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EX-10.2 - EX-10.2 - S&W Seed Cosanw-ex102_403.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 September 30, 2020

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

 

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 November 12, 2020 was 33,482,009.

 

 

 

 


S&W SEED COMPANY

TABLE OF CONTENTS

 

PART I.

 

FINANCIAL INFORMATION

 

Page No.

Item 1.

 

Financial Statements (Unaudited):

 

4

 

 

Consolidated Balance Sheets at September 30, 2020 and June 30, 2020

 

4

 

 

Consolidated Statements of Operations for the Three Months Ended September 30, 2020 and 2019

 

5

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2020 and 2019

 

6

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months Ended September 30, 2020 and 2019

 

7

 

 

Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2020 and 2019

 

8

 

 

Notes to Consolidated Financial Statements

 

9

Item 2.

 

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

 

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

Item 4.

 

Controls and Procedures

 

42

PART II.

 

OTHER INFORMATION

 

43

Item 1.

 

Legal Proceedings

 

43

Item 1A.

 

Risk Factors

 

43

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

Item 3.

 

Defaults Upon Senior Securities

 

43

Item 4.

 

Mine Safety Disclosures

 

43

Item 5.

 

Other Information

 

43

Item 6.

 

Exhibits

 

44

 

 

 

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, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact could be deemed forward-looking statements, including, but not limited to: statements concerning the potential effects of the COVID-19 pandemic on our business; 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:

the duration of the COVID-19 pandemic and the extent to which it continues to disrupt the local and global economies, as well as our business and the businesses of our customers, distributors and suppliers;

changes in demand for our seed products and stevia development program;

our plans for expansion of our business (including by expanding crop offerings and market share of existing offerings through acquisitions) and our ability to successfully integrate acquisitions into our operations;

whether we continue to invest in research and development and whether such investment results in trait improvement across our crop categories;

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

market 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 and in the section titled “Risk Factors” contained in Part I, Item A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, or the Annual Report, 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 described above.

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,

2


and accordingly, the terms fiscal 2021,” “fiscal 2020,” and “fiscal 2019” in this Quarterly Report on Form 10-Q refer to the respective fiscal year ended June 30, 2021, 2020 and 2019, 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.

3


PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

S&W SEED COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

ASSETS

 

September 30,

2020

 

 

June 30,

2020

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,529,994

 

 

$

4,123,094

 

Accounts receivable, net

 

 

20,208,165

 

 

 

19,023,098

 

Inventories, net

 

 

66,715,986

 

 

 

63,882,938

 

Prepaid expenses and other current assets

 

 

1,335,303

 

 

 

1,374,677

 

TOTAL CURRENT ASSETS

 

 

91,789,448

 

 

 

88,403,807

 

Property, plant and equipment, net

 

 

20,060,468

 

 

 

20,494,312

 

Intangibles, net

 

 

38,500,527

 

 

 

38,784,058

 

Goodwill

 

 

1,567,709

 

 

 

1,508,675

 

Other assets

 

 

6,439,452

 

 

 

6,764,781

 

TOTAL ASSETS

 

$

158,357,604

 

 

$

155,955,633

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,358,274

 

 

$

8,045,694

 

Deferred revenue

 

 

8,271,055

 

 

 

6,171,904

 

Accrued expenses and other current liabilities

 

 

8,511,941

 

 

 

9,618,892

 

Lines of credit, net

 

 

30,907,408

 

 

 

26,983,264

 

Current portion of long-term debt, net

 

 

1,759,228

 

 

 

1,780,522

 

TOTAL CURRENT LIABILITIES

 

 

61,807,906

 

 

 

52,600,276

 

Long-term debt, net, less current portion

 

 

14,092,873

 

 

 

14,328,823

 

Contingent consideration obligation

 

 

4,533,529

 

 

 

4,263,503

 

Other non-current liabilities

 

 

3,193,215

 

 

 

3,427,054

 

TOTAL LIABILITIES

 

 

83,627,523

 

 

 

74,619,656

 

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;                                   33,475,569 issued and 33,450,569 outstanding at September 30, 2020;          33,457,861 issued and 33,432,861 outstanding at June 30, 2020;

 

 

33,476

 

