* Fiscal year 2016 results shown above are restated amounts based on a June 30, 2017 correction of the treatment of Ingredion's $2,000,000 earnest money money deposit (see Note 1 to the Unaudited Consolidated Financial Statements).
The accompanying notes are an integral part of these consolidated financial statements.
Notes to the Unaudited Consolidated Financial Statements
NOTE 1 -
ORGANIZATION AND DESCRIPTION OF BUSINESS
Throughout this Quarterly Report on Form 10-Q, the terms “SWEE”, “Registrant,” “we,” “us,” “our,” and “the Company” refer to SweeGen, Inc., a Nevada corporation that was formerly known as Aceway Corp. prior to its name change in December 2014. The term “Business Commencement” refers to the date the Company commenced business operations (December 5, 2014).
The Company is dedicated to the development, production and distribution of nature-based, non-caloric sweeteners for the food, flavor and beverage industries. The Company’s robust product pipeline, intellectual property portfolio, and manufacturing resources provide the Company with its foundation for innovation and delivery of high-quality sweeteners. In response to increasing global sugar reduction demand, the Company intends to seek, develop and acquire, completely or a substantial interest in, companies or assets that would benefit from or that can be developed using the knowledge and expertise of the Company’s management resources.
The Company’s most significant recent business development is the commercialization of high purity stevia sweetener products known as Rebaudioside M and Rebaudioside D (the “Products”). Major achievements include:
February 2017: the U.S. FDA issued a GRAS (Generally Recognized as Safe) No Objection Letter for the Company’s Rebaudioside M Product.
July 2017: the Company’s Rebaudioside D Product obtained self-confirmed GRAS status.
July 2017: the Company’s Rebaudioside M Product received regulatory approval in Canada.
August 2017: the Company’s Rebaudioside M Product received Non-GMO Project Verification.
October 2017: the U.S. FDA issued a GRAS No Objection Letter for the Company’s Rebaudioside D Product.
October 2017:
the Company’s Rebaudioside M Product received regulatory approval in Mexico.
November 2017: 2 health-focused U.S. drink companies launched their products which contain the Company’s products.
November 2017: a U.S. beverage company launched its powdered beverage products which contain the Company’s products.
January 2018: a major U.S. confectionary brand launched its health-themed cookie products which contain the Company’s products.
On April 17, 2016, the Company received a $2,000,000 earnest money deposit from Ingredion Incorporated (“Ingredion”) in connection with the parties’ discussions of potential business initiatives and developments. In addition, the Company issued two warrants to purchase shares of the Company’s common stock, $0.001 par value per share. Each warrant provided Ingredion the right to acquire 0.33% of the Company’s total outstanding common stock on the exercise date, for a total of 0.66% of the total outstanding common stock on the exercise date, equal to 167,219 shares of common stock. The Company recorded a $2,000,000 liability as of June 30, 2016 for this earnest money deposit.
On November 28, 2016, the Ingredion business relationship was finalized with the execution of a 5-year distribution agreement (the “Distribution Agreement”), in which Ingredion will serve as the Company’s global distributor for the Products. Pursuant to the terms of the Distribution Agreement, Ingredion will serve as the exclusive distributor of the Products other than to the Company’s intended in-house accounts (the “House Accounts”) and other than within the People’s Republic of China (the “PRC”). Ingredion will serve as a non-exclusive distributor of the Products in the PRC.
On November 29, 2016, Ingredion exercised the warrants to purchase 167,219 shares of the Company’s $.001 par value common stock. As such, the $2,000,000 earnest money deposit liability was eliminated and a deferred revenue liability was established in the amount of $1,999,833, to be recorded as revenue over the 5-year term of the Distribution Agreement. The remaining $167.00 was used as consideration for the exercise of the warrants and recorded to common stock for the par value of the 167,219 shares of common stock that Ingredion purchased. As discussed in the Company’s Form 10-K for the year ended June 30, 2017 (Note 2 to the Consolidated Financial Statements), in the fourth quarter of fiscal year 2017 the Company corrected the accounting treatment to record the $2,000,000 as a sale of equity. As such, the Deferred Revenue Liability of $1,865,050 as of March 31, 2017, and Revenue amounts of $36,161 recorded in the second quarter of 2017 and $98,622 recorded in the third quarter of 2017, were reclassified to Additional Paid In Capital in the total amount of $1,999,833. The financial statements contained herein reflect restated prior year results pursuant to this correction.
On April 21, 2017, the Company’s majority shareholder (the “Majority Shareholder”) transferred 850,115 shares of the Company’s common stock owned by the Majority Shareholder to Amyris, Inc. in satisfaction of a $10,000,000 debt that one of the Majority Shareholder’s wholly owned companies owed to Amyris.
