .
9.1 Amendments . The Company and Network 1 Financial Securities, Inc., as Representative of the Underwriters (the “Representative”), may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and the Representative may deem necessary or desirable and that the Company and the Representative deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
9.2 Headings . The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
9.3. Entire Agreement . This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
9.4 Binding Effect . This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
9.5 Governing Law; Submission to Jurisdiction; Trial by Jury . This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. Each of the Company and the Holder hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. Each of the Company and the holder hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company or the Holder may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company and the Holder in any action, proceeding or claim. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.6 Waiver, etc . The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 Execution in Counterparts . This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
9.8 Exchange Agreement . As a condition of the Holder’s receipt and acceptance of this Purchase Warrant, Holder agrees that, at any time prior to the complete exercise of this Purchase Warrant by Holder, if the Company and the Representative enter into an agreement (“ Exchange Agreement ”) pursuant to which they agree that all outstanding Purchase Warrants will be exchanged for securities or cash or a combination of both, then Holder shall agree to such exchange and become a party to the Exchange Agreement.
[ Signature Page Follows ]
IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ____ day of _______, 2016.
LONG ISLAND ICED TEA CORP. | |||
By: | |||
Name: | |||
Title: |
[ Form to be used to exercise Purchase Warrant ]
Date: __________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for ______ shares of common stock, par value $0.0001 per share (the “ Shares ”), of Long Island Iced Tea Corp., a Delaware corporation (the “ Company ”), and hereby makes payment of $____ (at the rate of $____ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:
Y(A-B) | ||||
X | = | A |
Where, | |||
X | = | The number of Shares to be issued to Holder; | |
Y | = | The number of Shares for which the Purchase Warrant is being exercised; | |
A | = | The fair market value of one Share which is equal to $_____; and | |
B | = | The Exercise Price which is equal to $______ per share |
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.
Signature |
Signature Guaranteed |
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name: | ||
(Print in Block Letters) | ||
Address: | ||
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
[ Form to be used to assign Purchase Warrant ]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of Long Island Iced Tea Corp., a Delaware corporation (the “ Company ”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________, 20__
Signature |
Signature Guaranteed |
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
Exhibit 23.1
Independent Registered Public Accounting Firm’s Consent
We consent to the inclusion in Amendment No. 2 to this Registration Statement of Long Island Iced Tea Corp. on Form S-1 (File No. 333-210669) of our report dated March 22, 2016 with respect to our audits of the consolidated financial statements of Long Island Iced Tea Corp. as of December 31, 2015 and 2014 and for the years then ended, which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.
/s/ Marcum llp
Marcum llp
Melville, NY
June 8, 2016