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 ended September 30, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 orOR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 001-34719
S&W SEED COMPANYCOMPANY
(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 Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of common stock of the registrant as of November 4, 20226, 2023 was 42,623,44543,039,225.
S&W SEED COMPANY
TABLE OF CONTENTS
Page No. | ||||
Item 1. | 4 | |||
Condensed Consolidated Balance Sheets at September 30, | 4 | |||
5 | ||||
6 | ||||
7 | ||||
8 | ||||
9 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ||
Item 3. |
| |||
Item 4. |
| |||
| ||||
Item 1. |
| |||
Item 1A. |
| |||
Item 2. |
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Item 3. |
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Item 4. |
| |||
Item 5. |
| |||
Item 6. |
|
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 our loan agreements, including our ability to comply with and/or secure refinancing for such loan agreements; the potential effects of global macroeconomic events and the COVID-19 pandemic on our business; the plans, strategies and objectives of management for our future operations, including our expectations for new product introductions during fiscal 2023 and2024; our implementation of our recently implemented strategic review (which includes our plans to reduce annual operating expenses); our recent partnership with Shell and its role in enabling us to reduce our operating expenses and sharpen our focus on key growth priorities; our ability to raise capital in the future; 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; future economic conditions or performance; our ability to retain key employees; and our assumptions, expectations and beliefs 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, including certain assumptions, that, if they never materialize or they prove incorrect, could cause our 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:
2
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, and accordingly, the terms “fiscal 2023,2024,” “fiscal 2022,”2023” and “fiscal 2021”2022” in this Quarterly Report on Form 10-Q refer to the respective fiscal year ended June 30, 2024, 2023 2022 and 2021,2022, 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
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS |
| September 30, 2022 |
|
| June 30, 2022 |
|
| As of |
|
| As of |
| ||||
CURRENT ASSETS | CURRENT ASSETS |
| CURRENT ASSETS |
| ||||||||||||
Cash and cash equivalents |
| $ | 1,224,400 |
|
| $ | 2,056,508 |
|
| $ | 987,422 |
|
| $ | 3,398,793 |
|
Accounts receivable, net |
|
| 27,707,851 |
|
|
| 19,051,236 |
|
|
| 27,945,969 |
|
|
| 24,622,727 |
|
Notes receivable, net |
|
| 6,910,691 |
|
|
| 6,846,897 |
| ||||||||
Inventories, net |
|
| 49,831,196 |
|
|
| 54,515,894 |
|
|
| 42,941,333 |
|
|
| 45,098,268 |
|
Prepaid expenses and other current assets |
|
| 1,940,218 |
|
|
| 1,605,987 |
|
|
| 3,359,517 |
|
|
| 4,099,027 |
|
TOTAL CURRENT ASSETS |
|
| 80,703,665 |
|
|
| 77,229,625 |
|
|
| 82,144,932 |
|
|
| 84,065,712 |
|
Property, plant and equipment, net |
|
| 16,204,434 |
|
|
| 16,871,669 |
|
|
| 9,769,222 |
|
|
| 10,082,168 |
|
Intangibles, net |
|
| 33,111,696 |
|
|
| 34,095,827 |
| ||||||||
Intellectual property, net |
|
| 21,304,305 |
|
|
| 21,650,534 |
| ||||||||
Other intangibles, net |
|
| 7,758,855 |
|
|
| 8,082,325 |
| ||||||||
Right of use assets - operating leases |
|
| 3,340,651 |
|
|
| 2,983,303 |
| ||||||||
Equity method investments |
|
| 22,176,338 |
|
|
| 23,059,705 |
| ||||||||
Other assets |
|
| 5,272,985 |
|
|
| 5,590,730 |
|
|
| 2,327,714 |
|
|
| 2,066,081 |
|
TOTAL ASSETS |
| $ | 135,292,780 |
|
| $ | 133,787,851 |
|
| $ | 148,822,017 |
|
| $ | 151,989,828 |
|
LIABILITIES, SERIES B CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||||||||||
|
|
|
|
|
|
| ||||||||||
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
| ||||||||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable |
| $ | 17,073,969 |
|
| $ | 15,901,116 |
|
| $ | 17,076,594 |
|
| $ | 13,312,180 |
|
Deferred revenue |
|
| 963,435 |
|
|
| 605,960 |
|
|
| 306,758 |
|
|
| 464,707 |
|
Accrued expenses and other current liabilities |
|
| 10,540,681 |
|
|
| 10,788,740 |
|
|
| 10,514,049 |
|
|
| 8,804,456 |
|
Current portion of working capital lines of credit, net |
|
| 39,798,376 |
|
|
| 12,678,897 |
|
|
| 41,593,630 |
|
|
| 44,900,779 |
|
Current portion of long-term debt, net |
|
| 8,108,613 |
|
|
| 8,316,783 |
|
|
| 3,938,493 |
|
|
| 3,808,761 |
|
TOTAL CURRENT LIABILITIES |
|
| 76,485,074 |
|
|
| 48,291,496 |
|
|
| 73,429,524 |
|
|
| 71,290,883 |
|
Long-term working capital lines of credit, less current portion |
|
| — |
|
|
| 21,703,286 |
| ||||||||
Long-term debt, net, less current portion |
|
| 3,767,839 |
|
|
| 3,992,540 |
|
|
| 4,786,699 |
|
|
| 4,499,334 |
|
Other non-current liabilities |
|
| 3,461,501 |
|
|
| 3,587,041 |
|
|
| 2,382,695 |
|
|
| 2,102,030 |
|
TOTAL LIABILITIES |
|
| 83,714,414 |
|
|
| 77,574,363 |
|
|
| 80,598,918 |
|
|
| 77,892,247 |
|
SERIES B CONVERTIBLE PREFERRED STOCK |
|
|
|
|
|
| ||||||||||
Preferred stock, $0.001 par value; 3,323 shares authorized; |
|
| 4,918,880 |
|
|
| 4,804,819 |
| ||||||||
TOTAL SERIES B CONVERTIBLE PREFERRED STOCK |
|
| 4,918,880 |
|
|
| 4,804,819 |
| ||||||||
MEZZANINE EQUITY |
|
|
|
|
|
| ||||||||||
Preferred stock, $0.001 par value; 3,323 shares authorized; 1,695 issued and outstanding at September 30, 2023 and June 30, 2023 |
|
| 5,394,193 |
|
|
| 5,274,148 |
| ||||||||
TOTAL MEZZANINE EQUITY |
|
| 5,394,193 |
|
|
| 5,274,148 |
| ||||||||
STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common stock, $0.001 par value; 75,000,000 shares authorized; |
|
| 42,633 |
|
|
| 42,609 |
| ||||||||
Common stock, $0.001 par value; 75,000,000 shares authorized; 43,047,951 issued and 43,022,951 outstanding at September 30, 2023; 43,004,011 issued and 42,979,011 outstanding at June 30, 2023 |
|
| 43,048 |
|
|
| 43,004 |
| ||||||||
Treasury stock, at cost, 25,000 shares |
|
| (134,196 | ) |
|
| (134,196 | ) |
|
| (134,196 | ) |
|
| (134,196 | ) |
Additional paid-in capital |
|
| 164,486,927 |
|
|
| 163,892,575 |
|
|
| 168,011,474 |
|
|
| 167,768,104 |
|
Accumulated deficit |
|
| (110,496,559 | ) |
|
| (105,873,557 | ) |
|
| (98,002,482 | ) |
|
| (91,932,808 | ) |
Accumulated other comprehensive loss |
|
| (7,274,895 | ) |
|
| (6,560,600 | ) |
|
| (7,148,770 | ) |
|
| (6,987,791 | ) |
Noncontrolling interests |
|
| 35,576 |
|
|
| 41,838 |
| ||||||||
Non-controlling interests |
|
| 59,832 |
|
|
| 67,120 |
| ||||||||
TOTAL STOCKHOLDERS' EQUITY |
|
| 46,659,486 |
|
|
| 51,408,669 |
|
|
| 62,828,906 |
|
|
| 68,823,433 |
|
TOTAL LIABILITIES, SERIES B CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY |
| $ | 135,292,780 |
|
| $ | 133,787,851 |
| ||||||||
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY |
| $ | 148,822,017 |
|
| $ | 151,989,828 |
|
See notes to condensed consolidated financial statements.
4
S&W SEED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| Three Months Ended September 30, |
| Three Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
| 2023 |
|
| 2022 |
| ||||
Revenue |
| $ | 19,865,865 |
|
| $ | 15,531,682 |
| $ | 16,432,466 |
|
| $ | 19,865,865 |
|
Cost of revenue |
|
| 15,361,354 |
|
|
| 12,405,012 |
|
| 11,421,152 |
|
|
| 15,361,354 |
|
Gross profit |
|
| 4,504,511 |
|
|
| 3,126,670 |
|
| 5,011,314 |
|
|
| 4,504,511 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
|
| 5,056,257 |
|
|
| 5,587,635 |
|
| 5,786,579 |
|
|
| 5,056,257 |
|
Research and development expenses |
|
| 1,515,380 |
|
|
| 1,995,128 |
|
| 1,086,512 |
|
|
| 1,515,380 |
|
Depreciation and amortization |
|
| 1,336,434 |
|
|
| 1,331,045 |
|
| 1,069,022 |
|
|
| 1,336,434 |
|
Gain on disposal of property, plant and equipment |
|
| (3,660 | ) |
|
| (18,067 | ) |
| (32,955 | ) |
|
| (3,660 | ) |
Total operating expenses |
|
| 7,904,411 |
|
|
| 8,895,741 |
|
| 7,909,158 |
|
|
| 7,904,411 |
|
Loss from operations |
|
| (3,399,900 | ) |
|
| (5,769,071 | ) |
| (2,897,844 | ) |
|
| (3,399,900 | ) |
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency loss |
|
| 190,915 |
|
|
| 162,545 |
|
| 372,189 |
|
|
| 190,915 |
|
Change in contingent consideration obligation |
|
| — |
|
|
| (62,254 | ) | |||||||
Interest expense - amortization of debt discount |
|
| 283,643 |
|
|
| 192,195 |
|
| 455,574 |
|
|
| 283,643 |
|
Interest expense, net |
|
| 742,409 |
|
|
| 518,486 |
|
| 1,405,767 |
|
|
| 786,679 |
|
Other income |
| (37,560 | ) |
|
| (44,270 | ) | ||||||||
Loss before income taxes |
|
| (4,616,867 | ) |
|
| (6,580,043 | ) |
| (5,093,814 | ) |
|
| (4,616,867 | ) |
Benefit from income taxes |
|
| (101,664 | ) |
|
| (165,802 | ) | |||||||
Provision for (benefit from) income taxes |
| 1,207 |
|
|
| (101,664 | ) | ||||||||
Loss before equity in net earnings of affiliates |
| (5,095,021 | ) |
|
| (4,515,203 | ) | ||||||||
Equity in loss of equity method investees, net of tax |
| 861,896 |
|
|
| — |
| ||||||||
Net loss |
| $ | (4,515,203 | ) |
| $ | (6,414,241 | ) | $ | (5,956,917 | ) |
| $ | (4,515,203 | ) |
Net loss attributable to noncontrolling interests |
|
| (6,262 | ) |
|
| (14,266 | ) | |||||||
Loss attributable to non-controlling interests |
| (7,288 | ) |
|
| (6,262 | ) | ||||||||
Net loss attributable to S&W Seed Company |
| $ | (4,508,941 | ) |
| $ | (6,399,975 | ) | $ | (5,949,629 | ) |
| $ | (4,508,941 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Calculation of net loss for loss per share: |
|
|
|
|
|
| |||||||||
Calculation of net loss per share: |
|
|
|
|
| ||||||||||
Net loss attributable to S&W Seed Company |
| $ | (4,508,941 | ) |
| $ | (6,399,975 | ) | $ | (5,949,629 | ) |
| $ | (4,508,941 | ) |
Dividends accrued for participating securities and accretion |
|
| (114,061 | ) |
|
| — |
|
| (120,045 | ) |
|
| (114,061 | ) |
Net loss attributable to common shareholders |
| $ | (4,623,002 | ) |
| $ | (6,399,975 | ) | $ | (6,069,674 | ) |
| $ | (4,623,002 | ) |
|
|
|
|
|
|
|
|
|
| ||||||
Net loss attributable to S&W Seed Company per common share: |
|
|
|
|
|
| |||||||||
Basic |
| $ | (0.11 | ) |
| $ | (0.17 | ) | |||||||
Diluted |
| $ | (0.11 | ) |
| $ | (0.17 | ) | |||||||
Weighted average number of common shares outstanding: |
|
|
|
|
|
| |||||||||
Basic |
|
| 42,604,020 |
|
|
| 36,773,864 |
| |||||||
Diluted |
|
| 42,604,020 |
|
|
| 36,773,864 |
| |||||||
Net loss attributable to S&W Seed Company per common share, basic and diluted | $ | (0.14 | ) |
| $ | (0.11 | ) | ||||||||
Weighted average number of common shares outstanding, basic and diluted |
| 43,009,221 |
|
|
| 42,604,020 |
|
See notes to condensed consolidated financial statements.
5
S&W SEED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(UNAUDITED)
|
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
Net loss |
| $ | (4,515,203 | ) |
| $ | (6,414,241 | ) |
| $ | (5,956,917 | ) |
| $ | (4,515,203 | ) |
Foreign currency translation adjustment, net of income taxes |
|
| (714,295 | ) |
|
| (461,127 | ) |
|
| (160,979 | ) |
|
| (714,295 | ) |
Comprehensive loss |
|
| (5,229,498 | ) |
|
| (6,875,368 | ) |
|
| (6,117,896 | ) |
|
| (5,229,498 | ) |
Comprehensive loss attributable to noncontrolling interests |
|
| (6,262 | ) |
|
| (14,266 | ) | ||||||||
Comprehensive loss attributable to non-controlling interests |
|
| (7,288 | ) |
|
| (6,262 | ) | ||||||||
Comprehensive loss attributable to S&W Seed Company |
| $ | (5,223,236 | ) |
| $ | (6,861,102 | ) |
| $ | (6,110,608 | ) |
| $ | (5,223,236 | ) |
See notes to condensed consolidated financial statements.
6
S&W SEED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
(UNAUDITED)
|
| Preferred Stock |
|
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Accumulated |
|
| Noncontrolling |
|
| Accumulated |
|
| Total |
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Interests |
|
| Loss |
|
| Equity |
| |||||||||||
Balance, June 30, 2021 |
|
| — |
|
| $ | — |
|
|
| 36,772,983 |
|
| $ | 36,773 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 149,684,357 |
|
| $ | (69,311,909 | ) |
| $ | (31,006 | ) |
| $ | (5,850,826 | ) |
| $ | 74,393,193 |
|
Stock-based compensation - options, restricted stock, and RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 394,312 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 394,312 |
|
Net issuance to settle RSUs |
|
| — |
|
|
| — |
|
|
| 28,263 |
|
|
| 28 |
|
|
| — |
|
|
| — |
|
|
| (40,743 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (40,715 | ) |
Proceeds from sale of common stock, net of fees and expenses |
|
| — |
|
|
| — |
|
|
| 848 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| 2,480 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,481 |
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (461,127 | ) |
|
| (461,127 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,399,975 | ) |
|
| (14,266 | ) |
|
| — |
|
|
| (6,414,241 | ) |
Balance, September 30, 2021 |
|
| — |
|
| $ | — |
|
|
| 36,802,094 |
|
| $ | 36,802 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 150,040,406 |
|
| $ | (75,711,884 | ) |
| $ | (45,272 | ) |
| $ | (6,311,953 | ) |
| $ | 67,873,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance, June 30, 2022 |
|
| — |
|
| $ | — |
|
|
| 42,608,758 |
|
| $ | 42,609 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 163,892,575 |
|
| $ | (105,873,557 | ) |
| $ | 41,838 |
|
| $ | (6,560,600 | ) |
| $ | 51,408,669 |
|
Stock-based compensation - options, restricted stock, and RSUs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 456,112 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 456,112 |
|
Series B detachable warrant |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,838 | ) |
|
| — |
|
|
| — |
|
|
| (25,838 | ) |
Accrued dividends on Series B convertible preferred stock |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (88,223 | ) |
|
| — |
|
|
| — |
|
|
| (88,223 | ) |
Subordinated loan & security agreement warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 146,474 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 146,474 |
|
Net issuance to settle RSUs |
|
| — |
|
|
| — |
|
|
| 23,827 |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| (8,234 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,210 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (714,295 | ) |
|
| (714,295 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,508,941 | ) |
|
| (6,262 | ) |
|
| — |
|
|
| (4,515,203 | ) |
Balance, September 30, 2022 |
|
| — |
|
| $ | — |
|
|
| 42,632,585 |
|
| $ | 42,633 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 164,486,927 |
|
| $ | (110,496,559 | ) |
| $ | 35,576 |
|
| $ | (7,274,895 | ) |
| $ | 46,659,486 |
|
|
| Mezzanine Equity |
|
| Shareholders' Equity |
| |||||||||||||||||||||||||||||||||||||
|
| Preferred Stock |
|
| Common Stock |
|
| Treasury Stock |
|
| Additional |
|
| Accumulated |
| Non- |
|
| Accumulated |
|
| Total |
| ||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
| Interests |
|
| Loss |
|
| Equity |
| |||||||||||
Balance, June 30, 2022 |
|
| 1,695 |
|
| $ | 4,804,819 |
|
|
| 42,608,758 |
|
| $ | 42,609 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 163,892,575 |
|
| $ | (105,873,557 | ) | $ | 41,838 |
|
| $ | (6,560,600 | ) |
| $ | 51,408,669 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 456,112 |
|
|
| — |
|
| — |
|
|
| — |
|
|
| 456,112 |
|
Subordinated loan & security agreement warrants |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 146,474 |
|
|
| — |
|
| — |
|
|
| — |
|
|
| 146,474 |
|
Series B detachable warrant |
|
| — |
|
|
| 25,838 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,838 | ) |
| — |
|
|
| — |
|
|
| (25,838 | ) |
Accrued dividends on Series B convertible preferred stock |
|
| — |
|
|
| 88,223 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (88,223 | ) |
| — |
|
|
| — |
|
|
| (88,223 | ) |
Net issuance to settle RSUs |
|
| — |
|
|
| — |
|
|
| 23,827 |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| (8,234 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| (8,210 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| — |
|
|
| (714,295 | ) |
|
| (714,295 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,508,941 | ) |
| (6,262 | ) |
|
| — |
|
|
| (4,515,203 | ) |
Balance, September 30, 2022 |
|
| 1,695 |
|
| $ | 4,918,880 |
|
|
| 42,632,585 |
|
| $ | 42,633 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 164,486,927 |
|
| $ | (110,496,559 | ) | $ | 35,576 |
|
| $ | (7,274,895 | ) |
| $ | 46,659,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance, June 30, 2023 |
|
| 1,695 |
|
| $ | 5,274,148 |
|
|
| 43,004,011 |
|
| $ | 43,004 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 167,768,104 |
|
| $ | (91,932,808 | ) | $ | 67,120 |
|
| $ | (6,987,791 | ) |
| $ | 68,823,433 |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 411,820 |
|
|
| — |
|
| — |
|
|
| — |
|
|
| 411,820 |
|
Series B detachable warrant |
|
| — |
|
|
| 25,838 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,838 | ) |
| — |
|
|
| — |
|
|
| (25,838 | ) |
Accrued dividends on Series B convertible preferred stock |
|
| — |
|
|
| 94,207 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (94,207 | ) |
| — |
|
|
| — |
|
|
| (94,207 | ) |
Net issuance to settle RSUs |
|
| — |
|
|
| — |
|
|
| 43,940 |
|
|
| 44 |
|
|
| — |
|
|
| — |
|
|
| (15,220 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| (15,176 | ) |
Proceeds from sale of common stock, net of expenses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (153,230 | ) |
|
| — |
|
| — |
|
|
| — |
|
|
| (153,230 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| — |
|
|
| (160,979 | ) |
|
| (160,979 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,949,629 | ) |
| (7,288 | ) |
|
| — |
|
|
| (5,956,917 | ) |
Balance, September 30, 2023 |
|
| 1,695 |
|
| $ | 5,394,193 |
|
|
| 43,047,951 |
|
| $ | 43,048 |
|
|
| (25,000 | ) |
| $ | (134,196 | ) |
| $ | 168,011,474 |
|
| $ | (98,002,482 | ) | $ | 59,832 |
|
| $ | (7,148,770 | ) |
| $ | 62,828,906 |
|
See notes to condensed consolidated financial statements.
