UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20172018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 001-34719
S&W SEED COMPANY
(Exact name of Registrant as Specified in its Charter)
802 N. Douty106 K Street, Suite 300Hanford,Sacramento, California 9323095814
(Address of Principal Executive Offices, including Zip Code)
(559) 884-2535
(Registrant's Telephone Number, including Area Code)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES x 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 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 x | 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 x
As of May 10, 2017, 17,979,6819, 2018, 24,342,806 shares of the registrant's common stock were outstanding.
S&W SEED COMPANY
Table of Contents
1
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), andwhich are subject to the "safe harbor" created by those sections. All statements other than statements of historical fact are statements that could be deemedThese forward-looking statements includinginclude but are not limited to, any statements concerning projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any statements concerning expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases or to diversify our product offerings; any statements regarding future economic conditions or performance; any statements of expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "designed," "estimate," "expect," "intend," "may," "will,"plan," "plan,"potential," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements.statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations about future events. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Risks, uncertainties and assumptions include the following:
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 listed in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended June 30, 2016.2017, as updated in Part II, Item 1A. "Risks Factors" of this Quarterly Report on Form 10-Q.
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 Report.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 2017,2018," "fiscal 2016"2017" and "fiscal 2015"2016" in this Quarterly Report on Form 10-Q refer to the respective fiscal yearsyear ended June 30, 2018, 2017 2016 and 2015,2016, respectively, with corresponding meanings to any fiscal year reference beyond such dates. Trademarks, service marks and trade names of other companies appearing in this report are the property of their respective holders.
3
Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
S&W SEED COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, | June 30, | March 31, | June 30, | |||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
ASSETS | ||||||||||||
CURRENT ASSETS | ||||||||||||
Cash and cash equivalents | $ | 3,320,659 | $ | 6,904,500 | $ | 2,988,392 | $ | 745,001 | ||||
Accounts receivable, net | 23,179,172 | 27,619,599 | 14,589,886 | 23,239,325 | ||||||||
Inventories, net | 38,052,248 | 21,846,130 | 63,654,908 | 31,489,945 | ||||||||
Prepaid expenses and other current assets | 1,560,194 | 1,218,280 | 1,511,024 | 1,249,921 | ||||||||
TOTAL CURRENT ASSETS | 66,112,273 | 57,588,509 | 82,744,210 | 56,724,192 | ||||||||
Property, plant and equipment, net | 13,465,805 | 12,600,106 | 13,496,922 | 13,581,576 | ||||||||
Intangibles, net | 35,456,992 | 37,006,802 | 33,311,053 | 34,939,079 | ||||||||
Goodwill | 10,292,265 | 10,292,265 | 10,292,265 | 10,292,265 | ||||||||
Deferred tax assets | 7,728,370 | 7,279,923 | ||||||||||
Other assets | 1,553,503 | 2,237,380 | 1,303,489 | 1,563,176 | ||||||||
