| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The consolidated financial statements include the accounts of S&W Seed Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements were prepared in accordance with U.S. 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. The Company owns 50.1 % of SeedVision, which is a variable interest entity as defined in ASC 810-10, Consolidation, because no substantive equity contributions have been made to it, and SeedVision is being funded through advances, as needed, from its investors. The Company has concluded that it is the primary beneficiary of SeedVision because it has the power, through a tie-breaking vote on the board of directors, to direct the sales and marketing activities of SeedVision, which are considered to be the activities that have the greatest impact on the future economic performance of SeedVision. The Company owns 51.0 % of Sorghum Solutions South Africa, which is a variable interest entity as defined in ASC 810-10, Consolidation, because no substantive equity contributions have been made to it, and Sorghum Solutions South Africa is being funded through advances, as needed, from its investors. The Company has concluded that it is the primary beneficiary of Sorghum Solutions South Africa because it has the power, through a tie-breaking vote on the board of directors, to direct the sales and marketing activities of Sorghum Solutions South Africa, which are considered to be the activities that have the greatest impact on the future economic performance of Sorghum Solutions South Africa. Because the Company is its primary beneficiary, SeedVision's and Sorghum Solutions South Africa’s financial results are included in these financial statements. The Company recorded a combined $ 0.4 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. 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 revenue for the three months ended September 30, 2021. No customer accounted for more than 10 % 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 and Capital 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, 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 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 $ 1.2 million. The Company’s Loan and Security Agreement, dated December 26, 2019, or the 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, contain various operating and financial covenants (See Note 7). 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, the CIBC Loan Agreement as presently in effect requires the Company to maintain minimum liquidity of no less than $ 1,000,000 , 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 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. 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, 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, it may need to reduce the scope of its operations, repay amounts owing to its lenders or sell certain assets. The Company is also exploring strategic alternatives for underutilized assets, including plans to enter the camelina market as a seed and technology provider. These operating and liquidity factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. International Operations The Company translates its foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income (loss). Gains or losses from foreign currency transactions are included in the consolidated statement of operations, and included approximately $ 1.0 million benefit to cost of revenues and $ 0.2 million foreign currency loss to other (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. Cash and Cash Equivalents For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation. Accounts Receivable The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance for doubtful trade receivables was $ 80,743 and $ 233,927 at September 30, 2022 and June 30, 2022, respectively. Inventories Inventories consist of seed and packaging materials. Inventories are stated at the lower of cost or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories are valued as follows: Actual cost is used to value raw materials such as packaging materials, as well as goods in process. Costs for substantially all finished goods, which include the cost of carryover crops from the previous year, are valued at actual cost. Actual cost for finished goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing overhead costs based on normal capacity. The Company records abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) as current period charges and allocates fixed production overhead to the costs of finished goods based on the normal capacity of the production facilities. 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
Raw materials and supplies $ 3,138,774 $ 2,645,764
Work in progress 8,345,528 6,677,980
Finished goods 38,346,894 45,192,150
Inventories, net $ 49,831,196 $ 54,515,894 Property, Plant and Equipment Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5 - 35 years for buildings, 2 - 20 years for machinery and equipment, and 2 - 5 years for vehicles. Intangible Assets Intangible assets acquired in business acquisitions are reported at their initial fair value less accumulated amortization. Intangible assets are amortized using the straight-line method over the estimated useful life of the asset. Periods of 3 - 30 years for technology/IP/germplasm, 5 - 20 years for customer relationships and trade names and 3 - 20 for other intangible assets. The weighted average estimated useful lives are 26 years for technology/IP/germplasm, 20 years for customer relationships, 16 years for trade names, 18 years for license agreements and 19 years for other intangible assets. Goodwill The Company acquired Pasture Genetics in February 2020, and recorded goodwill of $ 1,452,436 as part 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 include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value is less than its carrying amount, management conducts a quantitative goodwill impairment test. The goodwill impairment test is used to identify potential impairment by comparing the fair value with its carrying amount, including goodwill. The Company uses market capitalization and an estimate of a control premium to estimate the fair value. If the fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill. The Company 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 . 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, 2022 and September 30, 2021 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 ’ s Series B Preferred Stock (as defined below) and the Warrant (as defined below) are participating securities because holders of such equity 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 Company in determining net loss attributable to common shareholders. During 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 undistributed earnings to allocate to the participating securities. Additionally, any accretion to the redemption value for the Series B Preferred Stock is 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. The calculation of Basic and Diluted EPS is shown in the table 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 ) The effects of employee stock options and restricted stock units are excluded because they would be anti-dilutive due to the Company’s net loss for the three months ended September 30, 2022 and 2021. Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. Refer to Note 5 for impairment discussion. Derivative Financial Instruments Foreign Exchange Contracts The Company’s subsidiary, S&W Australia, is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company at times manages through the use of foreign currency forward contracts. The Company has entered into certain derivative financial instruments (specifically foreign currency forward contracts), and accounts for these instruments in accordance with ASC Topic 815, “Derivatives and Hedging”, which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. The Company’s foreign currency contracts are not designated as hedging instruments under ASC 815; accordingly, changes in the fair value are recorded in current period earnings. Fair Value of Financial Instruments The Company discloses assets and liabilities that are recognized and measured at fair value, presented in a three-tier fair value hierarchy, as follows: • Level 1. Observable inputs such as quoted prices in active markets; • Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and • Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term borrowings, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments or interest rates commensurate with market rates. There have been no changes in operations and/or credit characteristics since the date of issuance that could impact the relationship between interest rate and market rates. Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as follows:
Fair Value Measurements as of
Level 1 Level 2 Level 3
Foreign exchange contract liability $ — $ 1,421,980 $ —
Contingent consideration obligations — — —
Total $ — $ 1,421,980 $ —
Fair Value Measurements as of
Level 1 Level 2 Level 3
Foreign exchange contract liability $ — $ 996,106 $ —
Contingent consideration obligations — — —
Total $ — $ 996,106 $ — New Accounting Pronouncements Accounting pronouncements not yet adopted In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments . The standard introduces new guidance for the accounting for credit losses on instruments within its scope, including trade and other receivables. In addition, the FASB subsequently issued several amendments to this standard. All of these standards are effective for the Company on July 1, 2023 and require adoption using a modified retrospective approach. The Company does not expect application of these standards to have a significant impact on its results of operations or financial position. |
