Attached files
| file | filename |
|---|---|
| EX-99.3 - UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION - S&W Seed Co | exh99-3.htm |
| EX-99.1 - AUDITED SPECIAL PURPOSE FINANCIAL STATEMENTS - S&W Seed Co | exh99-1.htm |
| EX-23.1 - CONSENT - S&W Seed Co | exh23-1.htm |
| 8-K/A - 8-K/A - S&W Seed Co | body8ka.htm |
EXHIBIT 99.2
Chromatin Business
Unaudited Special Purpose Financial Statements
December 31, 2017
Chromatin Business
Unaudited Special Purpose Financial Statements
December 31, 2017
Index
|
|
Page(s) |
|
Unaudited Special Purpose Financial Statements |
|
|
Special Purpose Statement of Assets Acquired and Liabilities Assumed as of December 31, 2017 |
1 |
|
Special Purpose Statement of Revenue and Direct Expenses for the Year Ended December 31, 2017 |
2 |
|
Notes to the Special Purpose Financial Statements |
3-8 |
i
Chromatin Business
Unaudited Special Purpose Statement of Assets Acquired and Liabilities Assumed
December 31, 2017
| December 31, | |||
| 2017 | |||
| (unaudited) | |||
| ASSETS | |||
| ASSETS ACQUIRED | |||
| Cash and cash equivalents | $ | 87,844 | |
| Accounts receivable, net | 4,251,790 | ||
| Inventories, net | 13,201,982 | ||
| Prepaid expenses and other current assets | 55,248 | ||
| TOTAL CURRENT ASSETS | 17,596,864 | ||
| Property, plant and equipment, net | 9,740,176 | ||
| TOTAL ASSETS ACQUIRED | $ | 27,337,040 | |
| LIABILITIES ASSUMED | |||
| Accounts payable | $ | 7,191,072 | |
| Deferred revenue | 927,970 | ||
| Accrued expenses and other current liabilities | 101,366 | ||
| TOTAL LIABILITIES ASSUMED | 8,220,408 | ||
| NET ASSETS ACQUIRED | $ | 19,116,632 |
The accompanying notes are integral to these special purpose financial statements.
1
Chromatin Business
Unaudited Special Purpose Statement of Revenue and Direct Expenses
Year Ended December 31, 2017
| Year Ended | |||
| December 31, | |||
| 2017 | |||
| (unaudited) | |||
| Revenue | $ | 19,694,247 | |
| Cost of revenue | 33,454,598 | ||
| Gross profit | (13,760,351) | ||
| Other direct expenses | |||
| Selling, general and administrative expenses | 8,986,538 | ||
| Research and development expenses | 3,742,253 | ||
| Depreciation expense | 2,539,724 | ||
| Disposal of property, plant and equipment gain | (87,355) | ||
| Total other direct expenses | 15,181,160 | ||
| Deficit of revenue over direct expenses | (28,941,511) | ||
| Deficit of revenue over direct expenses attributable to non-controlling interest | (3,998) | ||
| Deficit of revenue over direct expenses attributable to Chromatin business | $ | (28,937,513) |
The accompanying notes are integral to these special purpose financial statements.
2
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
1. Description of Business and Basis of Presentation
On October 25, 2018, S&W Seed Company ("S&W") completed the acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin", "the Company", and "the Chromatin Business"), as well as the assumption of certain contracts and limited specified liabilities of Chromatin, for an aggregate cash purchase price of approximately $26.5 million (the "Acquisition"), pursuant to the terms of an Asset Purchase Agreement dated September 14, 2018, with Novo Advisors (f/k/a Turnaround Advisory Group Inc.), solely in its capacity as the receiver for, and on behalf of, Chromatin.
Under the terms of the Asset Purchase Agreement, S&W Seed Company acquired assets which include accounts receivable, inventory and the related grower's compensation liability, germplasm, production facilities and equipment as well as research equipment. With the exception of the grower's compensation liability and customer deposits, no other liabilities, contingent or otherwise, were assumed by S&W Seed Company.
Basis of Presentation
These statements present the assets acquired and liabilities of Chromatin assumed by S&W as of December 31, 2017 and the revenue and direct expenses of Chromatin for the year then ended and have been prepared for inclusion in S&W's filings with the Securities and Exchange Commission to comply with Rule 8-04 of Regulation S-X.
These financial statements have been prepared to reflect the assets acquired and liabilities assumed by the Buyer in accordance with a waiver obtained by the Buyer from the Securities and Exchange Commission ("SEC Waiver").
These financial statements are presented in lieu of full financial statements of the Chromatin business because Chromatin, prior to entering receivership, had engaged in a number of complex financing and tax transactions that are not relevant to the business purchased by S&W, and because preparing financial information for certain subsidiaries of Chromatin, Inc. which were not acquired by S&W would be impracticable and of no relevance to the business acquired by S&W.
These financial statements have been derived from the accounting records of Chromatin using its historical financial information. The financial statements do not necessarily represent the assets sold or liabilities assumed or revenue and direct expenses as if the Chromatin Business had been operating as a separate, stand-alone entity during the period presented. In addition, the financial statements may not be indicative of the financial condition or results of operations of the Chromatin Business going forward.