TOTAL ASSETS | $ | 134,609,208 | $ | 127,004,985 | $ | 141,147,939 | $ | 117,100,288 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
CURRENT LIABILITIES | ||||||||||||
Accounts payable | $ | 7,218,726 | $ | 14,303,877 | $ | 12,384,239 | $ | 7,157,745 | ||||
Accounts payable - related parties | 77,599 | 396,027 | 120,081 | 331,694 | ||||||||
Deferred revenue | 570,662 | 509,857 | 107,897 | 880,326 | ||||||||
Accrued expenses and other current liabilities | 1,590,559 | 2,385,160 | 3,146,874 | 2,733,718 | ||||||||
Lines of credit | 36,166,497 | 16,687,473 | ||||||||||
Lines of credit, net | 25,128,689 | 27,399,784 | ||||||||||
Current portion of contingent consideration obligation | 2,346,091 | - | - | 2,500,000 | ||||||||
Current portion of long-term debt | 10,261,411 | 275,094 | ||||||||||
Current portion of convertible debt, net | - | 6,840,608 | ||||||||||
Current portion of long-term debt, net | 509,297 | 10,309,664 | ||||||||||
TOTAL CURRENT LIABILITIES | 58,231,545 | 41,398,096 | 41,397,077 | 51,312,931 | ||||||||
Contingent consideration obligation | - | 2,268,416 | ||||||||||
Long-term debt, less current portion | 1,040,414 | 11,114,333 | ||||||||||
Long-term debt, net, less current portion | 13,038,521 | 1,096,155 | ||||||||||
Derivative warrant liabilities | 3,512,700 | 4,354,100 | - | 2,836,600 | ||||||||
Other non-current liabilities | 42,049 | 108,596 | 553,498 | 632,947 | ||||||||
TOTAL LIABILITIES | 62,826,708 | 59,243,541 | 54,989,096 | 55,878,633 | ||||||||
STOCKHOLDERS' EQUITY | ||||||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized; | ||||||||||||
no shares issued and outstanding | - | - | - | - | ||||||||
Common stock, $0.001 par value; 50,000,000 shares authorized; | ||||||||||||
17,989,167 issued and 17,964,167 outstanding at March 31, 2017; | ||||||||||||
17,086,111 issued and 17,061,111 outstanding at June 30, 2016; | 17,989 | 17,086 | ||||||||||
24,362,579 issued and 24,337,579 outstanding at March 31, 2018; | ||||||||||||
18,004,681 issued and 17,979,681 outstanding at June 30, 2017; | 24,362 | 18,004 | ||||||||||
Treasury stock, at cost, 25,000 shares | (134,196) | (134,196) | (134,196) | (134,196) | ||||||||
Additional paid-in capital | 82,822,874 | 78,282,461 | 108,663,983 | 83,312,518 | ||||||||
Accumulated deficit | (5,345,205) | (4,614,244) | (16,875,228) | (16,436,286) | ||||||||
Accumulated other comprehensive loss | (5,578,962) | (5,789,663) | (5,520,078) | (5,538,385) | ||||||||
TOTAL STOCKHOLDERS' EQUITY | 71,782,500 | 67,761,444 | 86,158,843 | 61,221,655 | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 134,609,208 | $ | 127,004,985 | $ | 141,147,939 | $ | 117,100,288 |
See notes to consolidated financial statements.
4
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
March 31, | March 31, | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | March 31, | March 31, | |||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||
Revenue | $ | 21,012,243 | $ | 25,013,779 | $ | 57,487,560 | $ | 61,409,948 | $ | 22,949,170 | $ | 21,012,243 | $ | 54,193,682 | $ | 57,487,560 | ||||||||
Cost of revenue | 15,208,896 | 19,500,605 | 44,520,476 | 49,890,460 | 16,303,436 | 15,208,896 | 40,540,193 | 44,520,476 | ||||||||||||||||
Gross profit | 5,803,347 | 5,513,174 | 12,967,084 | 11,519,488 | 6,645,734 | 5,803,347 | 13,653,489 | 12,967,084 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative expenses | 2,720,131 | 2,459,737 | 7,767,530 | 7,239,821 | 2,676,166 | 2,720,131 | 8,037,202 | 7,767,530 | ||||||||||||||||
Research and development expenses | 714,512 | 626,316 | 2,204,625 | 2,049,332 | 1,065,323 | 714,512 | 2,662,404 | 2,204,625 | ||||||||||||||||
