Notes to the Consolidated Financial Statements
December 31, 2016
NOTE 1 -
ORGANIZATION AND DESCRIPTION OF BUSINESS
SweeGen, Inc
., formerly Aceway Corp.
(the "Company"), is a Nevada corporation incorporated on April 1, 2013. On December 23, 2014, the Company entered into a share exchange agreement (the Exchange Agreement) with Phytosub, Inc. (Phytosub), and the shareholder of Phytosub (the Phytosub Shareholder), pursuant to which the Phytosub Shareholder transferred all of the issued and outstanding capital stock of Phytosub to the Company in exchange for 25,000,000 shares of common stock of the Company. The transaction closed on December 23, 2014. As a result, Phytosub, a Nevada corporation formed on December 5, 2014, became a wholly owned subsidiary of the Company and the Phytosub Shareholder (the Majority Shareholder) acquired a controlling interest in the Company (the Share Exchange). For accounting purposes, the Share Exchange was treated as an acquisition of Aceway Corp. and a recapitalization of PhytoSub. PhytoSub is the accounting acquirer and the results of its operations carryover. Accordingly, the operations of Aceway Corp. are not carried over and have been adjusted to $0.
On December 23, 2014, the Company entered into a purchase agreement (the Purchase Agreement) with Armando Espinoza, a former officer and director of the Company, pursuant to which the Company sold and transferred all assets of the Company existing prior to the consummation of the Share Exchange to Mr. Espinoza. The transaction closed on December 23, 2014. In consideration for the transfer of such assets, Mr. Espinoza (i) surrendered for cancellation 25,000,000 shares of the Companys common stock owned by him; and (ii) assumed any and all liabilities of the Company existing prior to the consummation of the Share Exchange and agreed to assume any and all liabilities of the Company later asserted against the Company that related to the Companys operations prior to the consummation of the Share Exchange. Due to the cancellation of Mr. Espinozas 25,000,000 shares and the issuance of 25,000,000 shares to Phytosub pursuant to the Exchange Agreement, the Companys issued and outstanding shares of common stock was 35,000,020 after giving effect to the transactions described above.
On December 23, 2014, twenty-nine (29) Aceway Corp. shareholders delivered certificates and signed stock powers agreeing to cancel 9,663,786 shares of their common stock at any time that the Company wanted to cancel such shares. In February 2016, the Company cancelled the 9,663,786 shares. The Companys issued and outstanding shares of common stock totaled 25,336,234 after giving effect to the cancellation.
The Company is a development stage business-to-business company that intends to leverage its extensive experience and resources in managing and developing large and small private and public companies; pathway engineering; microbial platform development; and developing and supplying ingredients and biological products in the field of sweeteners to be used in its customers finished products. 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 Companys management resources.
The Companys most significant recent business development is the development and manufacture of a high purity stevia sweetener Rebaudioside M and Rebaudioside D product (the Products). At the end of January 2017, a customer of the Company began using the Product in a bottled beverage trial. The Company anticipates receiving additional orders for the Product in the near future.
On November 28, 2016, the Company entered into a 5-year distribution agreement (the Distribution Agreement) with Ingredion Incorporated (Ingredion) pursuant to which Ingredion will serve as the Companys 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 Companys intended in-house accounts (the House Accounts) and other than within the Peoples Republic of China (the PRC). The Companys House Accounts are entities with whom the Company is in active discussions regarding direct distribution of the Products. Ingredion will serve as a non-exclusive distributor of the Products in the PRC. The parties intend to initiate distribution pursuant to the terms of the Distribution Agreement within the United States and expand as the parties collaborate on respective regulatory approvals for the Products in other markets.
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NOTE 2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue and Deferred Revenue
The Company receives payments in advance of issuing distribution agreements for its product which is considered deferred revenue. The Company then recognizes revenues from these agreements ratably over the expected life of the agreement beginning on the commencement date of the distribution agreement, when distribution rights are considered transferred to the distributor. The Company recognizes product sales 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.
Unaudited Interim Financial Statements
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America 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 footnotes required by 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.
Basis of Presentation
The capital accounts of the Company have been retroactively restated to reflect the equivalent number of common shares based on the exchange ratio of the Share Exchange in the basic and diluted weighted-average shares, effective December 23, 2014.
