| 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, . The Company owns 51.0% of Sorghum Solutions South Africa, which is a variable interest entity as defined in ASC 810-10, Consolidation Because the Company is its primary beneficiary, SeedVision's and Sorghum Solutions South Africa’s financial results are included in these financial statements. We have recorded a combined $0.6 million of current assets (restricted) and $0.1 million of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of September 30, 2021. We have recorded a combined $0.6 million of current assets (restricted) and $0.1 million of current liabilities (nonrecourse) for these entities in our consolidated balance sheet as of June 30, 2021. 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 Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in the financial statements. These include allowance for doubtful trade receivables, inventory valuation, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable to farmers who grow seed for the Company), contingent consideration obligations, contingencies and litigation. Significant estimates and assumptions are also used to establish the fair value and useful lives of depreciable tangible and certain intangible assets, goodwill as well as valuing stock-based compensation. Actual results may differ from those estimates and assumptions, and such results may affect income, financial position or cash flows. The COVID-19 pandemic and the efforts to contain it have, among other things, negatively impacted the global economy and created significant volatility and disruption of financial markets. In addition, the COVID-19 pandemic has significantly increased economic and demand uncertainty. The Company believes the estimates and assumptions underlying the accompanying consolidated financial statements are reasonable and supportable based on the information available at the time the financial statements were prepared. However, uncertainty over the impact COVID-19 will have on the global economy and the Company’s business in particular makes many of the estimates and assumptions reflected in these consolidated financial statements inherently less certain. Therefore, actual results may ultimately differ from those estimates to a greater degree than historically. Certain Risks and Concentrations The Company’s revenue is principally derived from the sale of seed, the market for which is highly competitive. The Company depends on a core group of significant customers. Four customers accounted for 26% of its revenue for the three months ended September 30, 2021. Two customers accounted for 23% of its revenue for the three months ended September 30, 2020. One customer accounted for 13% of the Company’s accounts receivable at September 30, 2021. One customer accounted for 11% of the Company’s accounts receivable at June 30, 2021. The Company sells a substantial portion of its products to international customers. Sales to international markets represented 76% and 61% of revenue during the three months ended September 30, 2021 and 2020, respectively. The net book value of fixed assets located outside the United States was 20% and 19% of total fixed assets at September 30, 2021 and June 30, 2021, respectively. Cash balances located outside of the United States may not be insured and totaled $382,290 and $204,813 at September 30, 2021 and June 30, 2021, respectively. The following table shows revenue from external sources by destination country:
Three Months Ended September 30,
2021
2020
United States
$
3,665,328
24
%
$
5,361,777
39
%
Saudi Arabia
3,467,210
22
%
1,198,909
9
%
Australia
3,434,005
22
%
2,782,464
20
%
Libya
1,044,000
7
%
225,000
2
%
Sudan
819,618
5
%
484,700
3
%
China
473,125
3
%
—
0
%
South Africa
464,229
3
%
664,075
5
%
Egypt
402,300
3
%
394,200
3
%
Argentina
350,839
2
%
85
0
%
Mexico
228,420
1
%
1,136,090
8
%
Other
1,182,608
8
%
1,608,086
11
%
Total
$
15,531,682
100
%
$
13,855,386
100
% Liquidity and The Company is monitoring the impact of the COVID-19 pandemic on its business, including its results of operations and financial condition, and has implemented measures designed to protect the health and safety of its employees while continuing its operations. 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 has found these alternative approaches to generally be less effective than in-person sales efforts. In particular, the Company’s sales cycle is highly seasonal, and the majority of its sales season activities for the United States and Australia are typically concentrated between March and June of each year. If ongoing measures to protect against COVID-19 remain in effect throughout the 2022 sales season, the Company may experience similar negative impacts that it experienced during the 2020 and 2021 sales seasons. Further, vaccine mandates may be enforced in jurisdictions in which our business operates. Although it is not possible to predict with certainty the impact of these measures on our business and workforce, these requirements may result in attrition, difficulty securing future labor needs, and may further disrupt the national supply chain, all of which could have a material adverse effect on our business, financial condition and results of operations. In addition, the Company’s product revenue is predicated on its ability to timely fulfill customer orders, which depends in large part upon the consistent availability and operation of shipping and distribution networks operated by third parties. Farmers typically have a limited window during which they can plant seed, and their buying decisions can be shaped by actual or perceived disruptions in the Company’s distribution and supply channels. If the Company’s customers delay or decrease their orders due to potential disruptions in its distribution and supply channels, this would adversely affect the Company’s product revenue. During the year ended June 30, 2021 and the three months ended September 30, 2021, 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. The