Depreciation and amortization | 798,559 | 796,062 | 2,475,710 | 2,376,101 | 838,585 | 798,559 | 2,597,818 | 2,475,710 | ||||||||||||||||
Disposal of property, plant and equipment loss (gain) | 7,766 | (2,427) | 7,630 | (2,427) | - | 7,766 | (81,776) | 7,630 | ||||||||||||||||
Impairment charges | 319,001 | - | 319,001 | - | - | 319,001 | - | 319,001 | ||||||||||||||||
Total operating expenses | 4,559,969 | 3,879,688 | 12,774,496 | 11,662,827 | 4,580,074 | 4,559,969 | 13,215,648 | 12,774,496 | ||||||||||||||||
Income (loss) from operations | 1,243,378 | 1,633,486 | 192,588 | (143,339) | ||||||||||||||||||||
Income from operations | 2,065,660 | 1,243,378 | 437,841 | 192,588 | ||||||||||||||||||||
Other expense | ||||||||||||||||||||||||
Foreign currency loss (gain) | 2,125 | 87,342 | (4,358) | (164,471) | ||||||||||||||||||||
Foreign currency (gain) loss | (27,939) | 2,125 | (5,908) | (4,358) | ||||||||||||||||||||
Change in derivative warrant liabilities | (1,009,901) | (694,800) | (841,400) | (2,176,800) | - | (1,009,901) | (431,300) | (841,400) | ||||||||||||||||
Change in contingent consideration obligations | (86,688) | 48,963 | 77,675 | 1,490 | - | (86,688) | - | 77,675 | ||||||||||||||||
Loss on equity method investment | 95,591 | 28,916 | 144,841 | 252,619 | - | 95,591 | - | 144,841 | ||||||||||||||||
Gain on sale of marketable securities | - | - | - | (123,038) | ||||||||||||||||||||
Interest expense - amortization of debt discount | 150,875 | 1,150,412 | 1,131,994 | 3,111,866 | 51,185 | 150,875 | 118,284 | 1,131,994 | ||||||||||||||||
Interest expense - convertible debt and other | 300,627 | 438,879 | 948,211 | 1,672,863 | ||||||||||||||||||||
Interest expense | 512,892 | 300,627 | 1,244,515 | 948,211 | ||||||||||||||||||||
Income (loss) before income taxes | 1,790,749 | 573,774 | (1,264,375) | (2,717,868) | 1,529,522 | 1,790,749 | (487,750) | (1,264,375) | ||||||||||||||||
Provision (benefit) from income taxes | 463,509 | 5,901 | (533,414) | (2,773,294) | ||||||||||||||||||||
Provision (benefit) for income taxes | (248,931) | 463,509 | (48,808) | (533,414) | ||||||||||||||||||||
Net income (loss) | $ | 1,327,240 | $ | 567,873 | $ | (730,961) | $ | 55,426 | $ | 1,778,453 | $ | 1,327,240 | $ | (438,942) | $ | (730,961) | ||||||||
Net income (loss) per common share: | ||||||||||||||||||||||||
Basic | $ | 0.07 | $ | 0.04 | $ | (0.04) | $ | 0.00 | $ | 0.07 | $ | 0.07 | $ | (0.02) | $ | (0.04) | ||||||||
Diluted | $ | 0.02 | $ | 0.04 | $ | (0.09) | $ | 0.00 | $ | 0.07 | $ | 0.02 | $ | (0.02) | $ | (0.09) | ||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||||||||||
Basic | 17,963,598 | 15,420,308 | 17,630,906 | 14,278,107 | 24,335,821 | 17,963,598 | 21,861,038 | 17,630,906 | ||||||||||||||||
Diluted | 17,979,177 | 15,420,308 | 17,718,243 | 14,278,107 | 24,353,082 | 17,979,177 | 21,861,038 | 17,718,243 |
See notes to consolidated financial statements.
5
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||||||||||
March 31, | March 31, | March 31, | March 31, | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Net income (loss) | $ | 1,327,240 | $ | 567,873 | $ | (730,961) | $ | 55,426 | $ | 1,778,453 | $ | 1,327,240 | $ | (438,942) | $ | (730,961) | ||||||||
Foreign currency translation adjustment, net of income taxes | 454,319 | 383,723 | 210,701 | (457,391) | (97,123) | 454,319 | 18,307 | 210,701 | ||||||||||||||||
Comprehensive income (loss) | $ | 1,781,559 | $ | 951,596 | $ | (520,260) | $ | (401,965) | $ | 1,681,330 | $ | 1,781,559 | $ | (420,635) | $ | (520,260) |
See notes to consolidated financial statements.