The Statement of revenue and Direct Expenses reflect only those sales and revenue directly attributable to the Chromatin Business. The direct expenses of the Chromatin Business presented in these statements include cost of goods sold related to the Chromatin Business' sales and other direct expenses. Depreciation expense of assets used in the Chromatin Business is included, but depreciation associated with assets not acquired, interest expense, legal and professional fees and income taxes have been excluded from the financial statements.
The financial statements include the balances and activity of Sorghum Solutions Africa, a South African company of which a 51% ownership interest was acquired under the Asset Purchase Agreement. All significant intercompany balances and transactions have been eliminated.
3
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company maintains its accounting records on an accrual basis in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Unaudited Financial Information
These financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the Company's financial statements for the periods presented.
Business Overview
The Chromatin business is a sorghum genetics and seed company in the business of breeding, growing, processing and selling hybrid sorghum seed.
International Operations
The financial information of Chromatin's foreign operations involved in the Chromatin Business has been translated into U.S. dollars at the exchange rates as follows: (i) asset and liability accounts at end-of-period rates, and (ii) revenue and expense accounts at the average exchange rates in effect during the period.
Use of Estimates
The preparation of the financial statements requires management to make estimates and assumptions that may affect the reported amounts of the assets acquired, liabilities assumed, revenue, direct expenses and related disclosures during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions include the allowance for doubtful accounts receivables and inventory valuation and expected realization. Actual results may differ from management's assumptions.
Accounts Receivable
The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer's trade accounts receivable. The allowance for doubtful trade receivables was $942,952 at December 31, 2017.
4
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
Inventories
Inventories consist of seed and packaging materials.
Inventories are stated at the lower of cost or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories consist of raw materials, work in process and finished goods. Depending on market conditions, the actual amount received on sale could differ from the Company's estimated value of inventory. In order to determine the value of inventory at the balance sheet date, the Company evaluates a number of factors to determine the adequacy of provisions for inventory. The factors include the age of inventory, the quality and germination rates, the amount of inventory held by type, future demand for products and the expected future selling price the Company expects to realize by selling the inventory. These estimates are judgmental in nature and are made at a point in time, using available information, expected business plans and expected market conditions.
Inventories are valued as follows: Actual cost is used to value raw materials such as packaging materials, as well as goods in process. Costs for substantially all finished goods, which include the cost of carryover crops from the previous year, are valued at actual cost. Actual cost for finished goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing overhead costs based on normal capacity.
Components of inventory are:
| December 31, | |||
| 2017 | |||
| Raw materials and supplies | $ | 740,405 | |
| Work in progress | 9,410,915 | ||
| Finished goods, net | 3,050,662 | ||
| $ | 13,201,982 |
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5-39 years for buildings, 3-27 years for machinery and equipment, and 5-7 years for vehicles. Repairs and maintenance expenditures are expensed as incurred.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset.
5
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. Revenue for product sales is recognized upon delivery, when title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable. Estimates are made for sales returns and other allowances based on the Company's experience. Amounts to be billed to customers for shipping and handling fees are included in net sales and costs incurred by the Company for the delivery of goods are classified as direct costs of revenue.
These financial statements do not reflect the provisions of ASC Topic 606, Revenue from Contracts with Customers, which would have been mandatorily effective for the Company in 2019, absent the acquisition by S&W. This ASC topic outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
After the acquisition, the Company will, as part of S&W, report its revenue under the requirements of ASC Topic 606.
Direct Cost of revenue
The Company records purchasing and receiving costs, inspection costs and warehousing costs in direct cost of revenue. When the Company is required to pay for outward freight and/or the costs incurred to deliver products to its customers, the costs are included in direct cost of revenue.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses include costs (primarily consisting of employee costs, materials, contract services, research agreements, and other external spend) relating to the discovery and development of new products, and enhancement of existing products.
6
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
3. Property, Plant and Equipment
Components of property, plant and equipment were as follows:
| December 31, | |||
| 2017 | |||
| Land and improvements | $ | 299,024 | |
| Buildings and improvements | 6,389,864 | ||
| Machinery and equipment | 13,454,131 | ||
| Vehicles | 1,090,016 | ||
| Total property, plant and equipment | 21,233,035 | ||
| Less: accumulated depreciation | (11,492,859) | ||
| Property, plant and equipment, net | $ | 9,740,176 |
Depreciation expense totaled $2,539,724 for the year ended December 31, 2017.
4. Deferred Revenue
Deferred revenue represents deposits and prepayments from customers for products to be shipped in future periods.
7
Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017
5. Selected Cash Flows
The preparation of complete statements of cash flows was not practical since the historical operations were funded with various debt and equity transactions and these historical financing arrangements are not related to the assets acquired and liabilities assumed. Accordingly, it is impractical to identify and include investing or financing cash flows associated with the Business. The following selected cash flow information has been prepared by changes in the specific assets and liabilities comprising the Chromatin Business.
| Year Ended | |||
| December 31, | |||
| 2017 | |||
| (unaudited) | |||
| Deficit of revenue over direct expenses attributable to Chromatin business | $ | (28,937,513) | |
| Change in accounts receivable | 2,544,742 | ||
| Change in inventories | 15,055,395 | ||
| Change in accounts payable | 1,689,687 | ||
| Change in deferred revenue | (115,849) | ||
| Selected operating cash flows | $ | (9,763,538) |
6. Subsequent Events
The Company has evaluated subsequent events after the balance sheet date through January 2, 2019, which is the date the financial statements were available to be issued.
Please refer to Note 1 for further discussion on the closing of the Acquisition.
8