7
S&W SEED COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | (4,515,203 | ) |
| $ | (6,414,241 | ) |
| $ | (5,956,917 | ) |
| $ | (4,515,203 | ) |
Adjustments to reconcile net loss from operating activities to net |
|
|
|
|
|
| ||||||||||
Adjustments to reconcile net income (loss) from operating activities to net |
|
|
|
|
|
| ||||||||||
cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock-based compensation |
|
| 456,112 |
|
|
| 394,312 |
|
|
| 411,820 |
|
|
| 456,112 |
|
Change in allowance for doubtful accounts |
|
| (155,421 | ) |
|
| 97,028 |
| ||||||||
Allowance for doubtful accounts |
|
| 165,342 |
|
|
| (155,421 | ) | ||||||||
Inventory write-down |
|
| 537,998 |
|
|
| 307,000 |
|
|
| 376,168 |
|
|
| 537,998 |
|
Depreciation and amortization |
|
| 1,336,434 |
|
|
| 1,331,045 |
|
|
| 1,069,022 |
|
|
| 1,336,434 |
|
Gain on disposal of property, plant and equipment |
|
| (3,660 | ) |
|
| (18,067 | ) |
|
| (32,955 | ) |
|
| (3,660 | ) |
Equity in loss of equity method investees, net of tax |
|
| 861,896 |
|
|
| — |
| ||||||||
Change in deferred tax provision |
|
| 13,730 |
|
|
| — |
| ||||||||
Change in foreign exchange contracts |
|
| 503,985 |
|
|
| 235,912 |
|
|
| 64,127 |
|
|
| 503,985 |
|
Foreign currency transactions |
|
| (1,294,985 | ) |
|
| — |
|
|
| (329,196 | ) |
|
| (1,294,985 | ) |
Change in contingent consideration obligation |
|
| — |
|
|
| (62,254 | ) | ||||||||
Amortization of debt discount |
|
| 283,643 |
|
|
| 192,195 |
|
|
| 455,574 |
|
|
| 283,643 |
|
Accretion of note receivable |
|
| (63,738 | ) |
|
| — |
| ||||||||
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accounts receivable |
|
| (8,996,608 | ) |
|
| (3,247,001 | ) |
|
| (3,712,963 | ) |
|
| (8,996,608 | ) |
Inventories |
|
| 3,124,383 |
|
|
| (1,040,417 | ) |
|
| 1,703,845 |
|
|
| 3,124,383 |
|
Prepaid expenses and other current assets |
|
| (216,080 | ) |
|
| (17,504 | ) |
|
| 574,099 |
|
|
| (216,080 | ) |
Other non-current asset |
|
| 72,381 |
|
|
| (17,800 | ) | ||||||||
Other non-current assets |
|
| 33,551 |
|
|
| 72,381 |
| ||||||||
Accounts payable |
|
| 1,671,381 |
|
|
| 1,949,750 |
|
|
| 3,985,916 |
|
|
| 1,671,381 |
|
Deferred revenue |
|
| 361,348 |
|
|
| 324,688 |
|
|
| (156,719 | ) |
|
| 361,348 |
|
Accrued expenses and other current liabilities |
|
| (436,714 | ) |
|
| 566,298 |
|
|
| 1,291,682 |
|
|
| (436,714 | ) |
Other non-current liabilities |
|
| (48,989 | ) |
|
| (65,426 | ) |
|
| 40,394 |
|
|
| (48,989 | ) |
Net cash used in operating activities |
|
| (7,319,995 | ) |
|
| (5,484,482 | ) | ||||||||
Net cash provided by (used in) operating activities |
|
| 794,678 |
|
|
| (7,319,995 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Additions to property, plant and equipment |
|
| (151,376 | ) |
|
| (470,960 | ) |
|
| (239,434 | ) |
|
| (151,376 | ) |
Proceeds from disposal of property, plant and equipment |
|
| 3,660 |
|
|
| 18,313 |
|
|
| 92,656 |
|
|
| 3,660 |
|
Net cash used in by investing activities |
|
| (147,716 | ) |
|
| (452,647 | ) | ||||||||
Net cash used in investing activities |
|
| (146,778 | ) |
|
| (147,716 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net proceeds from sale of common stock |
|
| — |
|
|
| 2,481 |
|
|
| (153,230 | ) |
|
| — |
|
Taxes paid related to net share settlements of stock-based compensation awards |
|
| (8,210 | ) |
|
| (40,715 | ) |
|
| (15,176 | ) |
|
| (8,210 | ) |
Borrowings and repayments on lines of credit, net |
|
| 6,750,048 |
|
|
| 5,274,959 |
|
|
| (2,860,874 | ) |
|
| 6,750,048 |
|
Borrowings of long-term debt |
|
| 266,734 |
|
|
| 150,768 |
|
|
| 201,322 |
|
|
| 266,734 |
|
Repayments of long-term debt |
|
| (131,709 | ) |
|
| (457,929 | ) | ||||||||
Debt issuance costs |
|
| (128,879 | ) |
|
| (103,261 | ) |
|
| (140,304 | ) |
|
| (128,879 | ) |
Repayments of long-term debt |
|
| (457,929 | ) |
|
| (452,544 | ) | ||||||||
Net cash provided by financing activities |
|
| 6,421,764 |
|
|
| 4,831,688 |
| ||||||||
Net cash provided by (used in) financing activities |
|
| (3,099,971 | ) |
|
| 6,421,764 |
| ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
| 213,839 |
|
|
| (527,769 | ) |
|
| 40,700 |
|
|
| 213,839 |
|
NET DECREASE IN CASH & CASH EQUIVALENTS |
|
| (832,108 | ) |
|
| (1,633,210 | ) | ||||||||
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS |
|
| (2,411,371 | ) |
|
| (832,108 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of the period |
|
| 2,056,508 |
|
|
| 3,527,937 |
|
|
| 3,398,793 |
|
|
| 2,056,508 |
|
CASH AND CASH EQUIVALENTS, end of period |
| $ | 1,224,400 |
|
| $ | 1,894,727 |
|
| $ | 987,422 |
|
| $ | 1,224,400 |
|
See notes to condensed consolidated financial statements.
8
S&W SEED COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
OrganizationGENERAL
The Company began as S&W Seed Company,is a general partnership, in 1980 and was originally in the business of breeding, growing, processing and selling alfalfa seed. The Company incorporated a corporation with the same name in Delaware in October 2009, whichglobal multi-crop, middle-market agricultural company that 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.
In April 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.
In September 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.
As part of the Company’s 2018 acquisition of all the assets of Chromatin, Inc., the Company acquired 51.0% of Sorghum Solutions South Africa.
In February 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 operates seed cleaning and processing facilities, which are located in Idaho, Texas, New South Wales and 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 varietiesgrowing sales of steviatheir proprietary and traited products specifically through the expansion of Double TeamTM for forage and grain sorghum products, improving margins through pricing and operational efficiencies, and developing marketingthe camelina market via a recently formed partnership.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and, distribution programsin the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for its stevia products.a fair statement of the Company’s condensed consolidated balance sheets, statements of operations, comprehensive loss, cash flows and mezzanine equity 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, 2024. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2023, as filed with the SEC.
Certain prior period information has been reclassified to conform to the current period presentation.
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, the carrying value of the Company's equity investments, 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 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 Company has also been actively engagedbelieves the estimates and assumptions underlying the accompanying condensed consolidated financial statements are reasonable and supportable based on the information available at the time the financial statements were prepared. However, certain adverse geopolitical and macroeconomic events, such as the ongoing military conflict between Ukraine and Russia and related sanctions, the armed conflict in expansion initiatives through a combinationSudan, the war between Israel and Hamas, and uncertain market conditions, including higher inflation and supply chain disruptions, have, among other things, negatively impacted the global economy, created significant volatility and disruption of organic growthfinancial markets, and strategic acquisitions.
In May 2016, the Company acquired the assetssignificantly increased economic 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 alldemand uncertainty. These factors make many of the assets of Chromatin, Inc.,estimates and assumptions reflected in these condensed consolidated financial statements inherently less certain. Therefore, actual results may ultimately differ from those estimates to 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 Agriscience, Inc., or 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.greater degree than historically.
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
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of PresentationLiquidity 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. generally accepted accounting principles, or 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.Going Concern
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,not profitable and SeedVision is being funded through advances, as needed, from its investors. The Company has concluded that it isrecorded negative cash flows for the primary beneficiary of SeedVision because it haslast several years. For 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.
Becausethree months ended September 30, 2023, the Company is its primary beneficiary, SeedVision's and Sorghum Solutions South Africa’s financial results are included in these financial statements. Thereported a net loss of $6.0 million. While the Company recorded a combineddid report net cash provided by operations of $0.40.8 million of current assets (restricted) and $27,762 of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of September 30, 2022.
The Company recorded a combined $0.5 million of current assets (restricted) and $31,307 of current liabilities (nonrecourse) for these entities in its consolidated balance sheet as of June 30, 2022.
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, 2023. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP 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.
Certain adverse geopolitical and macroeconomic events, such as the continued impact of COVID-19, the ongoing conflict between Ukraine and Russia and related sanctions, and uncertain market conditions, including higher inflation and supply chain disruptions, have, among other things, negatively impacted the global economy, created significant volatility and disruption of financial markets, and 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.
10
However, uncertainty over the impact COVID-19 will have on the global economy and the Company’s business in particular makes many of the 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. One customer accounted for 16% of its revenue for the three months ended September 30, 2022 and no single customer accounted for more than 10% of its revenue2023, it expects this to be negative in fiscal 2024. The positive cash flow in operations for the three months ended September 30, 2021.
No customer accounted for more than 10%2023 was largely due to changes in operating assets and liabilities. As of the Company’s accounts receivable as of June 30, 2022 and September 30, 2022.
The Company sells a substantial portion of its products to international customers. Sales to international markets represented 79% and 76% of revenue during the three months ended September 30, 2022 and 2021, respectively. The net book value of fixed assets located outside the United States was 21% and 22% of total fixed assets at September 30, 2022 and June 30, 2022, respectively. Cash balances located outside of the United States may not be insured and totaled $195,158 and $811,551 at September 30, 2022 and June 30, 2022, respectively.
The following table shows revenue from external sources by destination country:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
Saudi Arabia |
| $ | 5,172,286 |
|
|
| 26 | % |
| $ | 3,467,210 |
|
|
| 22 | % |
United States |
|
| 4,260,754 |
|
|
| 21 | % |
|
| 3,665,328 |
|
|
| 24 | % |
Libya |
|
| 2,998,047 |
|
|
| 15 | % |
|
| 1,044,000 |
|
|
| 7 | % |
Australia |
|
| 2,557,732 |
|
|
| 13 | % |
|
| 3,434,005 |
|
|
| 22 | % |
Pakistan |
|
| 821,620 |
|
|
| 4 | % |
|
| 164,055 |
|
|
| 1 | % |
Sudan |
|
| 802,044 |
|
|
| 4 | % |
|
| 819,618 |
|
|
| 5 | % |
Algeria |
|
| 754,680 |
|
|
| 4 | % |
|
| — |
|
|
| — |
|
Mexico |
|
| 731,100 |
|
|
| 4 | % |
|
| 228,420 |
|
|
| 2 | % |
China |
|
| 468,500 |
|
|
| 2 | % |
|
| 473,125 |
|
|
| 3 | % |
Argentina |
|
| 362,978 |
|
|
| 2 | % |
|
| 350,839 |
|
|
| 2 | % |
Other |
|
| 936,124 |
|
|
| 5 | % |
|
| 1,885,082 |
|
|
| 12 | % |
Total revenue |
| $ | 19,865,865 |
|
|
| 100 | % |
| $ | 15,531,682 |
|
|
| 100 | % |
Liquidity andCapital Resources
The Company is monitoring the impact of adverse geopolitical and macroeconomic events, including the COVID-19 pandemic and the ongoing military conflict between Russia and Ukraine and related sanctions, and uncertain market conditions, including higher inflation and supply chain disruptions, on its business, including its results of operations and financial condition.
The Company’s sales efforts historically involved significant in-person interaction with potential customers and distributors. Throughout the COVID-19 pandemic, many national, state and local governments in its target markets implemented various stay-at-home, shelter-in-place and other quarantine measures. As a result,2023, the Company shifted its sales activities to video conferencing and similar customer interaction models and continues to evaluate its sales approach, but the Company found these alternative approaches to generally be less effective than in-person sales efforts. In particular, regular in-person customer interactions did not resume until February 2022 in some locations where the Company operates. If ongoing measures to protect against COVID-19 are reinstated during the fiscal 2023 sales season, the Company may experience similar negative impacts that it experienced during the fiscal 2021 and 2022 sales seasons.
Following the recent invasion of Ukraine by Russia, the U.S. and global financial markets experienced volatility, which has led to disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity globally. In response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social impact of the sanctions imposed on Russia and possible future punitive measures that may be implemented, as well as the counter measures imposed by Russia, in addition to the ongoing military conflict between Ukraine and Russia and related sanctions, which could conceivably expand into the surrounding region, remains uncertain; however, both the conflict and related sanctions have resulted and could continue to result in disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity on acceptable terms, in both Europe and globally, and has introduced significant uncertainty into global markets. As a result, the Company’s business, including its ability to deliver seed and timely receive payment from customers, and access to capital may be adversely affected by the ongoing military conflict
11
between Ukraine and Russia and related sanctions, particularly to the extent it escalates to involve additional countries, further economic sanctions or wider military conflict.
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, or if the Company is unable to timely fulfill their orders, this would adversely affect the Company’s product revenue.
During the year ended June 30, 2022 and the three months ended September 30, 2022, the Company experienced numerous logistical challenges due to limited availability of trucks for product deliveries, congestion at the ports, and overall increases in shipping and transportation costs, which the Company attributes to the COVID-19 pandemic and the general disruptions from the ongoing conflict between Ukraine and Russia and related sanctions. The Company expects these logistical challenges to persist throughout fiscal 2023, which may, among other things, delay or reduce its ability to recognize revenue within a particular fiscal period and harm its results of operations.
Given the level of uncertainty regarding the duration and broader impact of these adverse geopolitical and macroeconomic events, the Company is unable to fully assess the extent of their impact on the Company’s operations.
For the three months ended September 30, 2022, we reported a net loss of $4.5 million and net cash used in operations of $7.3 million. At September 30, 2022, we had cash on hand of $1.21.0 million. The Company had $3.0 million of unused availability from its working capital facilities as of September 30, 2023 (see Note 8 for further discussion). In relation to the partnerships formed in fiscal 2023, the Company is entitled to receive $1.0 million from Trigall Genetics S.A., or Trigall, in December 2023 and $6.0 million from Equilon Enterprises LLC (dba Shell Oil Products, or Shell) in February 2024, subject to adjustment in certain circumstances detailed further in Note 7. The Company is obligated to make an additional $0.4 million in capital contributions to Trigall Australia Pty Ltd, or Trigall Australia, through June 2025.
9
The Company’s Amended and Restated Loan and Security Agreement, dated December 26, 2019, or the Amended CIBC Loan Agreement, with CIBC Bank USA, or CIBC, and the secured promissory note, or Rooster Note, that it executed in favor of Conterra Agriculture Capital, LLC, or Conterra, and subsequently endorsed to Rooster Capital, LLC, or Rooster, which matures on December 23, 2022, and its debt facilities with National Australia Bank, or NAB, under the NAB Finance Agreement, contain various operating and financial covenants (See(refer to Note 7)8). Adverse geopolitical and macroeconomic events and other factors affecting the Company’s results of operations have increased the risk of the Company’s inability to comply with these covenants, which could result in acceleration of its repayment obligations and foreclosure on its pledged assets. For example, the Company was not in compliance with certain covenants in the CIBC Loan Agreement and the Rooster Note as of June 30, 2021, December 31, 2021, March 31, 2022, June 15, 2022 and June 30, 2022, and was required to obtain waivers and/or amendments from CIBC and Rooster. In particular, theThe Amended CIBC Loan Agreement as presently in effect requires the Company to maintainmeet minimum liquidity of no less than $1,000,000,adjusted EBITDA levels on a quarterly basis and the NAB Finance Agreement (as defined below) includes an undertaking that requires the Company to maintain a net related entity position of not more than AUDUSD $25,000,00018.5. Accordingly, the Company’s ability to comply with this undertaking is subject to fluctuations in foreign currency conversion rates, which are outside million and a minimum interest cover ratio at each fiscal year-end. As of the Company’s control. Due to recent fluctuations in foreign currency conversion rates,September 30, 2023, the Company is currently notwas in compliance with this undertaking. Althoughthe CIBC minimum adjusted EBITDA covenant as well as the NAB net related entity position covenant. While the Company is currentlywas in discussions with NAB to revise how compliance with this undertaking is measured,these covenants, there can be no assurances that the Company will be able to secure an amendment to the NAB Finance Agreement or regain compliance with this undertaking. The Company is actively pursuing refinancing of the CIBC Loan Agreement and the Rooster Note. There can be no assurance the Company will be successful in raising additional capital,meeting its covenants or securing future waivers and/or amendments from its lenders. Currently, the Company does not expect to meet certain of these covenants in fiscal 2024. If the Company is unsuccessful in meeting its covenants or securing future waivers and/or amendments from its lenders renewing or refinancing its existing debt or securing new financing. If the Company is unsuccessful in doing so,and cannot obtain other financing, it may need to reduce the scope of its operations, repay amounts owingowed to its lenders and/or sell certain assets. TheFurther, if the Company is also exploring strategic alternatives for underutilized assets, including planscannot renew or obtain other financing when its two major debt facilities with CIBC and NAB expire on August 31, 2024 and September 30, 2024, respectively, it may need to enterreduce the camelina market as a seed and technology provider.scope of its operations, repay amounts owed to its lenders and/or sell certain assets. These operating and liquidity factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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. Cash balances located outside of the United States may not be insured and totaled $252,236 and $191,766 on September 30, 2023 and June 30, 2023, respectively. Cash balances residing in the United States exceeding the Federal Deposit Insurance Corporation limit of $250,000 totaled $485,186 and $2,957,028 on September 30, 2023 and June 30, 2023, respectively.
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 condensed consolidated statement of operations,operations. For the three months ended September 30, 2023, a $0.6 million foreign currency transaction gain was recognized within Cost of revenue and included approximatelya $0.4 million foreign currency loss was recorded to Other (income) expense. For the three months ended September 30, 2022, a $1.0 million benefit to costforeign currency gain was recognized within Cost of revenuesrevenue and a $0.2 million foreign currency loss was recorded to otherOther (income) expense for the three months ended September 30, 2022.
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.
12
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.expense.
Accounts Receivable
The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. ThatPrior to July 1, 2023, 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. Effective July 1, 2023, in determining the Company's reserve for credit losses, receivables are assigned an expected loss based on historical information adjusted for forward-looking economic factors. The allowance for doubtful trade receivables was $80,743279,579 and $233,927209,757 aton September 30, 20222023 and June 30, 2022,2023, 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
10
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.
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 as follows:
| As of |
|
| As of |
| |||||||||||
|
| As of |
|
| As of |
|
| September 30, 2023 |
|
| June 30, 2023 |
| ||||
Raw materials and supplies |
| $ | 3,138,774 |
|
| $ | 2,645,764 |
|
| $ | 3,380,076 |
|
| $ | 3,309,211 |
|
Work in progress |
|
| 8,345,528 |
|
|
| 6,677,980 |
|
|
| 7,094,668 |
|
|
| 6,409,554 |
|
Finished goods |
|
| 38,346,894 |
|
|
| 45,192,150 |
|
|
| 32,466,589 |
|
|
| 35,379,503 |
|
Inventories, net |
| $ | 49,831,196 |
|
| $ | 54,515,894 |
|
| $ | 42,941,333 |
|
| $ | 45,098,268 |
|
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-to 35years for buildings, 2-to 20 yearsyears for machinery and equipment, and 2-to 5 yearsyears 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 310 -to 30 yearsyears for technology/IP/germplasm, 5-to 20 yearsyears for customer relationships and trade names and 310 -to 20for other intangible assets. The weighted average estimated useful lives are 2625 years for technology/IP/germplasm, 2019 years for customer relationships, 16years for trade names, 18 years for license agreements and 1918 years for other intangible assets.assets as of September 30, 2023.
GoodwillInvestments
TheIn fiscal 2023, the Company acquired Pasture Geneticsentered into two partnerships resulting in February 2020,a 34% ownership interest in Vision Bioenergy Oilseeds LLC, or Vision Bioenergy, and recorded goodwilla 20% ownership interest in Trigall Australia Pty Ltd, or Trigall Australia. Following the initial recording of $1,452,436 as parteach investment, the Company assesses and records its share of this transaction.
Goodwill is assessed at least annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could includeequity earnings from each investment on a significant changequarterly basis, resulting in the business climate, legal factors,investment carrying value increasing or decreasing depending on whether a decline in operating performance, competition, salegain 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
13
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 equalrecorded. For Trigall Australia, the Company is also required to that excess, limited tomake capital contributions, which increases the total amount of goodwill.