6
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
�� | Common Stock | Treasury Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders' | Common Stock | Treasury Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders' | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||
Balance, June 30, 2015 | 13,479,101 | $ | 13,479 | (25,000) | $ | (134,196) | $ | 62,072,379 | $ | (4,979,471) | $ | (5,096,586) | $ | 51,875,605 | ||||||||||||||||||||||||||||||||||
Stock-based compensation - options, restricted stock, and RSUs | - | - | - | - | 917,487 | - | - | 917,487 | ||||||||||||||||||||||||||||||||||||||||
Beneficial conversion feature | - | - | - | - | 871,862 | - | - | 871,862 | ||||||||||||||||||||||||||||||||||||||||
Net issuance to settle RSUs | 45,410 | 45 | - | - | (83,848) | - | - | (83,803) | ||||||||||||||||||||||||||||||||||||||||
Proceeds from sale of common stock, net of fees and expenses | 3,306,404 | 3,306 | - | - | 13,306,410 | - | - | 13,309,716 | ||||||||||||||||||||||||||||||||||||||||
Exercise of stock options, net of withholding taxes | 8,751 | 9 | - | - | 34,557 | - | - | 34,566 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | - | - | (457,391) | (457,391) | ||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 55,426 | - | 55,426 | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2016 | 16,839,666 | $ | 16,839 | (25,000) | $ | (134,196) | $ | 77,118,847 | $ | (4,924,045) | $ | (5,553,977) | $ | 66,523,468 | ||||||||||||||||||||||||||||||||||
Balance, June 30, 2016 | 17,086,111 | $ | 17,086 | (25,000) | $ | (134,196) | $ | 78,282,461 | $ | (4,614,244) | $ | (5,789,663) | $ | 67,761,444 | 17,086,111 | $ | 17,086 | (25,000) | $ | (134,196) | $ | 78,282,461 | $ | (4,614,244) | $ | (5,789,663) | $ | 67,761,444 | ||||||||||||||||||||
Stock-based compensation - options, restricted stock, and RSUs | - | - | - | - | 885,456 | - | - | 885,456 | - | - | - | - | 885,456 | - | - | 885,456 | ||||||||||||||||||||||||||||||||
Net issuance to settle RSUs | 56,954 | 57 | - | - | (107,552) | - | - | (107,495) | 56,954 | 57 | - | - | (107,552) | - | - | (107,495) | ||||||||||||||||||||||||||||||||
Issuance of common stock upon conversion of principal and interest of convertible debentures | 684,321 | 684 | - | - | 3,160,588 | - | - | 3,161,272 | ||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon conversion of principal and | ||||||||||||||||||||||||||||||||||||||||||||||||
interest of convertible debentures | 684,321 | 684 | - | - | 3,160,588 | - | - | 3,161,272 | ||||||||||||||||||||||||||||||||||||||||
Exercise of stock options, net of withholding taxes | 161,781 | 162 | - | - | 601,921 | - | - | 602,083 | 161,781 | 162 | - | - | 601,921 | - | - | 602,083 | ||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 210,701 | 210,701 | - | - | - | - | - | - | 210,701 | 210,701 | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (730,961) | - | (730,961) | - | - | - | - | - | (730,961) | - | (730,961) | ||||||||||||||||||||||||||||||||
Balance, March 31, 2017 | 17,989,167 | $ | 17,989 | (25,000) | $ | (134,196) | $ | 82,822,874 | $ | (5,345,205) | $ | (5,578,962) | $ | 71,782,500 | 17,989,167 | $ | 17,989 | (25,000) | $ | (134,196) | $ | 82,822,874 | $ | (5,345,205) | $ | (5,578,962) | $ | 71,782,500 | ||||||||||||||||||||
Balance, June 30, 2017 | 18,004,681 | $ | 18,004 | (25,000) | $ | (134,196) | $ | 83,312,518 | $ | (16,436,286) | $ | (5,538,385) | $ | 61,221,655 | ||||||||||||||||||||||||||||||||||
Stock-based compensation - options, restricted stock, and RSUs | - | - | - | - | 600,231 | - | - | 600,231 | ||||||||||||||||||||||||||||||||||||||||
