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EX-10.2 - EX-10.2 - S&W Seed Cosanw-ex102_312.htm
EX-10.1 - EX-10.1 - S&W Seed Cosanw-ex101_313.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period year ended December 31, 2019

or

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

For the transition period from _____________ to _____________

Commission File Number: 001-34719

S&W SEED COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

27-1275784

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

 

 

 

2101 Ken Pratt Blvd, Suite 201, Longmont, CO

 

80501

(Address of Principal Executive Offices)

 

(Zip Code)

(720) 506-9191

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share

SANW

The Nasdaq Capital Market

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No

The number of shares outstanding of common stock of the registrant as of February 12, 2020 was 33,398,019.

 

 

 

 


S&W SEED COMPANY

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

Page No.

Item 1.

 

Financial Statements (Unaudited):

 

3

 

 

Consolidated Balance Sheets at December 31, 2019 and June 30, 2019

 

3

 

 

Consolidated Statements of Operations for the Three Months and Six Months Ended December 31, 2019 and 2018

 

4

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended December 31, 2019 and 2018

 

5

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months and Six Months Ended December 31, 2019 and 2018

 

6

 

 

Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018

 

7

 

 

Notes to Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

31

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

46

Item 4.

 

Controls and Procedures

 

46

PART II.

 

OTHER INFORMATION

 

47

Item 1.

 

Legal Proceedings

 

47

Item 1A.

 

Risk Factors

 

47

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

Item 3.

 

Defaults Upon Senior Securities

 

47

Item 4.

 

Mine Safety Disclosures

 

47

Item 5.

 

Other Information

 

47

Item 6.

 

Exhibits

 

48

 

 

 

1


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include but are not limited to, any statements concerning projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any statements concerning expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases or to diversify our product offerings; any statements regarding future economic conditions or performance; any statements of expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “designed,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations about future events. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Risks, uncertainties and assumptions include the following:

whether we are successful in securing sufficient acreage to support the growth of our seed business,

our plans for expansion of our business (including through acquisitions) and our ability to successfully integrate acquisitions into our operations;

the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund their operations;

trends and other factors affecting our financial condition or results of operations from period to period;

the impact of crop disease, severe weather conditions, such as flooding, or natural disasters, such as earthquakes, on crop quality and yields and on our ability to grow, procure or export our products;

the impact of pricing of other crops that may be influence what crops our growers elect to plant;

whether we are successful in aligning expense levels to revenue changes;

whether we are successful in monetizing our stevia business;

the cost and other implications of pending or future legislation or court decisions and pending or future accounting pronouncements; and

other risks that are described herein including but not limited to the items discussed in “Risk Factors” below, and that are otherwise described or updated from time to time in our filings with the Securities Exchange Commission.

You are urged to carefully review the disclosures made concerning risks and uncertainties that may affect our business or operating results, which include, among others, those listed in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2019, as updated in Part II, Item 1A. “Risks Factors” of this Quarterly Report on Form 10-Q.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this Quarterly Report on Form 10-Q, some of which are beyond our control, will be important in determining our future performance. Consequently, these statements are inherently uncertain and actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Quarterly Report on Form 10-Q as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Furthermore, such forward-looking statements represent our views as of, and speak only as of, the date of this Quarterly Report on Form 10-Q, and such statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. We undertake no obligation to publicly update any forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company,” “S&W” and “S&W Seed” refer to S&W Seed Company and its subsidiaries or, as the context may require, S&W Seed Company only. Our fiscal year ends on June 30, and accordingly, the terms “fiscal 2020,” “fiscal 2019” and “fiscal 2018” in this Quarterly Report on Form 10-Q refer to the respective fiscal year ended June 30, 2020, 2019 and 2018, respectively, with corresponding meanings to any fiscal year reference beyond such dates. Trademarks, service marks and trade names of other companies appearing in this report are the property of their respective holders.

2


PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

S&W SEED COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

ASSETS

 

December 31,

2019

 

 

June 30,

2019

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,353,072

 

 

$

3,431,802

 

Accounts receivable, net

 

 

10,243,690

 

 

 

13,380,464

 

Unbilled accounts receivable, net

 

 

524,511

 

 

 

 

Inventories, net

 

 

75,610,319

 

 

 

71,295,520

 

Prepaid expenses and other current assets

 

 

1,598,496

 

 

 

1,687,490

 

Assets held for sale

 

 

 

 

 

1,850,000

 

TOTAL CURRENT ASSETS

 

 

90,330,088

 

 

 

91,645,276

 

Property, plant and equipment, net

 

 

20,344,674

 

 

 

20,634,949

 

Intangibles, net

 

 

34,217,214

 

 

 

32,714,484

 

Other assets

 

 

4,627,839

 

 

 

1,369,560

 

TOTAL ASSETS

 

$

149,519,815

 

 

$

146,364,269

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,507,963

 

 

$

6,930,829

 

Deferred revenue

 

 

10,121,405

 

 

 

9,054,549

 

Accrued expenses and other current liabilities

 

 

5,127,747

 

 

 

6,073,110

 

Lines of credit, net

 

 

16,995,697

 

 

 

10,755,548

 

Current portion of long-term debt, net

 

 

1,394,154

 

 

 

1,113,502

 

TOTAL CURRENT LIABILITIES

 

 

47,146,966

 

 

 

33,927,538

 

Long-term debt, net, less current portion

 

 

11,392,796

 

 

 

12,158,095

 

Other non-current liabilities

 

 

2,224,284

 

 

 

280,424

 

TOTAL LIABILITIES

 

 

60,764,046

 

 

 

46,366,057

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 50,000,000 shares authorized; 33,329,566

   issued and 33,304,566 outstanding at December 31, 2019; 33,303,218 issued and

   33,278,218 outstanding at June 30, 2019;

 

 

33,329

 

 

 

33,303

 

Treasury stock, at cost, 25,000 shares

 

 

(134,196

)

 

 

(134,196

)

Additional paid-in capital

 

 

137,204,276

 

 

 

136,751,875

 

Accumulated deficit

 

 

(42,056,965

)

 

 

(30,466,618

)

Accumulated other comprehensive loss

 

 

(6,192,962

)

 

 

(6,138,467

)

Noncontrolling interests

 

 

(97,713

)

 

 

(47,685

)

TOTAL STOCKHOLDERS' EQUITY

 

 

88,755,769

 

 

 

99,998,212

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

149,519,815

 

 

$

146,364,269

 

 

See notes to consolidated financial statements.

 

 

3


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product and other

 

$

12,353,100

 

 

$

18,580,996

 

 

$

24,625,557

 

 

$

44,701,133

 

Total revenue

 

 

12,353,100

 

 

 

18,580,996

 

 

 

24,625,557

 

 

 

44,701,133

 

Cost of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product and other

 

 

10,160,727

 

 

 

13,897,455

 

 

 

19,360,313

 

 

 

34,554,463

 

Total cost of revenue

 

 

10,160,727

 

 

 

13,897,455

 

 

 

19,360,313

 

 

 

34,554,463

 

Gross profit

 

 

2,192,373

 

 

 

4,683,541

 

 

 

5,265,244

 

 

 

10,146,670

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

5,119,598

 

 

 

4,342,696

 

 

 

9,767,924

 

 

 

7,230,074

 

Research and development expenses

 

 

1,671,873

 

 

 

1,373,554

 

 

 

3,260,064

 

 

 

2,365,667

 

Depreciation and amortization

 

 

1,346,004

 

 

 

1,035,606

 

 

 

2,410,802

 

 

 

1,890,714

 

(Gain) loss on disposal of property, plant and equipment

 

 

(1,500

)

 

 

3,463

 

 

 

(13,075

)

 

 

3,463

 

Total operating expenses

 

 

8,135,975

 

 

 

6,755,319

 

 

 

15,425,715

 

 

 

11,489,918

 

Loss from operations

 

 

(5,943,602

)

 

 

(2,071,778

)

 

 

(10,160,471

)

 

 

(1,343,248

)

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency gain

 

 

(112,363

)

 

 

(32,987

)

 

 

(14,176

)

 

 

(58,430

)

Change in estimated value of assets held for sale

 

 

7,238

 

 

 

 

 

 

92,931

 

 

 

 

Loss on extinguishment of debt

 

 

140,638

 

 

 

 

 

 

140,638

 

 

 

 

Interest expense - amortization of debt discount

 

 

111,810

 

 

 

68,914

 

 

 

297,712

 

 

 

135,392

 

Interest expense

 

 

501,781

 

 

 

641,479

 

 

 

938,279

 

 

 

1,298,709

 

Loss before income taxes

 

 

(6,592,706

)

 

 

(2,749,184

)

 

 

(11,615,855

)

 

 

(2,718,919

)

Provision for income taxes

 

 

23,290

 

 

 

(4,801

)

 

 

24,520

 

 

 

4,533

 

Net loss

 

$

(6,615,996

)

 

$

(2,744,383

)

 

$

(11,640,375

)

 

$

(2,723,452

)

Net income (loss) attributed to noncontrolling interests

 

 

48,861

 

 

 

21,673

 

 

 

(50,028

)

 

 

21,673

 

Net loss attributable to S&W Seed Company

 

$

(6,664,857

)

 

$

(2,766,056

)

 

$

(11,590,347

)

 

$

(2,745,125

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to S&W Seed Company per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.20

)

 

$

(0.09

)

 

$

(0.35

)

 

$

(0.10

)

Diluted

 

$

(0.20

)

 

$

(0.09

)

 

$

(0.35

)

 

$

(0.10

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

33,301,578

 

 

 

29,153,852

 

 

 

33,294,344

 

 

 

26,996,483

 

Diluted

 

 

33,301,578

 

 

 

29,153,852

 

 

 

33,294,344

 

 

 

26,996,483

 

 

See notes to consolidated financial statements.

 

 

4


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net loss

 

$

(6,615,996

)

 

$

(2,744,383

)

 

$

(11,640,375

)

 

$

(2,723,452

)

Foreign currency translation adjustment, net of income taxes

 

 

189,570

 

 

 

(143,198

)

 

 

(54,495

)

 

 

(325,621

)

Comprehensive loss

 

$

(6,426,426

)

 

$

(2,887,581

)

 

$

(11,694,870

)

 

$

(3,049,073

)

Comprehensive income (loss) attributable to noncontrolling interests

 

 

48,861

 

 

 

21,673

 

 

 

(50,028

)

 

 

21,673

 

Comprehensive loss attributable to S&W Seed Company

 

$

(6,475,287

)

 

$

(2,909,254

)

 

$

(11,644,842

)

 

$

(3,070,746

)

 

See notes to consolidated financial statements.

 

 

5


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Noncontrolling

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Loss

 

 

Equity

 

Balance, September 30, 2018

 

 

 

 

 

 

 

 

25,981,252

 

 

$

25,981

 

 

 

(25,000

)

 

$

(134,196

)

 

$

113,878,725

 

 

$

(21,140,445

)

 

 

 

 

$

(5,973,085

)

 

$

86,656,980

 

Stock-based compensation -

   options, restricted stock, and RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

222,153

 

 

 

 

 

 

 

 

 

 

 

 

222,153

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

29,889

 

 

 

30

 

 

 

 

 

 

 

 

 

(18,889

)

 

 

 

 

 

 

 

 

 

 

 

(18,859

)

Proceeds from sale of preferred stock, net

   of fees and expenses

 

 

7,235

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,420,455

 

 

 

 

 

 

 

 

 

 

 

 

22,420,462

 

Conversion of preferred stock

   to common stock

 

 

(7,235

)

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,228

)

 

 

 

 

 

 

 

 

 

 

 

(7,235

)

Proceeds from sale of common

   stock, net of fees and expenses

 

 

 

 

 

 

 

 

7,235,000

 

 

 

7,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,235

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(143,198

)

 

 

(143,198

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,766,056

)

 

 

21,673

 

 

 

 

 

 

(2,744,383

)

Balance, December 31, 2018

 

 

 

 

$

 

 

 

33,246,141

 

 

$

33,246

 

 

 

(25,000

)

 

$

(134,196

)

 

$

136,495,216

 

 

$

(23,906,501

)

 

$

21,673

 

 

$

(6,116,283

)

 

$

106,393,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2019

 

 

 

 

$

 

 

 

33,309,453

 

 

$

33,309

 

 

 

(25,000

)

 

$

(134,196

)

 

$

136,903,468

 

 

$

(35,392,108

)

 

$

(146,574

)

 

$

(6,382,532

)

 

$

94,881,367

 

Stock-based compensation -

   options, restricted stock, and RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

309,767

 

 

 

 

 

 

 

 

 

 

 

 

309,767

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

20,113

 

 

 

20

 

 

 

 

 

 

 

 

 

(8,959

)

 

 

 

 

 

 

 

 

 

 

 

(8,939

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

189,570

 

 

 

189,570

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,664,857

)

 

 

48,861

 

 

 

 

 

 

(6,615,996

)

Balance, December 31, 2019

 

 

 

 

$

 

 

 

33,329,566

 

 

$

33,329

 

 

 

(25,000

)

 

$

(134,196

)

 

$

137,204,276

 

 

$

(42,056,965

)

 

$

(97,713

)

 

$

(6,192,962

)

 

$

88,755,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Treasury Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Noncontrolling

 

 

Accumulated

Other

Comprehensive

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Interests

 

 

Loss

 

 

Equity

 

Balance, June 30, 2018

 

 

 

 

 

 

 

 

24,367,906

 

 

$

24,367

 

 

 

(25,000

)

 

$

(134,196

)

 

$

108,803,991

 

 

$

(21,161,376

)

 

 

 

 

$

(5,790,662

)

 

$

81,742,124

 

Stock-based compensation -

   options, restricted stock, and RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

377,458

 

 

 

 

 

 

 

 

 

 

 

 

377,458

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

35,518

 

 

 

36

 

 

 

 

 

 

 

 

 

(25,534

)

 

 

 

 

 

 

 

 

 

 

 

(25,498

)

Proceeds from sale of preferred stock, net

   of fees and expenses

 

 

7,235

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,420,455

 

 

 

 

 

 

 

 

 

 

 

 

22,420,462

 

Conversion of preferred stock

   to common stock

 

 

(7,235

)

 

 

(7

)

 

 

7,235,000

 

 

 

7,235

 

 

 

 

 

 

 

 

 

(7,228

)

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sale of common

   stock, net of fees and expenses

 

 

 

 

 

 

 

 

1,607,717

 

 

 

1,608

 

 

 

 

 

 

 

 

 

4,926,074

 

 

 

 

 

 

 

 

 

 

 

 

4,927,682

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(325,621

)

 

 

(325,621

)

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,745,125

)

 

 

21,673

 

 

 

 

 

 

(2,723,452

)

Balance, December 31, 2018

 

 

 

 

$

 

 

 

33,246,141

 

 

$

33,246

 

 

 

(25,000

)

 

$

(134,196

)

 

$

136,495,216

 

 

$

(23,906,501

)

 

$

21,673

 

 

$

(6,116,283

)

 

$

106,393,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2019

 

 

 

 

$

 

 

 

33,303,218

 

 

$

33,303

 

 

 

(25,000

)

 

$

(134,196

)

 

$

136,751,875

 

 

$

(30,466,618

)

 

$

(47,685

)

 

$

(6,138,467

)

 

$

99,998,212

 

Stock-based compensation -

   options, restricted stock, and RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

468,604

 

 

 

 

 

 

 

 

 

 

 

 

468,604

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

26,348

 

 

 

26

 

 

 

 

 

 

 

 

 

(16,203

)

 

 

 

 

 

 

 

 

 

 

 

(16,177

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(54,495

)

 

 

(54,495

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,590,347

)

 

 

(50,028

)

 

 

 

 

 

(11,640,375

)

Balance, December 31, 2019

 

 

 

 

$

 

 

 

33,329,566

 

 

$

33,329

 

 

 

(25,000

)

 

$

(134,196

)

 

$

137,204,276

 

 

$

(42,056,965

)

 

$

(97,713

)

 

$

(6,192,962

)

 

$

88,755,769

 

 

See notes to consolidated financial statements.

 

 

6


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(11,640,375

)

 

$

(2,723,452

)

Adjustments to reconcile net loss from operating activities to net

 

 

 

 

 

 

 

 

cash used in operating activities

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

468,604

 

 

 

377,458

 

Change in allowance for doubtful accounts

 

 

(36,018

)

 

 

(154,364

)

Inventory write-down

 

 

818,099

 

 

 

 

Depreciation and amortization

 

 

2,410,802

 

 

 

1,890,715

 

(Gain) loss on disposal of property, plant and equipment

 

 

(13,075

)

 

 

3,463

 

Change in foreign exchange contracts

 

 

(73,677

)

 

 

2,626

 

Change in estimated value of assets held for sale

 

 

92,931

 

 

 

 

Loss on debt extinguishment

 

 

140,638

 

 

 

 

Amortization of debt discount

 

 

297,712

 

 

 

135,392

 

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,169,182

 

 

 

(8,336,183

)

Unbilled accounts receivable

 

 

(524,511

)

 

 

(11,206,984

)

Inventories

 

 

(5,193,721

)

 

 

(21,513,547

)

Prepaid expenses and other current assets

 

 

16,829

 

 

 

123,752

 

Other non-current asset

 

 

31,935

 

 

 

 

Accounts payable

 

 

6,643,907

 

 

 

23,698,244

 

Deferred revenue

 

 

1,066,964

 

 

 

1,458,655

 

Accrued expenses and other current liabilities

 

 

(943,890

)

 

 

384,628

 

Other non-current liabilities

 

 

(218,475

)

 

 

(40,855

)

Net cash used in operating activities

 

 

(3,486,139

)

 

 

(15,900,452

)

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(1,447,549

)

 

 

(336,623

)

Proceeds from disposal of property, plant and equipment

 

 

20,075

 

 

 

24,106

 

Proceeds from sale of assets held for sale

 

 

1,757,069

 

 

 

 

Additions to internal use software

 

 

 

 

 

(43,000

)

Acquisition of business, net of cash acquired

 

 

 

 

 

(26,354,951

)

Acquisition of wheat assets

 

 

(2,633,000

)

 

 

 

Net cash used in investing activities

 

 

(2,303,405

)

 

 

(26,710,468

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net proceeds from sale of common stock

 

 

 

 

 

4,927,682

 

Net proceeds from sale of preferred stock

 

 

 

 

 

22,420,462

 

Taxes paid related to net share settlements of stock-based compensation awards

 

 

(16,177

)

 

 

(25,497

)

Borrowings and repayments on lines of credit, net

 

 

6,648,102

 

 

 

14,299,326

 

Borrowings of long-term debt

 

 

258,721

 

 

 

2,369,071

 

Debt issuance costs

 

 

(879,655

)

 

 

(354,589

)

Repayments of long-term debt

 

 

(1,147,447

)

 

 

(2,682,056

)

Net cash provided by financing activities

 

 

4,863,544

 

 

 

40,954,399

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

(152,730

)

 

 

(192,992

)

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

 

(1,078,730

)

 

 

(1,849,513

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

$

3,431,802

 

 

 

4,320,894

 

CASH AND CASH EQUIVALENTS, end of period

 

$

2,353,072

 

 

$

2,471,381

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

825,121

 

 

$

1,106,256

 

Income taxes

 

 

76,878

 

 

 

13,304

 

 

See notes to consolidated financial statements.

 

 

7


 

S&W SEED COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - BACKGROUND AND ORGANIZATION

Organization

S&W Seed Company, a Nevada corporation (the “Company”), began as S&W Seed Company, a general partnership, in 1980 and was originally in the business of breeding, growing, processing and selling alfalfa seed. We then incorporated a corporation with the same name in Delaware in October 2009, which is the successor entity to Seed Holding, LLC, having purchased a majority interest in the general partnership between June 2008 and December 2009. Following the Company’s initial public offering in May 2010, the Company purchased the remaining general partnership interests and became the sole owner of the general partnership’s original business. Seed Holding, LLC remains a consolidated subsidiary of the Company.

In December 2011, the Company reincorporated in Nevada as a result of a statutory short-form merger of the Delaware corporation into its wholly-owned subsidiary, S&W Seed Company, a Nevada corporation.

On April 1, 2013, the Company, together with its wholly-owned subsidiary, S&W Holdings Australia Pty Ltd, an Australia corporation (f/k/a S&W Seed Australia Pty Ltd “S&W Holdings”), consummated an acquisition of all of the issued and outstanding shares of Seed Genetics International Pty Ltd, an Australia corporation (“SGI”), from SGI’s shareholders. In April 2018, SGI changed its name to S&W Seed Company Australia Pty Ltd (“S&W Australia”).

On September 19, 2018, the Company and AGT Foods Africa Proprietary Limited (“AGT”) formed a venture based in South Africa named SeedVision Proprietary Limited (“SeedVision”). SeedVision will leverage AGT's African-based production and processing facilities to produce S&W's hybrid sunflower, grain sorghum, and forage sorghum to be sold by SeedVision in the African continent, Middle East countries, and Europe.

Business Overview

Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding, growing, processing and selling agricultural seeds, primarily alfalfa seed. The Company owns seed cleaning and processing facilities, which are located in Five Points, California, Nampa, Idaho, Dumas, Texas, New Deal, Texas and Keith, South Australia. The Company’s seed products are primarily grown under contract by farmers. The Company began its stevia initiative in fiscal year 2010 and is currently focused on breeding improved varieties of stevia and developing marketing and distribution programs for its stevia products.

The Company has also been actively engaged in expansion initiatives through a combination of organic growth and strategic acquisitions, including in December 31, 2014, when the Company purchased certain alfalfa research and production facilities and conventional (non-GMO) alfalfa germplasm assets and assumed certain related liabilities (the “Pioneer Acquisition”) of Pioneer Hi-Bred International, Inc. (“Pioneer”).

The Company had a long-term distribution agreement with Pioneer regarding conventional (non-GMO) varieties, and a production agreement with Pioneer (relating to GMO-traited varieties). These agreements were terminated on May 20, 2019. See Note 4 for further discussion.

In May 2016, the Company acquired the assets and business of SV Genetics, a private Australian company specializing in the breeding and licensing of proprietary hybrid sorghum and sunflower seed germplasm, which represented the Company’s initial effort to diversify its product portfolio beyond alfalfa seed and stevia.

In October 2018, the Company acquired substantially all of the assets of Chromatin, Inc., a U.S.-based sorghum genetics and seed company, as part of the Company's efforts to expand its penetration into the hybrid sorghum market.

 

In August 2019, S&W Australia, a wholly owned subsidiary of S&W Seed Company, licensed certain wheat germplasm varieties and acquired certain equipment from affiliates of Corteva. In the transaction, S&W Australia paid a one-time license fee of $2.3 million and an equipment purchase price of $0.3 million. The license has an initial term of 15 years.  

The Company’s operations span the world’s alfalfa seed production regions with operations in the San Joaquin and Imperial Valleys of California, Texas, five other U.S. states, Australia, and three provinces in Canada, and the Company sells its seed products in more than 30 countries around the globe.

8


 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of S&W Seed Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and majority-owned subsidiaries over which the Company's exercises control. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as Noncontrolling interests.

The Company owns 50.1% of SeedVision, which is a variable interest entity as defined in ASC 810-10, Consolidation, because no substantive equity contributions have been made to it, and SeedVision is being funded through advances, as needed, from its investorsThe Company has concluded that it is the primary beneficiary of SeedVision because it has the power, through a tie-breaking vote on the board of directors, to direct the sales and marketing activities of SeedVision, which are considered to be the activities that have the greatest impact on the future economic performance of SeedVision.

The Company owns 51.0% of Sorghum Solutions South Africa, which is a variable interest entity as defined in ASC 810-10, Consolidation, because no substantive equity contributions have been made to it, and Sorghum Solutions South Africa is being funded through advances, as needed, from its investorsThe Company has concluded that it is the primary beneficiary of Sorghum Solutions South Africa because it has the power, through a tie-breaking vote on the board of directors, to direct the sales and marketing activities of Sorghum Solutions South Africa, which are considered to be the activities that have the greatest impact on the future economic performance of Sorghum Solutions South Africa.

Because the Company is its primary beneficiary, SeedVision's and Sorghum Solutions South Africa’s financial results are included in these financial statements.  We have recorded a combined $0.8 million of current assets (restricted) and $0.5 million of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of December 31, 2019. We have recorded a combined $0.6 million of current assets (restricted) and $0.2 million of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of June 30, 2019.  

Unaudited Interim Financial Information

The Company has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These consolidated 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 consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending June 30, 2020. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019, as filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in the financial statements. These include allowance for doubtful trade receivables, revenue recognition, inventory valuation, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable to farmers who grow seed for the Company), contingencies and litigation. Significant estimates and assumptions are also used to establish the fair value and useful lives of depreciable tangible and certain intangible assets, goodwill as well as valuing stock-based compensation. Actual results may differ from those estimates and assumptions, and such results may affect income, financial position or cash flows.

Certain Risks and Concentrations

The Company’s revenue is principally derived from the sale of seed, the market for which is highly competitive. The Company depends on a core group of significant customers. One customer accounted for 27% and 52% of its revenue for the three months ended December 31, 2019 and 2018, respectively. One customer accounted for 41% and 65% of its revenue for the six months ended December 31, 2019 and 2018, respectively.

9


 

Two customers accounted for 26% of the Company’s accounts receivable at December 31, 2019. One customer accounted for 19% of the Company’s accounts receivable at June 30, 2019.

The Company sells a substantial portion of its products to international customers. Sales to international markets represented 51% and 33% of revenue during the three months ended December 31, 2019 and 2018, respectively. Sales to international markets represented 48% and 23% of revenue during the six months ended December 31, 2019 and 2018, respectively. The net book value of fixed assets located outside the United States was 13% and 11% of total fixed assets at December 31, 2019 and June 30, 2019, respectively. Cash balances located outside of the United States may not be insured and totaled $518,429 and $236,822 at December 31, 2019 and June 30, 2019, respectively.

The following table shows revenue from external sources by destination country:

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

United States

 

$

6,098,755

 

 

 

49

%

 

$

12,464,626

 

 

 

67

%

 

$

12,803,301

 

 

 

52

%

 

$

34,204,005

 

 

 

77

%

Saudi Arabia

 

 

2,095,140

 

 

 

17

%

 

 

863,982

 

 

 

5

%

 

 

2,285,140

 

 

 

9

%

 

 

1,570,275

 

 

 

4

%

Mexico

 

 

787,624

 

 

 

6

%

 

 

986,303

 

 

 

5

%

 

 

1,818,416

 

 

 

7

%

 

 

1,379,253

 

 

 

3

%

Australia

 

 

527,063

 

 

 

4

%

 

 

1,040,480

 

 

 

6

%

 

 

1,293,514

 

 

 

5

%

 

 

1,370,150

 

 

 

3

%

Pakistan

 

 

464,537

 

 

 

4

%

 

 

464,936

 

 

 

3

%

 

 

1,243,467

 

 

 

5

%

 

 

730,583

 

 

 

2

%

Libya

 

 

414,880

 

 

 

3

%

 

 

800,375

 

 

 

4

%

 

 

1,044,860

 

 

 

4

%

 

 

1,798,750

 

 

 

4

%

Italy

 

 

364,907

 

 

 

3

%

 

 

82,880

 

 

 

0

%

 

 

678,614

 

 

 

3

%

 

 

82,880

 

 

 

0

%

South Africa

 

 

343,997

 

 

 

3

%

 

 

121,567

 

 

 

1

%

 

 

458,444

 

 

 

2

%

 

 

248,696

 

 

 

1

%

China

 

 

213,168

 

 

 

2

%

 

 

 

 

 

0

%

 

 

379,270

 

 

 

2

%

 

 

169,027

 

 

 

0

%

Bolivia

 

 

169,900

 

 

 

1

%

 

 

119,464

 

 

 

1

%

 

 

169,900

 

 

 

1

%

 

 

230,464

 

 

 

1

%

Other

 

 

873,129

 

 

 

8

%

 

 

1,636,383

 

 

 

8

%

 

 

2,450,631

 

 

 

10

%

 

 

2,917,050

 

 

 

5

%

Total

 

$

12,353,100

 

 

 

100

%

 

$

18,580,996

 

 

 

100

%

 

$

24,625,557

 

 

 

100

%

 

$

44,701,133

 

 

 

100

%

 

 

International Operations

The Company translates its foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income (loss). Gains or losses from foreign currency transactions are included in the consolidated statement of operations.

Cost of Revenue

The Company records purchasing and receiving costs, inspection costs and warehousing costs in 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 cost of revenue.

Cash and Cash Equivalents

For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation.

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 $1,798,093 and $1,742,887 at December 31, 2019 and June 30, 2019, respectively.

10


 

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 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. The Company records abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) as current period charges and allocates fixed production overhead to the costs of finished goods based on the normal capacity of the production facilities.

The Company’s subsidiary, S&W Australia, does not fix the final price for seed payable to its growers until the completion of a given year’s sales cycle pursuant to its standard contract production agreement. S&W Australia records an estimated unit price; accordingly, inventory, cost of revenue and gross profits are based upon management’s best estimate of the final purchase price to growers.

Inventory is periodically reviewed to determine if it is marketable, obsolete or impaired. Inventory that is determined to be obsolete or impaired is written off to expense at the time the impairment is identified. Inventory quality is a function of germination percentage.  Our experience has shown that our alfalfa seed quality tends to be stable under proper storage conditions; therefore, we do not view inventory obsolescence for alfalfa seed as a material concern.  Hybrid crops (sorghum and sunflower) seed quality may be affected by warehouse storage pests such as insects and rodents.  The Company maintains a strict pest control program to mitigate risk and maximize hybrid seed quality.

Components of inventory are:

 

 

 

December 31,

2019

 

 

June 30,

2019

 

Raw materials and supplies

 

$

1,275,442

 

 

$

664,541

 

Work in progress

 

 

9,266,827

 

 

 

5,664,934

 

Finished goods

 

 

65,068,050

 

 

 

64,966,045

 

 

 

$

75,610,319

 

 

$

71,295,520

 

 

Property, Plant and Equipment

Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5-35 years for buildings, 2-20 years for machinery and equipment, and 2-5 years for vehicles. 

Intangible Assets

Intangible assets acquired in business acquisitions are reported at their initial fair value less accumulated amortization. Intangible assets are amortized using the straight-line method over the estimated useful life of the asset. Periods of 10-30 years for technology/IP/germplasm, 5-20 years for customer relationships and trade names and 3-20 for other intangible assets. The weighted average estimated useful lives are 25 years for technology/IP/germplasm, 17 years for customer relationships, 18 years for trade names, 15 years for license agreements and 16 years for other intangible assets.

11


 

Goodwill

Goodwill originated from acquisitions of Imperial Valley Seeds, Inc. (“IVS”) and S&W Australia in fiscal year 2013, the acquisition of the alfalfa business from Pioneer in fiscal year 2015, the acquisition of assets of SV Genetics in fiscal year 2016 and acquisition of substantially all of the assets of Chromatin, Inc. in fiscal year 2019.

Goodwill is assessed at least annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management conducts a quantitative goodwill impairment test. The goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses market capitalization and an estimate of a control premium to estimate the fair value of its one reporting unit as well as discounted cash flow analysis. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

The Company performed a quantitative assessment of goodwill at June 30, 2019 and determined that goodwill was fully impaired.  See Note 7 for further information.

Investment in Bioceres S.A.

The Company owns less than 1% of Bioceres, S.A., a provider of crop productivity solutions headquartered in Argentina.  The carrying value of the investment is $1.3 million at December 31, 2019 and June 30, 2019, and the investment is included in Other Assets on the Consolidated Balance Sheet.

The Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities beginning July 1, 2018.  As such, this investment is accounted for in accordance with ASC 321, Investments – Equity Securities. As the stock is not publicly traded, the Company has elected to account for its investment at cost, with adjustments to fair value when there are observable transactions that provide an indicator of fair value.  In addition, if qualitative factors indicate a potential impairment, fair value must be estimated and the investment written down to that fair value if it is lower than the carrying value.  

No adjustments for impairment or observable transactions were made for the three months or six months ended December 31, 2019 or December 31, 2018.  

Research and Development Costs

The Company is engaged in ongoing research and development (“R&D”) of proprietary seed and stevia varieties. All R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred. Third-party R&D costs are expensed when the contracted work has been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or constructed for R&D activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset.

Income Taxes

Deferred tax assets and liabilities are determined based on differences between the financial statement and tax basis of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company’s effective tax rate for the three and six months ended December 31, 2019 and December 31, 2018 has been affected by the valuation allowance on the Company’s deferred tax assets.

Net Income (Loss) Per Common Share Data

Basic net income (loss) per common share ("EPS"), is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. 

Diluted EPS is calculated by adjusting both the numerator (net income (loss)) and the denominator (weighted-average number of shares outstanding) for the dilutive effects of potentially dilutive securities, including options, restricted stock awards and common stock warrants. 

12


 

The treasury stock method is used for common stock warrants, stock options, and restricted stock awards. Under this method, consideration that would be received upon exercise (as well as remaining compensation cost to be recognized for awards not yet vested) is assumed to be used to repurchase shares of stock in the market, with net number of shares assumed to be issued added to the denominator.

The calculation of Basic and Diluted EPS is shown in the table below. 

