| NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES Basis of Presentation and Principles
of Consolidation The Company maintains its accounting records
on an accrual basis in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated financial statements include
the accounts of Seed Holding, LLC and its other wholly-owned subsidiaries, S&W Holdings, which owns 100% of S&W Australia,
and Stevia California, LLC. All significant intercompany balances and transactions have been eliminated. 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, derivative liabilities, contingencies and litigation. Significant estimates and
assumptions are also used to establish the fair value and useful lives of depreciable tangible and certain intangible assets, goodwill
as well as valuing stock-based compensation. Actual results may differ from those estimates and assumptions, and such results may
affect income, financial position or cash flows. Certain Risks and Concentrations The Company's revenue is principally derived
from the sale of alfalfa seed, the market for which is highly competitive. The Company depends on a core group of significant customers.
One customer accounted for 62% of its revenue for the year ended June 30, 2018. Two customers accounted for 58% of its revenue
for the year ended June 30, 2017. One customer accounted for 35% of the Company's
accounts receivable at June 30, 2018. Two customers accounted for 52% of the Company's accounts receivable at June 30, 2017. In addition, the Company sells a substantial
portion of its products to international customers. Sales to international markets represented 35% and 45% of revenue during the
years ended June 30, 2018 and 2017, respectively. The net book value of fixed assets located outside the United States was 20%
and 19% of total assets at June 30, 2018 and June 30, 2017, respectively. Cash balances located outside of the United States may
not be insured and totaled $369,803 and $192,879 at June 30, 2018 and June 30, 2017, respectively. The following table shows revenue from external
sources by destination country:
Years Ended June 30,
2018 2017
United States $ 41,662,556 65% $ 41,505,305 55%
Mexico 4,932,105 8% 4,749,315 6%
Sudan 3,178,039 5% 2,747,923 4%
Argentina 2,748,492 4% 2,881,050 4%
Peru 1,844,898 3% 1,230,999 2%
Saudi Arabia 1,461,368 2% 12,055,276 16%
Australia 1,242,957 2% 1,882,899 2%
Italy 938,252 1% 151,415 0%
Libya 936,423 1% 158,500 0%
South Africa 802,629 1% 1,190,789 2%
Other 4,337,791 8% 6,820,338 9%
Total $ 64,085,510 100% $ 75,373,810 100% International Operations The Company translates its foreign operations'
assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet
date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from
exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income.
Gains or losses from foreign currency transactions are included in the consolidated statement of operations. Revenue Recognition The Company derives its revenue primarily
from sale of seed and other crops and milling services. Revenue from seed and other crop sales is recognized when risk and title
to the product is transferred to the customer. The Company recognizes revenue from milling
services according to the terms of the sales agreements and when delivery has occurred, performance is complete and pricing is
fixed or determinable at the time of sale. Additional conditions for recognition of revenue
for all sales include the requirements that the collection of sales proceeds must be reasonably assured based on historical experience
and current market conditions, the sales price is fixed and determinable and that there must be no further performance obligations
under the sale. 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 $584,202 and $526,495 at June 30, 2018 and June 30, 2017, respectively. Inventories Inventories consist of seed and packaging
materials. Inventories are stated at the lower of cost
or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories are valued as follows:
Actual cost is used to value raw materials such as packaging materials, as well as goods in process. Costs for substantially all
finished goods, which include the cost of carryover crops from the previous year, are valued at actual cost. Actual cost for finished
goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing overhead costs based on
normal capacity. The Company records abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage)
as current period charges and allocates fixed production overhead to the costs of finished goods based on the normal capacity of
the production facilities. The Company's subsidiary, S&W Australia,
does not fix the final price for seed payable to its growers until the completion of a given year's sales cycle pursuant to its
standard contract production agreement. S&W Australia records an estimated unit price; accordingly, inventory, cost of revenue
and gross profits are based upon management's best estimate of the final purchase price to growers. Inventory is periodically reviewed to determine
if it is marketable, obsolete or impaired. Inventory that is determined to be obsolete or impaired is written off to expense at
the time the impairment is identified. Because the germination rate, and therefore the quality, of alfalfa seed improves over the
first year of proper storage, inventory obsolescence for alfalfa seed is not a material concern. The Company sells its inventory