Net issuance to settle RSUs | 97,898 | 98 | - | - | (107,145) | - | - | (107,047) | ||||||||||||||||||||||||||||||||||||||||
Proceeds from sale of common stock, net of fees and expenses | 6,260,000 | 6,260 | - | - | 22,453,079 | - | - | 22,459,339 | ||||||||||||||||||||||||||||||||||||||||
Reclassification of warrants upon expiration of repricing provisions | - | - | - | - | 2,405,300 | - | - | 2,405,300 | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | - | - | 18,307 | 18,307 | ||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (438,942) | - | (438,942) | ||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2018 | 24,362,579 | $ | 24,362 | (25,000) | $ | (134,196) | $ | 108,663,983 | $ | (16,875,228) | $ | (5,520,078) | $ | 86,158,843 |
See notes to consolidated financial statements.
7
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
Net (loss) income | $ | (730,961) | $ | 55,426 | ||||||||
Adjustments to reconcile net (loss) income to net cash used in operating activities | ||||||||||||
Net loss | $ | (438,942) | $ | (730,961) | ||||||||
Adjustments to reconcile net loss from operating activities to net | ||||||||||||
cash used in operating activities | ||||||||||||
Stock-based compensation | 885,456 | 917,487 | 600,231 | 885,456 | ||||||||
Change in allowance for doubtful accounts | 99,640 | (7,350) | ||||||||||
Bad debt expense | 20,547 | 99,640 | ||||||||||
Depreciation and amortization | 2,475,710 | 2,376,101 | 2,597,818 | 2,475,710 | ||||||||
Loss (gain) on disposal of property, plant and equipment | 7,630 | (2,427) | ||||||||||
(Gain) loss on disposal of property, plant and equipment | (81,776) | 7,630 | ||||||||||
Impairment charges | 319,001 | - | - | 319,001 | ||||||||
Change in deferred tax asset | (448,447) | (2,974,375) | - | (448,447) | ||||||||
Change in foreign exchange contracts | 50,522 | (55,817) | 192,360 | 50,522 | ||||||||
Change in derivative warrant liabilities | (841,400) | (2,176,800) | (431,300) | (841,400) | ||||||||
Change in contingent consideration obligations | 77,675 | 1,490 | ||||||||||
Change in contingent consideration obligation | - | 77,675 | ||||||||||
Amortization of debt discount | 1,131,994 | 3,111,866 | 118,284 | 1,131,994 | ||||||||
Gain on sale of marketable securities | - | (123,038) | ||||||||||
Intercompany foreign exchange gain | - | (284,774) | ||||||||||
Loss on equity method investment | 144,841 | 252,619 | - | 144,841 | ||||||||
Changes in operating assets and liabilities, net: | ||||||||||||
Changes in: | ||||||||||||
Accounts receivable | 4,481,129 | 13,498,542 | 8,663,419 | 4,481,129 | ||||||||
Inventories | (15,972,829) | (16,946,534) | (32,191,993) | (15,972,829) | ||||||||
Prepaid expenses and other current assets | (245,248) | (974,732) | (461,883) | (245,248) | ||||||||
Other non-current assets | - | (140,569) | ||||||||||
Other non-current asset | 259,683 | - | ||||||||||
Accounts payable | (7,323,842) | 1,632,353 | 5,236,255 | (7,323,842) | ||||||||
Accounts payable - related parties | (318,428) | (1,021,524) | (216,449) | (318,428) | ||||||||
Deferred revenue | 60,298 | (163,211) | (561,615) | 60,298 | ||||||||
Accrued expenses and other current liabilities | (770,337) | (277,084) | 396,478 | (770,337) | ||||||||
Other non-current liabilities | (67,915) | (31,311) | (79,096) | (67,915) | ||||||||
Net cash used in operating activities | (16,985,511) | (3,333,662) | (16,377,979) | (16,985,511) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