The Company performed a quantitative assessment of goodwill at June 30, 2022 on its one reporting unit and determined that goodwill was fully impaired. See Note 5 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 $0.4 million at September 30, 2022 and $0.4 million at June 30, 2022, and the investment is included in Other Assets on the Company’s 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.
During the third quarter of fiscal year 2022, the Company sold 71.4% of the investment in Bioceres, S.A. for net proceeds of $988,504, which included a gain on the sale of marketable securities of $68,967.investment.
No adjustments for impairment were made for the three months ended September 30, 2022 or September 30, 2021.
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.
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, 20222023 and September 30, 20212022 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 and restricted stock awards.
The treasury stock method is used for 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 Company computes earnings per share using the two-class method. The two-class method requires an earnings allocation formula that determines earnings per share for common shareholders and participating security holders according to dividends declared and participating rights in undistributed earnings. The Company’sCompany's Series B Preferred Stock (as defined below) and related warrant, or Series B Warrant (see Note 14 of the Warrant (as defined below)Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC), are participating securities because holders of such equityshares have non-forfeitable dividend rights and participate in any undistributed earnings with common stock. Under the two-class method, total dividends provided to the holders of participating securities and undistributed earnings allocated to participating securities, are subtracted from net income attributable to the
11
Company in determining net loss attributable to common shareholders. Duringshareholders in the three months ended September 30, 2022, there were $88,223 in accrued dividends subtracted from net income attributable to common shareholders; there were no undistributedtwo-class earnings to allocate
14
to the participating securities. Additionally, any accretionper share, or EPS, calculation. Accretion to the redemption value for the Series B Preferred Stock is also treated as a deemed dividend in the two-class EPS calculation. During the three months ended September 30, 2022, $25,838 was accreted to the redemption value of the Series B Preferred Stock and subtracted from net income attributable to common shareholders. There were no undistributed earnings to allocate to the participating securities in the three and nine month periods ended September 30, 2023 and 2022.
The calculation of Basic and Diluted EPSnet loss per common share is shown in the table below.below:
|
| Three Months Ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Numerator: |
|
|
|
|
|
| ||
Net loss attributable to S&W Seed Company |
| $ | (4,508,941 | ) |
| $ | (6,399,975 | ) |
Dividends accrued for participating securities and accretion |
|
| (114,061 | ) |
|
| — |
|
Numerator for basic and diluted EPS |
| $ | (4,623,002 | ) |
| $ | (6,399,975 | ) |
Denominator: |
|
|
|
|
|
| ||
Denominator for basic EPS - weighted average |
|
| 42,604,020 |
|
|
| 36,773,864 |
|
Effect of dilutive securities: |
|
|
|
|
|
| ||
Employee stock options |
|
| — |
|
|
| — |
|
Employee restricted stock units |
|
| — |
|
|
| — |
|
Dilutive potential common shares |
|
| — |
|
|
| — |
|
Denominator for diluted EPS - adjusted weighted |
|
| 42,604,020 |
|
|
| 36,773,864 |
|
Basic EPS |
| $ | (0.11 | ) |
| $ | (0.17 | ) |
Diluted EPS |
| $ | (0.11 | ) |
| $ | (0.17 | ) |
|
| Three Months Ended September 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Numerator: |
|
|
|
|
|
| ||
Net loss attributable to S&W Seed Company |
| $ | (5,949,629 | ) |
| $ | (4,508,941 | ) |
Dividends accrued for participating securities |
|
| (94,207 | ) |
|
| (88,223 | ) |
Accretion of Series B Preferred Stock redemption value |
|
| (25,838 | ) |
|
| (25,838 | ) |
Numerator for net loss per common share - basic and diluted |
| $ | (6,069,674 | ) |
| $ | (4,623,002 | ) |
Denominator: |
|
|
|
|
|
| ||
Weighted average shares outstanding - basic and diluted |
|
| 43,009,221 |
|
|
| 42,604,020 |
|
Net loss per common share - basic and diluted |
| $ | (0.14 | ) |
| $ | (0.11 | ) |
Anti-dilutive shares, which have been excluded from the computation of diluted income (loss) per share, included The effects of4,795,367 employee stock options, 1,695,000 shares issuable upon conversion of the Series B Convertible Preferred Stock, warrants to purchase 2,633,400 shares of common stock related to the MFP Loan Agreement (as defined below), 559,350 warrants issued with the Company's Series B Convertible Preferred Stock, and406,124 restricted stock unitsunits. The terms and conditions of these securities are more fully described in Note 11 and Note 12 in these condensed consolidated financial statements and in Note 13 and Note 14 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC. For the period ended September 30, 2023 and 2022, all potentially dilutive shares were anti-dilutive and excluded from the calculation of diluted loss per share because they would be anti-dilutive due tonet losses were recognized.
Concentrations
One customer accounted for 29% and 18% of the Company’s net lossCompany's revenue for the three months ended September 30, 2023 and 2022, and 2021. respectively.
ImpairmentOne customer accounted for 21% of Long-Lived Assetsthe Company's accounts receivable as of September 30, 2023 and no one customer accounted for more than 10% of the Company’s accounts receivable as of June 30, 2023.
The Company evaluatessells a substantial portion of its long-lived assets for impairment annually or more often if eventsproducts to international customers (see Note 4). Sales to international markets represented 82% 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. 89% of revenue during the three months ended September 30, 2023 and 2022, respectively. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carryingnet book value of long-livedfixed assets will be adjusted, basedlocated outside the United States was 31% of total fixed assets on estimates of future discounted cash flows resulting from the useSeptember 30, 2023 and ultimate disposition of the asset. Refer to Note 5 for impairment discussion.June 30, 2023.
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.derivative financial instruments.
The Company has entered into certain derivative financial instruments (specifically foreign currency forward contracts),contracts and foreign currency call options (see Note 9) and accounts for these instruments in accordance with ASC Topic 815, “Derivatives and Hedging”,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 and options are not designated as hedging instruments under ASC 815; accordingly, changes in the fair value are recorded in current period earnings.
Premiums paid for foreign currency options with strike prices below the spot market price when acquired represent the time value of the option, as there is no intrinsic value. Such premiums are recorded as a current asset and amortized over the option term. Currency options are measured at fair value if the market price at the reporting date exceeds the strike price. When the strike price exceeds the market price, no liability is recorded as the Company has no obligation to exercise the options.
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:
12
15
The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term borrowings, as reflected in the condensed 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.
S&W received a $6.0 million note receivable due from Shell in connection with the Vision Bioenergy partnership transaction (see Note 7). The note, which is due in February 2024, was initially recorded at its $5.7 million present value discounted at a rate of 4.4%, which is our estimated discount rate for similar instruments. The receivable balance is being accreted to the full receivable amount on a straight-line basis over the remaining receivable term due to its short-term maturity. The receivable balance was $5.9 million at September 30, 2023.
Also in conjunction with the Vision Bioenergy partnership transaction, S&W received a one-time option, or Purchase Option, exercisable at any time on or before the fifth anniversary of the closing of the partnership transaction, to repurchase a 6% membership interest from Shell. The option repurchase prices range between approximately $7.1 and $12.0 million, depending on the date on which such purchase is completed. The Purchase Option was valued at $0.7 million using a lattice option valuation model. The valuation model incorporated significant, unobservable inputs including a discounted cash flow model based on management projections of future Vision Bioenergy results and an estimate of the current per share value of Vision Bioenergy shares. In the model, the estimate of the current per share value was discounted to account for lack of control and marketability, which were considered to be part of the unit of account given the restrictions of the limited liability company agreement that governs the ownership rights of the members. Other unobservable inputs included the risk-free rates and the estimated future stock volatility based on the historical stock price volatilities of other market participants. A full fair value analysis will be performed at each fiscal year-end or when there is an indication that there may be an impairment to the valuation. Management will estimate and adjust the balance for interim periods. A fair value analysis was performed as of June 30, 2023, which resulted in no material adjustment to the fair value. No indicators have been identified for the three months ended September 30, 2023 to suggest any material change in the fair value of the purchase option. As such, there is no indication of impairment for the three months ended September 30, 2023.
Quantitative information about Level 3 fair value measurement is as follows:
|
| Fair Value at 9/30/23 |
|
| Valuation Technique |
| Unobservable Input |
| Range | |
Purchase Option |
| $ | 695,000 |
|
| Option Model |
| Risk-free rate |
| 3.8% - 4.9% |
|
|
|
|
|
|
| Stock price volatility |
| 60% - 65% | |
|
|
|
|
|
|
| Lack of control premium |
| 13% | |
|
|
|
|
|
|
| Lack of marketability premium |
| 30% |
Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as follows:
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of September 30, 2023 Using: |
| ||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||
Foreign exchange contract liability |
| $ | — |
|
| $ | 1,421,980 |
|
| $ | — |
|
| $ | — |
|
| $ | 887,316 |
|
| $ | — |
|
Contingent consideration obligations |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||
Note receivable due from Shell |
|
| — |
|
|
| 5,910,628 |
|
|
| — |
| ||||||||||||
Vision Bioenergy interest purchase option |
|
| — |
|
|
| — |
|
|
| 695,000 |
| ||||||||||||
Total |
| $ | — |
|
| $ | 1,421,980 |
|
| $ | — |
|
| $ | — |
|
| $ | 6,797,944 |
|
| $ | 695,000 |
|
|
| Fair Value Measurements as of |
|
| Fair Value Measurements as of June 30, 2023 Using: |
| ||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||
Foreign exchange contract liability |
| $ | — |
|
| $ | 996,106 |
|
| $ | — |
|
| $ | — |
|
| $ | 849,033 |
|
| $ | — |
|
Contingent consideration obligations |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||
Note receivable due from Shell |
|
| — |
|
|
| 5,846,890 |
|
|
| — |
| ||||||||||||
Vision Bioenergy interest purchase option |
|
| — |
|
|
| — |
|
|
| 695,000 |
| ||||||||||||
Total |
| $ | — |
|
| $ | 996,106 |
|
| $ | — |
|
| $ | — |
|
| $ | 6,695,923 |
|
| $ | 695,000 |
|
NewRecent Adopted Accounting Pronouncements
Accounting pronouncements not yetEffective July 1, 2023, the Company adopted
In June 2016, the FASB issued Accounting Standards Update No. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently amended in November 2018 through ASU No. 201819, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2016-13”). The standard introduces newamended guidance for the accounting forrequires entities to estimate lifetime expected credit losses on instruments within its scope, includingfor trade and other receivables.receivables, including those that are current with respect to payment terms, along with other financial instruments which may result in earlier recognition of credit losses. The Company evaluated its existing methodology for estimating an allowance for doubtful accounts and the risk profile of its receivables portfolio and developed a model that includes the qualitative and forecasting aspects of the “expected loss” model under the amended guidance. In addition,determining the FASB subsequentlyCompany’s reserve for
13
credit losses, receivables are assigned an expected loss based on historical information adjusted for forward-looking economic factors. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements.
We have evaluated all other issued several amendments to this standard. Alland unadopted Accounting Standards Updates and believe the adoption of these standards are effective for the Company on July 1, 2023 and require adoption using a modified retrospective approach. The Company doeswill not expect application of these standards to have a significantmaterial impact on its resultsour condensed consolidated statements of operations, comprehensive income, balance sheets, or financial position.cash flows.
NOTE 3 - LEASES
S&WThe Company leases office and laboratory space, research plots and equipment used in connection with its operations under various operating and finance leases.
Right-of-use, or 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, or 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 months ended September 30, 2022. The Company’s lease agreements do not contain material restrictive covenants.
16
The components of lease assets and liabilities as of September 30, 20222023 and June 30, 2023 are as follows:
Leases |
| Balance Sheet Classification: |
|
|
| Balance Sheet Classification: |
| As of September 30, 2023 |
|
| As of June 30, 2023 |
| |||
Assets: |
|
|
|
|
| ||||||||||
Right of use assets - operating leases |
| Other assets |
| $ | 4,014,379 |
| |||||||||
|
|
|
| ||||||||||||
Right of use assets - finance leases |
| Other assets |
| $ | 2,021,839 |
|
| $ | 1,922,637 |
| $ | 1,759,094 |
| ||
Accumulated amortization - finance leases |
| Other assets |
|
| (1,244,915 | ) |
|
| (923,233 | ) |
| (1,088,294 | ) | ||
Right of use assets - finance leases, net |
| Other assets |
| $ | 776,924 |
| Other assets |
| 999,404 |
|
| 670,800 |
| ||
Right of use assets - operating leases | Right of use assets - operating leases |
| 3,340,651 |
|
| 2,983,303 |
| ||||||||
Total lease assets |
| $ | 4,791,303 |
| $ | 4,340,055 |
| $ | 3,654,103 |
| |||||
|
|
|
|
|
| ||||||||||
Liabilities: |
|
|
|
|
| ||||||||||
Current portion of long-term debt, net |
| Current portion of long-term debt, net |
| $ | 754,818 |
| |||||||||
Current lease liabilities |
| Accrued expenses and other current liabilities |
|
| 1,233,912 |
| |||||||||
Long-term debt, net, less current portion |
| Long-term debt, net, less current portion |
|
| 313,605 |
| |||||||||
Long-term lease liabilities |
| Other non-current liabilities |
|
| 3,019,216 |
| |||||||||
Current lease liabilities - finance leases | Current portion of long-term debt, net | $ | 470,364 |
| $ | 383,403 |
| ||||||||
Current lease liabilities - operating leases | Accrued expenses and other current liabilities |
| 1,365,679 |
|
| 1,335,568 |
| ||||||||
Long-term portion of lease liabilities - | Long-term debt, net, less current portion |
| 538,178 |
|
| 304,761 |
| ||||||||
Long-term portion of lease liabilities - | Other non-current liabilities |
| 2,247,363 |
|
| 1,949,604 |
| ||||||||
Total lease liabilities |
| $ | 5,321,551 |
| $ | 4,621,584 |
| $ | 3,973,336 |
|
The components of lease cost are as follows:
| Three Months Ended September 30, |
| |||||||||||||
Lease cost: |
| Income Statement Classification: |
| Three Months Ended |
| Income Statement Classification: | 2023 |
| 2022 |
| |||||
Operating lease cost |
| Cost of revenue |
| $ | 183,860 |
| Cost of revenue | $ | 175,666 |
| $ | 183,860 |
| ||
Operating lease cost |
| Selling, general and administrative expenses |
|
| 55,334 |
| Selling, general and administrative expenses |
| 41,052 |
|
| 55,334 |
| ||
Operating lease cost |
| Research and development expenses |
|
| 136,197 |
| Research and development expenses |
| 119,227 |
|
| 136,197 |
| ||
Finance lease cost |
| Depreciation and amortization and interest expense |
|
| 156,335 |
| Depreciation and amortization |
| 119,469 |
|
| 139,690 |
| ||
Finance lease cost | Interest expense, net |
|
| 12,117 |
|
| 16,645 |
| |||||||
Total lease costs |
| $ | 531,726 |
| $ | 467,531 |
| $ | 531,726 |
|
Maturities of lease liabilities as of September 30, 2023, are as follows:
|
| Operating Leases |
|
| Finance Leases |
| ||||||||||
2023 |
| $ | 1,055,368 |
|
| $ | 662,269 |
| ||||||||
2024 |
|
| 1,293,732 |
|
|
| 320,703 |
| ||||||||
Fiscal Year | Operating Leases |
| Finance Leases |
| ||||||||||||
Remainder of 2024 |
| 1,204,384 |
|
| 421,118 |
| ||||||||||
2025 |
|
| 923,092 |
|
|
| 97,299 |
|
| 1,165,074 |
|
| 382,219 |
| ||
2026 |
|
| 756,049 |
|
|
| 36,804 |
|
| 860,785 |
|
| 281,648 |
| ||
2027 |
|
| 477,765 |
|
|
| — |
|
| 511,682 |
|
| 43,874 |
| ||
After 2027 |
|
| 122,223 |
|
|
| — |
| ||||||||
2028 |
| 219,538 |
|
| — |
| ||||||||||
Thereafter |
| 39,472 |
|
| — |
| ||||||||||
Total lease payments |
|
| 4,628,229 |
|
|
| 1,117,075 |
|
| 4,000,935 |
|
| 1,128,859 |
| ||
Less: Interest |
|
| (375,101 | ) |
|
| (48,652 | ) |
| (387,893 | ) |
| (120,317 | ) | ||
Present value of lease liabilities |
| $ | 4,253,128 |
|
| $ | 1,068,423 |
| $ | 3,613,042 |
| $ | 1,008,542 |
|
14
The following are the weighted average assumptions used for lease term and discount rate and supplemental cash flow information related to leases as of September 30, 2022:2023:
Operating lease remaining lease term |
| 3.8 years |
| 3.2 years |
| |||
Operating lease discount rate |
|
| 4.24 | % |
| 4.99 | % | |
Finance lease remaining lease term |
| 1.3 years |
| 1.6 years |
| |||
Finance lease discount rate |
|
| 5.51 | % |
| 8.34 | % | |
Cash paid for operating leases |
| $ | 349,947 |
| $ | 324,292 |
| |
Cash paid for finance leases |
|
| 306,812 |
|
| $ | 156,304 |
|
17
NOTE 4 - REVENUE RECOGNITION
The Company derives its revenue primarily from 1) the sale of seed 2) millingproducts to seed distributors. From time to time, the Company utilizes excess capacity to provide conditioning, treating and packaging services to other seed producers. The Company also derives service revenue from its two partnerships, Trigall Australia and 3) product licensing agreements.Vision Bioenergy Oilseeds LLC, or Vision Bioenergy, by providing administrative services under a service level agreement.
The following table disaggregates the Company’s revenue by type of contract:
|
| Three Months Ended September 30, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Other product sales |
| $ | 19,837,787 |
|
| $ | 14,905,402 |
|
Services |
|
| 28,078 |
|
|
| 626,280 |
|
Total revenue |
| $ | 19,865,865 |
|
| $ | 15,531,682 |
|
Other Product Sales
Revenue from otherseed 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.products through the end of the current sales year (September through August). The products must be in an unopened and undamaged state and must be resalable in the sole opinion of the Company to qualify for a refund. Returns are only accepted on product received by August 31st of the current sales year. The Company uses a historical returns percentage to estimate the refund liability and records a reduction of revenue in the period in which revenue is recognized.
ServicesADAMA Collaboration Agreement
Revenue from milling, conditioning,The Company has a collaboration agreement, or Collaboration Agreement, with Makhteshim Agan of North America, Inc., or ADAMA, for the development and treatingcommercialization of the Double Team Sorghum Weed Control System, or DT, which is comprised of ADAMA’s ACCase herbicide used in concert with the Company’s ACCase tolerant ATS Sorghum product, Double Team Sorghum Cropping Solution. Both parties are active participants in the operating activities of the collaboration and packaging services, which are performedexposed to significant risks and rewards depending on the customer'scommercial success of the activities. Although the DT product is recognizeddesigned to be used as servicesa system, the Company sells only the Double Team sorghum seed portion of the system and recognizes the revenue consistent with its sales of other seed products.
Under the Collaboration Agreement, the Company will only label and promote ATS Sorghum products with ADAMA herbicides, while ADAMA will not sell ACCase herbicides for use on competing ATS Sorghum products. Further, all DT related trademarks are completedjointly owned by the Company and ADAMA, and each company grants the milledother a license free royalty to use these DT related trademarks. The parties have agreed to share the increase in commercial value created and realized by DT, or Total Value Share, with the Company and ADAMA taking 60% and 40% of the Total Share Value, respectively. The Total Share Value is the sum of (a) the increase in gross margin realized by the Company from sale of the Double Team Sorghum product, compared to margins realized by its non-ATS Sorghum products, (b) 100% of the ADAMA’s ACCase herbicide gross margin, and (c) any DT-related technology licensing fees received by either party. The Total Value Share is deliveredestimated each calendar quarter and a final net settlement is paid at the end of each market year, which ends in August. Estimated and final net settlement amounts to be paid or received are recorded as adjustments to cost of sales.
Double Team sorghum seed sales were $0.5 million and $0.0 million for the three months ended September 30, 2023 and 2022, respectively. The Total Value Share net settlement amounts pursuant to the customer.Collaboration Agreement were not significant for the three months ended September 30, 2023 and 2022.
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 30to 180 daysdays for export customers and end of sales season (September 30th)(October 31st) 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.
UnbilledThe Company had $203,222 in unbilled receivables represent contract assets that arise when the Company has partially performed under a contract but is not yet ableas of September 30, 2023 and June 30, 2023, which related 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,its service level agreement with Vision Bioenergy, 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 Vision Bioenergy on a quarterly basis.
three months15
before billing is expected to occur. Unbilled receivables are generally expected to be generated in the first and second fiscal quarters, and to be billed in the second, third and fourth fiscal quarters.