6
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
During the quarter ended December 31, 2017, the Company completed a private placement of 19,140 shares of its common stock, $0.001 par value per share, generating proceeds of $225,000. During the current fiscal year, the Company completed private placement sales of 159,267 shares of its common stock, $0.001 par value per share, generating proceeds of $1,873,318 in the aggregate.
On August 16, 2017, the Company entered into a Stevia Sweetener Business Separation Binding Term Sheet (the “Term Sheet”) with Phyto Tech Corp. d/b/a Blue California (“Blue California”), a corporation controlled by the Company’s Majority Shareholder. Pursuant to the Term Sheet, the parties agreed to certain transfers and licenses to consolidate substantially all Rebaudioside A, Rebaudioside M, and potentially Rebaudioside D related tangible and intangible assets and manufacturing resources in the Company. The Company and Blue California intend to enter into one or more additional agreements to more fully set forth the terms and conditions of the transactions (the “Closing Documents”), which will supersede the Term Sheet, but intend that the Term Sheet be binding. All pricing in the Closing Documents shall be based upon a valuation performed by an independent third-party valuation firm mutually selected by the parties, with the closing date to be further agreed by the parties. In addition, the Company agrees to include in the Closing Documents a grant to its affiliate manufacturer in Asia of a non-exclusive, non-transferable and non-sublicensable sub-license to use all the existing know-how, patent registrations, patent applications and other proprietary technologies for the purpose of manufacturing of the Products in the territory of such manufacturer’s domicile of entity organization only for sale to the Company or the Company’s designated customers.
On August 16, 2017, the Company and another company owned by the Majority Shareholder (“Conagen”) entered into a First Amendment to Inter-Company Patent License Agreement dated November 28, 2016 (the “Amendment”). The Amendment expands the field of use from flavoring for foods and beverages to use as flavors or sweeteners in food and beverages. The Amendment also altered the royalty structure, eliminating the annual $2,000,000 minimum royalty requirement and adding an annual $15,000,000 maximum royalty limitation. The royalty calculation also changed from a tiered system of royalty percentages that decline annually to a flat 5% royalty on net sales. Royalty payments were also revised from semi-annual payments due within 60 days of the end of each royalty period to annual payments based upon the Company’s fiscal year due within 90 days of the end of each fiscal year.
In July 2017, the Company commenced shipping products for revenues pursuant to purchase orders. As further described in Note 6 - Related Party Transactions, most of the inventory associated with such purchase orders was purchased from Blue California and subsequently shipped to customers. In the future the Company intends to purchase this material directly from the affiliated manufacturer for purchase order fulfillment.
NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of SweeGen, Inc., and its wholly owned subsidiary Phytosub. All significant inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated 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 disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to investment tax credits, bad debts, income taxes and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by U.S. GAAP for complete financial statements.
In the opinion of management, all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial position; (b) the results of operations; and (c) cash flows, have been made in order to make the financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year.
7
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
Revenue
The Company recognizes operating revenues at the time title to the goods and all risks of ownership transfer to the customer. This transfer is considered complete when a sales agreement is in place, delivery has occurred, pricing is fixed or determinable and collection is reasonably assured.
Cost of Goods Sold
Cost of Goods Sold includes the cost of raw materials. As discussed in Note 6 – Related Party Transactions, these materials are purchased from companies owned by the Majority Shareholder.
The Company has entered into royalty agreements with a third party and with Conagen (see Note 1, the Amendment). Royalty expenses related to these agreements are included in Cost of Goods Sold.
Inventories
Inventory is carried at the lower of cost or net realizable value. Cost is computed using the average cost method which approximates the first-in, first-out method.
Property and equipment and depreciation
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of depreciable assets.
Net Loss Per Share of Common Stock
U.S. GAAP requires a reconciliation of the numerator and denominator of the basic earnings per share computation. In the accompanying consolidated financial statements, basic earnings (loss) per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
The following table sets forth the computation of basic earnings per share:
|
|
|
Six Months
Ended
Dec 31, 2017
|
|
Six Months
Ended
Dec 31, 2016
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,006,910)
|
|
$
|
(134,001)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares issued and
Outstanding, Basic and Diluted
|
|
|
25,618,352
|
|
|
25,366,224
|
|
|
|
|
|
|
|
|
|
Net loss per share, Basic and Diluted
|
|
$
|
(0.04)
|
|
$
|
(0.01)
|
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. The Company did not have any potentially dilutive securities, such as options or warrants, issued and outstanding as of December 31, 2017.