 

 

33,458

 

Treasury stock, at cost, 25,000 shares

 

 

(134,196

)

 

 

(134,196

)

Additional paid-in capital

 

 

138,112,664

 

 

 

137,809,540

 

Accumulated deficit

 

 

(57,313,702

)

 

 

(50,140,942

)

Accumulated other comprehensive loss

 

 

(5,834,586

)

 

 

(6,111,424

)

Noncontrolling interests

 

 

(133,575

)

 

 

(120,459

)

TOTAL STOCKHOLDERS' EQUITY

 

 

74,730,081

 

 

 

81,335,977

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

158,357,604

 

 

$

155,955,633

 

 

See notes to consolidated financial statements.

 

 

4


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

Revenue

 

$

13,855,386

 

 

$

12,272,458

 

Cost of revenue

 

 

12,074,454

 

 

 

9,199,586

 

Gross profit

 

 

1,780,932

 

 

 

3,072,872

 

Operating expenses

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

4,684,744

 

 

 

4,648,326

 

Research and development expenses

 

 

2,016,686

 

 

 

1,588,191

 

Depreciation and amortization

 

 

1,378,088

 

 

 

1,064,798

 

Gain on disposal of property, plant and equipment

 

 

(1,000

)

 

 

(11,575

)

Total operating expenses

 

 

8,078,518

 

 

 

7,289,740

 

Loss from operations

 

 

(6,297,586

)

 

 

(4,216,868

)

Other expense

 

 

 

 

 

 

 

 

Foreign currency loss

 

 

99,217

 

 

 

98,187

 

Change in estimated value of assets held for sale

 

 

 

 

 

85,693

 

Change in contingent consideration obligation

 

 

104,821

 

 

 

 

Interest expense - amortization of debt discount

 

 

110,136

 

 

 

185,903

 

Interest expense

 

 

572,283

 

 

 

436,497

 

Loss before income taxes

 

 

(7,184,043

)

 

 

(5,023,148

)

Provision for income taxes

 

 

1,833

 

 

 

1,231

 

Net loss

 

$

(7,185,876

)

 

$

(5,024,379

)

Net loss attributed to noncontrolling interests

 

 

(13,116

)

 

 

(98,889

)

Net loss attributable to S&W Seed Company

 

$

(7,172,760

)

 

$

(4,925,490

)

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

$

(0.21

)

 

$

(0.15

)

Diluted

 

$

(0.21

)

 

$

(0.15

)

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

33,450,569

 

 

 

33,284,453

 

Diluted

 

 

33,450,569

 

 

 

33,284,453

 

 

See notes to consolidated financial statements.

 

 

5


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(7,185,876

)

 

$

(5,024,379

)

Foreign currency translation adjustment, net of income taxes

 

 

276,838

 

 

 

(244,065

)

Comprehensive loss

 

$

(6,909,038

)

 

$

(5,268,444

)

Comprehensive loss attributable to noncontrolling interests

 

 

(13,116

)

 

 

(98,889

)

Comprehensive loss attributable to S&W Seed Company

 

$

(6,895,922

)

 

$

(5,169,555

)

 

See notes to consolidated financial statements.

 

 

6


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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158,837

 

 

 

 

 

 

 

 

 

 

 

 

158,837

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

6,235

 

 

 

6

 

 

 

 

 

 

 

 

 

(7,244

)

 

 

 

 

 

 

 

 

 

 

 

(7,238

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(244,065

)

 

 

(244,065

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,925,490

)

 

 

(98,889

)

 

 

 

 

 

(5,024,379

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2020

 

 

 

 

$

 

 

 

33,457,861

 

 

$

33,458

 

 

 

(25,000

)

 

$

(134,196

)

 

$

137,809,540

 

 

$

(50,140,942

)

 

$

(120,459

)

 

$

(6,111,424

)

 

$

81,335,977

 

Stock-based compensation -

   options, restricted stock,

   and RSUs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

320,409

 

 

 

 

 

 

 

 

 

 

 

 

320,409

 

Net issuance to settle RSUs

 

 

 

 

 

 

 

 

17,708

 

 

 

18

 

 

 

 

 

 

 

 

 

(17,285

)

 

 

 

 

 

 

 

 

 

 

 

(17,267

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

276,838

 

 

 

276,838

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,172,760

)

 

 

(13,116

)

 

 

 

 

 

(7,185,876

)

Balance, September 30, 2020

 

 

 

 

$

 

 

 

33,475,569

 

 

$

33,476

 

 

 

(25,000

)

 

$

(134,196

)

 

$

138,112,664

 

 

$

(57,313,702

)

 

$

(133,575

)

 

$

(5,834,586

)

 

$

74,730,081

 

 

See notes to consolidated financial statements.