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 September 30, 2023 and 2022, the Company recognized a gain on amounts previously written off to bad debt expense of $165,342 and ($155,421.), respectively, associated with impaired accounts receivable.
Deferred revenue represents payments received from customers in advance of completion of the Company's performance obligation. During the three months ended September 30, 2023, the Company recognized $0.4 million of revenue that was included in the deferred balance as of June 30, 2023. During the three months ended September 30, 2022, the Company recognized $0.6 million of revenue that was included in the deferred balance as of June 30, 2022. During the three months ended September 30, 2021, the
Disaggregation of Revenue
The Company recognized $disaggregates revenue by type of contract and by destination country. The following table shows revenue from external sources by type of contract:
|
| Three Months Ended September 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Seed sales |
| $ | 16,041,958 |
|
| $ | 19,837,787 |
|
Services |
|
| 390,508 |
|
|
| 28,078 |
|
Total revenue |
| $ | 16,432,466 |
|
| $ | 19,865,865 |
|
0.2 millionThe following tables show revenue and percentage of revenue that was included in the deferred balance as of June 30, 2021. from external sources by destination country:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
Saudi Arabia |
| $ | 4,359,730 |
|
|
| 27 | % |
| $ | 5,173,664 |
|
|
| 26 | % |
United States |
|
| 3,014,244 |
|
|
| 18 | % |
|
| 2,261,007 |
|
|
| 11 | % |
Australia |
|
| 2,006,197 |
|
|
| 12 | % |
|
| 2,585,832 |
|
|
| 13 | % |
South Africa |
|
| 1,932,333 |
|
|
| 12 | % |
|
| 316,266 |
|
|
| 2 | % |
Mexico |
|
| 1,562,814 |
|
|
| 9 | % |
|
| 2,723,203 |
|
|
| 14 | % |
Sudan |
|
| 1,421,527 |
|
|
| 9 | % |
|
| 796,883 |
|
|
| 4 | % |
Libya |
|
| 1,072,800 |
|
|
| 7 | % |
|
| 2,998,047 |
|
|
| 15 | % |
Pakistan |
|
| 583,132 |
|
|
| 4 | % |
|
| 821,620 |
|
|
| 4 | % |
Uruguay |
|
| 244,818 |
|
|
| 1 | % |
|
| 214,518 |
|
|
| 1 | % |
Jordan |
|
| 84,771 |
|
|
| 0 | % |
|
| — |
|
|
| 0 | % |
Other |
|
| 150,100 |
|
|
| 1 | % |
|
| 1,974,825 |
|
|
| 10 | % |
Total revenue |
| $ | 16,432,466 |
|
|
| 100 | % |
| $ | 19,865,865 |
|
|
| 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
16
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
During the fourth quarter of the fiscal year ended June 30, 2022, the Company had a sustained decline in market valuation of its common stock, thereby triggering a potential indicator of goodwill impairment. As a result, the Company initiated a goodwill impairment test for the year ended June 30, 2022.
The Company compared the carrying value of its invested capital to estimated fair values at June 30, 2022. The Company estimated the fair value using the market approach and a control premium (based on management’s best estimate) was added.
18
Upon completing the impairment test, the Company determined that the estimated fair value of invested capital was less than the carrying value by approximately 3%, thus indicating an impairment. The Company recognized a goodwill impairment charge of $1.5 million for the year ended June 30, 2022, which represented the entire goodwill balance prior to the impairment charge.
The following table summarizes the activity of goodwill for the three months ended September 30, 2022 and the year ended June 30, 2022, respectively.
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at |
|
| Additions |
|
| Impairment |
|
| Currency Translation Adjustment |
|
| Balance at |
| |||||
Goodwill |
| $ | 1,651,634 |
|
| $ | — |
|
| $ | (1,548,324 | ) |
| $ | (103,310 | ) |
| $ | — |
|
For the year ended June 30, 2022, the Company determined there was no impairment on its intangible assets.
Intangible assets consist of the following:
|
| Balance at |
|
| Additions |
|
| Amortization |
|
| Currency Translation Adjustment |
|
| Balance at |
|
| Balance at |
|
| Other Additions and Disposals |
|
| Amortization |
|
| Currency Translation Adjustment |
|
| Balance at |
| ||||||||||
Intellectual property |
| $ | 21,650,534 |
|
| $ | — |
|
| $ | (346,229 | ) |
| $ | — |
|
| $ | 21,304,305 |
| ||||||||||||||||||||
Trade name |
| $ | 1,084,791 |
|
| $ | — |
|
| $ | (49,481 | ) |
| $ | (11,783 | ) |
| $ | 1,023,527 |
|
|
| 880,933 |
|
|
| — |
|
|
| (48,248 | ) |
|
| (3,790 | ) |
|
| 828,895 |
|
Customer relationships |
|
| 5,499,815 |
|
|
| — |
|
|
| (89,285 | ) |
|
| (269,916 | ) |
|
| 5,140,614 |
|
|
| 4,968,675 |
|
|
| — |
|
|
| (86,755 | ) |
|
| (120,682 | ) |
|
| 4,761,238 |
|
Non-compete |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
GI customer list |
|
| 42,983 |
|
|
| — |
|
|
| (1,791 | ) |
|
| — |
|
|
| 41,192 |
|
|
| 35,819 |
|
|
| — |
|
|
| (1,791 | ) |
|
| — |
|
|
| 34,028 |
|
Supply agreement |
|
| 775,241 |
|
|
| — |
|
|
| (18,908 | ) |
|
| — |
|
|
| 756,333 |
|
|
| 699,608 |
|
|
| — |
|
|
| (18,908 | ) |
|
| — |
|
|
| 680,700 |
|
Grower relationships |
|
| 1,331,581 |
|
|
| — |
|
|
| (26,352 | ) |
|
| — |
|
|
| 1,305,229 |
|
|
| 1,226,175 |
|
|
| — |
|
|
| (26,352 | ) |
|
| — |
|
|
| 1,199,823 |
|
Intellectual property |
|
| 23,035,925 |
|
|
| — |
|
|
| (346,704 | ) |
|
| — |
|
|
| 22,689,221 |
| ||||||||||||||||||||
License agreement |
|
| 1,986,598 |
|
|
| — |
|
|
| (40,531 | ) |
|
| (112,436 | ) |
|
| 1,833,631 |
| ||||||||||||||||||||
Internal use software |
|
| 338,893 |
|
|
| — |
|
|
| (16,944 | ) |
|
| — |
|
|
| 321,949 |
|
|
| 271,115 |
|
|
| — |
|
|
| (16,944 | ) |
|
| — |
|
|
| 254,171 |
|
|
| $ | 34,095,827 |
|
| $ | — |
|
| $ | (589,996 | ) |
| $ | (394,135 | ) |
| $ | 33,111,696 |
|
| $ | 29,732,859 |
|
| $ | — |
|
| $ | (545,227 | ) |
| $ | (124,472 | ) |
| $ | 29,063,160 |
|
|
| Balance at |
|
| Additions |
|
| Amortization |
|
| Currency Translation Adjustment |
|
| Balance at |
|
| Balance at |
|
| Other Additions and Disposals |
|
| Amortization |
|
| Currency Translation Adjustment |
|
| Balance at |
| ||||||||||
Intellectual property |
| $ | 23,035,925 |
|
| $ | — |
|
| $ | (1,385,391 | ) |
| $ | — |
|
| $ | 21,650,534 |
| ||||||||||||||||||||
Trade name |
| $ | 1,310,489 |
|
| $ | — |
|
| $ | (203,009 | ) |
| $ | (22,689 | ) |
| $ | 1,084,791 |
|
|
| 1,084,791 |
|
|
| — |
|
|
| (196,627 | ) |
|
| (7,231 | ) |
|
| 880,933 |
|
Customer relationships |
|
| 6,302,591 |
|
|
| — |
|
|
| (373,393 | ) |
|
| (429,383 | ) |
|
| 5,499,815 |
|
|
| 5,499,815 |
|
|
| — |
|
|
| (353,000 | ) |
|
| (178,140 | ) |
|
| 4,968,675 |
|
Non-compete |
|
| 5,058 |
|
|
| — |
|
|
| (5,058 | ) |
|
| — |
|
|
| — |
| ||||||||||||||||||||
GI customer list |
|
| 50,146 |
|
|
| — |
|
|
| (7,163 | ) |
|
| — |
|
|
| 42,983 |
|
|
| 42,983 |
|
|
| — |
|
|
| (7,164 | ) |
|
| — |
|
|
| 35,819 |
|
Supply agreement |
|
| 850,874 |
|
|
| — |
|
|
| (75,633 | ) |
|
| — |
|
|
| 775,241 |
|
|
| 775,241 |
|
|
| — |
|
|
| (75,633 | ) |
|
| — |
|
|
| 699,608 |
|
Grower relationships |
|
| 1,436,988 |
|
|
| — |
|
|
| (105,407 | ) |
|
| — |
|
|
| 1,331,581 |
|
|
| 1,331,581 |
|
|
| — |
|
|
| (105,406 | ) |
|
| — |
|
|
| 1,226,175 |
|
Intellectual property |
|
| 24,427,857 |
|
|
| — |
|
|
| (1,391,932 | ) |
|
| — |
|
|
| 23,035,925 |
| ||||||||||||||||||||
In process research and development |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
License agreement |
|
| 2,340,269 |
|
|
| — |
|
|
| (172,004 | ) |
|
| (181,667 | ) |
|
| 1,986,598 |
|
|
| 1,986,598 |
|
|
| (1,885,907 | ) |
|
| (75,610 | ) |
|
| (25,081 | ) |
|
| — |
|
Internal use software |
|
| 406,670 |
|
|
| — |
|
|
| (67,777 | ) |
|
| — |
|
|
| 338,893 |
|
|
| 338,893 |
|
|
| — |
|
|
| (67,778 | ) |
|
| — |
|
|
| 271,115 |
|
|
| $ | 37,130,942 |
|
| $ | — |
|
| $ | (2,401,376 | ) |
| $ | (633,739 | ) |
| $ | 34,095,827 |
|
| $ | 34,095,827 |
|
| $ | (1,885,907 | ) |
| $ | (2,266,609 | ) |
| $ | (210,452 | ) |
| $ | 29,732,859 |
|
Amortization expense totaled $589,996545,227 and $604,489589,996 for the three months ended September 30, 20222023 and 2021,2022, respectively.
Estimated aggregate remaining amortization is as follows:
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| Thereafter |
| ||||||
Amortization expense |
| $ | 1,856,468 |
|
| $ | 2,298,113 |
|
| $ | 2,267,090 |
|
| $ | 2,181,123 |
|
| $ | 2,130,239 |
|
| $ | 22,378,663 |
|
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| 2028 |
|
| Thereafter |
| ||||||
Amortization expense |
| $ | 2,179,262 |
|
| $ | 2,139,453 |
|
| $ | 2,025,950 |
|
| $ | 1,921,798 |
|
| $ | 1,864,508 |
|
| $ | 18,932,189 |
|
1917
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment were as follows:
| As of |
|
| As of |
| |||||||||||
|
| As of |
|
| As of |
|
| September 30, 2023 |
|
| June 30, 2023 |
| ||||
Land and improvements |
| $ | 2,243,972 |
|
| $ | 2,265,087 |
|
| $ | 929,091 |
|
| $ | 939,089 |
|
Buildings and improvements |
|
| 8,065,798 |
|
|
| 8,119,960 |
|
|
| 3,328,790 |
|
|
| 3,356,755 |
|
Machinery and equipment |
|
| 14,931,729 |
|
|
| 14,972,462 |
|
|
| 12,539,138 |
|
|
| 12,667,858 |
|
Vehicles |
|
| 1,073,704 |
|
|
| 1,085,342 |
|
|
| 674,732 |
|
|
| 605,891 |
|
Leasehold improvements |
|
| 552,810 |
|
|
| 552,810 |
|
|
| 552,810 |
|
|
| 552,810 |
|
Construction in progress |
|
| 39,473 |
|
|
| 110,107 |
|
|
| 256,574 |
|
|
| 177,538 |
|
Total property, plant and equipment |
|
| 26,907,486 |
|
|
| 27,105,768 |
|
|
| 18,281,135 |
|
|
| 18,299,941 |
|
Less: accumulated depreciation |
|
| (10,703,052 | ) |
|
| (10,234,099 | ) |
|
| (8,511,913 | ) |
|
| (8,217,773 | ) |
Property, plant and equipment, net |
| $ | 16,204,434 |
|
| $ | 16,871,669 |
|
| $ | 9,769,222 |
|
| $ | 10,082,168 |
|
Depreciation expense totaled $606,748404,326 and $570,510606,748 for the three months ended September 30, 20222023 and 2021,2022, respectively.
NOte 7 - investments
Shell Partnership
The terms and conditions of the Contribution and Membership Interest Purchase Agreement, or Purchase Agreement, with Shell relating to the February 6, 2023 partnership for the development and production of sustainable biofuel feedstocks through Vision Bioenergy are presented in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. No new activity occurred during the three months ended September 30, 2023. Activity in the period consisted of the recording of the Company's 34% share of Vision Bioenergy's loss for the period, which is recorded to Equity in loss of equity method investees, net of tax in the condensed consolidated statements of operations.
Per the Purchase Agreement, in February 2024, Shell will be required to pay an additional $6.0 million to the Company, subject to adjustment in certain circumstances. The Purchase Agreement provides that this required payment could be decreased by up to $4.5 million if (i) certain key personnel transferred to Vision Bioenergy, or Transferred Personnel, are no longer employed by Vision Bioenergy on February 6, 2024 and (ii) the Company or Vision Bioenergy, as applicable, fail to replace such Transferred Personnel with personnel of reasonably similar qualifications within 90 days of the preceding event. The Company’s management deemed that the full $6.0 million payment from Shell to the Company was realizable due to the high likelihood that the Transferred Personnel would remain employed for the first year, or, in any event, could be replaced within 90 days. The fair value of the full amount of this payment, based on the discounted value of the payment as of September 30, 2023, was $5.9 million, which was recorded to Notes receivable, net on the condensed consolidated balance sheets.
The summarized unaudited balance sheet presented below reflects the financial information of Vision Bioenergy as of September 30, 2023:
|
| As of September 30, 2023 (Unaudited) |
| |
Cash |
| $ | 6,079,478 |
|
Other current assets |
|
| 1,798,566 |
|
Fixed assets |
|
| 15,232,881 |
|
Intangible assets |
|
| 18,116,986 |
|
Goodwill |
|
| 11,742,900 |
|
Other assets |
|
| 235,271 |
|
TOTAL ASSETS |
| $ | 53,206,082 |
|
Current liabilities |
|
| 1,619,917 |
|
Long-term liabilities |
|
| 159,304 |
|
Equity |
|
| 51,426,861 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 53,206,082 |
|
18
The summarized unaudited income statement presented below reflects the financial information of Vision Bioenergy for the three months ended September 30, 2023:
| Three Months Ended September 30, 2023 (Unaudited) |
| ||
Revenue |
| $ | 110,900 |
|
Gross profit (loss) |
|
| (549,607 | ) |
Loss from operations |
|
| (2,432,762 | ) |
Net loss |
|
| (2,362,135 | ) |
Trigall Australia Partnership
The terms and conditions of the December 23, 2022 partnership agreement that the Company’s wholly owned subsidiary, S&W Seed Company Australia Pty Ltd, or S&W Australia, entered into with Trigall are presented in Note 7 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. The partnership, Trigall Australia, was created for the development and marketing of wheat varieties in Australia. No new activity occurred during the three months ended September 30, 2023. Activity in the period consisted of the recording of the Company's 20% share of Trigall Australia's net loss for the period, which is recorded to Equity in loss of equity method investees, net of tax in the condensed consolidated statements of operations. No capital contributions to Trigall were made in the three months ended September 30, 2023. Per the partnership agreement, S&W Australia is entitled to receive an additional $1.0 million in cash from Trigall to be paid in December 2023.
The following summarizes the carrying amount of the Company's equity method investments reflected in the condensed consolidated balance sheets:
|
| As of September 30, 2023 |
|
| As of June 30, 2023 |
| ||||||||||
|
| Carrying Amount |
|
| Economic Interest |
|
| Carrying Amount |
|
| Economic Interest |
| ||||
Vision Bioenergy |
| $ | 21,530,513 |
|
|
| 34 | % |
| $ | 22,307,486 |
|
|
| 34 | % |
Trigall Australia |
|
| 645,825 |
|
|
| 20 | % |
|
| 752,219 |
|
|
| 20 | % |
Total equity method investments |
| $ | 22,176,338 |
|
|
|
|
| $ | 23,059,705 |
|
|
|
|
NOTE 78 - DEBT
Total debt outstanding is presented on the Company's condensed consolidated balance sheetsheets as follows:
|
| As of |
|
| As of |
|
| As of September 30, 2023 |
|
| As of June 30, 2023 |
| ||||
Current portion of working capital lines of credit |
|
|
|
|
|
|
|
|
|
| ||||||
CIBC |
| $ | 15,778,748 |
|
| $ | 12,804,611 |
|
| $ | 15,294,047 |
|
| $ | 19,335,427 |
|
National Australia Bank Limited |
|
| 24,016,700 |
|
|
| 338,314 |
|
|
| 26,623,733 |
|
|
| 25,938,839 |
|
National Australia Bank Limited Overdraft Facility |
|
| 313,687 |
|
|
| — |
| ||||||||
Debt issuance costs |
|
| (310,759 | ) |
|
| (464,028 | ) |
|
| (324,150 | ) |
|
| (373,487 | ) |
Total current portion of working capital lines of credit, net |
|
| 39,798,376 |
|
|
| 12,678,897 |
|
|
| 41,593,630 |
|
|
| 44,900,779 |
|
Long-term portion of working capital lines of credit, less current portion |
|
|
|
|
|
| ||||||||||
National Australia Bank Limited |
|
| — |
|
|
| 21,703,286 |
| ||||||||
Total long-term portion of working capital lines of credit |
|
| — |
|
|
| 21,703,286 |
| ||||||||
Total working capital lines of credit, net |
| $ | 39,798,376 |
|
| $ | 34,382,183 |
|
| $ | 41,593,630 |
|
| $ | 44,900,779 |
|
Current portion of long-term debt |
|
|
|
|
|
|
|
|
|
| ||||||
Finance leases |
| $ | 754,818 |
|
| $ | 804,309 |
|
| $ | 470,364 |
|
| $ | 383,403 |
|
Debt issuance costs |
|
| (1,079 | ) |
|
| (1,828 | ) | ||||||||
Term Loan - National Australia |
|
| 324,550 |
|
|
| 344,400 |
|
|
| 2,252,250 |
|
|
| 2,318,050 |
|
Machinery & equipment loans - |
|
| 273,874 |
|
|
| 246,547 |
|
|
| 1,228,264 |
|
|
| 1,141,349 |
|
Machinery & equipment loans - Hyster |
|
| 11,278 |
|
|
| 11,834 |
|
|
| 23,990 |
|
|
| 11,902 |
|
Vehicle loans - Ford Credit |
|
| 40,341 |
|
|
| 40,341 |
|
|
| 70,365 |
|
|
| 51,278 |
|
Secured real estate note - Rooster |
|
| 6,726,376 |
|
|
| 6,905,995 |
| ||||||||
Debt issuance costs |
|
| (21,545 | ) |
|
| (34,815 | ) |
|
| (106,740 | ) |
|
| (97,221 | ) |
Total current portion, net |
|
| 8,108,613 |
|
|
| 8,316,783 |
|
|
| 3,938,493 |
|
|
| 3,808,761 |
|
Long-term debt, less current portion |
|
|
|
|
|
|
|
|
|
| ||||||
Finance leases |
|
| 313,605 |
|
|
| 500,723 |
|
|
| 538,178 |
|
|
| 304,761 |
|
Debt issuance costs |
|
| — |
|
|
| (21 | ) | ||||||||
Term loan - National Australia |
|
| 2,271,850 |
|
|
| 2,410,800 |
| ||||||||
Machinery & equipment loans - |
|
| 1,080,841 |
|
|
| 963,733 |
| ||||||||
Machinery & equipment loans - Hyster |
|
| 24,200 |
|
|
| 28,722 |
|
|
| — |
|
|
| 15,715 |
|
Vehicle loans - Ford Credit |
|
| 77,343 |
|
|
| 88,583 |
|
|
| 131,887 |
|
|
| 70,103 |
|
Secured real estate note - AgAmerica |
|
| 4,300,000 |
|
|
| 4,300,000 |
| ||||||||
Debt issuance costs |
|
| (183,366 | ) |
|
| (191,245 | ) | ||||||||
Total long-term portion, net |
|
| 3,767,839 |
|
|
| 3,992,540 |
|
|
| 4,786,699 |
|
|
| 4,499,334 |
|
Total debt, net |
| $ | 11,876,452 |
|
| $ | 12,309,323 |
|
| $ | 8,725,192 |
|
| $ | 8,308,095 |
|
2019
CIBC Loan Agreement
On December 26, 2019, the Company entered into the CIBC Loan Agreement with CIBC, which originally provided for a $35.0 million credit facility, or the CIBC Credit Facility. TheAs described in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023, the CIBC Loan Agreement was subsequently amended on several occasions, including on March 22, 2023, when the Company entered into the Amended CIBC Loan Agreement. During the three months ended September 22, 2020, December 30, 2020, May 13, 2021,2023, the Amended CIBC Loan Agreement was amended as follows:
The Amended CIBC Loan Agreement provides for a total revolving loan commitment of $21.0 million. The following is a summary of certain terms ofsenior secured credit facility, or the CIBC Loan Agreement and the CIBC Credit Facility:
The Amended CIBC Credit Facility generally establishesLoan Agreement contains certain customary representations and warranties, events of default, and affirmative and negative covenants, including limitations with respect to debt, liens, fundamental changes, asset sales, restricted payments, investments and transactions with affiliates, subject to certain exceptions. Amounts due under the Amended CIBC Loan Agreement may be accelerated upon an “event of default,” as defined in the Amended CIBC Loan Agreement, such as failure to pay amounts owed thereunder when due, breach of a borrowing basecovenant, material inaccuracy of upa representation, or occurrence of bankruptcy or insolvency, subject in some cases to 85%cure periods. Additionally, upon the occurrence and during the continuance of eligible domestic accounts receivable (90%an event of eligible foreign accounts receivable) plus updefault, CIBC may elect to increase the lesser of (i) 65% of eligible inventory, (ii) 85%existing interest rate on all of the appraised net orderly liquidation value of eligible inventory, and (iii) an eligible inventory sublimit of $12,000,000, in each case, subject to lender reserves.
The October 28, 2022 amendment to the CIBC Loan Agreement, among other things, increased (i) the total revolving loan commitment to $21.0 million from $18.0 million; and (ii) the borrowing base eligible inventory sublimit to $12.0 million from $9.0 million. As of September 30, 2022,2023, the Company was in compliance with all financial covenants contained in the CIBC Loan Agreement.
As of September 30, 2022,2023, there was approximately $2.22.6 million of unused availability underon the CIBC Credit Facility.
In November 2017, the Company entered into a secured note financing transaction, or the Loan Transaction, with Conterra forFacility, which had an available borrowing base of $12.517.9 million. With additional collateral consisting of accounts receivable and inventories, the available borrowing base as of September 30, 2023 could have increased by an additional $7.1 million, in gross proceeds. Pursuant to the Loan Transaction, the Company issued the Rooster Note to Conterra (which was subsequently endorsed to Rooster) in the principala maximum amount of $10.425.0 million, which bears interest at million.7.75% per annum and is secured by a first priority security interest in the property, plant and fixtures located at the Company's Nampa, Idaho production facilities and its Nampa, Idaho research facilities. In January 2021, the Company completed the sale of its Five Points facility which resulted in the Company making a one-time principal pay-down of $1,706,845 on the secured real estate note. The final semi-annual principal and interest payment of $454,185 was made on July 1, 2022. On September 22, 2022, the Company entered into an amendment to extend the Rooster Note’s maturity date to December 23, 2022. The Company is required to make a one-time final payment of approximately $6,969,668 on December 23, 2022. The Company was not in compliance with the total debt coverage ratio as of June 30, 2022; Rooster provided a waiver.
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:
Australian Facilities
S&W Australia hasAustralia’s debt facilities with National Australia Bank, or NAB, pursuantas amended to andate, or the NAB Finance Agreement, were amended and restated finance agreement, entered into oneffective October 24, 2022 asand further amended on October 25, 2022, oras described in Note 8 to the NAB Finance Agreement, all of which are guaranteed by S&W Seed Company up to a maximum of AUD $15,000,000 (USD $9,736,500 as ofConsolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. The Company's facilities during the three months ended September 30, 2022). As of September 30, 2022, approximately AUD $1.4 million (USD $0.9 million) remained available for use under the NAB Finance Agreement.
21
Pursuant to the amendments contained in the NAB Finance Agreement, among other things:2023 were as follows:
The consolidated debt facilities under the NAB Finance Agreement provide for up to an aggregate of AUD $49,000,000 (USD $31,805,900 as of September 30, 2022) of credit, and include the following:
37,483,26420
(USD $
S&W Australia was in compliance with all debt covenants underAfter the amendments, the consolidated debt facilities under its loan agreement withthe NAB Finance Agreement provide for up to an aggregate of AUD $49.0 (USD $31.5 million as of September 30, 2022. Pursuant2023) of credit. The NAB Finance Agreement is guaranteed by S&W Seed Company up to a maximum of AUD $15.0 million (USD $9.7 million as of September 30, 2023).
The October 2022 amendments to the NAB Finance Agreement in effect after September 30, 2022, the Company must comply withcontained an undertaking that requiresrequiring the Company to maintain a net related entity position of not more than AUD $25,000,00025.0. Accordingly, million, which was subsequently amended on February 8, 2023 to change the Company’s abilitynet related entity position requirement from AUD $25.0 million to comply with this undertaking is subject to fluctuations in foreign currency conversion rates, which are outsideUSD $18.5 million. As of the Company’s control. Due to recent fluctuations in foreign currency conversion rates,September 30, 2023, the Company is currently notwas in compliance with this undertaking. Although the Company is currently in discussions with NAB to revise how compliance with this undertaking is measured, there can be no assurances that the Company will be able to secure an amendment to theall NAB Finance Agreement covenants.
AgAmerica Note
As described in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023, the Company entered into a term loan agreement, or regain compliancethe AgAmerica Loan Agreement, with AgAmerica on June 20, 2023 pursuant to which AgAmerica issued a term loan of $4.3 million, or the AgAmerica Term Loan, to the Company and, as security therefor, the Company granted to AgAmerica a mortgage on approximately 31 acres of land located in Lubbock and Moore Counties, Texas, and certain personal property thereon. No changes to this undertaking.agreement have occurred during the three months ended September 30, 2023.
MFP Loan Agreement
On September 22, 2022, the Company’s largest stockholder, MFP Partners, L.P., or MFP, provided a letter of credit issued by JPMorgan Chase Bank, N.A. for the account of MFP, with an initial face amountMFP. This letter of $9,000,000,credit, or the MFP Letter of Credit, for the benefit of CIBC, as additional collateral to support the Company’s obligations under the CIBC Loan Agreement. The MFP Letter of Credit matureswas subsequently amended onJanuary 23, 2023, one month after the maturity date of the CIBC Loan Agreement. On October 28, 2022, MFP amendedNovember 30, 2022, and March 22, 2023, as described in Note 8 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023. Per the March 22, 2023 amendment, the face amount of the MFP Letter of Credit to increase the face amount from $9,000,000increased to $12,000,00013.0, in order million and extend the maturity date to provide collateral to support the Company's obligations under the CIBC Loan Agreement.September 30, 2024.
Concurrently, onOn September 22, 2022, the Company also entered into a Subordinate Loan and Security Agreement, or the MFP Loan Agreement, with MFP, pursuant to which any draw CIBC may make on the MFP Letter of Credit will be deemed to be a term loan advance made by MFP to the Company. The MFP Loan Agreement initially provided for up to $9,000,000 of term loan advances. On October 28, 2022,Concurrent with the MFP Loan Agreement was amended to increase the maximum amount of term loan advances availableMarch 22, 2023 amendment to the Company under the MFP Loan Agreement from $9,000,000 to $12,000,000. As of September 30, 2022, no amounts were outstanding under the MFP Loan Agreement.
22
The MFP Loan Agreement will mature on November 30, 2025. Pursuant to the MFPCIBC Loan Agreement, the Company will payentered into a Third Amendment to Subordinate Loan and Security Agreement with MFP, aor MFP Amendment, to (i) increase the aggregate amount of cash advances permitted from $12.0 million to $13.0 million; (ii) increase the cash fee through the maturity date of thepayable to MFP Letter of Credit equal to 3.50% per annum on all amounts remaining undrawn under the MFP Letter of Credit.Creditfrom 3.50% to 4.25% per annum; (iii) provide for the issuance of the MFP Warrant to MFP (Note 10); and (iv) reflect the extension of the maturity date of the Letter of Credit to September 30, 2024. In the event any term advances are deemed made under the MFP Loan Agreement, such advances will bear interest at a rate per annum equal to term SOFR (with a floor of 1.25%) plus 9.25%, half50% of which will be payable in cash on the last day of each fiscal quarter and half50% of which will accrue as payment in kind interest payable on the maturity date, unless, with respect to any quarterly payment date, the Company elects to pay such interest in cash. As amended, the MFP Loan Agreement will mature on March 30, 2025.
The MFP Loan Agreement, as amended, includes customary affirmative and negative covenants and events of default. The MFP Loan Agreementdefault, and is secured by substantially all of the Company’s assets and is subordinated to the CIBC Loan Agreement. Upon the occurrence and during the continuance of an event of default, MFP may declare all outstanding obligations under the MFP Loan Agreement immediately due and payable and take such other actions as set forth in the MFP Loan Agreement.
On September 22, 2022, in connection with the Company's entry into the MFP Loan Agreement, the Company issued to MFP a warrant, or the MFP Warrant, to purchase 21500,000
shares
Maturities of the Company’s Common Stock, at an exercise price of $1.60 per share (subject to adjustment in connection with any stock dividends and splits, distributions with respect to common stock and certain fundamental transactions). The MFP Warrant will expire five years from the date of issuance. The $146,474 fair value of the warrant was determined using the Black-Scholes-Merton model and recorded in the consolidated statements of stockholders’ equity. The fair value of the MFP Warrant will be recognized as a component of interest expense over the term of the MFP Loan Agreement.Long-Term Debt
The annual maturities of short-term and long-term debt, excluding finance lease liabilities, are as follows:
Fiscal Year |
| Amount |
|
| Amount |
| ||
2023 |
| $ | 7,949,167 |
| ||||
2024 |
|
| 986,564 |
| ||||
Remainder of 2024 |
| $ | 3,557,278 |
| ||||
2025 |
|
| 683,719 |
|
|
| 78,701 |
|
2026 |
|
| 1,941,163 |
|
|
| 4,370,777 |
|
2027 |
|
| 156,501 |
| ||||
Thereafter |
|
| 181,962 |
| ||||
Total |
| $ | 11,899,076 |
|
| $ | 8,006,756 |
|
NOTE 89 - FOREIGN CURRENCY FORWARD CONTRACTS AND OPTIONS
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 $17,149,8688,337,155 aton September 30, 2022,2023, with maturities ranging from October 20222023 to June 2023January 2024.
The Company records an asset or liability on the condensed consolidated balance sheetsheets for the fair value of the foreign currency forward contracts. The foreign currency contract liabilities totaled $1,421,980887,316 atand $849,033 on September 30, 20222023 and foreign currency contract liabilities totaled $996,106 at June 30, 2022.2023, respectively. The Company recorded a loss on foreign exchange contractslosses of $58,268 and $503,985 and a loss on foreign exchangecurrency forward contracts of $238,803, for the three months ended September 30, 20222023 and 2021,2022, respectively, which are reflected in costwithin Cost of revenue.
NOTE 9 - COMMITMENTS AND CONTINGENCIESrevenue on the condensed consolidated statement of operations.
ContingenciesIn September 2023, the Company acquired foreign currency options with a total notional amount of $8,600,000
Based on information currently available, management is not aware of any other matters that would have a material adverse effect. The strike prices on the Company's financial condition, resultstransaction dates and as of operations or cash flows.September 30, 2023 were above the market price, so the options had no
Legal Matters intrinsic value. Option premiums of $5,553 are reflected within Prepaid expenses and other current assets on the condensed consolidated balance sheets as of September 30, 2023.
The Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty,Company's accounting policies for foreign currency contracts and regardless ofoptions are found in Note 2 under 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.section titled "Derivative Financial Instruments."
23
NOTE 10 – EQUITY
ATM Common Stock Sales
On September 23, 2020, the Company entered into an At Market Issuance Sales Agreement, or the ATM Agreement, with B. Riley Securities, Inc., or B. Riley, under which the Companyit may offer and sell from time to time, at its sole discretion, shares of its common stock having an aggregate offering price of up to $14.017.1 million through B. Riley as its sales agent. The Company agreed to pay B. Riley a commission of 3.5% of the gross proceeds of the sales price per share of any common stock sold through B. Riley under the ATM Agreement. For the year ended June 30, 2021, the Company received gross proceeds of approximately $10.9 million from the sale of 3,008,015 shares of its common stock pursuant to the ATM Agreement.
On September 27, 2021, the Company entered into an amendment to the ATM Agreement, under which the aggregate offering price was increased from $14.0 million to $17.1 million. For the three months ended September 30, 2021, the Company received gross proceeds of approximately $2,586 from the sale of 848 shares of its common stock pursuant to the ATM Agreement. No sales were made pursuant to the ATM Agreement during the three months ended September 30, 2022.
On May 17, 2022, the Company amended the ATM Agreement to increase thehave an aggregate offering price toof $24.6 million. As of
For the three months ended September 30, 2023 and 2022, the Company had $did 6.3no million remainingt sell any shares of its common stock pursuant to the ATM Agreement. The shares of common stock issuable under the ATM Agreement.Agreement were registered under the Securities Act pursuant to the Company’s Registration Statement on Form S-3 (File 333-248974), which ceased to be effective on November 2, 2023. The Company has elected to not renew the ATM agreement.
MFP Warrants
On October 14, 2021,September 22, 2022, the Company entered into a Securities PurchaseSubordinate Loan and Security Agreement, or the MFP Loan Agreement, with MFP, Partners, L.P., orpursuant to which any draw CIBC may make on the MFP Letter of Credit will be deemed to be a term loan advance made by MFP to the Company (see Note 8). Pursuant to the terms and conditions of the MFP Loan Agreement and subsequent amendments on October 28, 2022, December 22, 2022 and March 22, 2023, warrants to purchase a total of 2,633,400 shares of the Company’s common stock were issued to MFP in fiscal 2023. All warrants will expire five years from the date of issuance and have exercise prices ranging from $1.60 - $2.15 per share. The stated purchase prices of all of the MFP Warrants are subject to adjustment in connection with any stock dividends and splits, distributions with respect to common stock and certain fundamental transactions as described in the MFP Warrant. The MFP Warrants were valued using the Black-Scholes-Merton model as of the respective issue dates and recorded as financial commitment assets within Prepaid expenses and other current assets on the condensed consolidated balance sheets. The MFP Warrants financial commitment assets are amortized on a straight-line basis over the period from their initial issue dates through the end of the related MFP Letter of Credit commitment periods. During the three months ended September 30, 2023, an aggregate value of $212,873 was amortized as interest expense. For further details on the MFP Warrants, refer to Note 12 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended June 30, 2023.
22
MFP is the Company’s largest stockholder, Starlight 4, LLLP, an entity affiliated with Mark W. Wong,shareholder. One of the Company’s Chief Executive Officer and a member of its board of directors, Alan D. Willits, a member of its board of directors, and Charles B. Seidler and Robert Straus, each then a member of its board of directors, pursuant to which the Company sold and issued an aggregate of 1,847,343 shares of its common stock at a purchase price of $2.73 per share, for aggregate gross proceeds of approximately $5.0 million. Alexander C. Matina, a memberis Portfolio Manager of the Company’s board of directors, is Vice President of Investments ofMFP Investors LLC, the general partner of MFP.
NOTE 11 - 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, or as amended and/or restated from time to time, the 2009 Plan. The 2009 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 2009 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 December 2018 and January 2019, the Company's board of directors and stockholders, respectively, approved the 2019 Equity Incentive Plan, or the 2019 Plan, as a successor to and continuation of the 2009 Plan. In October 2020 and December 2020, the Company’s board of directors and stockholders approved, respectively, the amendment to the 2019 Plan to increase the number of shares available for issues as grants and awards by 4,000,000 shares. 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, as amended, will not exceed 8,243,790 shares, which is the sum of (i) 4,000,000 new shares, (ii) 2,750,000 additional shares that were reserved as of the effective date of the 2019 Plan, (iii) 350,343 shares (the number of unallocated shares that were available for grant under the 2009 Plan as of January 16, 2019, the effective date of the 2019 Plan), and (iv) 1,143,447 shares, which is the number of shares subject to outstanding stock awards granted under the 2009 Plan that on or after the effective date of the 2019 Plan may expire or terminate for any reason prior to exercise or settlement, are forfeited because of the failure to meet a contingency or condition required to vest such shares or otherwise return to us, or are reacquired, withheld or not issued to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award.
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.
24
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.Options
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:
|
| |||
|
|
| ||
|
|
| ||
|
|
| ||
|
|
|
During the three months ended September 30, 20222023 and 2021,2022, the Company did not grant options to its directors, certain members of the executive management team and other employees.
A summary of stock option activity for the three months ended September 30, 20222023 and the year ended June 30, 20222023 is presented below:
|
| Number |
|
| Weighted - |
|
| Weighted- |
|
| Aggregate |
|
| Number of |
|
| Weighted - |
|
| Weighted- |
|
| Aggregate |
| ||||||||
Outstanding at June 30, 2021 |
|
| 3,776,568 |
|
| $ | 2.65 |
|
|
| 8.0 |
|
| $ | 3,962,766 |
| ||||||||||||||||
Granted |
|
| 994,725 |
|
|
| 2.63 |
|
|
|
|
|
|
| ||||||||||||||||||
Exercised |
|
| (38,774 | ) |
|
| 2.33 |
|
|
|
|
|
|
| ||||||||||||||||||
Canceled/forfeited/expired |
|
| (95,419 | ) |
|
| 2.82 |
|
|
|
|
|
|
| ||||||||||||||||||
Outstanding at June 30, 2022 |
|
| 4,637,100 |
|
|
| 2.64 |
|
|
| 6.6 |
|
|
| — |
|
|
| 4,637,100 |
|
| $ | 2.64 |
|
|
| 6.6 |
|
| $ | — |
|
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
| 1,389,675 |
|
|
| 1.25 |
|
|
|
|
|
|
| ||||
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
| (2,100 | ) |
|
| 0.95 |
|
|
|
|
|
|
| ||||
Canceled/forfeited/expired |
|
| (125,307 | ) |
|
| 2.62 |
|
|
|
|
|
|
|
|
| (947,707 | ) |
|
| 2.84 |
|
|
|
|
|
|
| ||||
Outstanding at September 30, 2022 |
|
| 4,511,793 |
|
|
| 2.64 |
|
|
| 5.8 |
|
|
| — |
| ||||||||||||||||
Outstanding at June 30, 2023 |
|
| 5,076,968 |
|
| $ | 2.23 |
|
|
| 7.1 |
|
| $ | 292,079 |
| ||||||||||||||||
Granted |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||||||||||||||||||
Exercised |
|
| — |
|
|
| — |
|
|
|
|
|
|
| ||||||||||||||||||
Canceled/forfeited/expired |
|
| (281,601 | ) |
|
| 2.52 |
|
|
|
|
|
|
| ||||||||||||||||||
Outstanding at September 30, 2023 |
|
| 4,795,367 |
|
| $ | 2.21 |
|
|
| 7.2 |
|
| $ | 203,538 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Options vested and exercisable at September 30, 2022 |
|
| 3,527,758 |
|
| $ | 2.68 |
|
|
| 5.1 |
|
| $ | — |
| ||||||||||||||||
Options vested and expected to vest as of |
|
| 4,507,581 |
|
|
| 2.64 |
|
|
| 5.8 |
|
|
| — |
| ||||||||||||||||
Options vested and exercisable at September 30, 2023 |
|
| 3,668,546 |
|
| $ | 2.40 |
|
|
| 6.7 |
|
| $ | 82,412 |
| ||||||||||||||||
Options vested and expected to vest at September 30, 2023 |
|
| 4,787,384 |
|
| $ | 2.21 |
|
|
| 7.2 |
|
| $ | 201,954 |
|
There were no options granted for the three months ended September 30, 2022. At2023. On September 30, 2022,2023, the Company had $796,441668,860 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the S&W Seed Company 2009 Equity Incentive Plan and the S&W Seed Company 2019 Equity Incentive Plan, or 2019 Plan, which will be recognized over the weighted average remaining service period of 1.721.33 years. The Company settles employee stock option exercises with newly issued shares of common stock.