Share-based Expenses
Share-based payment transactions include incurring liabilities or issuing or offering to issue shares, options or other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the consolidated financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
There were no share-based expenses for the period from Business Commencement to December 31, 2017.
8
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
Deferred Income Taxes and Valuation Allowance
Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. No net deferred tax assets or liabilities were recognized as of December 31, 2017 and June 30, 2017.
Concentrations of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit risk primarily consist of its cash and cash equivalents and related party payables it will likely incur in the near future. The Company places its cash with financial institutions of high credit worthiness. At times, its cash with a particular financial institution may exceed any applicable government insurance limits. The Company's management plans to assess the financial strength and credit worthiness of any parties to which it extends funds, and as such, it believes that any associated credit risk exposures are limited.
The Company’s current sales are primarily concentrated with our global distributor, Ingredion. Sales to Ingredion represent 84% of the total sales for the three months ended December 31, 2017, and include shipments to the U.S. and other international locations. Ingredion also represents 100% of the Company’s Accounts Receivable balance at December 31, 2017.
The Company evaluates customer credit quality on a case-by-case basis, and if warranted, intends to establish an allowance for amounts for which collection is considered doubtful. For the three months ended December 31, 2017, most of the shipment activity is with Ingredion, the Company’s global distributor, and therefore deemed a low credit risk. No allowance for doubtful accounts has been established as of December 31, 2017.
Fair Value of Financial Instruments
Assets and liabilities are measured at fair value on a recurring basis. U.S. GAAP establishes a common definition for fair value to be applied that requires the use of fair value measurements, which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets or liabilities
|
|
|
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
|
|
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, and accrued liabilities approximate their estimated fair market value based on the short-term maturity of this instrument.
Related Parties
The Company maintains procedures for the identification of related parties and disclosure of related party transactions. As discussed in Note 6 – Related Party Transactions, the Company has business relationships with companies owned by the Majority Shareholder, and the Company will occasionally record short-term assets or liabilities resulting from these business transactions. Short-term assets are the result of prepaid inventory to a related party manufacturer, and liabilities are the result of loans made to the Company for working capital purposes. All amounts loaned to the Company are non-interest bearing and due upon demand. On December 31, 2017 and June 30, 2017, the Company was owed $313,378 and owed $186,514, respectively, to companies owned by the Majority Shareholder.
9
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. There were no commitments or contingencies as of December 31, 2017.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The revenue recognition standard affects all entities that have contracts with customers, except for certain items. The new revenue recognition standard eliminates the transaction-and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principle-based approach for determining revenue recognition. As amended, public entities are required to adopt the revenue recognition standard for annual periods beginning after December 15, 2017, and interim reporting periods thereafter. Early adoption is not permitted for public entities. As such, the Company will first implement this standard effective July 1, 2018. As the Company has only recently begun to generate revenue, management is in the process of evaluating the effect of implementing this new guidance.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Although the Company is not currently engaged in any lease agreement, management will evaluate the potential impact of the adoption of this standard prior to July 1, 2019, as applicable to any potential lease arrangement the Company considers.
Subsequent Events
The Company has evaluated subsequent events through the date of issuance of this filing.
NOTE 3 - GOING CONCERN
The Company's consolidated financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit of $3,260,353 and working capital of $592,070 as of December 31, 2017. The Company has not established an ongoing source of revenues sufficient to cover its operating costs and requires additional capital to proceed with its operating plan. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These factors raise substantial doubt about its ability to continue as a going concern.
In order to continue as a going concern, the Company will need, among other things, additional capital resources. Management's plan to obtain such resources for the Company may include: product sales, sales of equity instruments, traditional financing such as loans, and obtaining capital from management and significant stockholders sufficient to meet its operating expenses. During the current fiscal year, as a result of various regulatory approvals being granted on the Company’s Products, the Company commenced shipping products to customers for revenue, and the Company completed private placement sales of its common stock, generating proceeds of $1,873,318 (see Note 1). However, management cannot provide any assurance that the Company will be successful in accomplishing all of its plans.
There is no assurance that the Company will be able to obtain sufficient additional funds when needed or that such funds, if available, will be obtainable on terms satisfactory to the Company. The obtainment of financing, the successful development of the Company’s contemplated plan of operations, or its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.
10
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
NOTE 4 - EQUITY
Authorized Stock
The Company’s Articles of Incorporation authorize 75,000,000 shares of common stock with a par value of $0.001 per share. Each share of common stock entitles the holder to one vote, in person or proxy, on any matter on which action of the stockholders of the Company is sought.