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 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value. As of December 31, 2016 and June 30, 2016, the Company had $62,751 and $683,542, respectively, in cash and no cash equivalents.
Net Loss Per Share of Common Stock
The Company has adopted ASC Topic 260,
Earnings per Share
, which requires presentation of basic earnings per share on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation. In the accompanying consolidated financial statements, basic earnings (loss) per share are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
8
The following table sets forth the computation of basic earnings per share:
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Six Months Ended
December 31,
2016
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Six Months Ended
December 31,
2015
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Net loss
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$
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(97,840)
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$
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(34,552)
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Weighted average common shares issued and
Outstanding, Basic and Diluted
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25,366,224
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25,336,234
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Net loss per share, Basic and Diluted
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$
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-
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$
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-
|
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, 2016, and 2015.
Share-Based Expenses
ASC 718,
Compensation Stock Compensation
, prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. 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 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).
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,
EquityBased Payments to Non-Employees
. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
There were no share-based expenses for the period from inception (December 5, 2014) to December 31, 2016.
Deferred Income Taxes and Valuation Allowance
The Company accounts for income taxes under ASC 740,
Income Taxes
(ASC 740). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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 deferred tax assets or liabilities were recognized as of December 31, 2016 or June 30, 2016.
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 and cash equivalents with financial institutions of high credit worthiness. At times, its cash and cash equivalents 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.
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Fair Value of Financial Instruments
The Company adopted ASC 820,
Fair Value Measurements and Disclosures
(ASC 820
)
, for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing U.S. GAAP that requires the use of fair value measurements which establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 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:
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Level 1:
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Observable inputs such as quoted market prices in active markets for identical assets or liabilities
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Level 2:
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Observable market-based inputs or unobservable inputs that are corroborated by market data
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Level 3:
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Unobservable inputs for which there is little or no market data, which require the use of the reporting entitys own assumptions.
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The carrying amounts reported in the balance sheet for cash, accounts payable, and accrued liabilities approximate their estimated fair market value based on the short-term maturity of this instrument.
Fair value of financial instruments at December 31, 2016:
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Fair Value Measurements Using:
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Quoted Prices
in Active
Markets
(Level 1)
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Significant
Other
Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Derivative liability
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$
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-
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$
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-
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$
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-
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The derivative liability as of June 30, 2016 was the result of the warrants that were issued in April 2016 to Ingredion. The warrants had expiration of December 31, 2016. The warrants were exercised on November 30, 2016. The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable input (Level 3) on June 30, 2016 and December 31, 2016:
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Conversion feature derivative liability
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Balance June 30, 2016
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$
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1,505
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Change in fair value
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(1,505)
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Balance December 31, 2016
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$
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-
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Related Parties
The Company follows ASC 850,
Related Party Disclosures
, for the identification of related parties and disclosure of related party transactions. During the period from inception (December 5, 2014) to April 21, 2016, a company owned by the Majority Shareholder, loaned the Company $170,641 to pay for professional fees and other general and administrative expenses. The Company repaid the $170,641 on April 21, 2016. As of December 31, 2016, and June 30, 2016, no amounts were owed to the Majority Shareholder for loans provided to pay for professional fees and other general and administrative expenses. As of June 30, 2016, the Company owed $500,000 to a company owned by the Companys Majority Shareholder for product research and development services provided from April 1, 2016 through June 30, 2016. The $500,000 owed as of June 30, 2016, was paid on July 7, 2016.
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On November 28, 2016, the Company entered into a patent license agreement (the License Agreement) with Conagen Inc. (Conagen), a corporation majority owned by Steven Chen, the Companys President, Director and majority shareholder. Pursuant to the terms of the license agreement, Conagen granted to the Company an exclusive, perpetual and sub-licensable license to use its know-how, technology and intellectual property relating to development, production, distribution and commercialization of compounds, substances, products and services related to the stevia plant for use in food and beverage flavoring (the Licensed Technology). The license allows the Company to use the Licensed Technology in the research, development, manufacture, marketing, sale, distribution and support of the Products.