Restricted Stock Units
During the three months ended September 30, 2023, the Company issued 24,076 restricted stock units to its directors, certain members of the executive management team, other employees, and non-employee service providers. 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 three months ended September 30, 2023 totaled $29,373 and was based on the closing stock price on the date of grants. There were no restricted stock units granted during the three months ended September 30, 2022 and 2021.2022.
25
The Company recorded $173,994 and $171,524 of stock-based compensation expense associated with grants of restricted stock units during the three months ended September 30, 2022 and 2021, respectively. A summary of activity related to non-vested restricted stock units is presented below:
|
| Number of |
|
| Weighted-Average |
|
| Weighted-Average |
| |||
Nonvested restricted units outstanding at June 30, 2022 |
|
| 267,919 |
|
| $ | 2.66 |
|
|
| 1.2 |
|
Granted |
|
| 534,628 |
|
|
| 1.14 |
|
|
| 1.5 |
|
Vested |
|
| (353,649 | ) |
|
| 2.22 |
|
|
| — |
|
Forfeited |
|
| (8,750 | ) |
|
| 2.50 |
|
|
| — |
|
Nonvested restricted units outstanding at June 30, 2023 |
|
| 440,148 |
|
| $ | 1.17 |
|
|
| 1.4 |
|
Granted |
|
| 24,076 |
|
|
| 1.22 |
|
|
| 0.3 |
|
Vested |
|
| (58,100 | ) |
|
| 1.57 |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
Nonvested restricted units outstanding at September 30, 2023 |
|
| 406,124 |
|
| $ | 1.11 |
|
|
| 1.4 |
|
|
| Number of Nonvested |
|
| Weighted-Average |
|
| Weighted-Average |
| |||
Nonvested restricted units outstanding at June 30, 2021 |
|
| 361,570 |
|
| $ | 2.51 |
|
|
| 1.3 |
|
Granted |
|
| 304,421 |
|
|
| 2.78 |
|
|
| 2.4 |
|
Vested |
|
| (391,036 | ) |
|
| 2.62 |
|
|
| — |
|
Forfeited |
|
| (7,036 | ) |
|
| 2.35 |
|
|
| — |
|
Nonvested restricted units outstanding at June 30, 2022 |
|
| 267,919 |
|
|
| 2.66 |
|
|
| 1.2 |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
Vested |
|
| (30,332 | ) |
|
| 2.44 |
|
|
| — |
|
Forfeited |
|
| (8,750 | ) |
|
| 2.50 |
|
|
| — |
|
Nonvested restricted units outstanding at September 30, 2022 |
|
| 228,837 |
|
|
| 2.70 |
|
|
| 1.2 |
|
23
AtOn September 30, 2022,2023, the Company had $251,317231,808 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the weighted average remaining service period of 1.191.37 years.
At September 30, 2022, there were 2,691,979 shares available under the 2019 Plan for future grants and awards.Stock-based Compensation Expense
Stock-based compensation expense recorded for grants of stock options, restricted stock grants and restricted stock units for the three months ended September 30, 2023 and 2022 and 2021, totaled$456,112411,820 and $394,312456,112, respectively.
On September 30, 2023, there were 1,918,207 shares available under the 2019 Plan for future grants and awards.
NOTE 12 – SERIES B CONVERTIBLE PREFERRED STOCK
On February 18, 2022,The terms and conditions of the Company entered into a Securities Purchase Agreement, or the Purchase Agreement, with MFP, pursuant to which the Company sold and issued to MFP, in a private placement, 1,695 shares of itsCompany’s Series B Redeemable Convertible Non-Voting Preferred Stock, par value $0.001 per share, or the Series B Preferred Stock and an accompanying warrant orare presented in Note 14 to the Warrant, to purchase up to 559,350 shares ofConsolidated Financial Statements in the Company’s Common Stock at a combined unit price of $Annual Report on Form 10-K for the year ended June 30, 2023. 2,950No per share,issuances or the Stated Value, for aggregate gross proceeds of approximately $5.0 million.
The Warrant first becomes exercisable on the date that is six months after the date of issuance, at an exercise price of $5.00 per share (subject to adjustment in connection with any stock dividends and splits, distributions with respect to Common Stock and certain fundamental transactions as described in the Warrant) and will expire five years from the date it first becomes exercisable.
The Series B Preferred Stock is initially convertible into shares of Common Stock at the rate of 1,000 shares of Common Stock per shareconversions of Series B Convertible Preferred Stock at any time atoccurred during the optionthree months ended September 30, 2023. Activity in the period consisted of accrual of dividends and accretion of the holder of such shares, subject to the following limitations: (i) unless a holder was a stockholder of the Company as of February 18, 2022 (in which case such limitation shall not apply), the Company shall not affect any conversion of Series B Preferred Stock to the extent that, after giving effect to an attempted conversion, such holder, together with its affiliates, would beneficially own a number of shares of Common Stock in excess of 4.99% of the total number of shares of Common Stock outstanding immediately after giving effect to the issuance of such shares, which limit may be decreased or increased (not to exceed 19.99%) upon written notice to the Company, with any increase not becoming effective until at least 61 days after such notice; (ii) a holder may not acquire shares of Common Stock upon conversion of Series B Preferred Stock if such conversion would result in the total number of shares of Common Stock issued or issuable upon conversion or exercise of the securities issued pursuant to the Purchase Agreement to exceed 7,777,652 shares, or 19.99% of the outstanding shares of Common Stock as of the date of the Purchase Agreement; and (iii) to the extent Nasdaq Listing Rule 5635(c) is applicable or deemed applicable to a holder, such holder may not acquire shares of Common Stock upon conversion of Series B Preferred Stock that would exceed the maximum number of all shares of Common Stock that could be issued by the Company to such holder without requiring stockholder approval pursuant to Nasdaq Listing Rule 5635(c). Upon receiving shareholder approval of a proposal to be submitted to the shareholders of the Company for the purpose of approving the transactions contemplated by the Purchase Agreement, pursuant to Nasdaq Listing Rules 5635(a), (c) and (d), the foregoing limitations in (ii) and (iii) above shall no longer have any force or effect.
A holder of Series B Preferred Stock is entitled to receive cumulative cash dividends of 5% per annum, payable semi-annually in arrearsdiscount on the last day of March and September of each calendar year. In lieu of paying such cash dividends, the Company may elect to add an amount to the Stated Value, provided that the dividend rate shall be 7% per annum, calculated semi-annually in arrears on the last day of March and September of each calendar year. A holder of Series B Preferred Stock is also entitled to receive any dividend declared and paid to holders of the Common Stock as if such Series B Preferred Stock had been converted into Common
26
Stock. In addition, a holder of Series B Preferred Stock is entitled to a liquidation preference equal to the greater of (i) the Stated Value, plus any cash dividends accrued but unpaid thereon, and (ii) the payment such holder would have received had the Series B Preferred Stock been converted into shares of Common Stock immediately prior to such liquidation event.
Unless prohibited by Nevada law governing distributions to stockholders, the Series B Preferred Stock is redeemable, at any time after August 18, 2025, upon written request from the holders of a majority of the outstanding shares of Series B Preferred Stock, at a price equal to the Stated Value, plus any cash dividends accrued but unpaid thereon.
The Series B Preferred Stock is non-voting except with respect to certain matters affecting the Series B Preferred Stock. In addition, the approval of a majority of the outstanding shares of Series B Preferred Stock is required if after February 18, 2022 the Company seeks to issue Common Stock, pursuant to the Sales Agreement, dated September 27, 2021, between the Company and B. Riley Securities, for cumulative gross proceeds in excess of $6.1 million.
Since the holder has the option to redeem their shares of Series B Preferred Stock at any time after August 18, 2025, the stock is considered contingently redeemable and, accordingly, is classified as temporary equity, net of the relative fair value assigned to the warrant of $361,729 recorded in the unaudited consolidated statement of stockholders’ equity as of September 30, 2022. Over the initial 42-month term the $4,638,521 relative fair value of the Series B Preferred Stock will be accreted to its redemption value of $5,000,250. Dividends will be accrued and recognized through retained earnings.Warrants.
The following summarizes changes to ourthe Series B Convertible Preferred Stock:
Balance at June 30, 2021 |
| $ | — |
|
Issuance of preferred stock |
|
| 4,638,521 |
|
Dividends accrued |
|
| 127,541 |
|
Accretion of discount for warrants |
|
| 38,757 |
|
Balance at June 30, 2022 |
|
| 4,804,819 |
|
Issuance of preferred stock |
|
| — |
|
Dividends accrued |
|
| 88,223 |
|
Accretion of discount for warrants |
|
| 25,838 |
|
Balance at September 30, 2022 |
| $ | 4,918,880 |
|
27
Balance at June 30, 2022 |
| $ | 4,804,819 |
|
Dividends accrued |
|
| 365,979 |
|
Accretion of discount for warrants |
|
| 103,350 |
|
Balance at June 30, 2023 |
| $ | 5,274,148 |
|
Dividends accrued |
|
| 94,207 |
|
Accretion of discount for warrants |
|
| 25,838 |
|
Balance at September 30, 2023 |
| $ | 5,394,193 |
|
NOTE 13 – SUBSEQUENT EVENTS- NON-CASH ACTIVITIES FOR STATEMENTS OF CASH FLOWS
The below table represents supplemental information to the Company’s condensed consolidated statements of cash flows for non-cash activities during the three months ended September 30, 2023 and 2022, respectively.
|
| Three Months Ended September 30, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Non-cash investing activities: |
|
|
|
|
|
| ||
ROU assets financed by lease liabilities |
| $ | 938,003 |
|
| $ | 397,017 |
|
Non-cash financing activities: |
|
|
|
|
|
| ||
Dividends accrued for participating securities |
|
| 94,207 |
|
|
| 88,223 |
|
Accretion of discount for Series B preferred stock warrants |
|
| 25,838 |
|
|
| 25,838 |
|
Warrants issued for financial commitment asset |
|
| — |
|
|
| 146,474 |
|
On October 24 2022, S&W Australia and NAB entered into an amended and restated finance agreement, pursuant to which, among other things:
The NAB Finance Agreement, inclusive of the October 25, 2022 amendment, includes an undertaking that requires the Company to maintain a net related entity position of not more than AUD $25,000,000. Accordingly, the Company’s ability to comply with this undertaking is subject to fluctuations in foreign currency conversion rates, which are outside of the Company’s control. Due to recent fluctuations in foreign currency conversion rates, the Company is currently not in compliance with this undertaking. Although the Company is currently in discussions with NAB to revise how compliance with this undertaking is measured, there can be no assurances that the Company will be able to secure an amendment to the NAB Finance Agreement or regain compliance with this undertaking.
On October 28, 2022, the Company amended the CIBC Loan Agreement, which increased (i) the total revolving loan commitment provided under the CIBC Loan Agreement from $18,000,000 to $21,000,000 and (ii) the borrowing base eligible inventory sublimit from $9,000,000 to $12,000,000.
On October 28, 2022, MFP amended the MFP Letter of Credit to increase the face amount from $9,000,000 to $12,000,000, as additional collateral to support the Company’s obligations under the CIBC Loan Agreement.
Concurrently, on October 28, 2022, the Company amended the MFP Loan Agreement to increase the maximum amount of term loan advances available to the Company from $9,000,000 to $12,000,000. On October 28, 2022, in connection with the amendment to the MFP Loan Agreement, the Company issued to MFP a warrant, or the Additional MFP Warrant, to purchase 166,700 shares of the Company’s Common Stock, at an exercise price of $1.60 per share (subject to adjustment in connection with any stock dividends and splits, distributions with respect to common stock and certain fundamental transactions). The Additional MFP Warrant will expire five years from the date of issuance.
MFP is the Company’s largest shareholder. One of the Company’s directors, Alexander C. Matina, is Vice President and Portfolio Manager of MFP Investors LLC, the general partner of MFP.
28
Item 2. Management’s 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 condensed 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 condensed 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 under the heading “Forward-Looking Statements” in 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, 2022,2023, particularly in Part I, Item 1A., “Risk Factors.”
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 commercial market presence in sunflower, wheat and pasture seed 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 sell over 500 seed products in more than 40 countries. We maintain an active product pipeline and expect to introduce more than 20 new products during fiscal 2023.
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 and collaborations, including:
29
In 2019, we restructured our relationship with Corteva, under which, among other things:
Strategic Review
We recently undertook ahave maintained our strategic review of ourpath for operations and future growth opportunitiesin sorghum while continuing to determine areas we believe areexecute and refine our key centers of value includingfor our sorghum technology operations (led by Double Team™, our non-GMO herbicide tolerant sorghum solution), international forage operations, U.S.and pastures and alfalfa businesses. With grower adoption of our Double Team grain sorghum solution accelerating since its fiscal 2022 launch and the technological development of Double Team planned for forage operations and our specialty crops.
With respect to specialty crops,grain sorghum products in fiscal 2024, we intend to initially focus on stevia and camelina. We believe that an opportunity exists to bring to market new stevia varieties that can both meet consumer taste requirements and have yield quality that would enable farmers to profitably grow stevia in North and South America. We plan to leverage our proprietary stevia germplasm to form collaborations and commercial agreements with supply chain partners to create a U.S.-based stevia production industry for high-quality stevia sweetener with superior taste profiles that would supply major customers in the U.S. market, including pursuant to our previously announced U.S. stevia pilot production supply agreement with Ingredion. We also believe we have an opportunityare in a unique position to enterbe the camelina market as a seed andleading technology provider where we plan to work with large oil companies for biofuel production leveraging our capabilities in producing, processing, and packaging camelina.of this important global crop.
We have also begun workingcontinued to align our cost structure to support theseour key centers of value in order to drive the business towards profitability. We have decided to pause our development of stevia leaf and re-evaluate its longer-term profit opportunity with our partners. We have reduced obsolescence costs through improved life cycle management and SKU optimization efforts with the reduction of low margin forage lines and seed treatment offerings. In fiscal 2024, we have already recognized and expect to further recognize improvement in our seed cost position as additional operational efficiency plans are implemented and guided by best-in-class cost standards.
In fiscal 2023, we entered into a partnership with Equilon Enterprises LLC (dba Shell Oil Products, or Shell), Vision Bioenergy Oilseeds LLC, or Vision Bioenergy, that we believe will generate value while assessing other potential value-generating transactions and means to strengthenstrengthening our balance sheet. On May 11, 2022, weThis partnership intends to develop camelina and Trigall Genetics, a leader in transgenic wheat, announced that we have entered into preliminary, nonbinding discussion to potentially combine our respective wheat operations through a joint venture in Australia. While we believe this joint venture could be beneficial in a number of respects, thereother oilseed species from which oil and meal can be no assuranceextracted for future processing into animal feed, biofuels, and other bioproducts. With a limited supply of arable land, camelina provides a long-term opportunity of maximizing farmland food production. The partnership has either met or exceeded all initial cropping acre thresholds and expects to carry out initial grain production later this calendar year on the more than 7,000 acres of camelina planted. Shell is expected to buy all the grain that these preliminary, nonbinding discussions will resultVision Bioenergy produces through the offtake agreement that is in a consummated transaction.place.
In addition, we have begun implementing our plan to reduce annual operating expenses by approximately $5.0 million, including through efforts to streamline our European sunflower operations by closing our facilities in Hungary, which we estimate could result in operating expense reductions of approximately $700,000.
Global Economic Conditions
We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic events, such as the continued impact of the COVID-19 pandemic, the ongoing military conflict between Ukraine and Russia and related sanctions, the armed conflict in Sudan, the war between Israel and Hamas, uncertain market conditions, including higher inflation and supply chain disruptions, recent bank failures, and other global events, which have had and may continue to have an adverse impact on our business, operations and the markets and communities in which we, our partners and customers operate. The
In 2023, we experienced a lessening of the severity of these supply chain issues related to the COVID-19 pandemic, continuesthough continue to rapidly evolve and may cause further disruptionsexperience negative effects in the various markets in which we operate.
The COVID-19 pandemic has negatively impacted our operations and financial results. Beginning in 2021 and continuing into 2022, ongoing strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across the U.S. and globally, including inflation on many consumer products, labor shortages and demand outpacing supply.certain jurisdictions. We continue to work closely with our customers, business units, third party contractors and suppliers, and other external business partners to minimize the potential impact on our business.
As the COVID-19 pandemic continues to affect the areas in which we operate, we believe the outbreak has and will continue to have a negative impact on our sales, operating results and financial condition. The extent of the impact of the COVID-19 pandemic on our sales, operating results and financial condition will depend on certain developments, including the location, duration and spread of future outbreaks, and the outbreak, impact onresulting specific impacts felt by our customers, employees, and vendors, all of which are uncertain and cannot be predicted.
30
Following the recent invasion of Ukraine by Russia in early 2022, the U.S. and global financial markets experienced volatility, which has led to disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity globally. In response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social impact of the sanctions imposed on Russia and possible future punitive measures that may be implemented, as well as the counter measures imposed by Russia, in addition to the ongoing military conflict between Ukraine and Russia and related sanctions, which could conceivably expand into the surrounding region, remains uncertain; however, both the conflict and related sanctions have resulted and could continue to result in disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity on acceptable terms, in both Europe and globally, and has introduced significant uncertainty into global markets.
The armed conflict in Sudan, which began in April 2023, has disrupted our shipments to the country. We have shipped $1.4 million of our product to Sudan in the first quarter of fiscal 2024 and do not expect any additional sales to occur in fiscal 2024, although we will continue to monitor and assess conditions. Also, in Saudi Arabia, unregistered lower priced and lower quality European produced seed is currently being dumped into the country, which has created a short-term imbalance. We believe inventory levels will normalize following the quick flushing out of this seed and we are making the strategic decision not to discount our high value seed to compete with this
25
low-quality product. As a result although we have not been materially impactedof the Sudan geopolitical conflict and this short-term impact in Saudi Arabia, a significant amount of alfalfa orders were moved from the second half of fiscal 2023 to date,the first half of fiscal 2024.
Additionally, in October 2023, Hamas initiated an attack against Israel, resulting in a state of war. The conflict, and the potential escalation or expansion of the conflict, could result in sanctions, cause disruptions to global economic conditions and affect the stability of the Middle East region and our business including our ability to deliver seed and timely receive payment from customers, and access to capital could become adversely affected by the ongoing military conflict between Ukraine and Russia and related sanctions, particularly to the extent it escalates to involve additional countries, further economic sanctions or wider military conflict.in that region.
Our product revenue is predicated on our 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 our distribution and supply channels, or concerns about our ability to timely fulfill their orders. If our customers delay or decrease their orders due to potential disruptions in our distribution and supply channels, including as a result of the COVID-19 pandemic or other adverse geopolitical and macroeconomic events, this will adversely affect our product revenue.
During the fiscal year ended June 30, 20222023 and the three months ended September 30, 2022,2023, we experienced numerous logistical challenges due to limited availability of trucks for product deliveries, congestion at the ports, and overall rising costsvolatility of shipping and transportation costs. We expect these logistical challenges to persist throughout fiscal 2023,2024, which may, among other things, delay or reduce our ability to recognize revenues within a particular fiscal period and harm our results of operations.
The ultimate impact that COVID-19 and other adverse geopolitical and macroeconomic events will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic and any broad-based supply chain disruptions, labor shortages, rising levels of inflation and interest rates, tightening of credit markets or other developments resulting from the pandemic or recent geopolitical and macroeconomic events, as well as the economic recovery and actions taken in response to local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of those potential and evolving impacts to our business and condensed consolidated financial statements.
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 pasture seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into 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 potentialefforts. Potential sources of new revenue include expansion of novel, non-GMO product lines, potential entry into gene-edited product markets, potential entry into specialty crop markets, including stevia andsuch as biofuels, and potential additional strategic transactions.
Our revenue will fluctuate depending on the timing of orders from our customers and distributors and the extent to which markets are impacted by sources of instability and volatility in global markets and industries, including, among other things, the COVID-19 pandemic, the military conflict between Russia and Ukraine, the armed conflict in Sudan, the war between Israel and Hamas, supply chain issues and global inflation. Because some of our large customers and distributors order in bulk only one or two times per year, our product revenue can fluctuate significantly from period to period. Some of this fluctuation is offset by having operations in both the northern and southern hemispheres. In addition, due to the numerous logistical challenges we have experienced in our shipping and distribution networks resulting from current geopolitical and macroeconomic events, including the COVID-19 pandemic, our product revenue has fluctuated, and our ability to recognize revenues within a particular fiscal period has been impacted. We expect our product revenue will fluctuate from period to period as a result of the current geopolitical and macroeconomic conditions.