 

 

7


S&W SEED COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net loss

 

$

(7,185,876

)

 

$

(5,024,379

)

Adjustments to reconcile net loss from operating activities to net

 

 

 

 

 

 

 

 

cash (used in) provided by operating activities

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

320,409

 

 

 

158,837

 

Change in allowance for doubtful accounts

 

 

35,435

 

 

 

12,639

 

Inventory write-down

 

 

908,497

 

 

 

347,566

 

Depreciation and amortization

 

 

1,378,088

 

 

 

1,064,798

 

Gain on disposal of property, plant and equipment

 

 

(1,000

)

 

 

(11,575

)

Change in foreign exchange contracts

 

 

(7,615

)

 

 

43,863

 

Change in contingent consideration obligation

 

 

104,821

 

 

 

 

Change in estimated value of assets held for sale

 

 

 

 

 

85,693

 

Amortization of debt discount

 

 

110,136

 

 

 

185,903

 

Changes in:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(957,486

)

 

 

(974,615

)

Inventories

 

 

(3,103,060

)

 

 

(3,330,136

)

Prepaid expenses and other current assets

 

 

69,035

 

 

 

104,664

 

Other non-current asset

 

 

53,916

 

 

 

24,212

 

Accounts payable

 

 

4,046,160

 

 

 

7,282,377

 

Deferred revenue

 

 

2,099,161

 

 

 

2,677,388

 

Accrued expenses and other current liabilities

 

 

(1,262,195

)

 

 

(89,253

)

Other non-current liabilities

 

 

(80,409

)

 

 

(414,033

)

Net cash (used in) provided by operating activities

 

 

(3,471,983

)

 

 

2,143,949

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(121,525

)

 

 

(816,169

)

Proceeds from disposal of property, plant and equipment

 

 

2,000

 

 

 

20,075

 

Acquisition of wheat assets

 

 

 

 

 

(2,633,000

)

Net cash used in investing activities

 

 

(119,525

)

 

 

(3,429,094

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

 

(17,267

)

 

 

(7,238

)

Borrowings and repayments on lines of credit, net

 

 

3,208,863

 

 

 

(706,865

)

Borrowings of long-term debt

 

 

 

 

 

258,194

 

Debt issuance costs

 

 

(54,956

)

 

 

(41,636

)

Repayments of long-term debt

 

 

(439,027

)

 

 

(342,304

)

Net cash provided by (used in) financing activities

 

 

2,697,613

 

 

 

(839,849

)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 

300,795

 

 

 

(239,815

)

NET DECREASE IN CASH & CASH EQUIVALENTS

 

 

(593,100

)

 

 

(2,364,809

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

$

4,123,094

 

 

 

3,431,802

 

CASH AND CASH EQUIVALENTS, end of period

 

$

3,529,994

 

 

$

1,066,993

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

768,530

 

 

$

385,023

 

Income taxes

 

 

55,463

 

 

 

 

 

See notes to consolidated financial statements.

 

 

8


 

S&W SEED COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 - BACKGROUND AND ORGANIZATION

Organization

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, or S&W Holdings, consummated an acquisition of all of the issued and outstanding shares of Seed Genetics International Pty Ltd, an Australia corporation, or SGI, from SGI’s shareholders. In April 2018, SGI changed its name to S&W Seed Company Australia Pty Ltd, or S&W Australia.

On September 19, 2018, the Company and AGT Foods Africa Proprietary Limited, or AGT, formed a venture based in South Africa named SeedVision Proprietary Limited, or 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.

On February 24, 2020, S&W Australia, acquired all of the issued and outstanding shares of Pasture Genetics Ltd., or Pasture Genetics, from Pasture Genetics’ sole shareholder.