Company expects these logistical challenges to persist throughout fiscal 2022. Given the level of uncertainty regarding the duration and broader impact of the COVID-19 pandemic, the Company is unable to fully assess the extent of its impact on the Company’s operations. The Company’s loan and security agreement with CIBC Bank USA, or CIBC, and the Company’s secured promissory notes with Conterra Agriculture Capital, LLC contains various operating and financial covenants (See Note 8). The COVID-19 pandemic has 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 loan and security agreement with CIBC requires the Company to comply with a minimum EBITDA covenant for the fiscal quarters ending September 30, 2021 and December 31, 2021 and a fixed charge coverage ratio, tested on a trailing twelve-month basis beginning with the quarter ending March 31, 2022. It also requires the Company to maintain minimum liquidity of no less than $3,000,000 at all times. The Company believes it is uncertain it will be able to generate sufficient cash flow from operations or maintain sufficient liquidity to meet these covenants. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. If the Company is unable to meet these covenants, the Company will need to raise additional capital or secure future waivers and/or amendments from its lenders. There can be no assurance the Company will be successful in raising additional capital or securing future waivers and/or amendments from its lenders. If the Company is unable to raise sufficient additional capital or secure future waivers and/or amendments, it may need to reduce the scope of its operations, repay amounts owing to its lenders or sell certain assets. International Operations The Company translates its foreign operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income (loss). Gains or losses from foreign currency transactions are included in the consolidated statement of operations. Cost of Revenue The Company records purchasing and receiving costs, inspection costs and warehousing costs in cost of revenue. When the Company is required to pay for outward freight and/or the costs incurred to deliver products to its customers, the costs are included in cost of revenue. Cash and Cash Equivalents For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. At times, cash and cash equivalents balances exceed amounts insured by the Federal Deposit Insurance Corporation. Accounts Receivable The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. The allowance for doubtful trade receivables was $155,657 and $57,582 at September 30, 2021 and June 30, 2021, 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:
September 30, 2021
June 30, 2021
Raw materials and supplies
$
1,749,836
$
2,722,832
Work in progress
11,316,519
6,662,006
Finished goods
50,204,096
54,010,418
$
63,270,451
$
63,395,256
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, 15 years for trade names, 17 years for license agreements and 18 years for other intangible assets. Goodwill Goodwill is assessed at least annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value is less than its carrying amount, management conducts a quantitative goodwill impairment test. The goodwill impairment test is used to identify potential impairment by comparing the fair value with its carrying amount, including goodwill. The Company uses market capitalization and an estimate of a control premium to estimate the fair value. If the fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill. The Company acquired Pasture Genetics in February 2020, and recorded goodwill of $1,452,436 as part of this transaction. The Company performed a quantitative assessment of goodwill at June 30, 2021 on its one reporting unit and determined that goodwill was not impaired. See Note 6 for further information. Investment in Bioceres S.A. The Company owns less than 1% of Bioceres, S.A., a provider of crop productivity solutions headquartered in Argentina. The carrying value of the investment is $1.3 million at September 30, 2021 and June 30, 2021, and the investment is included in Other Assets on the Consolidated Balance Sheet. The Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities Investments – Equity Securities No adjustments for impairment or observable transactions were made for the three months ended September 30, 2021 or the year ended June 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, 2021 and September 30, 2020 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 calculation of Basic and Diluted EPS is shown in the table below.
Three Months Ended September 30,
2021
2020
Numerator:
Net loss attributable to S&W Seed Company
$
(6,399,975
)
$
(7,172,760
)
Numerator for basis EPS
(6,399,975
)
(7,172,760
)
Effect of dilutive securities:
Warrants
—
—
—
—
Numerator for diluted EPS
$
(6,399,975
)
$
(7,172,760
)
Denominator:
Denominator for basic EPS-weighted- average shares
36,773,864
33,450,569
Effect of dilutive securities:
Employee stock options
—
—
Employee restricted stock units
—
—
Dilutive potential common shares
—
—
Denominator for diluted EPS - adjusted weighted average shares and assumed conversions
36,773,864
33,450,569
Basic EPS
$
(0.17
)
$
(0.21
)
Diluted EPS
$
(0.17
)
$
(0.21
) 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, 2021 and 2020. Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. Refer to Note 4 and Note 6 for impairment discussion. Derivative Financial Instruments 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 September 30, 2021 Using:
Level 1
Level 2
Level 3
Foreign exchange contract liability
$
—
$
324,595
$
—
Contingent consideration obligations
$
—
$
—
$
650,970
Total
$
—
$
324,595
$
650,970
Fair Value Measurements as of June 30, 2021 Using:
Level 1
Level 2
Level 3
Foreign exchange contract liability
$
—
$
96,466
$
—
Contingent consideration obligations
$
—
$
—
$
741,552
Total
$
—
$
96,466
$
741,552
Recently Adopted Accounting Pronouncements The Company adopted ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes |