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to S&W Seed Company

 

$

(6,664,857

)

 

$

(2,766,056

)

 

$

(11,590,347

)

 

$

(2,745,125

)

Numerator for basis EPS

 

 

(6,664,857

)

 

 

(2,766,056

)

 

 

(11,590,347

)

 

 

(2,745,125

)

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted EPS

 

$

(6,664,857

)

 

$

(2,766,056

)

 

$

(11,590,347

)

 

$

(2,745,125

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic EPS-weighted- average

   shares

 

 

33,301,578

 

 

 

29,153,852

 

 

 

33,294,344

 

 

 

26,996,483

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

 

 

 

 

 

 

 

 

 

 

 

 

Employee restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive potential common shares

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for diluted EPS - adjusted weighted

   average shares and assumed conversions

 

 

33,301,578

 

 

 

29,153,852

 

 

 

33,294,344

 

 

 

26,996,483

 

Basic EPS

 

$

(0.20

)

 

$

(0.09

)

 

$

(0.35

)

 

$

(0.10

)

Diluted EPS

 

$

(0.20

)

 

$

(0.09

)

 

$

(0.35

)

 

$

(0.10

)

 

The effects of employee stock options and stock units, and warrants are excluded because they would be anti-dilutive due to the Company’s net loss for the three and six months ended December 31, 2019 and 2018.  

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. Refer to Note 4 and Note 7 for impairment discussion.

Derivative Financial Instruments

Foreign Exchange Contracts

The Company’s subsidiary, S&W Australia, is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company at times manages through the use of foreign currency forward contracts.

The Company has entered into certain derivative financial instruments (specifically foreign currency forward contracts), and accounts for these instruments in accordance with ASC Topic 815, “Derivatives and Hedging”, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. The Company’s foreign currency contracts are not designated as hedging instruments under ASC 815; accordingly, changes in the fair value are recorded in current period earnings.

13


 

Fair Value of Financial Instruments

The Company discloses assets and liabilities that are recognized and measured at fair value, presented in a three-tier fair value hierarchy, as follows:

Level 1. Observable inputs such as quoted prices in active markets;

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The assets acquired and liabilities assumed in the Chromatin acquisition were valued at fair value on a non-recurring basis as of October 25, 2018.

The assets acquired and liabilities assumed in the Dow Wheat acquisition (see Note 7 below) were valued at fair value on a non-recurring basis as of August 15, 2019.

The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term borrowings, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments or interest rates commensurate with market rates. There have been no changes in operations and/or credit characteristics since the date of issuance that could impact the relationship between interest rate and market rates.

Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as follows:

 

 

 

Fair Value Measurements as of

December 31, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Foreign exchange contract asset

 

$

 

 

$

32,827

 

 

$

 

Total

 

$

 

 

$

32,827

 

 

$

 

 

 

 

Fair Value Measurements as of

June 30, 2019 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Foreign exchange contract liability

 

$

 

 

$

42,255

 

 

$

 

Total

 

$

 

 

$

42,255

 

 

$

 

 

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Update No. 2016-02: Leases (“ASU 2016-02”) effective July 1, 2019. ASC 842 superseded previously existing guidance on accounting for leases and generally requires all leases to be recognized in the statement of financial position.

The adoption of ASC 842 resulted in the recognition of $2.6 million of right-of-use assets ("ROU assets") and $4.3 million related lease liabilities as of July 1, 2019, with no cumulative effect adjustment. The adoption of ASC 842 had no impact on the Company’s consolidated statement of operations and consolidated statement of cash flows.

The Company adopted ASC 842 on a modified retrospective approach at the effective date and, therefore, did not revise comparative period information or disclosure. In addition, the Company elected the package of practical expedients permitted under ASC 842.

See "Note 3—Leases" for additional information on the adoption of ASC 842.

14


 

Recently Issued, but Not Yet Adopted, Accounting Pronouncements

In August 2018, the FASB issued authoritative guidance intended to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance also requires presentation of the capitalized implementation costs in the statement of financial position and in the statement of cash flows in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented, and the expense related to the capitalized implementation costs to be presented in the same line item in the statement of operations as the fees associated with the hosting element (service) of the arrangement. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact of the adoption of Subtopic 350-40 on its consolidated financial statements and related disclosures.

NOTE 3 - LEASES

S&W leases office and laboratory space, research plots and equipment used in connection with its operations under various operating and finance leases.

ROU assets represent the Company’s right to use the underlying assets for the lease term and lease liabilities represent the net present value of the Company’s obligation to make payments arising from these leases. The lease liabilities are based on the present value of fixed lease payments over the lease term using the implicit lease interest rate or, when unknown, the Company's incremental borrowing rate on the lease commencement date or July 1, 2019 for leases that commenced prior to that date. If the lease includes one or more options to extend the term of the lease, the renewal option is considered in the lease term if it is reasonably certain the Company will exercise the option(s). Operating lease expense is recognized on a straight-line basis over the term of the lease. As permitted by ASC 842, leases with an initial term of twelve months or less ("short-term leases") are not recorded on the accompanying consolidated balance sheet.

The Company has lease agreements with lease and non-lease components, which are accounted for as a single lease component under the practical expedient provisions of the standard. The Company has lease agreements with terms less than one year. For the qualifying short-term leases, the Company elected the short-term lease recognition exemption in which the Company will not recognize ROU assets or lease liabilities, including the ROU assets or lease liabilities for existing short-term leases of those assets in upon adoption.

Variable lease payments consist primarily of common area maintenance, utilities and taxes, which are not included in the recognition of ROU assets and related lease liabilities.  Variable lease payments and short-term lease expenses were immaterial to the Company’s financial statements for the three and six months ended December 31, 2019. The Company’s lease agreements do not contain material restrictive covenants.

The components of lease assets and liabilities are as follows:

 

Leases

 

Balance Sheet Classification

 

December 31, 2019

 

Assets:

 

 

 

 

 

 

Right of use assets - operating leases

 

Other assets

 

$

2,318,388

 

 

 

 

 

 

 

 

Right of use assets - finance leases

 

Other assets

 

 

1,053,231

 

Accumulated amortization - finance leases

 

Other assets

 

 

(141,308

)

Right of use assets - finance leases, net

 

Other assets

 

 

911,923

 

Total lease assets

 

 

 

$

3,230,311

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Current portion of long-term debt, net

 

Current portion of long-term debt, net

 

 

683,119

 

Current lease liabilities

 

Accrued expenses and other current liabilities

 

 

784,925

 

Long-term debt, net

 

Long-term debt, net

 

 

1,684,646

 

Long-term lease liabilities

 

Other long-term liabilities

 

 

2,134,092

 

Total lease liabilities

 

 

 

$

5,286,782

 

15


 

The components of lease cost are as follows:

Leases

 

Income Statement Classification

 

Three Months

Ended

December 31,

2019

 

 

Six Months

Ended

December 31,

2019

 

Operating lease cost

 

Cost of revenue

 

$

71,591

 

 

$

142,885

 

Operating lease cost

 

Selling, general and administrative expenses

 

 

109,287

 

 

 

307,334

 

Operating lease cost

 

Research and development expenses

 

 

52,304

 

 

 

104,532

 

Finance lease cost

 

Depreciation and amortization

 

 

135,855

 

 

 

229,162

 

Total lease costs

 

 

 

$

369,037

 

 

$

783,913

 

 

Maturities of lease liabilities as of December 31, 2019 are as follows:

 

 

 

 

 

Operating Leases

 

Finance Leases

 

Remainder of 2020

 

 

 

$

534,093

 

$

399,664

 

2021

 

 

 

 

840,640

 

 

805,446

 

2022

 

 

 

 

630,613

 

 

736,979

 

2023

 

 

 

 

444,342

 

 

628,491

 

2024

 

 

 

 

397,761

 

 

59,861

 

After 2024

 

 

 

 

417,663

 

 

 

Total lease payments

 

 

 

 

3,265,112

 

 

2,630,441

 

Less: Interest

 

 

 

 

346,095

 

 

262,676

 

Present value of lease liabilities

 

 

 

$

2,919,017

 

$

2,367,765

 

 

Future minimum lease payments for operating leases accounted for under ASC 840, “Leases” in excess of one year at December 31, 2019 are as follows:

 

 

 

 

 

December 31, 2019

 

Remainder of 2020

 

 

 

$

531,500

 

2021

 

 

 

 

723,454

 

2022

 

 

 

 

547,651

 

2023

 

 

 

 

396,999

 

2024

 

 

 

 

369,941

 

After 2024

 

 

 

 

388,890

 

Total

 

 

 

$

2,958,435

 

 

The following are the weighted average assumptions used for lease term and discount rate and supplemental cash flow information related to leases as of December 31, 2019:

 

Operating lease remaining lease term

 

4.8 years

 

Operating lease discount rate

 

 

5.43

%

Finance lease remaining lease term

 

3.5 years

 

Finance lease discount rate

 

 

6.27

%

Cash paid for operating leases

 

$

243,672

 

Cash paid for finance leases

 

$

362,042

 

 

NOTE 4 – PIONEER RELATIONSHIP

Distribution and Production Agreements with Pioneer

In 2014, the Company purchased from Pioneer certain assets related to alfalfa and entered into a long-term contract to sell alfalfa seed to Pioneer under a production agreement (“GMO varieties”) and a distribution agreement (conventional varieties). Under the production and distribution agreements with Pioneer, the Company grew, processed, and delivered alfalfa seed for and to Pioneer.  See Note 5 for a discussion of the recognition of revenue under these agreements.  

16


 

On May 22, 2019, the Company and Pioneer terminated the production and distribution agreements.  As part of the termination, Pioneer’s parent company, Corteva, agreed to purchase from the Company certain quantities of seed held by the Company as of that date that Pioneer was not previously obligated to purchase.  Those quantities of seed will be delivered to Corteva periodically through February 2021.  

The Company does not expect to sell any other products to Pioneer or Corteva beyond those quantities of seed.  

In conjunction with the termination of the Pioneer production and distribution agreements, the Company recorded a $6.0 million impairment charge on its intangible assets related to the Pioneer distribution agreements for the year ended June 30, 2019. In addition, the termination of this relationship was a significant factor leading to the $11.9 million impairment of goodwill during the year ended June 30, 2019.

License Agreement with Corteva

Contemporaneously with the termination, the Company entered into a license with Corteva, under which Corteva received a fully pre-paid, exclusive license to produce and distribute certain of the Company's alfalfa seed varieties world-wide (except South America). The licensed seed varieties include certain of the Company's existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties. The Company also assigned to Corteva grower production contract rights, and Corteva assumed grower production contract obligations, related to the licensed and certain other alfalfa varieties.  Corteva received no license to the Company's other commercial alfalfa varieties or pre-commercial alfalfa pipeline products and no rights to any future products developed by the Company.

Payments Due from Corteva and Pioneer

The Company received payments of $45.0 million in May 2019 and $5.55 million in September 2019 from Pioneer/Corteva, and will receive additional quarterly payments through February 2021, which total approximately $19.45 million.  Approximately $34.2 million of these amounts referenced above has been allocated to the license to the Company’s alfalfa varieties. The $34.2 million was reported as licensing revenue in the consolidated statement of operations for the year ended June 30, 2019.  

The remaining amounts will be recognized as revenue as the seed is delivered to Corteva through February 2021.  The amount allocated to the seed represents the estimated standalone selling price of those quantities of seed, determined based on the Company’s normal profit margin on the quantities and varieties of seed that Corteva agreed to purchase.  The Company allocated approximately $1.8 million to an unbilled receivable related to revenue recognition at contract termination and the remainder of the payments was allocated to the license using a residual method approach.

NOTE 5 - REVENUE RECOGNITION

The Company derives its revenue from 1) the sale of seed, 2) milling and packaging services 3) research and development services and 4) product licensing agreements.

 

The following table disaggregates the Company’s revenue by type of contract:

 

 

 

Three Months Ended December 31,

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Pioneer product sales

 

$

3,144,106

 

 

$

9,677,988

 

 

$

6,407,122

 

 

$

29,185,614

 

Other product sales

 

 

8,908,371

 

 

 

8,761,172

 

 

 

17,536,548

 

 

 

15,336,201

 

Services

 

 

300,623

 

 

 

141,836

 

 

 

681,887

 

 

 

179,318

 

 

 

$

12,353,100

 

 

$

18,580,996

 

 

$

24,625,557

 

 

$

44,701,133

 

Pioneer Product Sales

In the three and six months ended December 31, 2019, Pioneer product sales consisted of product shipments to Pioneer under the termination agreement discussed in Note 4.

In the three and six months ended December 31, 2018, Pioneer product sales consisted of revenue under the Distribution and Production Agreements.

Under the production and distribution agreements with Pioneer, the Company grew, processed, and delivered alfalfa seed for and to Pioneer. The Company concluded that none of the individual activities performed under these contracts were distinct, as the customer was contracting for processed and packaged product.

17


 

Until those contracts were terminated in May 2019 (see Note 4), Pioneer submitted a demand plan to the Company in advance of the growing season specifying the amount of seed that it intends to order for the upcoming sales year. The Company was required to use commercially reasonable efforts to arrange for the requisite amount of seed to be grown, processed and packaged. Once the demand plan was submitted, Pioneer was committed to at least that amount of seed. In addition, the Company was not permitted to sell products produced for Pioneer under the agreements to other customers. Therefore, as provided in Topic 606, the Company recognized revenue from these agreements over time in 2019, as it incurred costs to fulfill its obligations.

To the extent the Company produced more product than Pioneer specified in its demand plan, the Company was required to first offer such product to Pioneer. If Pioneer did not purchase such excess product, the Company was permitted to sell the excess product to other customers subject to certain limitations.

The agreements specified prices per finished unit which were adjusted each year, up or down, based on current market conditions, by a maximum of 4% per year. The prices for a given crop year were determined one year in advance of the beginning of the sales season.

The Company concluded that cost was the best measure of progress under these contracts because no other measure adequately reflected the value added to the product by each of the Company's major tasks - having the crop grown, processing, and packaging. As the Company typically contracted out the growing of seed to third parties, the vast majority of the Company's costs under these agreements were incurred, and therefore the vast majority of the revenue from such agreements was recognized, when the raw seed was purchased from the third-party contract growers. The rest of the costs were incurred, and therefore the rest of the revenue was recognized, as the Company processed and packaged the product.  As of the date of the termination of the production and distribution agreements with Pioneer (see Note 4), all seed covered by the active demand plan had been grown, processed and packaged.

Licensing

Contemporaneously with the termination in Note 4, the Company entered into a license with Corteva, under which Corteva received a fully pre-paid, exclusive license to produce and distribute certain of the Company's alfalfa seed varieties world-wide (except South America). The licensed seed varieties include certain of the Company's existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties.

Other Product Sales

Revenue from other product sales is recognized at the point in time at which control of the product is transferred to the customer. Generally, this occurs upon shipment of the product. Pricing for such transactions is negotiated and determined at the time the contracts are signed. We have elected the practical expedient that allows us to account for shipping and handling activities as a fulfillment cost, and we accrue those costs when the related revenue is recognized.

The Company has certain contracts with customers that offer a limited right of return on certain branded products. The products must be in an unopened and undamaged state and must be resalable in the sole opinion of the Company to qualify for refund.  Returns are only accepted on product received by August 31st of the current sales year.  The Company uses the three-year historical returns percentage to estimate the refund liability and records a reduction of revenue in the period in which revenue is recognized.

Services

Revenue from milling and packaging services, which are performed on the customer's product, is recognized as services are completed and the milled product is delivered to the customer.

Revenue from research and development services is recognized over time as the services are performed. R&D services are generally paid for in advance. During the three and six months ended December 31, 2019, R&D revenue relates to a single contract in which the customer may decide annually whether to continue the arrangement. Revenue is recognized straight-line over time, as services are expected to be provided roughly evenly throughout the year.

Payment Terms and Related Balance Sheet Accounts

Accounts receivable represent amounts that are payable to the Company by its customers subject only to the passage of time. Payment terms on invoices are generally 30 to 120 days for export customers and end of sales season (September 30th) for branded products sold within the United States. As the period between the transfer of goods and/or services to the customer and receipt of payment is less than one year, the Company does not separately account for a financing component in its contracts with customers.

18


 

Unbilled receivables represent contract assets that arise when the Company has partially performed under a contract, but is not yet able to invoice the customer until the Company has made additional progress. Unbilled receivables arose from the distribution and production agreements for which the Company recognized revenue over time, as the Company bills for these arrangements upon product delivery, while revenue was recognized, as described above, as costs were incurred. Unbilled receivables may arise as much as three months before billing is expected to occur.

Losses on accounts receivable and unbilled receivables are recognized if and when it becomes probable that amounts will not be paid. These losses are reversed in subsequent periods if these amounts are paid. During the three months ended December 31, 2019, the Company recognized a net gain from collections on amounts previously written off to bad debt expense of $48,657.  During the six months ended December 31, 2019, the Company recognized a net gain from collections on amounts previously written off to bad debt expense of $36,018.

Deferred revenue represents payments received from customers in advance of completion of the Company's performance obligation.