Our specialty crops, including our stevia breeding program and biofuels program, have yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various opportunities to monetize the results of
31
our research and development efforts. Such potential opportunities include possible collaborations, partnerships and/or joint ventures, licensing agreements and royalty-based agreements. For example, we entered into our Vision Bioenergy partnership with Shell in February 2023 in order to develop commercially viable camelina sativa and other oilseeds varieties that produce grain from which oil and meal can be extracted for future processing into biofuels, feed and other potential bioproducts. Although we have received upfront payments from Shell pursuant to the partnership and will be entitled to receive an additional payment from Shell upon the one-year anniversary of our entry into the partnership, there can be no assurance that this will generate any meaningful revenue.
26
Cost of Revenue and Gross Margin
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. Gross margin represents the profit remaining after deducting these costs from total revenue. As Double Team sorghum continues to gain market acceptance, we expect to see additional favorability in our gross margin.
Operating Expenses
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 expenses as much as is reasonably possible.
Research and Development Expenses
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, proprietary herbicide tolerance traits and improved safety and palatability in forage products. We expect our research and development expenses will 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 constructed 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 Pasture Genetics Ltd., or Pasture Genetics, in 2020, Chromatin Inc. in 2018 and from SV Genetics Pty Ltd in May 2016, using the straight-line method over the estimated useful life of the asset, consisting of periods of 3-3010 to 30 years for technology/IP/germplasm, 5-205 to 20 years for customer relationships and trade names and 3-2010 to 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 5-355 to 35 years for buildings, 2-202 to 20 years for machinery and equipment and 2-52 to 5 years for vehicles.
Other (Income) Expense
Other (income) expense consists primarily of foreign currency gainslosses, interest expense, interest expense resulting from the amortization of debt discount, and losses, change in contingent consideration obligationother income. Interest expense and interest expense in connection with- amortization of debt discount. Interest expensediscount primarily consists of interest costs related to outstanding borrowings on our working capital credit facilities and our financing with Conterra Agricultural Capital, LLC, and its affiliates, or Conterra.facilities. Amortization of the MFP Letter of Credit (as defined below) asset is also recorded to Interest expense - amortization of debt discount.
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. generally accepted accounting principles, or 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 condensed consolidated financial statements. As a result, our effective tax rate reflected in our condensed 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 condensed consolidated statements of operations. In the fourth quarterBased on projections of fiscal year 2017,taxable income, we recorded a valuation allowance against all of our deferred tax assets. The full valuation
32
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 do not believehad previously determined that it is more likely than not that ourthe deferred tax assets in the United States and South Africa will not be realized. We also previously determined that the deferred tax assets related to certain Australian intangible assets more likely than not would not be realized. Accordingly, a valuation allowance was recorded against the net deferred tax assets in the United States and South Africa and a partial valuation allowance was recorded to Australian deferred tax assets.
27
Results of Operations
Three Months Ended September 30, 20222023 Compared to the Three Months Ended September 30, 20212022
Revenue and CostThe following table presents our results of Revenueoperations for the periods indicated:
|
| Three Months Ended September 30, |
|
|
|
|
|
|
| |||||||||||||||
|
| 2023 |
|
| 2022 |
|
| Change |
| |||||||||||||||
|
| $ |
|
| % of |
|
| $ |
|
| % of |
|
| $ |
|
| % Change |
| ||||||
Revenue |
| $ | 16,432,466 |
|
|
| 100.0 | % |
| $ | 19,865,865 |
|
|
| 100.0 | % |
| $ | (3,433,399 | ) |
|
| (17.3 | )% |
Cost of revenue |
|
| 11,421,152 |
|
|
| 69.5 | % |
|
| 15,361,354 |
|
|
| 77.3 | % |
|
| (3,940,202 | ) |
|
| (25.7 | )% |
Gross profit |
|
| 5,011,314 |
|
|
| 30.5 | % |
|
| 4,504,511 |
|
|
| 22.7 | % |
|
| 506,803 |
|
|
| 11.3 | % |
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Selling, general and administrative expenses |
|
| 5,786,579 |
|
|
| 35.2 | % |
|
| 5,056,257 |
|
|
| 25.5 | % |
|
| 730,322 |
|
|
| 14.4 | % |
Research and development expenses |
|
| 1,086,512 |
|
|
| 6.6 | % |
|
| 1,515,380 |
|
|
| 7.6 | % |
|
| (428,868 | ) |
|
| (28.3 | )% |
Depreciation and amortization |
|
| 1,069,022 |
|
|
| 6.5 | % |
|
| 1,336,434 |
|
|
| 6.7 | % |
|
| (267,412 | ) |
|
| (20.0 | )% |
Loss (gain) on disposal of property, plant and equipment |
|
| (32,955 | ) |
|
| (0.2 | )% |
|
| (3,660 | ) |
|
| (0.0 | )% |
|
| (29,295 | ) |
|
| 800.4 | % |
Total operating expenses |
|
| 7,909,158 |
|
|
| 48.1 | % |
|
| 7,904,411 |
|
|
| 39.8 | % |
|
| 4,747 |
|
|
| 0.1 | % |
Loss from operations |
|
| (2,897,844 | ) |
|
| (17.6 | )% |
|
| (3,399,900 | ) |
|
| (17.1 | )% |
|
| 502,056 |
|
|
| (14.8 | )% |
Other (income) expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency loss |
|
| 372,189 |
|
|
| 2.3 | % |
|
| 190,915 |
|
|
| 1.0 | % |
|
| 181,274 |
|
|
| 95.0 | % |
Interest expense - amortization of debt discount |
|
| 455,574 |
|
|
| 2.8 | % |
|
| 283,643 |
|
|
| 1.4 | % |
|
| 171,931 |
|
|
| 60.6 | % |
Interest expense, net |
|
| 1,405,767 |
|
|
| 8.6 | % |
|
| 786,679 |
|
|
| 4.0 | % |
|
| 619,088 |
|
|
| 78.7 | % |
Other income |
|
| (37,560 | ) |
|
| (0.2 | )% |
|
| (44,270 | ) |
|
| (0.2 | )% |
|
| 6,710 |
|
|
| (15.2 | )% |
Loss before income taxes |
|
| (5,093,814 | ) |
|
| (31.0 | )% |
|
| (4,616,867 | ) |
|
| (23.2 | )% |
|
| (476,947 | ) |
|
| 10.3 | % |
Provision for (benefit from) income taxes |
|
| 1,207 |
|
|
| 0.0 | % |
|
| (101,664 | ) |
|
| (0.5 | )% |
|
| 102,871 |
|
|
| (101.2 | )% |
Loss before equity in net earnings of affiliates |
|
| (5,095,021 | ) |
|
| (31.0 | )% |
|
| (4,515,203 | ) |
|
| (22.7 | )% |
|
| (579,818 | ) |
|
| 12.8 | % |
Equity in loss of equity method investees, net of tax |
|
| 861,896 |
|
|
| 5.2 | % |
|
| — |
|
|
| — |
|
|
| 861,896 |
|
| - |
| |
Net loss |
| $ | (5,956,917 | ) |
|
| (36.3 | )% |
| $ | (4,515,203 | ) |
|
| (22.7 | )% |
| $ | (1,441,714 | ) |
|
| 31.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amount in column may not foot due to rounding
Revenue forThe discussion and analysis presented below is concerned with material changes in our results of operations between the three months ended September 30, 2022 was $19.9 million compared to $15.5 million for2023 and the three months ended September 30, 2021, representing an increase2022. All comparisons presented are with respect to the prior year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of $4.4Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC on September 27, 2023.
Revenue
The $3.4 million or 27.9%. The $4.4year-over-year decrease in revenue is due to a $2.9 million decrease in Middle East and North Africa region sales caused by management's decision to not discount non-dormant alfalfa as cheaper European seed disrupted the market, a $1.6 million decrease in Mexico non-dormant alfalfa sales due to wet conditions causing missed plantings, a $0.7 million decrease in Asia sales due to COVID using inventory carryover into fiscal 2024 leading to lost sales, and a $0.4 million decrease in Australia sorghum sales due to dry planting conditions. This decrease was offset by a $1.0 million increase in revenue forSouth Africa sorghum sales from the three months ended September 30, 2022 was primarily due to the increase in product revenue from alfalfa sales to the Middle East North Africa, or MENA, regionaddition of $5.0 million, a $1.5new customer, a $0.7 million increase in alfalfa sales delivered in the first quarter of fiscal 2024 that have historically been pushed into the second quarter, and a $0.5 million increase in Double Team sorghum salesrevenue.
Cost of Revenue and Gross Margin
Cost of revenue decreased year-over-year and the gross margin percentage improved from 22.7% to North America, partially offset30.5% compared to the prior year period. The margin improvement was driven by a decrease of $0.9 million4.0% increase in product revenue from pasture productour non-traited sorghum margins due to better inventory and sales to Australia,life cycle management, a decrease of $0.7 million of service revenue3.1% increase in global non-dormant alfalfa margins driven by pricing in the United Statesglobal market, and a decrease in product revenue from pasture1.6% increase related to Double Team margins due to increased sales and alfalfa sales to South Africa of $0.3 million.
Sales into international markets represented 79% and 76%improved margins of our total revenuehigh margin Double Team traited sorghum during the three months ended September 30, 2022 and 2021, respectively. Domestic revenue accounted for 21% and 24% of our total revenue for the three months ended September 30, 2022 and 2021, respectively. The decrease in domestic revenue as a percentage of total revenue is primarily attributable to the increase in alfalfa sales to the MENA region. In addition, wet conditions in Australia have led to a slow start in our domestic business.
The following table shows revenue from external sources by destination country:
|
| Three Months Ended September 30, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
Saudi Arabia |
| $ | 5,172,286 |
|
|
| 26 | % |
| $ | 3,467,210 |
|
|
| 22 | % |
United States |
|
| 4,260,754 |
|
|
| 21 | % |
|
| 3,665,328 |
|
|
| 24 | % |
Libya |
|
| 2,998,047 |
|
|
| 15 | % |
|
| 1,044,000 |
|
|
| 7 | % |
Australia |
|
| 2,557,732 |
|
|
| 13 | % |
|
| 3,434,005 |
|
|
| 22 | % |
Pakistan |
|
| 821,620 |
|
|
| 4 | % |
|
| 164,055 |
|
|
| 1 | % |
Sudan |
|
| 802,044 |
|
|
| 4 | % |
|
| 819,618 |
|
|
| 5 | % |
Algeria |
|
| 754,680 |
|
|
| 4 | % |
|
| — |
|
|
| — |
|
Mexico |
|
| 731,100 |
|
|
| 4 | % |
|
| 228,420 |
|
|
| 2 | % |
China |
|
| 468,500 |
|
|
| 2 | % |
|
| 473,125 |
|
|
| 3 | % |
Argentina |
|
| 362,978 |
|
|
| 2 | % |
|
| 350,839 |
|
|
| 2 | % |
Other |
|
| 936,124 |
|
|
| 5 | % |
|
| 1,885,082 |
|
|
| 12 | % |
Total revenue |
| $ | 19,865,865 |
|
|
| 100 | % |
| $ | 15,531,682 |
|
|
| 100 | % |
Cost of revenue of $15.4 million for the three months ended September 30, 20222023. This was equal to 77.3% of total revenue for the three months ended September 30, 2022, while the cost of revenue of $12.4 million for the three months ended September 30, 2021 was equal to 79.9% of total revenue for the three months ended September 30, 2021. Cost of revenue for the three months ended September 30, 2022 and 2021 included inventory write-downs of $0.5 million and $0.3 million, respectively. The write-down of inventory during the three months ended September 30, 2022 and 2021 related to certain inventory lots that deteriorated in quality and germination rates during the quarter. The write-down of inventory during the three months ended September 30, 2022 also related to amounts reserved for an estimated amount that is expected to deteriorate in quality and germination before being saleable.
Gross profit margin for the three months ended September 30, 2022 was 22.7% compared to 20.1% for the three months ended September 30, 2021. The increase in gross margin for the three months ended September 30, 2022, was primarily driven by higher margins on Alfalfa sales in the MENA region, partially offset by a 0.9% decrease in dormant alfalfa margins from conventional grain sorghum sales and inventory write-downs, as discussed above.in the U.S. domestic market.
Selling, General and Administrative Expenses
Selling, GeneralThe $0.7 million increase in selling, general and Administrative, or SG&A, expense foradministrative expenses is attributable to a $0.3 million increase in our bad debt allowance, a $0.3 million increase in accounting and legal fees related primarily to the three months ended September 30, 2022 totaled $5.1audit of the fiscal 2023 financial statements, a $0.2 million compared to $5.6increase in payroll and other employee compensation related expenses, a $0.1 million for the three months ended September 30, 2021.increase in advertising and marketing, and a $0.1 million increase in other personnel expenses. The $0.5cost increases were partially offset by a $0.2 million decrease in SG&A expense comparedexpenses attributable to the prior year-period was primarily dueservices provided to Vision Bioenergy and a $0.1 million decrease in our board of directors fees.
28
Research and Development Expenses
The year-over-year decrease in research and development expenses of $0.4 million is attributable to a $0.3 million decrease in salaries, wages, and wages,related employment expenses as a $0.3 million decrease in bad debt expenseresult of management's cost reduction efforts and a $0.2 million decrease in advertising and marketing expenses, offset by $0.1 million incurred for contract labor changes, $0.1 million in stock-based compensation expense, and $0.1 million in travel related expenses. As a percentage of revenue, SG&A expenses were 25.5% for the three months ended September 30, 2022, compared to 36.0% for the three months ended September 30, 2021.
33
Research and Development Expenses
Research and development expense for the three months ended September 30, 2022 totaled $1.5 million compared to $2.0 million for the three months ended September 30, 2021. The $0.5 million decrease in research and development expense compared to the prior year-period was primarily driven by a $0.2 million reduction of investment in our sunflower programs in Hungary, a $0.2 million reduction in salaries and wages,narrowed R&D program focus and a $0.1 million reductiondecrease in Unites StatesAustralia field trials. We expect that researchtrial and development costs will total approximately $5.4 million for the year ended June 30, 2023.outside service related expenses.
Depreciation and Amortization
Depreciation and amortization expense for eachexpenses decreased by $0.3 million following contributions of the three months ended September 30, 2022intangible and 2021 was $1.3 million. For each of the three months ended September 30, 2022 and 2021, depreciation and amortization expense consisted of $0.6 million of depreciation expense of fixed assets $0.6 million of amortization expense of intangible assetsto the Trigall and $0.1 million of amortization expense of finance leases.
Gain on Disposal of Property, Plant and Equipment
Gain on disposal of property, plant and equipment for the three months ended September 30, 2022 was $3,660 compared to $18,067 for the three months ended September 30, 2021.Vision Bioenergy partnerships.
Foreign Currency Loss
ForeignThe increase in foreign currency loss forwas attributable to fluctuations in foreign currency exchange rates between the three months ended September 30, 2022Australian dollar and 2021 was $0.2 million. Foreign currency losses and gains are primarily associated with S&W Australia and S&W Hungary, our wholly-owned subsidiaries.
Change in Contingent Consideration Obligation
The change in contingent consideration obligation for the three months ended September 30, 2022 was $0 compared to a $0.1 million benefit for the three months ended September 30, 2021. Contingent consideration obligation is considered a level 3 fair value financial instrument and is measured at each reporting period. The $0.1 million decrease in benefit to non-cash change in contingent consideration compared to the prior year-period was driven by the decrease in the estimated fair value of the contingent consideration obligation associated with our acquisition of Pasture Genetics in February 2020.U.S. dollar.
Interest Expense - Amortization of Debt Discount
Non-cashThe increased debt amortization of debt discount expense for the three months ended September 30, 2022 was $0.3 million comparedis due to $0.2 million for the three months ended September 30, 2021. The expense in both periods represents the amortization of the debt issuancefinancial commitment asset established in conjunction with the granted MFP Warrants in fiscal 2023 and increased amortization of costs associated with the completion of refinancing our working capital facilities, our secured property note and our equipment capital leases.CIBC Credit Facility.
Interest Expense, Net
Interest expense for the three months ended September 30, 2023 and 2022 totaledprimarily consisted of interest incurred on our working capital credit facilities with CIBC and NAB, the MFP Loan, and equipment capital leases. The $0.7 million compared to $0.5increase year over year in interest expense was primarily driven by increases in average borrowings and increased interest rates on the working capital credit facilities.
(Benefit from) Provision for Income Tax Benefit
The income tax provision (benefit) totaled $0.0 million for the three months ended September 30, 2021. Interest expense2023, compared to a ($0.1) million income tax provision for the three months ended September 30, 2022 and 2021 primarily consisted of interest incurred on the working capital credit facilities, the Rooster Note (as defined below), and equipment capital leases. The $0.2 million increase in interest expense for2022. Our effective tax rate was 0.0% during the three months ended September 30, 2022 was primarily driven by increases in S&W Australia’s average borrowings on the working capital credit facilities and increased interest rates.
Income Tax Benefit
Income tax benefit totaled $0.1 million for the three months ended September 30, 20222023 compared to $0.2 million for the three months ended September 30, 2021. Our effective tax rate was 2.2% for the three months ended September 30, 2022 compared to 2.5% for the three months ended September 30, 2021.2022. Our effective tax rate for the three months ended September 30, 20222023 was due primarily to the valuation allowance recorded against substantially all of our deferred tax assets. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operatingoperation results, with the exception of our operations in Australia. Our effective tax rate for the current quarter is primarily due to income tax expense
Equity in Loss of Equity Method Investees, Net of Tax
The loss on equity investments of $0.9 million was related to our foreign operationsproportionate share of loss from our 34% interest in Vision Bioenergy and state taxes.our 20% interest in Trigall Australia.
34
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 paidpay our North American contracted growers progressively, starting in the second fiscal quarter. In fiscal year 2022,2023, we paid our North American growers approximately 50% of amounts due in the fall of 20212022 and the balance was paid in the spring of 2022. This2023. We expect this payment cycle to our growers wasto be similar in fiscal year 2021, and we expect it to be similar for fiscal year 2023.2024. S&W Australia and Pasture Genetics, our Australia-based wholly-ownedwholly owned subsidiaries, have production cycles that are counter-cyclical to North America; however, thisthe timing of payments to Australian growers, which occurs in the second through fourth quarters, 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.these periods.
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 expenseexpenses and other current assets, accounts payable and our working capital lines of credit.
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.
Capital Resources and Material Cash Requirements
We are not profitable and have had negative cash flow from operations for the last several years.years, excluding the fiscal 2023 gain recognized in relation to the Vision Bioenergy partnership. To help fund our operations, we have relied on equity and debt financings, and
29
we will need to obtain additional funding to finance our operations in the future. Accordingly, we are actively evaluating financing and strategic alternatives, including debt and equity financings and potential sales of assets or certain lines of business.
We believe our existing cash and cash equivalents, accounts receivable,that cash flow from revenues derivedoperations, cash payments from sales of our products,Trigall and the undrawnShell in fiscal 2024 pursuant to their partnership agreements, where we are entitled to receive $1.0 million from Trigall in December 2023 and $6.0 million from Shell in February 2024, and availability under our existing debt facilities will be sufficient to meet our cash requirements over the next 12 months. We believe we willexpect to meet our longer-term expected future cash requirements and obligations beyond the next 12 months through a combination of existing cash and cash equivalents, accounts receivable, cash flow from operations, the undrawn availability under our debt facilities and issuances of equity securities or debt offerings.offerings, among other sources of capital. Our ability to fund longer-term operating needs will depend on our ability to generate sufficient cash flows through sales of our products, our ability to maintain compliance with, and secure additional funds from, our existing debt facilities, and our ability to access the capital markets, the impacts of adverse geopolitical and macroeconomic events, and other factors, including those discussed under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2022.2023, as filed with the SEC on September 27, 2023.
Below is a summary of material changes to our sources of capital during the three months ended September 30, 2023:.
CIBC Loan Agreement
Our Loan and Security Agreement with CIBC Bank USA, or CIBC, as amended to date, or the CIBC Loan Agreement, provides for a $25.0 million credit facility. The following amendments to the CIBC Loan Agreement occurred during the three months ended September 30, 2023:
All amounts outstanding under the Amended CIBC Loan Agreement, including, but not limited to, accrued and unpaid principal and interest due under the CIBC Credit Facility, will be due and payable in full on August 31, 2024.
NAB Finance Agreement
No amendments have occurred to the NAB Finance Agreement for the three months ended September 30, 2023.
MFP Loan Agreement
No amendments have occurred to the MFP Loan Agreement for the three months ended September 30, 2023.
Summary
The CIBC Loan Agreement (as defined below), with CIBC Bank USA, or CIBC, and the secured promissory note, or the Rooster Note, we executed in favor of Conterra in November 2017 and subsequently endorsed to Rooster Capital, LLC, or Rooster, which matures on December 23, 2022, and our debt facilities with National Australia Bank, or NAB contain various operating and financial covenants. Adverse geopolitical and macroeconomic events such as the continued impact of the COVID-19 pandemic, the ongoing conflict between Ukraine and Russia and related sanctions, and uncertain market conditions including higher inflation and supply chain disruptions, and other factors affecting our results of operations have increased the risk of our inability to comply with these covenants, which could result in acceleration of our repayment obligations and foreclosure on our pledged assets. In addition, these loan agreements contain cross-default provisions, such that certain defaults or breaches under any of our loan agreements may entitle CIBC or Rooster to invoke default remedies. We were not in compliance with certain covenants in the CIBC Loan Agreement and the Rooster NoteNAB Finance Agreement as of June 30, 2021, December 31, 2021, March 31, 2022, June 15, 2022 and June 30, 2022,2023 and were required to obtain waivers and/or amendments from CIBC and Rooster. In particular,NAB for such non-compliance. For the CIBC Loan Agreement as presently in effect requires us to maintain minimum liquidity of no less than $1,000,000 and the NAB Finance Agreement (as defined below) includes an undertaking that requires us to maintain a net related entity position of not more than AUD $25,000,000. Accordingly, our ability to comply with this undertaking is subject to fluctuations in foreign currency conversion rates, which are outside of our control. Due to recent fluctuations in foreign currency conversion rates,three months ended September 30, 2023, we are currently notwere in compliance with this undertaking. Although we are currently in discussions with NABall covenants related to revise how compliance with this undertaking is measured, there can be no assurances that we will be able to secure an amendment to the NAB Finance Agreement or regain compliance with this undertaking. We are actively pursuing refinancing of the CIBC Loan Agreement and the Rooster Note.NAB Finance Agreement.
35
Our future liquidity and capital requirements will be influenced by numerous factors, including:
30
We cannot assure you that we will be successful in renewing or refinancing our existing debt, raising additional capital, securing future waivers and/or amendments from CIBC, RoosterNAB, or our other lenders, or securing new financing. If we are unsuccessful in doing so, we may need to reduce the scope of our operations, repay amounts owing to our lenders, finance our cash needs through a combination of equity and debt financings, enter into collaborations, strategic alliances and licensing arrangements, sell certain assets or divest certain operations. We are also exploring strategic alternatives for underutilized assets, including plans to enter the camelina market as a seed and technology provider.
If we are required or desire to raise additional capital in the future, whether as a condition to loan refinancing or separately, such additional financing may not be available on favorable terms, or available at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest would be diluted and the terms of these securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and may be secured by all or a portion of our assets, and may be on terms less favorable than our existing loans. If we fail to obtain additional capital as and when required, such failure could have a material impact on our business, results of operations and financial condition.
As a result of the COVID-19 pandemic and actions taken to slow its spread, the ongoing military conflict between Russia and Ukraine, the armed conflict in Sudan, the war between Israel and Hamas, and other geopolitical and macroeconomic factors beyond our control, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. On March 10, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank. While we did not have deposits at Silicon Valley Bank, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. It is possible that further deterioration in credit and financial markets and confidence in economic conditions will occur. If equity and credit markets deteriorate, it may affect our ability to raise equity capital, borrow on our existing facilities, access our existing cash, or make any additional necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. In addition, while we are currently in compliance with our loan agreements or have received waivers of non-compliance, our ability to comply with the terms of our loan agreements has beencan be compromised in the future and could result in an event of default. If an event of default were to occur, our lenders could accelerate our repayment obligations or enforce their other rights under our agreements with them. Any such default may also require us to seek additional or alternative financing, which may not be available on commercially reasonable terms or at all.
Below is a summary of our material sources of capital in recent periods:
Debt Financings
Loan and Security Agreement with CIBC
On December 26, 2019, we entered into a Loan and Security Agreement with CIBC, or the CIBC Loan Agreement, which we amended on September 22, 2020, December 30, 2020, May 12, 2021, September 27, 2021, May 13, 2022, September 22, 2022 and October 28, 2022. As amended, the CIBC Loan Agreement provides for a $21.0 million credit facility, or the CIBC Credit Facility. As of September 30, 2022, approximately $2.2 million remained available for use under the CIBC Credit Facility.
The key terms of the CIBC Loan Agreement include the following:
36
The October 28, 2022 amendment to the CIBC Loan Agreement, among other things, increased (i) the total revolving loan commitment to $21,000,000 from $18,000,000 and (ii) the borrowing base eligible inventory sublimit to $12.0 million from $9.0 million. As of September 30, 2022, we were in compliance with all covenants contained in the CIBC Loan Agreement.
We cannot guarantee that we will be able to comply with our covenants in the CIBC Loan Agreement in the future, or secure additional waivers if or when required. If we are unable to comply with or obtain a waiver of any noncompliance under the CIBC Loan Agreement, CIBC could declare an event of default or require us to further renegotiate the CIBC Loan Agreement on terms that may be significantly less favorable to us, or we may be required to seek additional or alternative financing.
We are actively engaging with potential lenders to refinance the CIBC Loan Agreement prior to its maturity on December 23, 2022. However, we cannot assure you that we will succeed in securing such refinancing on commercially reasonable terms, if at all, and whether such terms may be more restrictive than the provisions governing the CIBC Loan Agreement. In addition, we cannot assure you that we will not experience an event of default or be required to further renegotiate with, or seek additional waivers from, CIBC, including on terms that may be significantly less favorable to us, before we are able to refinance the CIBC Loan Agreement, if ever. Any declaration by CIBC of an event of default could significantly harm our liquidity, financial condition, operating results, business, and prospects and cause the price of our securities to decline.
Debt Facilities with National Australia Bank
S&W Australia has debt facilities with NAB, pursuant to an amended and restated finance agreement, entered into on October 24, 2022, as amended on October 25, 2022, or the NAB Finance Agreement, all of which are guaranteed by S&W Seed Company up to a maximum of AUD $15,000,000 (USD $9,736,500 as of September 30, 2022). As of September 30, 2022, approximately AUD $1.4 million (USD $0.9 million) remained available for use under the NAB Finance Agreement.
Pursuant to the amendments contained in the NAB Finance Agreement, among other things:
The consolidated debt facilities under the NAB Finance Agreement provide for up to an aggregate of AUD $49,000,000 (USD $31,805,900 as of September 30, 2022) of credit, and include the following:
37
S&W Australia was in compliance with all debt covenants under its loan agreement with NAB in effect as of September 30, 2022. Pursuant to the NAB Finance Agreement, inclusive of the October 25, 2022 amendment, we must comply with an undertaking that requires us to maintain a net related entity position of not more than AUD $25,000,000. Accordingly, our ability to comply with this undertaking is subject to fluctuations in foreign currency conversion rates, which are outside of our control. Due to recent fluctuations in foreign currency conversion rates, we are currently not in compliance with this undertaking. Although we are currently in discussions with NAB to revise how compliance with this undertaking is measured, there can be no assurances that we will be able to secure an amendment to the NAB Finance Agreement or regain compliance with this undertaking.
Rooster Note
In November 2017, we entered into a secured note financing transaction with Conterra for $12.5 million in gross proceeds. Pursuant to this transaction, we issued a secured real estate note to Conterra in the principal amount of $10.4 million, which bears interest of 7.75% per annum and is secured by a first priority security interest in the property, plant and fixtures located at our Nampa, Idaho production facilities and our Nampa, Idaho research facilities, and was subsequently endorsed to Rooster Capital LLC, or Rooster. We may prepay the Rooster Note, in whole or in part, at any time. In January 2021, we completed the sale of our Five Points facility which resulted in us making a one-time principal pay-down of $1,706,845 on the Rooster Note. The final semi-annual principal and interest payment of $454,185 was made on July 1, 2022. On September 22, 2022, we entered into an amendment to extend the Rooster Note’s maturity date to December 23, 2022. We are required to make a one-time final payment of approximately $6,969,668 on December 23, 2022. We were not in compliance with our total debt coverage ratio as of June 30, 2022, but received a waiver from Rooster. We are actively engaging with Rooster and potential lenders to refinance the Rooster Note prior to the maturity date. However, we cannot assure you that we will succeed in securing such refinancing on commercially reasonable terms, if at all, and whether such terms may be more restrictive than the provisions governing the Rooster Note. In addition, we cannot assure you that we will not experience an event of default or be required to further renegotiate with, or seek additional waivers from, Rooster, including on terms that may be significantly less favorable to us, before we are able to refinance the Rooster Note, if ever.
MFP Loan Agreement
On September 22, 2022, our largest stockholder, MFP Partners, L.P., or MFP, provided a letter of credit, issued by JPMorgan Chase Bank, N.A. for the account of MFP, with a face amount of $9,000,000, or the MFP Letter of Credit, for the benefit of CIBC, as additional collateral to support our obligations under the CIBC Loan Agreement. The MFP Letter of Credit matures on January 23, 2023, one month after the maturity date of the CIBC Loan Agreement. On October 28, 2022, MFP amended the MFP Letter of Credit to increase the face amount from $9,000,000 to $12,000,000, in order to provide collateral to support our obligations under the CIBC Loan Agreement.
Concurrently, on September 22, 2022, we entered into a Subordinate Loan and Security Agreement, or the MFP Loan Agreement, with MFP, pursuant to which any draw CIBC may make on the MFP Letter of Credit will be deemed to be a term loan advance made by MFP to us. The MFP Loan Agreement will mature on November 30, 2025. Pursuant to the MFP Loan Agreement, we will pay to MFP a cash fee through the maturity date of the MFP Letter of Credit equal to 3.50% per annum on all amounts remaining undrawn under the MFP Letter of Credit. In the event any term advances are deemed made under the MFP Loan Agreement, such advances will bear interest at a rate per annum equal to term SOFR (with a floor of 1.25%) plus 9.25%, half of which will be payable in cash on the last day of each fiscal quarter and half of which will accrue as payment in kind interest payable on the maturity date, unless, with respect to any quarterly payment date, we elect to pay such interest in cash. On October 28, 2022, the MFP Loan Agreement was amended to increase the maximum amount of term loan advances available to us under the MFP Loan Agreement from $9,000,000 to $12,000,000. As of September 30, 2022, no amounts were outstanding under the MFP Loan Agreement.
38
The MFP Loan Agreement includes customary affirmative and negative covenants and events of default. The MFP Loan Agreement is secured by substantially all of our assets and is subordinated to the Loan Agreement with CIBC. Upon the occurrence and during the continuance of an event of default, MFP may declare all outstanding obligations under the MFP Loan Agreement immediately due and payable and take such other actions as set forth in the MFP Loan Agreement.
Equity Issuances
On September 23, 2020 we entered into an At Market Issuance Sales Agreement, as amended on September 27, 2021, the ATM Agreement, with B. Riley Securities, Inc., or B. Riley, under which we may offer and sell from time to time, at our sole discretion, shares of our common stock having an aggregate offering price of up to $17.1 million through B. Riley as our sales agent. We have agreed to pay B. Riley a commission of 3.5% of the gross proceeds of the sales price per share of any common stock sold through B. Riley under the ATM Agreement.
For the year ended June 30, 2022, we received gross proceeds of approximately $7.4 million from the sale of 3,655,136 shares of our common stock pursuant to the ATM Agreement. No sales were made during the three months ended September 30, 2022. As of September 30, 2022, we had $6.3 million of availability remaining under the ATM Agreement.
On October 14, 2021, we entered into a Securities Purchase Agreement, or the Purchase Agreement, with the purchasers named therein, or the Purchasers, pursuant to which we agreed to sell and issue to the Purchasers an aggregate of 1,847,343 shares of our common stock, at a purchase price of $2.73 per share, for aggregate gross proceeds of approximately $5.0 million.
The Purchasers included MFP, our largest stockholder, Starlight 4, LLLP, an entity affiliated with Mark W. Wong, our Chief Executive Officer and a member of our board of directors, Alan D. Willits, a member of our board of directors, and Charles B. Seidler and Robert Straus, each then a member of our board of directors. Alexander C. Matina, a member of our board of directors, is Vice President and Portfolio Manager of MFP Investments LLC, the general partner of MFP.
On February 18, 2022, we entered into a Securities Purchase Agreement with MFP, pursuant to which we sold and issued to MFP, in a private placement, 1,695 shares of our Series B Redeemable Convertible Non-Voting Preferred Stock, par value $0.001 per share, an accompanying warrant to purchase up to 559,350 shares of our common stock, at a combined unit price of $2,950 per share, for aggregate gross proceeds of approximately $5.0 million.
Summary of Cash Flows
The following table shows a summary of our cash flows for the three months ended September 30, 20222023 and 2021:2022:
|
| Three Months Ended September 30, |
|
| Three Months Ended September 30, |
| ||||||||||
|
| 2022 |
|
| 2021 |
|
| 2023 |
|
| 2022 |
| ||||
Cash flows from operating activities |
| $ | (7,319,995 | ) |
| $ | (5,484,482 | ) |
| $ | 794,678 |
|
| $ | (7,319,995 | ) |
Cash flows from investing activities |
|
| (147,716 | ) |
|
| (452,647 | ) |
|
| (146,778 | ) |
|
| (147,716 | ) |
Cash flows from financing activities |
|
| 6,421,764 |
|
|
| 4,831,688 |
|
|
| (3,099,971 | ) |
|
| 6,421,764 |
|
Effect of exchange rate changes on cash |
|
| 213,839 |
|
|
| (527,769 | ) |
|
| 40,700 |
|
|
| 213,839 |
|
Net decrease in cash and cash equivalents |
|
| (832,108 | ) |
|
| (1,633,210 | ) |
|
| (2,411,371 | ) |
|
| (832,108 | ) |
Cash and cash equivalents, beginning of period |
|
| 2,056,508 |
|
|
| 3,527,937 |
|
|
| 3,398,793 |
|
|
| 2,056,508 |
|
Cash and cash equivalents, end of period |
| $ | 1,224,400 |
|
| $ | 1,894,727 |
|
| $ | 987,422 |
|
| $ | 1,224,400 |
|
Operating Activities
For the three months ended September 30, 2023, operating activities provided $0.8 million in cash. Of this, the net loss excluding non-cash items as detailed on the statement of cash flows used $3.0 million in cash and changes in operating assets and liabilities as detailed on the statement of cash flows provided $3.8 million in cash. The increase in cash from changes in operating assets and liabilities was primarily driven by a $4.0 million increase in accounts payable, $1.7 million decrease in inventory, a $1.3 million increase in accrued expenses and other current liabilities, and a $0.6 million decrease in prepaid expenses and other current assets, offset by a $3.7 million
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increase in accounts receivable and a $0.1 million decrease in deferred revenue from prepayments for our fiscal 2024 U.S. domestic business.
For the three months ended September 30, 2022, operating activities used $7.3 million in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows used $1.6 million in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $4.5 million in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by $1.3 million in unrealized foreign currency gains, an increase in accounts receivable of $9.0 million and increased pre-paidprepaid expenses of $0.2 million offset by a decrease in inventory of $3.1 million, an increase in accounts payable and accruals of $1.2 million and an increase of $0.4 million in deferred revenue from prepayments for our fiscal 2023 United States domestic business.
ForInvesting Activities
Investing activities during the three months ended September 30, 2021, operating activities2023 used $5.5 million in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows used $3.9$0.1 million in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $1.5which resulted from $0.2 million in cash. The decrease in cash from changes in operating assetsadditions to property, plant and liabilities was primarily driven by increases in inventory of $1.0 millionequipment for our United States and accounts receivable of $3.2 million, partiallyAustralian facilities offset by increases$0.1 million in accounts payableproceeds from the disposal of $1.9 millionproperty, plant and accrued expensesequipment from our United States and other current liabilities of $0.5 million.
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Investing ActivitiesAustralian facilities.
Investing activities during the three months ended September 30, 2022 used $0.1 million in cash, which resulted from additions to property, plant and equipment for our United States and Australian facilities.
InvestingFinancing Activities
Financing activities during the three months ended September 30, 20212023, used $0.5$3.1 million in cash, which resultedconsisting of $2.9 million in net borrowings and repayments on the working capital lines of credit, $0.2 million in net proceeds from additions to property, plantsale of common stock, $0.1 million in debt issuance costs, and equipment consisting primarily$0.1 million in repayments of machinery and equipment purchases for our Penfield and Keith facilities in Australia.
Financing Activitieslong term debt, offset by $0.2 million from borrowings of long-term debt.
Financing activities during the three months ended September 30, 2022 provided $6.4 million in cash, consisting of net borrowings on the working capital lines of credit and borrowings of long-term debt of $7.0 million, partially offset by net repayments of long-term debt of $0.5 million.
Financing activities during the three months ended September 30, 2021 provided $4.8 million in cash, consisting of net borrowings on the working capital lines of credit and borrowings of long-term debt of $5.4 million, partially offset by net repayments of long-term debt of $0.5 million.
Inflation Risk
Inflationary pressures on labor and commodity price increases directly impacted our condensed consolidated results of operations during the three months ended September 30, 2022,2023 and we expect this to continue throughout the remainder of fiscal year 2023.2024. We attempt to manage any inflationary costs through selective price increases and changes in product mix, but rapidly changing inflationary pressures from global commodity prices and logistics could impact our costs of goods before pricing adjustments can be implemented. Delays in implementing such price increases, competitive pressures, and other factors may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through the product mix that we sell and selective price increases.
Critical Accounting Estimates
In preparing our unaudited condensed consolidated financial statements, we must select and apply various accounting policies in accordance with GAAP. Our most significant policies are discussed in Note 2 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements. In order to applyapplying our accounting policies, we often need to make estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. 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. These events could include a significant change in business climate, legal factors, a decline in operating performance or market capitalization or our common stock, competition, sale or disposition of a significant portion of a business, or other factors. We perform our annual or interim goodwill impairment test by comparing the estimated fair value of our one reporting unit with its carrying amount. If the estimated fair value of our reporting unit is less than the carrying amount, an impairment is indicated, requiring recognition of a goodwill impairment charge for the differential, not to exceed the total amount of goodwill allocated to the reporting unit.
We had a sustained decline in the market capitalization of our common stock during the fourth quarter of the fiscal year ended June 30, 2022, thereby triggering a potential indicator of goodwill impairment. As a result, we initiated a goodwill impairment test for the year ended June 30, 2022.
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We compared the carrying value of our invested capital to estimated fair values at June 30, 2022. We estimated the fair value using the market approach and a control premium (based on management’s best estimate) was added.
Upon completing the impairment test, we determined that the estimated fair value of invested capital was less than the carrying value by approximately 11%, thus indicating an impairment. We recognized a goodwill impairment charge of $1.5 million for the year ended June 30, 2022, which represented the entire goodwill balance prior to the impairment charge.
Our impairment assessment is sensitive to changes in control premium. For the June 30, 2022 assessment of our one reporting unit, if we assumed our selected control premium of 20% was increased to 24%, our goodwill impairment would have been approximately $1.4 million less.
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 estimated 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.
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Stock-Based Compensation
We account for stock-based compensation in accordance with FASB Accounting Standards Codification, or ASC, 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).
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).non-employees. 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 condensed 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 condensed 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.inventory and this may require us in some cases to make significant judgments. The factors include the age of inventory, the amount of inventory held by type, future demand for products and the
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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.
During the three months ended September 30, 2022, 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 September 30, 2022 was primarily related to certain sorghum, alfalfa, sunflower and other inventory lots that deteriorated in quality and germination rates during the period or has been reserved for as an estimated amount that is expected to deteriorate in quality and germination before being saleable.
During the three months ended September 30, 2021, we recognized a write-down of inventory in the amount of $0.3 million which is included in Cost of Revenue in the Consolidated Statement of Operations. The write-down of inventory during the three months ended September 30, 2021 was primarily related to certain sorghum and alfalfa inventory lots that deteriorated in quality and germination rates during the quarter.
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 typically disclosed under this item.
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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 September 30, 2022.2023. 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 September 30, 2022,2023, 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 significant 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.
From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.
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.
Not applicable.None.
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Item 6. Exhibits.
Exhibit No. | Description | |
| ||
| ||
3.2 | ||
3.3 | Registrant's | |
4.1 | ||
4.2 | ||
4.3 | ||
4.4(6) | Common Stock Purchase Warrant issued to MFP Partners, L.P. on September 22, 2022. | |
| ||
4.6(8) | Common Stock Purchase Warrant issued to MFP Partners, L.P. on December 22, 2022. | |
| ||
4.7(9) |
| |
10.1+(10) | Separation Agreement by and between the Registrant and Mark W. Wong, dated August 18, 2023. | |
10.2+(11) | ||
10.3(12) | ||
| ||
| ||
31.1 | ||
31.2 | ||
32.1* | ||
32.2* | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
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* 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.
45+ Indicates management contract or compensatory plan.
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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: November | By: | /s/ | |
| |||
Chief Financial Officer (On behalf of the registrant in her capacity as Principal Financial and Accounting Officer) |
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