to distributors, dealers and directly to growers. Components of inventory are:
June 30, June 30,
2018 2017
Raw materials and supplies $ 344,620 $ 266,551
Work in progress and growing crops 2,775,398 5,603,825
Finished goods 57,299,258 25,619,569
$ 60,419,276 $ 31,489,945 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 5-28 years for buildings, 3-20 years for
machinery and equipment, and 3-5 years for vehicles. Intangible Assets Intangible assets acquired in business acquisitions
are reported at their initial fair value less accumulated amortization. Intangible assets are amortized using the straight-line
method over the estimated useful life of the asset. Periods of 10-30 years for technology/IP/germplasm, 10-20 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, 18 years for customer relationships and 20 years for trade names and other intangible assets. Goodwill Goodwill originated from acquisitions of
Imperial Valley Seeds, Inc. ("IVS") and S&W Australia in fiscal year 2013, the acquisition of the alfalfa business
from DuPont Pioneer in fiscal year 2015 and the acquisition of assets of SV Genetics in fiscal year 2016. Goodwill is assessed
at least annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events
could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale
or disposition of a significant portion of the business, or other factors. The Company first assesses qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.
If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
management conducts a two-step quantitative goodwill impairment test. The first step of the goodwill impairment test is used to
identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The
Company uses market capitalization and an estimate of a control premium to estimate the fair value of its one reporting unit.
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired,
and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value,
the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step
of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
The Company performed a quantitative assessment of goodwill at June 30, 2018 and 2017 and determined that goodwill was not impaired. Equity Method Investments Investee companies that are not consolidated,
but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including,
among others, representation on the investee company's board of directors and ownership level, which is generally a 20% to 50%
interest in the voting securities of the investee company. Under the equity method of accounting, an investee company's accounts
are not reflected within the Company's consolidated balance sheets and statements of operations; however, the Company's share of
the earnings or losses of the investee company is reflected in the caption ``Loss on equity method investment'' in the consolidated
statements of operations. The Company's carrying value in an equity method investee company is included in the Company's consolidated
balance sheets. When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are
recorded in the Company's consolidated financial statements unless the Company guaranteed obligations of the investee company or
has committed additional funding. When the investee company subsequently reports income, the Company will not record its share
of such income until it equals the amount of its share of losses not previously recognized. Cost Method Investments Investee companies not accounted for under
the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method,
the Company's share of the earnings or losses of such investee companies is not included in the consolidated balance sheet or statement
of operations. However, impairment charges are recognized in the consolidated statement of operations. If circumstances suggest
that the value of the investee company has subsequently recovered, such recovery is not recorded. Research and Development Costs The Company is engaged in ongoing research
and development ("R&D") of proprietary seed and stevia varieties. All R&D costs must be charged to expense as incurred.
Accordingly, internal R&D costs are expensed as incurred. Third-party R&D costs are expensed when the contracted work has
been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or constructed
for R&D activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated
useful life of the asset. Income Taxes Deferred tax assets and liabilities are determined
based on differences between the financial statement and tax basis of assets and liabilities, as well as a consideration of net
operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected
to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that
is more likely than not to be realized. The Company's effective tax rate for the years ended June 30, 2018 and 2017 has been effected
by the valuation allowance on the Company's deferred tax assets. Net Income (Loss) Per Common Share Data
Basic net income (loss) per common share ("EPS"),
is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by adjusting both
the numerator (net income (loss)) and the denominator (weighted-average number of shares outstanding) for the dilutive effects
of potentially dilutive securities, including options, restricted stock awards, convertible debt and common stock warrants.
The
if-converted method is used for convertible debt. Under the if-converted method, interest expense recognized in the period on
the convertible debt is added to net income, and the number of shares that would be obtained upon conversion is added to the denominator. The
treasury stock method is used for common stock warrants, stock options, and restricted stock awards. Under this method,
consideration that would be received upon exercise (as well as remaining compensation cost to be recognized for awards not yet
vested) is assumed to be used repurchase shares of stock in the market, with net number of shares assumed to be issued added to
the denominator. The calculation of Basic and Diluted EPS is
shown in the table below. Classes of securities identified in the table with no adjustments in the calculation of Diluted EPS were
determined to be antidilutive for the applicable periods.
Years Ended
June 30,
2018 2017
Numerator:
Net loss $ (4,725,090) $ (11,822,042)
Numerator for basic EPS (4,725,090) (11,822,042)
Effect of dilutive securities:
Warrants - -
- -
Numerator for diluted EPS $ (4,725,090) $ (11,822,042)
Denominator:
Denominator for basic EPS -
weighted-average shares 22,481,491 17,718,057
Effect of dilutive securities:
Employee stock options - -
Employee restricted stock units - -
Warrants - -
Dilutive potential common shares - -
Denominator for diluted EPS -
adjusted weighted average shares
and assumed conversions 22,481,491 17,718,057
Basic EPS $ (0.21) $ (0.67)
Diluted EPS $ (0.21) $ (0.67) 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. 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. Derivative Liabilities The Company reviews the terms of the common
stock, warrants and convertible debt it issues to determine whether there are embedded derivative instruments, including embedded
conversion options and redemption options, which are required to be bifurcated and accounted for separately as derivative financial
instruments. 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. No assets or liabilities were valued at fair
value on a non-recurring basis as of June 30, 2018 or June 30, 2017. 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. The Company used a discounted cash flows approach to measure the fair value using Level 3 inputs. Assets and liabilities that are recognized
and measured at fair value on a recurring basis are categorized as follows:
Fair Value Measurements as of June 30, 2018 Using:
Level 1 Level 2 Level 3
Foreign exchange contract liability $ - $ 100,138 $ -
Contingent consideration obligations - - -
Total $ - $ 100,138 $ -
Fair Value Measurements as of June 30, 2017 Using:
Level 1 Level 2 Level 3
Foreign exchange contract asset $ - $ 166,629 $ -
Contingent consideration obligations - - 2,500,000
Derivative warrant liabilities - - 2,836,600
Total $ - $ 166,629 $ 5,336,600 During the year ended June 30, 2018, a change
in derivative warrant liability of $431,300 was recorded in earnings. Upon expiration of the round-down pricing protection on December
31, 2017, the warrants were reclassified from derivative warrant liabilities to equity. During the year ended June 30, 2018, there
was no change in the contingent consideration obligations. The DuPont contingent consideration was settled on December 1, 2017.
Refer to Note 5 for further discussion. Recently Adopted and Issued Accounting
Pronouncements In January 2017, the FASB issued Accounting
Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04") In August 2016, the FASB issued Accounting
Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15") In March 2016, the FASB issued Accounting
Standards Update No. 2016-09, Improvements to Employee Share-Based Payment Accounting In February 2016, the FASB issued Accounting
Standards Update No. 2016-02: Leases ASC Topic 606, Revenue from Contracts with
Customers , The Company is near finalization of its evaluation
of the impact of the adoption of Topic 606 on its consolidated financial statements and related disclosures. From that evaluation,
the Company has identified a need to potentially change the accounting for revenue from the DuPont Pioneer distribution agreement,
which made up 62% of the Company's revenues in the year ended June 30, 2018. The result of this change would be that revenue
would be recognized earlier than it currently is, because the provisions of Topic 606 would require recognition during processing
of the seed, rather than upon delivery, which is the current accounting. The Company believes that the total amount of revenue
for each fiscal year will remain the same, but that a significant portion of the Pioneer revenue would be recognized in earlier
quarters under ASC 606. The Company has preliminarily concluded that
the new standards will not result in changes to its revenue recognition policies for the rest of its customer contracts.
The Company continues to work on preparing the enhanced revenue disclosures that will be presented in the first quarter of fiscal
year 2019. |