Commitments and Contingencies
The Company follows ASC 450-20,
Loss Contingencies
, to report accounting for 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, 2016, and June 30, 2016. See Note 7 Earnest Money Deposit/Deferred Revenue.
Recent Accounting Pronouncements
In May 2014, the FASB issued new guidance related to revenue recognition. In March, April and May 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, and transition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry specific guidance. The new revenue recognition update guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB has issued several updates to the standard which i) clarify the application of the principal versus agent guidance (ASU 2016-08); ii) clarify the guidance on inconsequential and perfunctory promises and licensing (ASU 2016-10) and iii) narrow-scope improvements and practical expedients (ASU 2016-12). On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the new standard. Therefore, the new standard will be effective commencing with our quarter ending March 31, 2018. The Company is currently assessing the potential impact of this new standard on its consolidated financial statements and has not selected the transition method.
Reclassification
The Company has made certain reclassifications to conform prior periods data to the current presentation. These reclassifications had no effect on reported assets, liabilities or results of operations. Due to the February 2016 cancellation of 9,663,786 shares, we reduced common stock and negative additional paid in capital by 9,664 on the 2015 consolidated financial statements, and the Company effectively reduced the total shares outstanding on the 2015 consolidated financial statements by the 9,663,786 shares that were cancelled in February 2016.
Subsequent Events
The Company has evaluated subsequent events through February 14, 2017, the date of issuance of the financial statements.
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 $1,910,496 as of December 31, 2016, and a working capital deficit of $348,128 as of December 31, 2016, The Company has not established an ongoing source of revenues sufficient to cover its operating costs, and requires additional capital to continue 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.
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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 include: sales of equity instruments; traditional financing, such as loans; and obtaining capital from management and significant stockholders sufficient to meet its operating expenses. However, management cannot provide any assurance that the Company will be successful in accomplishing any 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 Companys 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 Companys 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.
NOTE 4 - EQUITY
Authorized Stock
The Companys 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
On December 23, 2014, twenty-nine (29) Aceway Corp. shareholders signed stock powers agreeing to cancel 9,663,786 shares of their common stock at any time that the Company wanted to cancel such shares. In February 2016, the Company cancelled the 9,663,786 shares. On November 30, 2016, Ingredion exercised its warrants to purchase 167,219 shares of the Companys $.001 par value common stock. The Company effectively had 25,503,453 and 25,336,234 common shares issued and outstanding as of December 31, 2016 and June 30, 2016, respectively.
Preferred shares
No preferred shares have been authorized or issued.
Stock Options and Warrants
On April 17, 2016, the Company issued two warrants to Ingredion in connection with the parties discussions of potential business initiatives and developments. The Company issued Ingredion two warrants that each provided Ingredion the right to acquire 0.33% of the Companys total outstanding common stock on the exercise date, for a total of 0.66% of the total outstanding common stock on the exercise date. The exercise price of the warrants was $.001 per share. Pursuant to the terms of the warrants, Ingredion could exercise the warrants in whole or in part at any time prior to the expiration date of December 31, 2016, which was subject to extension until March 31, 2017 upon mutual agreement of the parties. The parties agreed that if they had not finalized any business relationship agreements by the expiration date, and the warrants had not been exercised, the Company would refund $1 million of the consideration paid by Ingredion upon Ingredions request and cancellation of one of the warrants. The business relationship agreements were finalized on November 28, 2016 with the execution of a Distribution Agreement and Ingredion exercised the warrants on November 30, 2016.
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, however, the Company has open tax years subject to audit by the Internal Revenue Service for the years beginning in 2013.
Due to the change in ownership provisions of the income tax laws of the United States, 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.
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The provision for income taxes differs from the amounts that would be provided by applying the statutory federal income tax rate of 34% 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, 2016 and 2015 since the Company has had net operating losses since inception (December 5, 2014).
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Six Months Ended December 31, 2016
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Six Months Ended December 31, 2015
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Net operating loss before non-deductible items
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$
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97,840
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$
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34,552
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Tax rate
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34%
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34%
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Deferred tax assets
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33,266
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11,748
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Less: Valuation allowance
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(33,266)
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(11,748)
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Income tax expense per books
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$
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-
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$
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-
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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, 2016 and 2015. The Company had accumulated losses of $1,910,496 and $102,757 as of December 31, 2016 and 2015, respectively. The net operating loss carry-forwards will begin to expire in varying amounts from year 2033, subject to eligibility as determined by respective tax regulating authorities.