Common Shares
During the current fiscal year, the Company completed private placement sales of 159,267 shares of its common stock. In fiscal year 2017, the Company issued 167,219 shares of its common stock in connection with the Ingredion transaction (Note 1). The Company effectively had 25,662,720 and 25,503,453 common shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively. The Company currently has no warrants outstanding.
Preferred shares
No preferred shares have been authorized or issued.
Stock Options
The Company has no outstanding stock options and does not have any outstanding rights to acquire securities.
NOTE 5 - PROVISION FOR INCOME TAXES
The Company is subject to taxation in the United States and certain state jurisdictions. The Company has not taken any uncertain tax positions, but has open tax years subject to audit by the Internal Revenue Services for the years beginning in 2013.
Due to the change in ownership provisions of the income tax laws of United States of America, net operating loss carry forwards for federal income tax reporting purposes are subject to annual limitations. When a change in ownership occurs, net operating loss carry forwards may be limited as to use in future years.
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduces the U.S. federal corporate tax rate to 21%. At December 31, 2017, we had not completed our accounting for the tax effects of the Act; however, we made a reasonable estimate of the effects on our existing deferred tax balance.
The provision for income taxes differs from the amounts that would be provided by applying the statutory federal income tax rate of 21% to the net loss before provision for income taxes due primarily to changes in the valuation allowance to fully reserve net deferred tax assets. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance. The Company has not recorded a provision for income taxes for the three months ended December 31, 2017 and 2016 since the Company has had net operating losses since Business Commencement.
The deferred tax assets are measured using enacted tax rates for each of the jurisdictions in which we operate, and the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. As of December 31, 2017, we remeasured certain tax assets based on the tax rates expected to apply in the future.
|
|
|
Six Months Ended December 31, 2017
|
|
Six Months Ended December 31, 2016
|
|
|
|
|
|
|
|
Net operating loss before non-deductible items
|
|
$
|
1,006,910
|
|
$
|
134,001
|
|
Tax rate
|
|
|
21%
|
|
|
34%
|
|
Deferred tax assets
|
|
|
211,451
|
|
|
45,560
|
|
Less: Valuation allowance
|
|
|
(211,451)
|
|
|
(45,560)
|
|
Income tax expense per books
|
|
$
|
-
|
|
$
|
-
|
11
SWEEGEN, INC.
Notes to the Unaudited Consolidated Financial Statements
Due to uncertainties surrounding the Company's ability to generate future taxable income to realize deferred income tax assets arising as a result of net operating losses carried forward, the Company has not recorded any deferred income tax asset as of December 31, 2017 and 2016. The Company has an operating loss of $3,258,848 since Business Commencement. The net operating loss carryforwards will begin to expire in varying amounts from year 2033, subject to its eligibility as determined by respective tax regulating authorities.
Net deferred tax assets consist of the following components as of:
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Net operating loss carryover
|
|
$
|
684,674
|
|
$
|
401,204
|
|
Valuation allowance
|
|
|
(684,674)
|
|
|
(401,204)
|
|
Net deferred tax asset
|
|
$
|
-
|
|
$
|
-
|
NOTE 6 – RELATED PARTY TRANSACTIONS
On August 16, 2017, the Company entered into a Stevia Sweetener Business Separation Binding Term Sheet (the “Term Sheet”) with Phyto Tech Corp. d/b/a Blue California (“Blue California”), a corporation controlled by the Company’s Majority Shareholder. Pursuant to the Term Sheet, the parties agreed to certain transfers and licenses to consolidate substantially all Rebaudioside A, Rebaudioside M, and potentially Rebaudioside D related tangible and intangible assets and manufacturing resources in the Company. The Company and Blue California intend to enter into one or more additional agreements to more fully set forth the terms and conditions of the transactions (the “Closing Documents”), which will supersede the Term Sheet, but intend that the Term Sheet be binding. All pricing in the Closing Documents shall be based upon a valuation performed by an independent third-party valuation firm mutually selected by the parties, with the closing date to be further agreed by the parties. In addition, the Company agrees to include in the Closing Documents a grant to its affiliate manufacturer in Asia of a non-exclusive, non-transferable and non-sublicensable sub-license to use all the existing know-how, patent registrations, patent applications and other proprietary technologies for the purpose of manufacturing of the Products in the territory of such manufacturer’s domicile of entity organization only for sale to the Company or the Company’s designated customers.
On August 16, 2017, the Company and another company owned by the Majority Shareholder (“Conagen”) entered into a First Amendment to Inter-Company Patent License Agreement dated November 28, 2016 (the “Amendment”). The Amendment expands the field of use from flavoring for foods and beverages to use as flavors or sweeteners in food and beverages. The Amendment also altered the royalty structure, eliminating the annual $2,000,000 minimum royalty requirement and adding an annual $15,000,000 maximum royalty limitation. The royalty calculation also changed from a tiered system of royalty percentages that decline annually to a flat 5% royalty on net sales. Royalty payments were also revised from semi-annual payments due within 60 days of the end of each royalty period to annual payments based upon the Company’s fiscal year due within 90 days of the end of each fiscal year.
On November 15, 2017 (the “Execution Date”), the Company entered into a “Facility Sharing and Service Agreement” with Phyto Tech Corp. d/b/a Blue California (“Blue California”), a corporation controlled by the Company’s Majority Shareholder. According to this agreement, the Company has utilized and will continue to utilize until June 30, 2018, approximately 3,000 square feet (the “Shared Premises”), or 10% of the entire square footage of the office and warehouse space that Blue California currently leases. In addition, the Company will be responsible for its allocable share of the utilities, insurance, maintenance, services and office supplies in connection with use of the Shared Premises, and will lease certain IT equipment, furniture and other office equipment during the term of the agreement. Blue California will provide the Company with certain personal and consulting support relating to its operations. In consideration for these services and the shared facility, the Company will reimburse Blue California a total of $250,000 for each of the calendar quarters beginning July 1, 2017 and October 1, 2017, and an estimated $133,000 for each of the calendar quarters beginning January 1, 2018 and April 1, 2018, subject to adjustment by the parties as provided in the agreement. The agreement can be terminated upon 30 days’ notice by either party.
There are three general categories of recurring financial transactions executed by the Company with related parties:
Operating Expenses / working capital - the Company periodically receives short-term loans from Blue California for working capital needs. Also, expenses for the Company are occasionally incurred and paid by related parties, and subsequently charged back to the Company.
Inventory - the Company purchases inventory for resale from Blue California, which is in the process of decline as the Company has started to purchase inventory directly from another related party manufacturer, and the Company will also make deposit payments to a related party manufacturer for future deliveries.
Royalty payments - the Company records a liability to its Balance Sheet for royalty payments due to Conagen (see Note 1, the Amendment).
12
As of December 31, 2017 and June 30, 2017, the Company was owed $313,378 and owed $186,514, respectively, to companies owned by the Majority Shareholder, further explained as follows:
Operating Expense: During the six months ended December 31, 2017, related parties charged the Company $604,844 for various Operating Expenses (including the $250,000 flat fee allocation per quarter described above), and the Company repaid $944,111 for Operating Expenses. At the beginning of the fiscal year, the Company owed $186,514 to related parties, and at the end of the current period the Company was owed $152,752.
Inventory: During the six months ended December 31, 2017, the Company purchased $1,951,759 of inventory from related parties, and the Company repaid $1,818,124 of this amount. Additionally, the Company paid $320,00 as deposits against future inventory deliveries (the Company subsequently received this inventory in January, 2018). At the beginning of the fiscal year, the Company had no outstanding balance to related parties for inventory, and at the end of the current period, the Company was owed $186,365.
Royalty: During the six months ended December 31, 2017, the Company recorded liabilities of $25,739 in recognition of royalty payments due to Conagen based on Product shipments (see Note 1, the Amendment). At the beginning of the fiscal year, the Company had no outstanding balance to related parties for royalties, and at the end of the current period, the Company owed $25,739. Payment is due to Conagen within 90 days after the end of the Company’s fiscal year ending on June 30, 2018.
Total amount owed to the Company by related parties includes $152,752 from Operating Expense transactions, plus $186,365 from Inventory transactions, offset by $25,739 in royalty fees, or a net total owed of $313,378 as of December 31, 2017. The Company’s balance sheet reflects this amount with an Asset of $320,000 (Deposits) and Liability of $6,622 (Due to Related Parties). All amounts loaned to / from the Company are non-interest bearing and due on demand.
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.
NOTE 7 SUBSEQUENT EVENTS
For the fiscal year to date, the Company received confirmation of estimated, non-binding purchase volumes exceeding $10,000,000 in the aggregate from two major customers for its natural stevia sweetener products, expected to be fulfilled over a period of one year. Purchases will be made pursuant to purchase orders, which the Company has recently begun receiving and fulfilling.
As of the date of this filing, and subsequent to the period ending December 31, 2017, the Company shipped $465,100 of products to customers. The Company’s current backlog of unshipped orders is $1,291,900.
In January 2018, a major U.S. confectionary brand launched its health-themed cookie products which contain the Company’s products.
13