Business Overview

Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding, growing, processing and selling agricultural seeds. 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, or the Pioneer Acquisition, of Pioneer Hi-Bred International, Inc., or 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.

In February 2020, S&W Australia acquired Pasture Genetics, the third largest pasture seed company in Australia, as part of the Company’s efforts to diversify its product offerings and expand its distribution channels.

  

9


 

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 40 countries around the globe.

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 investors. The 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 $1.3 million of current assets (restricted) and $0.1 million of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of September 30, 2020. We have recorded a combined $1.3 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, 2020.  

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, or 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, 2021. 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 Annual Report, 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, inventory valuation, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable to farmers who grow seed for the Company), contingent consideration obligations, 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. The new strain of coronavirus, or COVID-19, in 2020 and the efforts to contain it have, among other things, negatively impacted the global economy and created significant volatility and disruption of financial markets. In addition, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The Company believes the estimates and assumptions underlying the accompanying consolidated financial statements are reasonable and supportable based on the information available at the time the financial statements were prepared. However, uncertainty over the impact COVID-19 will have on the global economy and the Company’s business in particular makes many of the

10


 

estimates and assumptions reflected in these consolidated financial statements inherently less certain. Therefore, actual results may ultimately differ from those estimates to a greater degree than historically.

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. Two customers accounted for 23% of its revenue for the three months ended September 30, 2020. One customer accounted for 28% of its revenue for the three months ended September 30, 2019.

One customer accounted for 16% of the Company’s accounts receivable at September 30, 2020. One customer accounted for 21% of the Company’s accounts receivable at June 30, 2020.

The Company sells a substantial portion of its products to international customers. Sales to international markets represented 61% and 46% of revenue during the three months ended September 30, 2020 and 2019, respectively. The net book value of fixed assets located outside the United States was 18% and 17% of total fixed assets at September 30, 2020 and June 30, 2020, respectively. Cash balances located outside of the United States may not be insured and totaled $1,667,351 and $1,690,748 at September 30, 2020 and June 30, 2020, respectively.

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

 

 

 

Three Months Ended September 30,

 

 

 

2020

 

 

2019

 

United States

 

$

5,361,777

 

 

 

39

%

 

$

6,665,581

 

 

 

54

%

Australia

 

 

2,782,464

 

 

 

20

%

 

 

765,978

 

 

 

6

%

Saudi Arabia

 

 

1,198,909

 

 

 

9

%

 

 

160,185

 

 

 

1

%

Mexico

 

 

1,136,090

 

 

 

8

%

 

 

1,030,792

 

 

 

9

%

South Africa

 

 

664,075

 

 

 

5

%

 

 

114,448

 

 

 

1

%

Peru

 

 

499,034

 

 

 

4

%

 

 

77,625

 

 

 

1

%

Sudan

 

 

484,700

 

 

 

3

%

 

 

823,148

 

 

 

7

%

Egypt

 

 

394,200

 

 

 

3

%

 

 

120

 

 

 

0

%

Pakistan

 

 

305,090

 

 

 

2

%

 

 

778,929

 

 

 

6

%

Libya

 

 

225,000

 

 

 

2

%

 

 

629,980

 

 

 

5

%

Other

 

 

804,047

 

 

 

5

%

 

 

1,225,672

 

 

 

10

%

Total

 

$

13,855,386

 

 

 

100

%

 

$

12,272,458

 

 

 

100

%

 

Covid-19 Pandemic

In addition to the foregoing, the Company is monitoring closely the impact of the COVID-19 pandemic on its business, including its results of operations and financial condition, and has implemented measures designed to protect the health and safety of its employees while continuing its operations.  

In particular, the Company’s sales cycle is highly seasonal, and the majority of its sales season activities for the United States and Australia are typically concentrated between March and June of each year. The Company’s sales efforts also have historically involved significant in-person interaction with potential customers and distributors. In March 2020, at the beginning of what is typically the Company’s most active selling period, many national, state and local governments in its target markets implemented various stay-at-home, shelter-in-place and other quarantine measures in response to the COVID-19 pandemic. As a result, the Company immediately attempted to shift its sales activities to video conferencing and similar customer interaction models, but the Company has found these alternative approaches to generally be less effective than in-person sales efforts.