Net deferred tax assets consist of the following components as of:
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December 31, 2016
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December 31, 2015
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Net operating loss carryover
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$
|
649,569
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|
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$
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34,937
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Valuation allowance
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(649,569)
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(34,937)
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Net deferred tax asset
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$
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-
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$
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-
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NOTE 6 RELATED PARTY TRANSACTIONS
The Company does not own or lease any real estate. The Majority Shareholder provides the Company with 200 square feet of furnished office space, which is its principal executive office. This location currently serves as the Companys primary office for planning and implementing its business plan. This space is currently sufficient for the Companys purposes, and management expects it to be sufficient for the foreseeable future. It is provided free of charge from the Majority Shareholder.
During the three and six months ended December 31, 2015, a company owned by the Majority Shareholder loaned the Company incremental amounts totaling $10,477 to pay for professional fees and other general and administrative expenses. No such loans were provided during the three months or six ended December 31, 2016. All amounts loaned to the Company were non-interest bearing and were due on demand. As of December 31, 2016, the balance due to a company owned by the Majority Shareholder was $0 for such loans.
During the year ended June 30, 2016, a company owned by the Majority Shareholder (the R&D Company) provided product research and development services to the Company valued at $1,500,000. During the year ended June 30, 2016, $1,000,000 of the $1,500,000 was paid to the R&D Company, resulting in a balance of $500,000 owed as of June 30, 2016 to the R&D Company. The $500,000 owed as of June 30, 2016 was paid on July 7, 2016. The R&D Company provides research and development and process development services to various companies utilizing proprietary technology. The R&D Company is developing proprietary products for the Company.
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On November 28, 2016, the Company entered into a patent license agreement (the License Agreement) with Conagen Inc. (Conagen), a corporation majority owned by Steven Chen, the Companys President, Director and majority shareholder. Pursuant to the terms of the license agreement, Conagen granted to the Company an exclusive, perpetual and sub-licensable license to use its know-how, technology and intellectual property relating to development, production, distribution and commercialization of compounds, substances, products and services related to the stevia plant for use in food and beverage flavoring (the Licensed Technology). The license allows the Company to use the Licensed Technology in the research, development, manufacture, marketing, sale, distribution and support of the Products. Pursuant to the terms of the License Agreement, the Company must pay a minimum royalty to Conagen of $2 million per year beginning in the year in which there is a first commercial sale (FCS) of the Products, and as follows: (i) 10% of the Companys Product net sales for the year of FCS (pro-rated, if necessary); (ii) 9% of Product net sales for the first year after FCS; (iii) 8% of Product net sales for the second year after FCS; (iv) 7% of Product net sales for the third year after FCS; (v) 6% of Product net sales for the fourth year after FCS; and (vi) 5% of Product net sales for all following years after FCS.
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 EARNEST MONEY DEPOSIT / DEFERRED REVENUE
On April 17, 2016, the Company received a $2,000,000 earnest money deposit from 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 Companys common stock, $0.001 par value per share.. The two warrants provide Ingredion the right to acquire 0.33% of the Companys total outstanding common stock on the exercise date, for a total of 0.66% of the total outstanding common stock on the exercise date. The exercise price of the warrants is $.001 per share. Pursuant to the terms of the warrants, Ingredion could exercise the warrants in whole or in part at any time prior to the expiration date of December 31, 2016, which was subject to extension until March 31, 2017 upon mutual agreement of the parties. The parties agreed that if they had not finalized any business relationship agreements by the expiration date, and the warrants had not been exercised, the Company would refund $1 million of the consideration paid by Ingredion upon Ingredions request and cancellation of one of the warrants. The Company recorded a $2,000,000 liability as of June 30, 2016 for this earnest money deposit. The business relationship agreements were finalized on November 28, 2016 with the execution of a Distribution Agreement and Ingredion exercised the warrants on November 30, 2016.
As such, on November 30, 2016, 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 one hundred sixty seven dollars ($167.00) was used as consideration for the exercise of the warrants.
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