NOTE 6 - BUSINESS COMBINATIONS

On October 25, 2018, the Company completed the acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin"), 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 its Asset Purchase Agreement, dated September 14, 2018, with Novo Advisors, solely in its capacity as the receiver for, and on behalf of, Chromatin ("Novo").

The acquisition expanded the Company's sorghum production capabilities, diversified its product offerings and provided access to new distribution channels.

The Acquisition has been accounted for as a business combination, and the Company valued and recorded all assets acquired and liabilities assumed at their estimated fair values on the date of the Acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of October 25, 2018:

 

 

 

 

 

October 25, 2018

 

Cash and cash equivalents

 

 

 

$

95,049

 

Accounts receivable

 

 

 

 

947,015

 

Inventories

 

 

 

 

6,959,936

 

Prepaid expenses and other current assets

 

 

 

 

16,501

 

Property, plant and equipment

 

 

 

 

10,193,620

 

Assets held for sale

 

 

 

 

1,930,400

 

In-process research and development

 

 

 

 

380,000

 

Technology/IP - germplasm

 

 

 

 

7,200,000

 

Trade names

 

 

 

 

150,000

 

Goodwill

 

 

 

 

1,573,546

 

Current liabilities

 

 

 

 

(2,881,198

)

Noncurrent liabilities

 

 

 

 

(114,869

)

Total acquisition cost allocated

 

 

 

$

(26,450,000

)

 

Management determined that one of the facilities acquired as part of the Chromatin acquisition would not be operated and is being held for sale. The components of that facility are:

 

Land and improvements

 

 

 

 

320,000

 

Buildings and improvements

 

 

 

 

1,380,000

 

Machinery and equipment

 

 

 

 

332,000

 

Less: Costs to sell

 

 

 

 

(101,600

)

Less: Fair value adjustment subsequently recorded

 

 

 

 

(1,230,400

)

Assets recorded as held for sale that have been subsequently sold

 

 

 

$

700,000

 

19


 

 

Management expected the sale to be completed within 12 months and planned to pay down a portion of the Company's short-term debt with the proceeds, accordingly, these held for sale assets were presented as current assets.

 

The estimated fair value of accounts receivable acquired was $947,015, with the gross contractual amount totaling $2,164,476, less $1,217,461 expected to be uncollectible. The current liabilities assumed relate to inventory acquired in the acquisition as well as customer deposits. The excess of the purchase price over the fair value of the net assets acquired, amounting to $1,573,546, was recorded as goodwill on the consolidated balance sheet. The primary item that generated goodwill was the premium paid by the Company for the ability to control the acquired business, technology, and the distribution channels. Goodwill is not amortized for financial reporting purposes, but is amortized for tax purposes.

Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method, the multi-period excess earnings method, and the replacement cost method. In-process research and development costs are being accounted for as an indefinite lived intangible asset subject to impairment testing until completion or abandonment of research and development efforts associated with the in-process projects. Upon successful completion of each project, the Company will make a determination about the then remaining useful life of the intangible asset and begin amortization.

The values and useful lives of the acquired intangibles are as follows:

 

 

 

Estimated Useful

Life (Years)

 

Estimated Fair

Value

 

In-process research and development

 

n/a

 

$

380,000

 

Technology/IP - germplasm

 

30

 

 

7,200,000

 

Trade names

 

5

 

 

150,000

 

Total identifiable intangible assets

 

 

 

$

7,730,000

 

 

The Company incurred acquisitions costs of $586,800 and $995,316 during the three and six months ended December 31, 2018 that have been recorded in selling, general and administrative expenses on the consolidated statement of operations. The results of the Chromatin acquisition are included in our consolidated financial statements from the date of acquisition through December 31, 2019.

The following unaudited pro forma financial information presents results as if the Acquisition occurred on July 1, 2018.

 

 

 

Six Months Ended

 

 

 

December 31,

2018

 

Revenue

 

$

46,374,310

 

Net loss

 

$

(4,889,152

)

 

For purposes of the pro forma disclosures above, there are no adjustments for the three and six months ended December 31, 2019.

 

For purposes of the pro forma disclosures above, the primary adjustments for the three and six months ended December 31, 2018 include the elimination of acquisition expenses of $586,800 and $995,316, respectively.

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

During the fourth quarter of the year ended June 30, 2019, the Company terminated its production and distribution agreements with Pioneer, thereby triggering a potential indicator of goodwill impairment. As a result, the Company initiated a goodwill impairment test for the year ended June 30, 2019.

The Company compared the carrying value of its invested capital to its estimated fair values at June 30, 2019. The Company estimated the fair value based on the income approach. The discounted cash flows served as the primary basis for the income approach and were based on discrete financial forecasts developed by management. Cash flows beyond the discrete forecast period of ten years were estimated using the perpetuity growth method calculation. The income approach valuation included estimated weighted average cost of capital, which was 10.6%.

Upon completing the impairment test, the Company determined that the fair value of invested capital was less than the carrying value by approximately 10%, thus indicating an impairment. The Company recognized a goodwill impairment charge of $11.9 million for the year ended June 30, 2019, which represented the entire goodwill balance prior to the impairment charge.

20


 

The following table summarizes the activity of goodwill for the six months ended December 31, 2019 and the year ended June 30, 2019, respectively.

 

 

 

Balance at

July 1, 2019

 

 

Additions

 

 

Impairment

 

 

Balance at

December 31, 2019

 

Goodwill

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

Balance at

July 1, 2018

 

 

Additions

 

 

Impairment

 

 

Balance at

June 30, 2019

 

Goodwill

 

$

10,292,265

 

 

$

1,573,546

 

 

$

(11,865,811

)

 

$

 

 

For the year ended June 30, 2019, the Company recorded an impairment charge on its intangible assets of $6.0 million.  Refer to Note 4 for further information.

Intangible assets consist of the following:

 

 

 

Balance at

July 1, 2019

 

 

Additions

 

 

Impairment

 

 

Amortization

 

 

Currency Translation Adjustment

 

 

Balance at

December 31, 2019

 

Trade name

 

$

1,205,346

 

 

$

 

 

$

 

 

$

(57,240

)

 

$

 

 

$

1,148,106

 

Customer relationships

 

 

1,055,747

 

 

 

 

 

 

 

 

 

(55,785

)

 

 

 

 

 

999,962

 

Non-compete

 

 

30,267

 

 

 

 

 

 

 

 

 

(8,402

)

 

 

 

 

 

21,865

 

GI customer list

 

 

64,475

 

 

 

 

 

 

 

 

 

(3,582

)

 

 

 

 

 

60,893

 

Supply agreement

 

 

1,002,154

 

 

 

 

 

 

 

 

 

(37,820

)

 

 

 

 

 

964,334

 

Grower relationships

 

 

1,647,800

 

 

 

 

 

 

 

 

 

(52,703

)

 

 

 

 

 

1,595,097

 

Intellectual property

 

 

26,786,468

 

 

 

 

 

 

 

 

 

(685,408

)

 

 

 

 

 

26,101,060

 

In process research and development

 

 

380,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

380,000

 

License agreement

 

 

 

 

 

2,400,863

 

 

 

 

 

 

(77,499

)

 

 

114,195

 

 

 

2,437,559

 

Internal use software

 

 

542,227

 

 

 

 

 

 

 

 

 

(33,889

)

 

 

 

 

 

508,338

 

 

 

$

32,714,484

 

 

$

2,400,863

 

 

$

 

 

$

(1,012,328

)

 

$

114,195

 

 

$

34,217,214

 

 

 

 

Balance at

July 1, 2018

 

 

Additions

 

 

Impairment

 

 

Amortization

 

 

Currency Translation Adjustment

 

 

Balance at

June 30, 2019

 

Trade name

 

$

1,159,826

 

 

$

150,000

 

 

$

 

 

$

(104,480

)

 

$

 

 

$

1,205,346

 

Customer relationships

 

 

1,156,955

 

 

 

 

 

 

 

 

 

(101,208

)

 

 

 

 

 

1,055,747

 

Non-compete

 

 

62,720

 

 

 

 

 

 

 

 

 

(32,453

)

 

 

 

 

 

30,267

 

GI customer list

 

 

71,639

 

 

 

 

 

 

 

 

 

(7,164

)

 

 

 

 

 

64,475

 

Supply agreement

 

 

1,077,783

 

 

 

 

 

 

 

 

 

(75,629

)

 

 

 

 

 

1,002,154

 

Distribution agreement

 

 

6,344,253

 

 

 

 

 

 

(5,991,792

)

 

 

(352,461

)

 

 

 

 

 

 

Grower relationships

 

 

1,753,208

 

 

 

 

 

 

 

 

 

(105,408

)

 

 

 

 

 

1,647,800

 

Intellectual property

 

 

20,873,393

 

 

 

7,200,000

 

 

 

 

 

 

(1,286,925

)

 

 

 

 

 

26,786,468

 

In process research and development

 

 

 

 

 

380,000

 

 

 

 

 

 

 

 

 

 

 

 

380,000

 

Internal use software

 

 

610,003

 

 

 

43,000

 

 

 

(43,000

)

 

 

(67,776

)

 

 

 

 

 

542,227

 

 

 

$

33,109,780

 

 

$

7,773,000

 

 

$

(6,034,792

)

 

$

(2,133,504

)

 

$

 

 

$

32,714,484

 

 

Amortization expense totaled $531,373 and $552,967 for the three months ended December 31, 2019 and 2018, respectively. Amortization expense totaled $1,012,328 and $1,059,585 for the six months ended December 31, 2019 and 2018, respectively.

 

Estimated aggregate remaining amortization is as follows:

 

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

Amortization expense

 

$

1,010,287

 

 

$

2,014,124

 

 

$

2,059,372

 

 

$

1,981,632

 

 

$

1,959,097

 

 

$

25,192,702

 

 

Acquisition of Wheat Assets

 

On August 15, 2019, the Company entered into several agreements to effectuate the purchase of a wheat breeding program in Australia (“Wheat Acquisition”) from Dow AgroScience (“Dow”).  In the transaction, the Company acquired:

21


 

 

 

A 15 year prepaid license of germplasm.  The license includes commercial, pre-commercial and experimental proprietary wheat populations.

 

The right, during the term of the license, to develop future varieties.  The license does not transfer ownership of the existing varieties licensed, but the Company will own any future varieties developed.

 

An option to renew the license for five additional years.

 

Tangible fixed assets used in the wheat breeding program.

 

A contract with a service provider to promote existing commercialized wheat varieties covered by the license.

 

The wheat market in Australia operates under an End Point Royalty (“EPR”) System in which the wheat variety owner earns a fixed royalty on every metric ton of grain produced.  With the Wheat Acquisition, the Company has the right to collect EPR on commercialized wheat varieties included in its license.

 

The purchase price was approximately $2.6 million, which was paid in cash.  The purchase price was allocated to the assets acquired based on the relative fair values of the license and fixed assets.  $2.4 million was allocated to the license, which will be amortized over 15 years in accordance with the term of the agreement.  The fair value of the license was determined using a discounted cash flow analysis.  $0.2 million was allocated to the fixed assets, which have useful lives of 3 - 5 years.  

 

The acquired assets did not meet the definition of a business in the Accounting Standards Codification.

 

NOTE 8 - PROPERTY, PLANT AND EQUIPMENT

Components of property, plant and equipment were as follows:

 

 

 

December 31,

2019

 

 

June 30,

2019

 

Land and improvements

 

$

2,166,279

 

 

$

2,150,085

 

Buildings and improvements

 

 

10,450,880

 

 

 

10,018,108

 

Machinery and equipment

 

 

12,894,482

 

 

 

12,579,698

 

Vehicles

 

 

1,458,395

 

 

 

2,099,814

 

Construction in progress

 

 

83,345

 

 

 

66,921

 

Total property, plant and equipment

 

 

27,053,381

 

 

 

26,914,626

 

Less: accumulated depreciation

 

 

(6,708,707

)

 

 

(6,279,677

)

Property, plant and equipment, net

 

$

20,344,674

 

 

$

20,634,949

 

 

Depreciation expense totaled $733,073 and $482,639 for the three months ended December 31, 2019 and 2018, respectively. Depreciation expense totaled $1,257,166 and $831,130 for the six months ended December 31, 2019 and 2018, respectively.

22


 

NOTE 9 - DEBT

Total debt outstanding is presented on the consolidated balance sheet as follows:

 

 

 

December 31,

2019

 

 

June 30,

2019

 

Working capital lines of credit

 

 

 

 

 

 

 

 

KeyBank

 

$

 

 

$

2,350,000

 

CIBC

 

 

7,719,066

 

 

 

 

National Australia Bank Limited

 

 

9,114,300

 

 

 

8,426,400

 

National Australia Bank Limited Overdraft Facility

 

 

962,637

 

 

 

351,544

 

Debt issuance costs

 

 

(800,306

)

 

 

(372,396

)

Total working capital lines of credit, net

 

$

16,995,697

 

 

$

10,755,548

 

Current portion of long-term debt

 

 

 

 

 

 

 

 

Capital lease

 

$

683,119

 

 

$

563,087

 

Debt issuance costs

 

 

(9,632

)

 

$

(11,070

)

Keith facility (building loan) - National Australia

   Bank Limited

 

 

73,616

 

 

 

73,731

 

Keith facility (machinery & equipment loans) -

   National Australia Bank Limited

 

 

351,126

 

 

 

215,519

 

Unsecured subordinate promissory note

 

 

100,000

 

 

 

100,000

 

Secured real estate note - Conterra

 

 

235,481

 

 

 

247,942

 

Debt issuance costs

 

 

(39,556

)

 

 

(75,707

)

Total current portion, net

 

 

1,394,154

 

 

 

1,113,502

 

Long-term debt, less current portion

 

 

 

 

 

 

 

 

Capital lease

 

 

1,684,646

 

 

 

1,709,481

 

Debt issuance costs

 

 

(10,625

)

 

 

(15,078

)

Keith facility (building loan) - National Australia

   Bank Limited

 

 

252,396

 

 

 

256,303

 

Keith facility (machinery & equipment loans) -

   National Australia Bank Limited

 

 

482,201

 

 

 

309,988

 

Secured real estate note - Conterra

 

 

9,059,994

 

 

 

9,922,269

 

Debt issuance costs

 

 

(75,816

)

 

 

(24,869

)

Total long-term portion, net

 

 

11,392,796

 

 

 

12,158,095

 

Total debt, net

 

$

12,786,950

 

 

$

13,271,596

 

 

In September 2015, the Company entered into a credit and security agreement (the “KeyBank Credit Facility”) with KeyBank. Key provisions of the KeyBank Credit Facility, as amended, included:

An aggregate principal amount that the Company was able to borrow, repay and reborrow, of up to $45.0 million in the aggregate, subject to a requirement that the Company maintain a reduced loan balance of (i) not more than $20.0 million for at least 30 consecutive days over the prior twelve months (measured each quarter on a trailing 12 month basis) and (ii) not more than $25.0 million for at least 60 consecutive days over the prior twelve months (measured each quarter on a trailing 12 month basis).

All amounts due and owing, including, but not limited to, accrued and unpaid principal and interest, were payable in full on December 31, 2020.

A borrowing base of up to the total of the following: (a) 85% of eligible domestic accounts receivable, plus (b) and 90% of eligible foreign accounts receivable, plus (c) the lesser of (i) 75% of the cost eligible inventory or (ii) 90% of the net orderly liquidation value of the inventory, plus (d) the amount of any unencumbered cash the Company holds at KeyBank, minus (e) $16.0 million subject to lender reserves.

23


 

Loans were based on a Base Rate or Eurodollar Rate (which was increased by an applicable margin of 2.9% per annum for Eurodollar Loans and 1.0% for Base Rate Loans) (both as defined in the KeyBank Credit Facility), generally at the Company’s option. In the event of a default, at the option of KeyBank, the interest rate on all obligations owing would have increased by 3% per annum over the rate otherwise applicable.

Subject to certain exceptions, the KeyBank Credit Facility was secured by a first priority perfected security interest in all of the Company’s assets and its domestic subsidiaries, which guaranteed the Company’s obligations under the KeyBank Credit Facility. The KeyBank Credit Facility was further secured by a lien on, and a pledge of, 65% of the stock of its wholly-owned subsidiary, S&W Holdings Australia Pty Ltd.

 

In connection with the consummation of the Loan Agreement with CIBC described below, the Company terminated the KeyBank Credit Facility on December 26, 2019. In connection with such termination, the Company paid KeyBank approximately $5.9 million in aggregate principal, interest and fees that were outstanding and payable under the KeyBank Credit Facility at the time of its termination, and all liens on the assets of the Company and its subsidiaries guaranteeing such facility, together with such subsidiary guarantees, were released and terminated.

 

On December 26, 2019, the Company entered into a $35.0 million aggregate principal amount (the “CIBC Credit Facility”) Loan and Security Agreement (the “Loan Agreement”) by and among the Company and CIBC Bank USA (“CIBC”). The following is a summary of the terms of the CIBC Credit Facility:

 

 

Advances under the CIBC Credit Facility are to be used: (i) to refinance indebtedness to KeyBank; (ii) to finance the Company’s ongoing working capital requirements; and (iii) for general corporate purposes. The Company may also use a portion of the CIBC Credit Facility to finance permitted acquisitions and related costs.

 

All amounts due and owing, including, but not limited to, accrued and unpaid principal and interest due under the CIBC Credit Facility, will be payable in full on December 23, 2022.

 

The Credit Facility generally establishes a borrowing base of up to 85% of eligible domestic accounts receivable (90% of eligible foreign accounts receivable) plus up to the lesser of (i) 65% of eligible inventory, (ii) 85% of the appraised net orderly liquidation value of eligible inventory, and (iii) an eligible inventory sublimit as more fully set forth in the Loan Agreement, in each case, subject to lender reserves.

 

Loans may be based on (i) a Base Rate plus 0.5% per annum or (ii) LIBOR Rate plus 2.5% per annum (both as defined in the Loan Agreement), generally at the Company’s option. In the event of a default, at the option of CIBC, the interest rate on all obligations owing will increase by 2% per annum over the rate otherwise applicable.

 

The CIBC Credit Facility is secured by a first priority perfected security interest in substantially all of the Borrowers’ assets (subject to certain exceptions), including intellectual property.

 

The Loan Agreement contains customary representations and warranties, affirmative and negative covenants and customary events of default that permit CIBC to accelerate the Company’s outstanding obligations under the Credit Facility, all as set forth in the Loan Agreement and related documents. The CIBC Credit Facility also contains customary and usual financial covenants imposed by CIBC.

 

As of December 31, 2019, there was approximately $21 million of unused availability on the CIBC Credit Facility.

24


 

In November 2017, the Company entered into a secured note financing transaction (the "Loan Transaction") with Conterra Agricultural Capital, LLC ("Conterra") for $12.5 million in gross proceeds. Pursuant to the Loan Transaction, the Company issued two secured promissory notes (the "Notes") to Conterra as follows:

Secured Real Estate Note. The Company issued one Note in the principal amount of $10.4 million (the "Secured Real Estate Note") that is secured by a first priority security interest in the property, plant and fixtures (the "Real Estate Collateral") located at the Company's Five Points, California and Nampa, Idaho production facilities and its Nampa, Idaho research facilities (the "Facilities"). On December 24, 2019, the Company signed an amendment to the Note that extended the maturity date to November 30, 2022, as well as revised the Note’s payments starting July 1, 2020. The Secured Real Estate Note bears interest of 7.75% per annum. The Company agreed to make semi-annual payments of interest and amortized principal on a 20-year amortization schedule, for a combined payment of $515,711, starting July 1, 2018, in addition to a one-time interest only payment on January 1, 2018. In November 2019, the Company paid down $753,120 of principal.  Pursuant to the December 2019 amendment, the Company agreed to make (i) a principal and interest payment of approximately $515,711 on January 1, 2020; (ii) five consecutive semi-annual principal and interest payments of approximately $454,185, beginning on July 1, 2020; and (iii) a one-time final payment of approximately $8,957,095 on November 30, 2022. The Company may prepay the Secured Real Estate Note, in whole or in part, at any time.

Secured Equipment Note. The Company issued a second Note in the principal amount of $2.1 million (the "Secured Equipment Note") that was secured by a first priority security interest in certain equipment not attached to real estate located at the Facilities. The Secured Equipment Note was also secured by the Real Estate Collateral. The Secured Equipment Note was scheduled to mature on November 30, 2019. The Secured Equipment Note bore an interest at a rate of 9.5% per annum. The Company agreed to make semi-annual payments of interest and amortized principal on a 20-year amortization schedule, for a combined payment of $118,223, starting July 1, 2018, in addition to a one-time interest only payment on January 1, 2018. The Secured Equipment Note was repaid in full in August 2018.

On August 15, 2018, the Company completed a sale and leaseback transaction with American AgCredit involving certain equipment located at the Company's Five Points, California and Nampa, Idaho production facilities. Due to its terms, the sale and leaseback transaction was required to be accounted for as a financing arrangement. Accordingly, the proceeds received from American AgCredit were accounted for as proceeds from a debt financing. Under the terms of the transaction:

The Company sold the equipment to American AgCredit for $2,106,395 million in proceeds. The proceeds were used to pay off in full a note (in the principal amount of $2,081,527, plus accrued interest of $24,868) held by Conterra Agricultural Capital, LLC, which had an interest rate of 9.5% per annum and was secured by, among other things, the equipment.

The Company entered into a lease agreement with American AgCredit relating to the equipment. The lease agreement has a five-year term and provides for monthly lease payments of $40,023 (representing an annual interest rate of 5.6%). At the end of the lease term, the Company will repurchase the equipment for $1.

S&W Australia finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facilities with National Australia Bank Ltd (“NAB”). The current facilities (the “NAB Facilities”) were amended as of July 9, 2019 and expire on March 31, 2021. As of December 31, 2019, AUD $14,373,038 (USD $10,076,937) was outstanding under the NAB Facilities.

The NAB Facilities, as recently amended, comprise two distinct facility lines: (i) an overdraft facility (the “Overdraft Facility”), having a credit limit of AUD $2,000,000 (USD $1,402,200) and a borrowing base facility (the “Borrowing Base Facility”), having a credit limit of AUD $13,000,000 (USD $9,114,300).

The Borrowing Base Facility permits S&W Australia to borrow funds for periods of up to 180 days, at S&W Australia’s discretion, provided that the term is consistent with its trading terms. Interest for each drawdown is set at the time of the drawdown as follows: (i) for Australian dollar drawings, based on the Australian Trade Refinance Rate plus 1.5% per annum and (ii) for foreign currency drawings, based on the British Bankers’ Association Interest Settlement Rate for the relevant foreign currency for the relevant period, or if such rate is not available, the rate reasonably determined by NAB to be the appropriate equivalent rate, plus 1.5% per annum. As of December 31, 2019, the Borrowing Base Facility accrued interest on Australian dollar drawings at approximately 4.3% calculated daily. The Borrowing Base Facility is secured by a lien on all the present and future rights, property and undertakings of S&W Australia, the mortgage on S&W Australia’s Keith, South Australia property and the Company’s corporate guarantee (up to a maximum of AUD $15,000,000).

The Overdraft Facility permits S&W Australia to borrow funds on a revolving line of credit up to the credit limit. Interest accrues daily and is calculated by applying the daily interest rate to the balance owing at the end of the day and is payable monthly in arrears. As of December 31, 2019, the Overdraft Facility accrued interest at approximately 5.97% calculated daily.

For both the Overdraft Facility and the Borrowing Base Facility, interest is payable each month in arrears. In the event of a default, as defined in the NAB Facility Agreement, the principal balance due under the facilities will thereafter bear interest at an increased rate per annum above the interest rate that would otherwise have been in effect from time to time under the terms of each facility (i.e., the interest rate increases by 4.3% per annum under the Borrowing Base Facility and the Overdraft Facility rate increases to 13.94% per annum upon the occurrence of an event of default).

25


 

Both facilities constituting the NAB Facilities are secured by a fixed and floating lien over all the present and future rights, property and undertakings of S&W Australia and are guaranteed by the Company as noted above. The NAB Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate S&W Australia’s outstanding obligations, all as set forth in the NAB facility agreements. S&W Australia was in compliance with all NAB debt covenants at December 31, 2019.

In January 2015, NAB and S&W Australia entered into a new business markets – flexible rate loan (the “Keith Building Loan”) and a separate machinery and equipment facility (the “Keith Machinery and Equipment Facility”). In February 2016, NAB and S&W Australia also entered into a master asset finance facility (the “Master Assets Facility”).  The Master Asset Facility has various maturity dates through 2023 and have interest rates ranging from 3.64% to 5.31%. The credit limit under the facility is AUD $1,200,000 (USD $841,320) at December 31, 2019.

The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a building on S&W Australia’s Keith, South Australia property, purchase of adjoining land and for the machinery and equipment for use in the operations of the building. The Keith Building Loan matures on November 30, 2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such period approximately 30 days), based on the weighted average of a specified basket of interest rates (5.49% as of December 31, 2019). Interest is payable each month in arrears. The Keith Machinery and Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate quoted by NAB at the time of the drawdown, plus 2.9%. The Keith Credit Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate S&W Australia’s outstanding obligations, all as set forth in the facility agreement. They are secured by a lien on all the present and future rights, property and undertakings of S&W Australia, the Company’s corporate guarantee and a mortgage on S&W Australia’s Keith, South Australia property. As of December 31, 2019, USD $326,012 and USD $833,327 was outstanding under the Keith Building Loan and the Keith Machinery and Equipment Facility, respectively.

The annual maturities of short-term and long-term debt are as follows:

 

Fiscal Year

 

Amount

 

Remaining in 2020

 

$

1,148,701

 

2021

 

 

1,247,718

 

2022

 

 

9,645,966

 

2023

 

 

716,007

 

2024

 

 

136,506

 

Thereafter

 

 

27,681

 

Total

 

$

12,922,579

 

 

NOTE 10 - WARRANTS

The following table summarizes the total warrants outstanding at December 31, 2019:

 

 

 

Issue Date

 

Exercise Price

Per Share

 

 

Expiration

Date

 

Outstanding

as of

June 30, 2019

 

 

New

Issuances

 

 

Expired

 

 

Outstanding

as of

December 31, 2019

 

Warrants

 

Dec 2014

 

$

4.32

 

 

June 2020

 

 

2,699,999

 

 

 

 

 

 

 

 

 

2,699,999

 

 

 

 

 

 

 

 

 

 

 

 

2,699,999

 

 

 

 

 

 

 

 

 

2,699,999

 

 

The following table summarizes the total warrants outstanding at June 30, 2019:

 

 

 

Issue Date

 

Exercise Price

Per Share

 

 

Expiration

Date

 

Outstanding

as of

June 30, 2018

 

 

New

Issuances

 

 

Expired

 

 

Outstanding

as of

June 30, 2019

 

Warrants

 

Dec 2014

 

$

4.32

 

 

June 2020

 

 

2,699,999

 

 

 

 

 

 

 

 

 

2,699,999

 

 

 

 

 

 

 

 

 

 

 

 

2,699,999

 

 

 

 

 

 

 

 

 

2,699,999

 

 

NOTE 11 - EQUITY

On September 5, 2018, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with MFP Partners, L.P. ("MFP"), pursuant to which the Company sold to MFP 1,607,717 shares of common stock of the Company (the "Common Shares") at a purchase price of $3.11 per share at an initial closing, and agreed to sell, subject to the satisfaction of certain conditions, 7,235 shares of newly designated Series A Convertible Preferred Stock of the Company ("Preferred Shares") to MFP at a purchase price of $3,110 per share at a second closing (the "Second Closing").

26


 

The Second Closing was completed on October 23, 2018, for aggregate gross proceeds of approximately $22.5 million, which was used primarily to fund the Chromatin Acquisition. The Preferred Shares carried no voting rights and were automatically convertible into shares of common stock at the rate of 1,000 shares of common stock per Preferred Share upon the approval of the Company's stockholders for the issuance of the requisite shares of common stock. Pursuant to the Securities Purchase Agreement, the Company agreed to use its reasonable best efforts to solicit the approval of its shareholders for the issuance of stock upon the conversion of the Preferred Shares at a special meeting of shareholders, and at each annual meeting of shareholders thereafter, if necessary.  Approval was obtained at a Special Meeting of Stockholders held on November 20, 2018, and the Preferred Shares automatically converted into 7,235,000 shares of common stock on that same day.

NOTE 12 - FOREIGN CURRENCY CONTRACTS

The Company’s subsidiary, S&W Australia, is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company manages through the use of foreign currency forward contracts. These foreign currency contracts are not designated as hedging instruments; accordingly, changes in the fair value are recorded in current period earnings. These foreign currency contracts had a notional value of $5,234,038 at December 31, 2019, with maturities ranging from January to October 2020.

The Company records an asset or liability on the consolidated balance sheet for the fair value of the foreign currency forward contracts. The foreign currency contract assets totaled $32,827 at December 31, 2019 and foreign currency contract liabilities totaled $42,255 at June 30, 2019. The Company recorded a gain on foreign exchange contracts of $117,540 and $35,836, which is reflected in cost of revenue for the three months ended December 31, 2019 and 2018, respectively. The Company recorded a gain on foreign exchange contracts of $73,677 and a loss of $2,626, which is reflected in cost of revenue for the six months ended December 31, 2019 and 2018, respectively.

NOTE 13 - COMMITMENTS AND CONTINGENCIES

Contingencies

Based on information currently available, management is not aware of any other matters that would have a material adverse effect on the Company's financial condition, results of operations or cash flows.

Legal Matters

The Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources, and other factors.  Any current litigation is considered immaterial and counter claims have been assessed as remote.

NOTE 14 - RELATED PARTY TRANSACTIONS

On September 5, 2018, the Company entered into the Securities Purchase Agreement with MFP, pursuant to which the Company sold the Common Shares at the Initial Closing and the Preferred Shares at the Second Closing. The Initial Closing was completed on September 5, 2018 and the Second Closing was completed on October 23, 2018. See Note 11 for further discussion on the Second Closing.

On December 18, 2018, the Company entered into a Loan and Security Agreement (the "MFP Loan Agreement") with MFP, pursuant to which the Company was able to borrow up to $5,000,000, in minimum increments of $1,000,000, from MFP during the period beginning on December 18, 2018 and ending on the earlier to occur of (i) March 18, 2019 and (ii) certain specified events of default. Pursuant to the MFP Loan Agreement, interest accrued on outstanding principal at a fixed per annum rate of 6.0%. In addition, the Company was obligated to pay to MFP a fee equal to 2.0% of each advance under the MFP Loan Agreement. Concurrently with the execution of the MFP Loan Agreement, the Company drew down $1,000,000 under the MFP Loan Agreement, which was disbursed to the Company on December 21, 2018. On December 31, 2018, the Company repaid in full the $1,000,000 disbursed to the Company. As of December 31, 2019, no amounts remained outstanding under the MFP Loan Agreement.

27


 

NOTE 15 - EQUITY-BASED COMPENSATION

Equity Incentive Plans

In October 2009 and January 2010, the Company's Board of Directors and stockholders, respectively, approved the 2009 Equity Incentive Plan (as amended and/or restated from time to time, the "2009 Plan"). The plan authorized the grant and issuance of options, restricted shares and other equity compensation to the Company's directors, employees, officers and consultants, and those of the Company's subsidiaries and parent, if any. In October 2012 and December 2012, the Company's Board of Directors and stockholders, respectively, approved the amendment and restatement of the 2009 Plan, including an increase in the number of shares available for issuance as grants and awards under the Plan to 1,250,000 shares. In September 2013 and December 2013, the Company's Board of Directors and stockholders, respectively, approved the amendment and restatement of the 2009 Plan, including an increase in the number of shares available for issuance as grants and awards under the Plan to 1,700,000 shares. In September 2015 and December 2015, the Company's Board of Directors and stockholders, respectively, approved the amendment and restatement of the 2009 Plan, including an increase in the number of shares available for issuance as grants and awards under the Plan to 2,450,000 shares.

In January 2019, the Company's Board of Directors and stockholders approved the 2019 Equity Incentive Plan (the "2019 Plan") as a successor to and continuation of the 2009 Plan. Subject to adjustment for certain changes in the Company's capitalization, the aggregate number of shares of the Company's common stock that may be issued under the 2019 Plan will not exceed 4,243,790 shares, which is the sum of (i) 2,750,000 new shares, plus (ii) 350,343 shares that remained available for grant under the 2009 Plan as of January 16, 2019, plus (iii) 1,143,447 shares subject to outstanding stock awards granted under the 2009 Plan.

The term of incentive stock options granted under the Company’s equity incentive plans may not exceed ten years, or five years for incentive stock options granted to an optionee owning more than 10% of the Company's voting stock. The exercise price of options granted under the Company’s equity incentive plans must be equal to or greater than the fair market value of the shares of the common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than 10% of voting stock must have an exercise price equal to or greater than 110% of the fair market value of the common stock on the date the option is granted.

The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest. The Company amortizes stock-based compensation expense on a straight-line basis over the requisite service period.

The Company utilizes a Black-Scholes-Merton option pricing model, which includes assumptions regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of the Company's common stock to estimate the fair value of employee options grants.

Weighted average assumptions used in the Black-Scholes-Merton model are set forth below:

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Risk free rate

 

1.5 - 1.6%

 

 

2.7% - 3.0%

 

Dividend yield

 

 

0

%

 

 

0

%

Volatility

 

39.4% - 44.2%

 

 

40.4% - 45.5%

 

Average forfeiture assumptions

 

2.7%

 

 

 

1.4

%

28


 

During the six months ended December 31, 2019, the Company granted options to purchase 1,869,934 shares of its common stock to certain of its Directors, members of the executive management team and other employees at exercise prices ranging from $2.26 - $2.37. These options vest in either quarterly or annual periods over one to three years, and expire ten years from the date of grant.

A summary of stock option activity for the six months ended December 31, 2019 and the year ended June 30, 2019 is presented below:

 

 

 

Number

Outstanding

 

 

Weighted -

Average

Exercise

Price

Per Share

 

 

Weighted-

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding at June 30, 2018

 

 

792,074

 

 

$

4.55

 

 

 

6.3

 

 

$

10,413

 

Granted

 

 

497,178

 

 

 

2.85

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Canceled/forfeited/expired

 

 

(166,500

)

 

 

6.17

 

 

 

 

 

 

 

Outstanding at June 30, 2019

 

 

1,122,752

 

 

 

3.55

 

 

 

8.0

 

 

 

34,135

 

Granted

 

 

1,869,934

 

 

 

2.37

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

Canceled/forfeited/expired

 

 

(110,284

)

 

 

3.95

 

 

 

 

 

 

 

Outstanding at December 31, 2019

 

 

2,882,402

 

 

 

2.74

 

 

 

9.1

 

 

 

 

Options vested and exercisable at December 31, 2019

 

 

622,689

 

 

 

3.80

 

 

 

7.1

 

 

 

 

Options vested and expected to vest as of

   December 31, 2019

 

 

2,877,095

 

 

$

2.74

 

 

 

9.1

 

 

$

 

 

The weighted average grant date fair value of options granted and outstanding at December 31, 2019 was $0.98. At December 31, 2019, the Company had $1,636,115 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the 2009 and 2019 Plans, which will be recognized over the weighted average remaining service period of 2.8 years. The Company settles employee stock option exercises with newly issued shares of common stock.

During the six months ended December 31, 2019 and 2018, the Company issued 217,943 and 99,902 restricted stock units to its directors, certain members of the executive management team, and other employees. The restricted stock units have varying vesting periods ranging from immediate vesting to quarterly or annual installments over one to three-years. The fair value of the awards granted during the six months ended December 31, 2019 and 2018 totaled $513,380 and $306,047, respectively, and was based on the closing stock price on the date of grants.

The Company recorded $193,329 and $222,431 of stock-based compensation expense associated with grants of restricted stock units during the six months ended December 31, 2019 and 2018, respectively. A summary of activity related to non-vested restricted stock units is presented below:

 

 

 

Number of Nonvested

Restricted Stock Units

 

 

Weighted-Average

Grant Date Fair Value

 

 

Weighted-Average

Remaining Contractual

Life (Years)

 

Nonvested restricted units outstanding at June 30, 2018

 

 

89,193

 

 

$

3.98

 

 

 

1.1

 

Granted

 

 

175,758

 

 

 

2.69

 

 

 

2.8

 

Vested

 

 

(107,747

)

 

 

3.75

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

Nonvested restricted units outstanding at June 30, 2019

 

 

157,204

 

 

 

2.69

 

 

 

1.4

 

Granted

 

 

217,943

 

 

 

2.36

 

 

 

2.8

 

Vested

 

 

(28,860

)

 

 

3.26

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

Nonvested restricted units outstanding at December 31, 2019

 

 

346,287

 

 

$

2.43

 

 

 

2.4

 

 

At December 31, 2019, the Company had $615,060 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the weighted average remaining service period of 2.4 years.

At December 31, 2019, there were 986,266 shares available under the 2019 Plan for future grants and awards.

29


 

Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the three months ended December 31, 2019 and 2018, totaled $309,767 and $222,153, respectively. Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the six months ended December 31, 2019 and 2018, totaled $468,604 and $377,458, respectively.

 

NOTE 16 - NON-CASH ACTIVITIES FOR STATEMENTS OF CASH FLOWS

The below table represents supplemental information to the Company's consolidated statements of cash flows for non-cash activities during the six months ended December 31, 2019 and 2018, respectively.

 

 

 

Six Months Ended

December 31,

 

 

 

2019

 

 

2018

 

Purchases of equipment classified as finance lease

 

$

(396,680

)

 

$

 

 

NOTE 17 - SUBSEQUENT EVENTS

None.  

 

30


 

Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as referred to on page 2 of this Quarterly Report on Form 10-Q. Factors that could cause or contribute to these differences include those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, particularly in Part I, Item 1A, “Risk Factors”, as updated in Part II, Item 1A. “Risks Factors” of this Quarterly Report on Form 10-Q.

Executive Overview

We are a global multi-crop, middle-market agricultural company. We are market leaders in the breeding, production and sale of alfalfa seed and sorghum seed. We also have a growing commercial market presence in sunflower and maintain an active stevia development program.

Our seed platform develops and supplies high quality germplasm designed to produce higher yields for farmers worldwide. We produce approximately 250 seed products in the Western United States, Canada, Australia, Europe and South Africa for sale in more than 30 countries. We maintain an active product pipeline and expect to introduce more than 20 new products during the 2020-2022 fiscal years.

Founded in 1980, we began our operations as a limited producer of non-dormant alfalfa seed varieties bred for warm climates and high-yields, including varieties that can thrive in poor, saline soils. Over the years we have built a diversified, global agricultural platform through a combination of organic growth and strategic acquisitions, including:

Our 2012 acquisition of Imperial Valley Seeds, Inc., which enabled us to expand production of non-GMO alfalfa seed into California's Imperial Valley, thereby ensuring a non-GMO uncontaminated source of alfalfa seed due to the prohibition on growing GMO crops in the Imperial Valley, as well as enabling us to diversify our production areas and distribution channels;

Our 2012 acquisition of a portfolio of dormant alfalfa germplasm, which launched our entry into the dormant alfalfa market;

Our 2013 acquisition of Seed Genetics International Pty Ltd (now S&W Seed Company Australia Pty Ltd), the leading producer of non-dormant alfalfa seed in South Australia, which made us the largest non-dormant alfalfa seed company in the world, with production capabilities in both hemispheres;

Our 2014 acquisition of alfalfa production and research facility assets and conventional (non-GMO) alfalfa germplasm from Pioneer, which substantially broadened and improved our dormant alfalfa germplasm portfolio and deepened our production, research and product development capabilities;

Our 2016 acquisition of the business and assets of SV Genetics Pty Ltd, a developer of proprietary hybrid sorghum and sunflower seed germplasm, which expanded our crop focus into two areas which we believe have high global growth potential;

Our 2018 acquisition of the assets of Chromatin, Inc. and related companies, which positioned us to become a global leader in the hybrid sorghum seed market and enhanced our distribution channels both internationally and within a U.S.-based farmer-dealer network; and

Our 2018 joint venture with AGT Foods Africa Proprietary Limited (“AGT”) based in South Africa named SeedVision Proprietary Limited (“SeedVision”). SeedVision will leverage AGT's African-based production and processing facilities to produce our hybrid sunflower, grain sorghum, and forage sorghum to be sold by SeedVision in the African continent, Middle East countries, and Europe.

On May 22, 2019, we restructured our relationship with Pioneer, a subsidiary of Corteva Agriscience (“Corteva”), by entering into two agreements under which, among other things:

We received $45.0 million in May 2019, $5.55 million in September 2019, $5.55 million in January 2020, and are entitled to receive an aggregate of $13.9 million in additional payments on the dates and in the amounts as set forth below.

31


 

 

Date

 

Payment

Amount

 

February 15, 2020

 

$

5,551,372

 

September 15, 2020

 

$

3,750,927

 

January 15, 2021

 

$

2,500,618

 

February 15, 2021

 

$

2,100,519

 

Total:

 

$

13,903,436

 

 

Corteva received a fully pre-paid, exclusive license to produce and distribute certain of our alfalfa varieties world-wide (except South America). The licensed varieties include certain of our existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties. Corteva received no license to our other commercial alfalfa varieties or pre-commercial alfalfa pipeline products and no rights to any future products developed by us.

We assigned to Corteva grower production contract rights, and Corteva assumed grower production contract obligations, related to the licensed and certain other alfalfa varieties.

Our prior Distribution Agreement, related to conventional (non-GMO) alfalfa varieties, and Contract Alfalfa Production Services Agreement, related to GMO-traited alfalfa varieties, with Corteva both terminated.  Under the Distribution Agreement, Corteva was obligated to make minimum annual purchases from us.

As a result of the May 2019 transactions with Corteva, we recognized licensing revenue of $34.2 million and wrote-off $6.0 million of intangible assets during the year ended June 30, 2019.  We also attributed our $11.9 million goodwill impairment charge recorded during the fourth quarter of the year ended June 30, 2019 largely to the termination of the production and distribution agreements with Corteva.  

As a result of the 2018 Chromatin acquisition and the 2019 restructuring of our relationship with Corteva, we expect that our results of operations for fiscal 2020 and future periods will differ significantly from prior periods as the mix of our product portfolio rebalances away from a reliance on alfalfa sales (sales of alfalfa seed to Corteva totaled $37.6 million during the year ended June 30, 2019) to a more diverse product mix. We expect to generate alfalfa seed revenue of approximately $34 million to Corteva over the fiscal 2020 and fiscal 2021 combined periods as the seed is delivered to Corteva through February 2021.  We do not expect any other significant revenue from sales to Corteva in the future.

Components of Our Statements of Operations Data

Revenue and Cost of Revenue

Product and Other Revenue

We derive most of our revenue from the sale of our proprietary seed varieties and hybrids. We expect that over the next several years, a substantial majority of our revenue will be generated from the sale of alfalfa, sorghum, and sunflower seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into other, higher margin crops.

The mix of our product offerings will continue to change over time with the introduction of new seed varieties and hybrids resulting from our robust research and development efforts, including our potential expansion into gene-edited products in future periods.

32


 

Our revenue will fluctuate depending on the timing of orders from our customers and distributors. Because some of our large customers and distributors order in bulk only one or two times per year, our product revenue may fluctuate significantly from period to period. However, some of this fluctuation is offset by having operations in both the northern and southern hemispheres.

Our stevia breeding program has yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various means to monetize the results of our effort to breed new, better tasting stevia varieties. Such potential opportunities include possible licensing agreements and royalty-based agreements.

Licensing Revenue

During the year ended June 30, 2019, we entered into a license with Corteva, under which Corteva received a fully pre-paid, exclusive license to produce and distribute certain of our alfalfa seed varieties world-wide (except South America). The licensed seed varieties include certain of the our existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties.

Cost of Revenue

Cost of revenue relates to sale of our seed products and consists of the cost of procuring seed, plant conditioning and packaging costs, direct labor and raw materials and overhead costs.

Operating Expenses

Research and Development Expenses

 

Seed and stevia research and development expenses consist of costs incurred in the discovery, development, breeding and testing of new products incorporating the traits we have specifically selected. These expenses consist primarily of employee salaries and benefits, consultant services, land leased for field trials, chemicals and supplies and other external expenses.

 

Overall, we have been focused on controlling research and development expenses, while balancing that objective against the recognition that continued advancement in product development is an important part of our strategic planning. We intend to focus our resources on high value activities.  For alfalfa seed, we plan to invest in further development of differentiating forage quality traits.  For sorghum, we plan to invest in higher value grain products as well as development of proprietary herbicide tolerance traits. We expect our research and development expenses will increase in 2020 and fluctuate from period to period as a result of the timing of various research and development projects.

 

Our internal research and development costs are expensed as incurred, while third party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or construed for research and development activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses consist primarily of employee costs, including salaries, employee benefits and share-based compensation, as well as professional service fees, insurance, marketing, travel and entertainment expense, public company expense and other overhead costs. We proactively take steps on an ongoing basis to control selling, general and administrative expense as much as is reasonably possible.

Depreciation and Amortization

 

We amortize intangible assets, including those acquired from Chromatin in 2018 and from SV Genetics in May 2016, using the straight-line method over the estimated useful life of the asset, consisting of periods of 10-30 years for technology/IP/germplasm, 5-20 years for customer relationships and trade names and 3-20 years for other intangible assets. Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset, consisting of periods of 5-35 years for buildings, 2-20 years for machinery and equipment and 2-5 years for vehicles.

33


 

Other Expense

 

Other expense consists primarily of foreign currency gains and losses, changes in the estimated fair value of assets held for sale and interest expense in connection with amortization of debt discount. Interest expense primarily consists of interest costs related to outstanding borrowings on our working capital credit facilities and our financing with Conterra Agricultural Capital, LLC ("Conterra").

Provision (Benefit) for Income Taxes

 

Our effective tax rate is based on income, statutory tax rates, differences in the deductibility of certain expenses and inclusion of certain income items between financial statement and tax return purposes, and tax planning opportunities available to us in the various jurisdictions in which we operate. Under U.S. GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. Tax regulations require certain items to be included in the tax return at different times than when those items are required to be recorded in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial statements is different from that reported in our tax returns. Some of these differences are permanent, such as meals and entertainment expenses that are not fully deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our consolidated statements of operations. In the fourth quarter of fiscal year 2017, we recorded a valuation allowance against all of our deferred tax assets. The full valuation allowance was recorded during the fiscal year 2017 as a result of changes to our operating results and future projections, resulting from a decline in export sales to Saudi Arabia. As a result, we don’t believe that it is more likely than not that our deferred tax assets will be realized.

Results of Operations

Three Months Ended December 31, 2019 Compared to the Three Months Ended December 31, 2018

34


 

Revenue and Cost of Revenue

Revenue for the three months ended December 31, 2019 was $12.4 million compared to $18.6 million for the three months ended December 31, 2018. The $6.2 million decrease in revenue for the three months ended December 31, 2019 was primarily due to a decrease in revenue received from Pioneer.  In May 2019, we terminated the production and distribution agreements with Pioneer, and entered into a new license agreement with Corteva.  

As part of the termination, Corteva agreed to purchase certain quantities of seed held by us as of the date of the termination, which Pioneer was not previously obligated to purchase.  Those quantities of seed will be delivered to Corteva periodically through February 2021.  Contemporaneously with the termination, we entered into a license with Corteva, under which Corteva received a fully pre-paid, exclusive license to produce and distribute certain of our alfalfa seed varieties world-wide (except South America). The licensed seed varieties include certain of the our existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties.  We received a payment of $45.0 million in May 2019, $5.6 million in September 2019, $5.6 million in January 2020 and are entitled to receive an aggregate of $13.9 million in additional payments through February 2021. During the three months ended December 31, 2019 we recorded sales of $3.1 million to Pioneer, which was a decrease of $6.6 million from the three months ended December 31, 2018 amount of $9.7 million.

The $6.6 million decrease in revenue to Pioneer was partially offset by increases of $0.3 million in Core Revenue.  Core Revenue (excluding product revenue attributable to Pioneer) for the three months ended December 31, 2019 was $9.2 million compared to Core Revenue for the three months ended December 31, 2018 of $8.9 million, representing an increase of 3%.  Due to the revised agreements with Pioneer in May 2019, we plan to provide Core Revenue as a metric to track performance of our business.

The increase in Core Revenue for the three months ended December 31, 2019 can be attributed to an increase in alfalfa revenues in the Middle East and Northern Africa (“MENA”) region partially offset by decreases in Australia.

Sales into international markets represented 51% and 33% of our total revenue during the three months ended December 31, 2019 and 2018, respectively. Domestic revenue accounted for 49% and 67% of our total revenue for the three months ended December 31, 2019 and 2018, respectively. The decrease in domestic revenue as a percentage of total revenue was primarily attributable to the termination of the Pioneer/Corteva agreement mentioned above. As a result, we anticipate that international sales will increase as a percentage of our total sales in fiscal 2020.

The following table shows revenue from external sources by destination country:

 

 

Three Months Ended December 31,

 

 

 

2019

 

 

2018

 

United States

 

$

6,098,755

 

 

 

49

%

 

$

12,464,626

 

 

 

67

%

Saudi Arabia

 

 

2,095,140

 

 

 

17

%

 

 

863,982

 

 

 

5

%

Mexico

 

 

787,624

 

 

 

6

%

 

 

986,303

 

 

 

5

%

Australia

 

 

527,063

 

 

 

4

%

 

 

1,040,480

 

 

 

6

%

Pakistan

 

 

464,537

 

 

 

4

%

 

 

464,936

 

 

 

3

%

Libya

 

 

414,880

 

 

 

3

%

 

 

800,375

 

 

 

4

%

Italy

 

 

364,907

 

 

 

3

%

 

 

82,880

 

 

 

0

%

South Africa

 

 

343,997

 

 

 

3

%

 

 

121,567

 

 

 

1

%

China

 

 

213,168

 

 

 

2

%

 

 

 

 

 

0

%

Bolivia

 

 

169,900

 

 

 

1

%

 

 

119,464

 

 

 

1

%

Other

 

 

873,129

 

 

 

8

%

 

 

1,636,383

 

 

 

8

%

Total

 

$

12,353,100

 

 

 

100

%

 

$

18,580,996

 

 

 

100

%

35


 

Cost of revenue of $10.2 million for the three months ended December 31, 2019 was equal to 82.3% of total revenue for the three months ended December 31, 2019, while the cost of revenue of $13.9 million for the three months ended December 31, 2018 was equal to 74.8% of total revenue for the three months ended December 31, 2018.

Total gross profit margin for the three months ended December 31, 2019 was 17.7% compared to 25.2% in the three months ended December 31, 2018. The decrease in gross profit margins was primarily due to a change in sales mix as our prior year sales consisted of our higher concentration of sales to Pioneer.

Selling, General and Administrative Expenses

Selling, General and Administrative (“SG&A”) expense for the three months ended December 31, 2019 totaled $5.1 million compared to $4.3 million for the three months ended December 31, 2018. The $0.8 million increase in SG&A expense versus the comparable period of the prior year was primarily due to $0.4 million in additional compensation and benefits costs associated with sales and marketing personnel, $0.4 million for executive leadership personnel, as well as other expense increases. As a percentage of revenue, SG&A expenses were 41.1% for the three months ended December 31, 2019, compared to 23.4% for the three months ended December 31, 2018.

Research and Development Expenses

Research and development expenses for the three months ended December 31, 2019 totaled $1.7 million compared to $1.4 million for the three months ended December 31, 2018. The $0.3 million increase in research and development expense versus the comparable period of the prior year was driven by additional research and development activities incurred in connection with the Chromatin business following our acquisition of Chromatin in October 2018, as well as additional investment in our hybrid sunflower programs.  We expect our research and development spend for fiscal 2020 to increase as we expand our hybrid sorghum and sunflower programs.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended December 31, 2019 was $1.3 million compared to $1.0 million for the three months ended December 31, 2018. Included in these amounts was amortization expense for intangible assets, which totaled $0.5 million for the three months ended December 31, 2019 and $0.6 million for the three months ended December 31, 2018. The $0.3 million increase in depreciation and amortization expense over the comparable period of the prior year was primarily driven by $0.1 million of additional Chromatin expenses following the October 2018 acquisition, $0.1 million of expense associated with amortization of right of use assets and $0.1 million of additional expenses following our August 2019 acquisition of a wheat breeding program in Australia from Dow AgroScience (“the Dow Wheat Acquisition”), as discussed in more detail in Note 7 to the financial statements above.

Foreign Currency Gain

We recorded a foreign currency gain of $0.1 million for the three months ended December 31, 2019 compared to a gain of $32,987 for the three months ended December 31, 2018. The foreign currency gains and losses are primarily associated with S&W Australia and S&W Hungary, our wholly-owned subsidiaries.

Interest Expense - Amortization of Debt Discount

Non-cash amortization of debt discount expense for the three months ended December 31, 2019 was $0.1 million compared to $0.1 million for the three months ended December 31, 2018. The expense in both periods represents the amortization of the debt issuance costs associated with our working capital facilities, our secured property note, and our equipment capital leases.

Interest Expense

Interest expense for the three months ended December 31, 2019 totaled $0.5 million compared to $0.6 million for the three months ended December 31, 2018. Interest expense for the three months ended December 31, 2019 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, the secured property loan entered into in November 2017, and equipment

36


 

capital leases. Interest expense for the three months ended December 31, 2018 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, the secured property loan entered into in November 2017, and equipment capital leases. The $0.1 million decrease in interest expense for the three months ended December 31, 2019 was primarily driven by lower interest on the working capital credit facilities due to decreased levels of borrowings.

Provision for Income Taxes

Income tax expense totaled $23,290 for the three months ended December 31, 2019 compared to income tax benefit of $4,801 for the three months ended December 31, 2018. Our effective tax rate was 0.4% for the three months ended December 31, 2019 compared to 0.2% for the three months ended December 31, 2018. Our effective tax rate for the three months ended December 31, 2019 was 0.4% due to the full valuation allowance established against our deferred tax assets which was recorded during the fourth quarter of fiscal year 2017. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operating results, as such results are generally incorporated in our net operating loss deferred tax asset position, which has a full valuation allowance against it.  However, in prior years, we did record tax expense related to certain other factors occurring throughout the year.  Our effective tax rate is driven by minimal state taxes.

 

Six Months Ended December 31, 2019 Compared to the Six Months Ended December 31, 2018

 

Revenue and Cost of Revenue

 

Revenue for the six months ended December 31, 2019 was $24.6 million compared to $44.7 million for the six months ended December 31, 2018. The $20.1 million decrease in revenue for the six months ended December 31, 2019 was primarily due to a decrease in revenue received from Pioneer.  In May 2019, we terminated the production and distribution agreements with Pioneer, and entered into a new license agreement with Corteva.  

As part of the termination, Corteva agreed to purchase certain quantities of seed held by us as of the date of the termination, which Pioneer was not previously obligated to purchase.  Those quantities of seed will be delivered to Corteva periodically through February 2021.  Contemporaneously with the termination, we entered into a license with Corteva, under which Corteva received a fully pre-paid, exclusive license to produce and distribute certain of our alfalfa seed varieties world-wide (except South America). The licensed seed varieties include certain of our existing commercial conventional (non-GMO) alfalfa varieties and six pre-commercial dormant alfalfa varieties.  We received a payment of $45.0 million in May 2019, $5.6 million in September 2019, $5.6 million in January 2020 and are entitled to receive an aggregate of $13.9 million in additional payments through February 2021. During the six months ended December 31, 2019 we recorded sales of $6.4 million to Pioneer, which was a decrease of $22.8 million from the six months ended December 31, 2018 amount of $29.2 million.

The $22.8 million decrease in revenue to Pioneer was partially offset by increases of $2.7 million in Core Revenue.  Core Revenue (excluding product revenue attributable to Pioneer) for the six months ended December 31, 2019 was $18.2 million compared to Core Revenue for the six months ended December 31, 2018 of $15.5 million, representing an increase of 17%.  Due to the revised agreements entered into with Pioneer in May 2019, we plan to provide Core Revenue as a metric to track performance of our business.

The increase in Core Revenue for the six months ended December 31, 2019 can be attributed to an increase in alfalfa revenues to the MENA region and Mexico.

37


 

Sales into international markets represented 48% and 23% of our total revenue during the six months ended December 31, 2019 and 2018, respectively. Domestic revenue accounted for 52% and 77% of our total revenue for the six months ended December 31, 2019 and 2018, respectively. The decrease in domestic revenue as a percentage of total revenue was primarily attributable to the termination of the Pioneer/Corteva agreement mentioned above. As a result, we anticipate that international sales will increase as a percentage of our total sales in fiscal 2020.

The following table shows revenue from external sources by destination country:

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

United States

 

$

12,803,301

 

 

 

52

%

 

$

34,204,005

 

 

 

77

%

Saudi Arabia

 

 

2,285,140

 

 

 

9

%

 

 

1,570,275

 

 

 

4

%

Mexico

 

 

1,818,416

 

 

 

7

%

 

 

1,379,253

 

 

 

3

%

Australia

 

 

1,293,514

 

 

 

5

%

 

 

1,370,150

 

 

 

3

%

Pakistan

 

 

1,243,467

 

 

 

5

%

 

 

730,583

 

 

 

2

%

Libya

 

 

1,044,860

 

 

 

4

%

 

 

1,798,750

 

 

 

4

%

Italy

 

 

678,614

 

 

 

3

%

 

 

82,880

 

 

 

0

%

South Africa

 

 

458,444

 

 

 

2

%

 

 

248,696

 

 

 

1

%

China

 

 

379,270

 

 

 

2

%

 

 

169,027

 

 

 

0

%

Bolivia

 

 

169,900

 

 

 

1

%

 

 

230,464

 

 

 

1

%

Other

 

 

2,450,631

 

 

 

10

%

 

 

2,917,050

 

 

 

5

%

Total

 

$

24,625,557

 

 

 

100

%

 

$

44,701,133

 

 

 

100

%

Cost of revenue of $19.4 million for the six months ended December 31, 2019 was equal to 78.6% of total revenue for the six months ended December 31, 2019, while the cost of revenue of $34.6 million for the six months ended December 31, 2018 was equal to 77.3% of total revenue for the six months ended December 31, 2018.

Total gross profit margin for the six months ended December 31, 2019 was 21.4% compared to 22.7% in the six months ended December 31, 2018. The decrease in gross profit margins was primarily due to a change in sales mix as our prior year sales consisted of our higher concentration of sales to Pioneer.

Selling, General and Administrative Expenses

SG&A expense for the six months ended December 31, 2019 totaled $9.8 million compared to $7.2 million for the six months ended December 31, 2018. The $2.5 million increase in SG&A expense versus the comparable period of the prior year was primarily due to $1.4 million in additional compensation and benefits costs associated with sales and marketing personnel, $0.7 million for executive leadership personnel, as well as other expense increases. As a percentage of revenue, SG&A expenses were 39.7% for the six months ended December 31, 2019, compared to 16.2% for the six months ended December 31, 2018.

Research and Development Expenses

Research and development expenses for the six months ended December 31, 2019 totaled $3.3 million compared to $2.4 million for the six months ended December 31, 2018. The $0.9 million increase in research and development expense versus the comparable period of the prior year was driven by additional research and development activities incurred in connection with the Chromatin business following our acquisition of Chromatin in October 2018, as well as additional investment in our hybrid sunflower programs.  We expect our research and development spend for fiscal 2020 to increase as we expand our hybrid sorghum and sunflower programs.

Depreciation and Amortization

Depreciation and amortization expense for the six months ended December 31, 2019 was $2.4 million compared to $1.9 million for the six months ended December 31, 2018. Included in these amounts was amortization expense for intangible assets, which totaled $1.0 million for the six months ended December 31, 2019 and $1.1 million for the six months ended December 31, 2018. The $0.5 million increase in depreciation and amortization expense over the comparable period of the prior year was primarily driven by $0.4 million of additional Chromatin expenses following the October 2018 acquisition, $0.1 million of expense associated with amortization of right of use assets and $0.1 million of additional expenses following the Dow Wheat Acquisition in August 2019, partially offset by fully depreciated assets.

38


 

Foreign Currency Gain

We recorded a foreign currency gain of $14,176 for the six months ended December 31, 2019 compared to a gain of $58,430 for the six months ended December 31, 2018. The foreign currency gains and losses are primarily associated with S&W Australia and S&W Hungary, our wholly-owned subsidiaries.

Interest Expense - Amortization of Debt Discount

Non-cash amortization of debt discount expense for the six months ended December 31, 2019 was $0.3 million compared to $0.1 million for the six months ended December 31, 2018. The expense in both periods represents the amortization of the debt issuance costs associated with our working capital facilities, our secured property note, and our equipment capital leases.

Interest Expense

Interest expense for the six months ended December 31, 2019 totaled $0.9 million compared to $1.3 million for the six months ended December 31, 2018. Interest expense for the six months ended December 31, 2019 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, the secured property loan entered into in November 2017, and equipment capital leases. Interest expense for the six months ended December 31, 2018 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, the secured property loan entered into in November 2017, and equipment capital leases. The $0.4 million decrease in interest expense for the six months ended December 31, 2019 was primarily driven by lower interest on the working capital credit facilities due to decreased levels of borrowings.

Provision for Income Taxes

Income tax expense totaled $24,520 for the six months ended December 31, 2019 compared to income tax expense of $4,533 for the six months ended December 31, 2018. Our effective tax rate was 0.2% for the six months ended December 31, 2019 compared to 0.2% for the six months ended December 31, 2018. Our effective tax rate for the six months ended December 31, 2019 was 0.2% due to the full valuation allowance established against our deferred tax assets which was recorded during the fourth quarter of fiscal year 2017. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operating results, as such results are generally incorporated in our net operating loss deferred tax asset position, which has a full valuation allowance against it.  However, in prior years, we did record tax expense related to certain other factors occurring throughout the year.   Our effective tax rate is driven by minimal state taxes.

Liquidity and Capital Resources

Our working capital and working capital requirements fluctuate from quarter to quarter depending on the phase of the growing and sales cycle that falls during a particular quarter. Our need for cash has historically been highest in the second and third fiscal quarters (October through March) because we historically have paid our North American contracted growers progressively, starting in the second fiscal quarter. In fiscal year 2019, we paid our North American growers approximately 50% of amounts due in October 2018 and the balance was paid in February 2019. This payment cycle to our growers was similar in fiscal year 2018, and we expect it to be similar for fiscal year 2020.  S&W Australia, our Australian-based subsidiary, has a production cycle that is counter-cyclical to North America; however, this also puts a greater demand on our working capital and working capital requirements during the second, third and fourth fiscal quarters based on timing of payments to growers in the second through fourth quarters.

Historically, due to the concentration of sales to certain distributors, our month-to-month and quarter-to-quarter sales and associated cash receipts are highly dependent upon the timing of deliveries to and payments from these distributors, which varies significantly from year to year.

We continuously monitor and evaluate our credit policies with all of our customers based on historical collection experience, current economic and market conditions and a review of the current status of the respective trade accounts receivable balance. Our principal working capital components include cash and cash equivalents, accounts receivable, inventory, prepaid expense and other current assets, accounts payable and our working capital lines of credit.

39


 

In addition to funding our business with cash from operations, we have historically relied upon occasional sales of our debt and equity securities and credit facilities from financial institutions, both in the United States and South Australia.

In recent periods, we have consummated the following equity and debt financings:

Debt Financings

 

Loan and Security Agreement with CIBC

 

On December 26, 2019, we entered into a $35.0 million aggregate principal amount (the “CIBC Credit Facility”) Loan and Security Agreement (the “Loan Agreement”) by and among us and CIBC Bank USA (“CIBC”). The following is a summary of the terms of the CIBC Credit Facility:

 

 

Advances under the CIBC Credit Facility are to be used: (i) to refinance indebtedness to KeyBank; (ii) to finance our ongoing working capital requirements; and (iii) for general corporate purposes. We may also use a portion of the CIBC Credit Facility to finance permitted acquisitions and related costs.

 

All amounts due and owing, including, but not limited to, accrued and unpaid principal and interest due under the CIBC Credit Facility, will be payable in full on December 23, 2022.

 

The Credit Facility generally establishes a borrowing base of up to 85% of eligible domestic accounts receivable (90% of eligible foreign accounts receivable) plus up to the lesser of (i) 65% of eligible inventory, (ii) 85% of the appraised net orderly liquidation value of eligible inventory, and (iii) an eligible inventory sublimit as more fully set forth in the Loan Agreement, in each case, subject to lender reserves.

 

Loans may be based on (i) a Base Rate plus 0.5% per annum or (ii) LIBOR Rate plus 2.5% per annum (both as defined in the Loan Agreement), generally at our option. In the event of a default, at the option of CIBC, the interest rate on all obligations owing will increase by 2% per annum over the rate otherwise applicable.

 

The CIBC Credit Facility is secured by a first priority perfected security interest in substantially all of the Borrowers’ assets (subject to certain exceptions), including intellectual property.

 

The Loan Agreement contains customary representations and warranties, affirmative and negative covenants and customary events of default that permit CIBC to accelerate our outstanding obligations under the Credit Facility, all as set forth in the Loan Agreement and related documents. The CIBC Credit Facility also contains customary and usual financial covenants imposed by CIBC.

Termination of KeyBank Credit Facility

 

In connection with the consummation of the Loan Agreement with CIBC described above, we terminated the Credit and Security Agreement, dated September 22, 2015 (as amended, the “KeyBank Agreement”), with KeyBank National Association (“KeyBank”). In connection with such termination, we paid KeyBank approximately $5.9 million in aggregate principal, interest and fees that were outstanding and payable under the KeyBank Agreement at the time of its termination, and all liens on our assets and the assets of our subsidiaries guaranteeing such facility, together with such subsidiary guarantees, were released and terminated. The KeyBank Agreement had provided for borrowings of up to a $45.0 million revolving line of credit.

Conterra Transaction

 

In November 2017, we entered into a secured note financing transaction with Conterra for $12.5 million in gross proceeds. In the transaction, we issued two secured promissory notes to Conterra. One promissory note in the principal amount of $10.4 million (the "Secured Real Estate Note") is secured by a first priority security interest in the property, plant and fixtures located at our Five Points, California and Nampa, Idaho production facilities and our Nampa, Idaho research facilities. The note was scheduled to mature on November 30, 2020.  On December 24, 2019, we entered into an amendment to extend the maturity date to November 30, 2022. The note bears interest of 7.75% per annum. We have agreed to make (i) a principal and interest payment of approximately $515,711 on January 1, 2020; (ii) five consecutive semi-annual principal and interest payments of approximately $454,185, beginning on July 1, 2020; and (iii) a one-time final payment of approximately $8,957,095 on November 30, 2022.

40


 

We may prepay the note, in whole or in part, at any time.

A second promissory note, in the principal amount of $2.1 million and secured by certain of our equipment, was repaid in full in August 2018.