In addition, the Company’s product revenue is predicated on its ability to timely fulfill customer orders, which depends in large part upon the consistent availability and operation of shipping and distribution networks operated by third parties. Farmers typically have a limited window during which they can plant seed, and their buying decisions can be shaped by actual or perceived disruptions in the Company’s distribution and supply channels. If the Company’s customers delay or decrease their orders due to potential disruptions in its distribution and supply channels, this would adversely affect the Company’s product revenue.

Given the level of uncertainty regarding the duration and broader impact of the COVID-19 pandemic, the Company is unable to fully assess the extent of its impact on the Company’s operations.

 

11


 

The terms of the Company’s loan and security agreement with CIBC place restrictions on its operating and financial flexibility (See Notes 9). The COVID-19 pandemic creates risk in the Company’s ability to comply with its CIBC covenants which could result in acceleration of its repayment obligations and foreclosure on its pledged assets. In order for the Company to maintain compliance with its CIBC covenants, the Company may need to obtain additional capital or alternative financing. There can be no assurance that the Company will be successful in raising additional capital or obtaining alternative financing. If the Company is unable to raise sufficient additional capital or obtain alternative financing, it may need to reduce the scope of its operations or sell certain assets.

 

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 $135,124 and $1,366,220 at September 30, 2020 and June 30, 2020, respectively.

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.

12


 

Components of inventory are:

 

 

 

September 30,

2020

 

 

June 30,

2020

 

Raw materials and supplies

 

$

2,036,553

 

 

$

1,227,185

 

Work in progress

 

 

6,755,099

 

 

 

4,395,503

 

Finished goods

 

 

57,924,334

 

 

 

58,260,250

 

 

 

$

66,715,986

 

 

$

63,882,938

 

 

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 26 years for technology/IP/germplasm, 20 years for customer relationships, 15 years for trade names, 15 years for license agreements and 16 years for other intangible assets.

Goodwill

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 is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value 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 with its carrying amount, including goodwill. The Company uses market capitalization and an estimate of a control premium to estimate the fair value. If the fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill.

The Company acquired Pasture Genetics in February 2020, and recorded goodwill of $1,452,436 as part of this transaction.  The Company performed a quantitative assessment of goodwill at June 30, 2020 on its one reporting unit and determined that goodwill was not 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 September 30, 2020 and June 30, 2020, and the investment is included in Other Assets on the Consolidated Balance Sheet.

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 ended September 30, 2020 or September 30, 2019.  

Research and Development Costs

The Company is engaged in ongoing research and development, or 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.

13


 

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 months ended September 30, 2020 and September 30, 2019 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, or 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. 

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 September 30,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss attributable to S&W Seed Company

 

$

(7,172,760

)

 

$

(4,925,490

)

Numerator for basis EPS

 

 

(7,172,760

)

 

 

(4,925,490

)

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted EPS

 

$

(7,172,760

)

 

$

(4,925,490

)

Denominator:

 

 

 

 

 

 

 

 

Denominator for basic EPS-weighted- average

   shares

 

 

33,450,569

 

 

 

33,284,453

 

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

 

 

33,450,569

 

 

 

33,284,453

 

Basic EPS

 

$

(0.21

)

 

$

(0.15

)

Diluted EPS

 

$

(0.21

)

 

$

(0.15

)

 

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 months ended September 30, 2020 and 2019.  

14


 

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.

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 Dow AgroScience, or Dow Wheat acquisition (see Note 7) were valued at fair value on a non-recurring basis as of August 15, 2019.

 

The assets acquired and liabilities assumed in the Pasture Genetics acquisitions (see Note 6) were valued at fair value on a non-recurring basis as of February 24, 2020.

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

September 30, 2020 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Foreign exchange contract liability

 

$

 

 

$

31,850

 

 

$

 

Contingent consideration obligations

 

$

 

 

$

 

 

$

4,533,529

 

Total

 

$

 

 

$

 

 

$

4,533,529

 

 

 

 

Fair Value Measurements as of

June 30, 2020 Using:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3