Equipment Sale-Leaseback

In August 2018, we closed on a sale-leaseback transaction with American AgCredit involving certain equipment located at our Five Points, California and Nampa, Idaho production facilities. Under the terms of the sale-leaseback transaction:

 

We sold the equipment to American AgCredit for $2.1 million in proceeds. The proceeds were used to pay off in full the Conterra promissory note mentioned above.

 

We entered into a lease agreement with American AgCredit relating to the equipment. The lease agreement has a five-year term and provides for monthly lease payments of $40,023 (representing an annual interest rate of 5.6%). At the end of the lease term, we will repurchase the equipment for $1.

S&W Australia Facilities

S&W Australia has a series of debt facilities with National Australia Bank Ltd (“NAB”), all of which are guaranteed by us.  The NAB facilities and their key terms are as follows:

 

S&W Australia finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility comprised of two facility lines: (i) an overdraft line having a credit limit of AUD 2,000,000 (USD $1,402,000 at December 31, 2019) and a borrowing base line having a credit limit of AUD 13,000,000 (USD $9,114,300 at December 31, 2019). The seasonal credit facility expires on March 31, 2021. As of December 31, 2019, AUD 14,373,038 (USD $10,076,937) was outstanding under S&W Australia’s seasonal credit facility with NAB.  The seasonal credit facility is secured by a fixed and floating lien over all the present and future rights, property and undertakings of S&W Australia.  S&W Australia was in compliance with all debt covenants under the seasonal credit facility at December 31, 2019.

 

S&W Australia financed the construction of a building on S&W Australia’s Keith, South Australia property, purchase of adjoining land and for the machinery and equipment for use in the operations of the building through two additional debt facilities with NAB:  a business markets – flexible rate loan (the “Keith Building Loan”) and a separate machinery and equipment facility (the “Keith Machinery and Equipment Facility”).  The Keith Building Loan matures on November 30, 2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such period approximately 30 days), based on the weighted average of a specified basket of interest rates (5.49% as of December 31, 2019). Interest is payable each month in arrears. The Keith Machinery and Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate quoted by NAB at the time of the drawdown, plus 2.9%.  The Keith Building Loan and Keith Machinery and Equipment Facility are secured by a lien on all the present and future rights, property and undertakings of S&W Australia and a mortgage on S&W Australia’s Keith, South Australia property. As of December 31, 2019, USD $326,012 and USD $833,327 was outstanding under the Keith Building Loan and the Keith Machinery and Equipment Facility, respectively.

 

S&W Australia finances certain equipment purchases under a master asset finance facility with NAB.  The master asset finance facility has various maturity dates through 2023 and have interest rates ranging from 3.64% to 5.31%.  The credit limit under the facility is AUD 1,200,000 (USD $841,320) at December 31, 2019.

S&W Australia was in compliance with all debt covenants under its debt facilities with NAB at December 31, 2019.

41


 

Equity Issuances

In July 2017, we sold and issued to certain investors an aggregate of 2,685,000 shares of our Common Stock at a purchase price of $4.00 per share, for aggregate gross proceeds of approximately $10.7 million.

In October 2017, we sold and issued to Mark W. Wong, our President and Chief Executive Officer, an aggregate of 75,000 shares of our Common Stock at a purchase price of $3.50 per share, for aggregate gross proceeds of approximately $0.3 million.

In December 2017, we completed a rights offering of 3,500,000 shares of our Common Stock. At the closing, we sold and issued an aggregate of 2,594,923 shares of our Common Stock at a subscription price of $3.50 per share. Pursuant to a backstop commitment with MFP Partners, L.P. (“MFP”), concurrently with the closing of rights offering, we sold and issued the remaining 905,077 shares of our Common Stock not purchased in the rights offering to MFP at the subscription price of $3.50 per share. Combined, we sold and issued an aggregate of 3,500,000 shares of our common stock for aggregate gross proceeds of approximately $12.3 million.

In September 2018, we sold 1,607,717 shares of our common stock to MFP at a purchase price of $3.11 per share, for gross proceeds of approximately $5.0 million.  

In October 2018, we issued to MFP 7,235 shares of a newly designated Series A Convertible Preferred Stock at a purchase price of $3,110 per share, for aggregate gross proceeds of approximately $22.5 million. The preferred shares carried no voting rights and were automatically convertible into shares of our common stock at the rate of 1,000 shares of common stock per preferred share upon the approval of our stockholders for the issuance of the requisite shares of common stock. Pursuant to the purchase agreement for the preferred shares, we agreed to use reasonable best efforts to solicit the approval of our shareholders for the issuance of stock upon the conversion of the preferred shares.  Approval was obtained in November 2018 and the shares of Series A Convertible Preferred Stock converted into 7,235,000 shares of our common stock.

Summary of Cash Flows

The following table shows a summary of our cash flows for the six months ended December 31, 2019 and 2018:

 

 

 

Six Months Ended December 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

$

(3,486,139

)

 

$

(15,900,452

)

Cash flows from investing activities

 

 

(2,303,405

)

 

 

(26,710,468

)

Cash flows from financing activities

 

 

4,863,544

 

 

 

40,954,399

 

Effect of exchange rate changes on cash

 

 

(152,730

)

 

 

(192,992

)

Net increase (decrease) in cash and cash equivalents

 

 

(1,078,730

)

 

 

(1,849,513

)

Cash and cash equivalents, beginning of period

 

 

3,431,802

 

 

 

4,320,894

 

Cash and cash equivalents, end of period

 

$

2,353,072

 

 

$

2,471,381

 

 

Operating Activities

 

For the six months ended December 31, 2019, operating activities used $3.5 million in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows used $7.5 million in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows provided $4.0 million in cash. The increase in cash from changes in operating assets and liabilities was primarily driven by an increase in accounts payable of $6.6 million, a decrease in accounts receivable of $3.2 million, partially offset by an increase in inventory of $5.2 million.

For the six months ended December 31, 2018, operating activities used $15.9 million in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows used $0.5 million in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $15.4 million in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by an increase in inventory of $21.5 million, an increase in unbilled accounts receivable of $11.2 million, and an increase in accounts receivable of $8.3 million, partially offset by an increase in accounts payable of $23.7 million.

42


 

Investing Activities

 

Investing activities during the six months ended December 31, 2019 used $2.3 million in cash. The Dow Wheat Acquisition accounted for $2.6 million of the cash used in investing activities. We also had additions to property, plant and equipment of $1.4 million consisting primarily of equipment purchases for our facility in Keith, Australia and leasehold improvements to our new corporate headquarters in Longmont, Colorado; partially offset by $1.7 million of net proceeds from the sale of properties in Arlington Wisconsin and Plainview Texas.

Investing activities during the six months ended December 31, 2018 used $26.7 million in cash. The Chromatin Acquisition accounted for $26.4 million of the cash used in investing activities.  We also had additions to property, plant and equipment of $0.3 million consisting primarily equipment purchases for our facility in Keith, Australia.

Financing Activities

 

Financing activities during the three months ended December 31, 2019 provided $4.9 million in cash. During the six months ended December 31, 2019, we had net borrowings on the working capital lines of credit of $6.6 million, net repayments of long-term debt of $1.1 million and debt issuance costs of $0.8 million.

Financing activities during the six months ended December 31, 2018 provided $41.0 million in cash. During the six months ended December 31, 2018, we completed a private placement of common stock which raised net proceeds of $4.9 million in cash and a private placement of preferred stock which raised net proceeds of $22.4 million. During the six months ended December 31, 2018, we also had net borrowings on the working capital lines of credit of $14.3 million. On August 15, 2018, we closed on a sale and leaseback transaction involving certain equipment located at our Five Points, California and Nampa, Idaho production facilities. Under the terms of the transaction, we sold the equipment for $2.1 million in proceeds. The proceeds were used to pay off in full the Secured Equipment Note mentioned above.  

Inflation Risk

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations, including our revenue and income from continuing operations. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

Off Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during the three months ended December 31, 2019.

 

Capital Resources and Requirements

 

Our future liquidity and capital requirements will be influenced by numerous factors, including:

 

the extent and duration of future operating income;

 

the level and timing of future sales and expenditures;

 

working capital required to support our growth;

 

investment capital for plant and equipment;

 

our sales and marketing programs;

 

investment capital for potential acquisitions;

 

our ability to renew and/or refinance our debt on acceptable terms;

 

competition; and

 

market developments.

 

Critical Accounting Policies

 

The accounting policies and the use of accounting estimates are set forth in the footnotes to our consolidated financial statements.

 

43


 

In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2 – Summary of Significant Accounting Policies of the footnotes to the consolidated financial statements. In order to apply our accounting policies, we often need to make estimates based on judgments about future events. In making such estimates, we rely on historical experience, market and other conditions, and on assumptions that we believe to be reasonable. However, the estimation process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our results of operations, financial condition and changes in financial condition may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or to take other corrective actions, either of which may also have a material effect on our results of operations, financial condition or changes in financial condition. Members of our senior management have discussed the development and selection of our critical accounting estimates, and our disclosure regarding them, with the audit committee of our board of directors, and do so on a regular basis.

 

We believe that the following estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our results of operations, financial condition or changes in financial condition for the current period could have been materially different from those presented.

 

Goodwill

 

Goodwill is assessed annually for impairment or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit.  We adopted Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04") effective July 1, 2018. This standard eliminates Step 2 from the goodwill impairment test. Instead, we perform our annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

 

During the fourth quarter of the year ended June 30, 2019, we terminated our production and distribution agreements with Pioneer, thereby triggering a potential indicator of goodwill impairment. As a result, we initiated a goodwill impairment test for the year ended June 30, 2019.

 

We compared the carrying value of our invested capital to estimated fair values at June 30, 2019. We estimated the fair value based on the income approach. The discounted cash flows served as the primary basis for the income approach and were based on discrete financial forecasts developed by management. Cash flows beyond the discrete forecast period of ten years were estimated using the perpetuity growth method calculation. The income approach valuation included estimated weighted average cost of capital, which was 10.6%.

 

Upon completing the impairment test, we determined that the fair value of invested capital was less than the carrying value by approximately 10%, thus indicating an impairment. We recognized a goodwill impairment charge of $11.9 million for the year ended June 30, 2019, which represented the entire goodwill balance prior to the impairment charge.

 

Intangible Assets

 

All amortizable intangible assets are assessed for impairment whenever events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the intangible. If the review indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying amount of the intangible is compared to its fair value, with an impairment loss recognized if the fair value is below carrying value. Fair values are typically estimated using discounted cash flow techniques. Significant changes in key assumptions about the business, market conditions and prospects for which the intangible asset is currently utilized or expected to be utilized could result in an impairment charge.

 

In conjunction with the termination of the Pioneer production and distribution agreements, we recorded a $6.0 million impairment charge of intangible assets related to the Pioneer distribution agreements for the year ended June 30, 2019.

 

Stock-Based Compensation

 

We account for stock-based compensation in accordance with FASB Accounting Standards Codification Topic 718 Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee’s requisite service period (generally the vesting period of the equity grant).

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We account for equity instruments, including stock options issued to non-employees, in accordance with authoritative guidance for equity-based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest.

 

We utilize the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under share-based compensation plans. The Black-Scholes-Merton model requires us to estimate a variety of factors including, but not limited to, the expected term of the award, stock price volatility, dividend rate, risk-free interest rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. The expected term used represents the weighted-average period that the stock options are expected to be outstanding. We have used the historical volatility for our stock for the expected volatility assumption required in the model, as it is more representative of future stock price trends. We use a risk-free interest rate that is based on the implied yield available on U.S. Treasury issued with an equivalent remaining term at the time of grant. We have not paid dividends in the past and currently do not plan to pay any dividends in the foreseeable future, and as such, dividend yield is assumed to be zero for the purposes of valuing the stock options granted. We evaluate the assumptions used to value stock awards on a quarterly basis. If factors change, and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. When there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. To the extent that we grant additional equity securities to employees, our share-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants.

 

Income Taxes

 

We regularly assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. When a valuation allowance is established or increased, an income tax charge is included in the consolidated financial statements and net deferred tax assets are adjusted accordingly. Changes in tax laws, statutory tax rates and estimates of our future taxable income levels could result in actual realization of the deferred tax assets being materially different from the amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision, resulting in a reduction of earnings and stockholders’ equity.

 

Inventories

 

All inventories are accounted for on a lower of cost or net realizable value. Inventories consist of raw materials and finished goods. Depending on market conditions, the actual amount received on sale could differ from our estimated value of inventory. In order to determine the value of inventory at the balance sheet date, we evaluate a number of factors to determine the adequacy of provisions for inventory. The factors include the age of inventory, the amount of inventory held by type, future demand for products and the expected future selling price we expect to realize by selling the inventory. Our estimates are judgmental in nature and are made at a point in time, using available information, expected business plans and expected market conditions. We perform a review of our inventory by product line on a quarterly basis.

 

Our subsidiary, S&W Australia, does not fix the final price for seed payable to its growers until the completion of a given year’s sales cycle pursuant to its standard contract production agreement. We record an estimated unit price accordingly, inventory, cost of revenue and gross profits are based upon management’s best estimate of the final purchase price to our S&W Australia growers. To the extent the estimated purchase price varies from the final purchase price for seed, the adjustment to actual could materially impact the results in the period when the difference between estimates and actuals are identified. If the actual purchase price is in excess of our estimated purchase price, this would negatively impact our financial results including a reduction in gross profits and earnings.

 

During the fourth quarter of the year ended June 30, 2019, we recognized a write-down of inventory in the amount of $8.8 million, which is included in Cost of Revenue in the Consolidated Statement of Operations.  $4.8 million of this write-down related to dormant alfalfa seed products. The termination of the distribution and production agreements with Pioneer altered our planned consumption of these varieties and as a result we determined this particular dormant seed inventory will need to be sold to alternative sales channels at lower selling prices.  The remaining inventory write-down primarily relates to changes in our assessment of the future market prices for non-dormant alfalfa seed varieties.  The changes in our assessment occurred as we updated our business plans taking into account activity during the fourth quarter, which is the height of the sales season for non-dormant varieties.  

 

During the three months ended December 31, 2019, we recognized a write-down of inventory in the amount of $0.5 million which is included in Cost of Revenue in the Consolidated Statement of Operations.  The write-down of inventory during the three months ended December 31, 2019 was primarily related to certain inventory lots that deteriorated in quality / germination rates during the quarter.

 

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Allowance for Doubtful Accounts 

We regularly assess the collectability of receivables and provide 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. Our estimates are judgmental in nature and are made at a point in time. Management believes the allowance for doubtful accounts is appropriate to cover anticipated losses in our accounts receivable under current conditions; however, unexpected, significant deterioration in any of the factors mentioned above or in general economic conditions could materially change these expectations.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company and, therefore, we are not required to provide information required by this item of Form 10-Q.

Item 4.

Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2019 (the “Evaluation Date”). The term “disclosure controls and procedures,” as defined in Rules 13a‑15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2019, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation that have significantly affected, or are reasonably likely to significantly affect, our internal control over financial reporting.

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Part II

OTHER INFORMATION

Item 1.

Legal Proceedings.

None.

Item 1A.

Risk Factors.

We are a smaller reporting company, and, as such, we are not required to provide the information under this Item of Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

None.

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Item 6.

Exhibits.

 

Exhibit No.

 

Description

 

 

 

  3.1(1)

 

Registrant's Articles of Incorporation.

 

 

 

  3.2(2)

 

Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock.

 

 

 

  3.3(3)

 

Registrant’s Amended and Restated Bylaws, together with Amendments One, Two and Three thereto.

 

 

 

  4.1

 

Reference is made to Exhibits 3.1, 3.2 and 3.3.

 

 

 

  4.2(4)

 

Form of Common Stock Certificate.

 

 

 

  4.3(5)

 

Form of Common Stock Purchase Warrant.

 

 

 

10.1*

 

Loan and Security Agreement by and among the Registrant, Seed Holding, LLC, Stevia California, LLC, and CIBC Bank USA, dated December 26, 2019.

 

 

 

10.2

 

Amendment to Note between the Registrant and Rooster Capital LLC, dated December 24, 2019.

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1**

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2**

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

(1)

Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on December 19, 2011 (File No. 001-34719).

(2)

Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on October 25, 2018 (File No. 001-34719).

(3)

Incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K, filed on September 28, 2015 (File No. 001-34719).

(4)

Incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-3, filed on August 4, 2017 (File No. 333-219726).

(5)

Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on December 31, 2014 (File No. 001-34719).

*

Certain portions of this exhibit (indicated by “[***]”) have been omitted as the Registrant as determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Registrant if publicly disclosed.

**

This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

S&W SEED COMPANY

 

 

 

 

Date: February 12, 2020

By:

 

/s/ Matthew K. Szot

 

 

 

Matthew K. Szot

 

 

 

Executive Vice President of Finance and

Administration and Chief Financial Officer

(On behalf of the registrant in his capacity as

Principal Financial and Accounting Officer)

 

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