Additions to property, plant and equipment | (1,624,493) | (1,852,865) | (1,062,406) | (1,624,493) | ||||||||
Proceeds from disposal of property, plant and equipment | 6,000 | 28,100 | 46,218 | 6,000 | ||||||||
Purchase of marketable securities | - | (316,000) | ||||||||||
Sale of marketable securities | - | 439,038 | ||||||||||
Equity method investment | - | (439,038) | ||||||||||
Additions to internal use software | (118,121) | (236,555) | - | (118,121) | ||||||||
Net cash used in investing activities | (1,736,614) | (2,377,320) | (1,016,188) | (1,736,614) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
Net proceeds from sale of common stock | - | 13,309,716 | 22,459,339 | - | ||||||||
Net proceeds from exercise of common stock options | 602,083 | 34,566 | - | 602,083 | ||||||||
Taxes paid related to net share settlements of stock-based compensation awards | (107,495) | (83,803) | (107,047) | (107,495) | ||||||||
Borrowings and repayments on lines of credit, net | 19,325,988 | 7,822,160 | (2,371,486) | 19,325,988 | ||||||||
Repayment of contingent consideration obligation | (2,500,000) | - | ||||||||||
Borrowings of long-term debt | 89,717 | 601,341 | 12,836,896 | 89,717 | ||||||||
Debt issuance costs | (257,964) | - | ||||||||||
Repayments of long-term debt | (209,454) | (1,974,582) | (10,470,302) | (209,454) | ||||||||
Repayments of convertible debt | (4,721,551) | (11,274,679) | - | (4,721,551) | ||||||||
Net cash provided by financing activities | 14,979,288 | 8,434,719 | 19,589,436 | 14,979,288 | ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 158,996 | 8,427 | 48,122 | 158,996 | ||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (3,583,841) | 2,732,164 | ||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 2,243,391 | (3,583,841) | ||||||||||
CASH AND CASH EQUIVALENTS, beginning of the period | 6,904,500 | 3,535,458 | 745,001 | 6,904,500 | ||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 3,320,659 | $ | 6,267,622 | $ | 2,988,392 | $ | 3,320,659 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||||||
Cash paid during the period for: | ||||||||||||
Cash paid (received) during the period for: | ||||||||||||
Interest | $ | 1,039,100 | $ | 922,561 | $ | 1,121,977 | $ | 1,039,100 | ||||
Income taxes | 194,886 | 205,225 | (118,224) | 194,886 |
See notes to consolidated financial statements.
8
S&W SEED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BACKGROUND AND ORGANIZATION
Organization
S&W Seed Company, a Nevada corporation (the "Company"), began as S&W Seed Company, a general partnership, in 1980 and was originally in the business of breeding, growing, processing and selling alfalfa seed. We then incorporated a corporation with the same name in Delaware in October 2009, which is the successor entity to Seed Holding, LLC, having purchased a majority interest in the general partnership between June 2008 and December 2009. Following the Company's initial public offering in May 2010, the Company purchased the remaining general partnership interests and became the sole owner of the general partnership's original business. Seed Holding, LLC remains a consolidated subsidiary of the Company.
In December 2011, the Company reincorporated in Nevada as a result of a statutory short-form merger of the Delaware corporation into its wholly-owned subsidiary, S&W Seed Company, a Nevada corporation.
On April 1, 2013, the Company, together with its wholly-owned subsidiary, S&W SeedHoldings Australia Pty Ltd, an Australia corporation ("(f/k/a S&W Australia"Seed Australia Pty Ltd "S&W Holdings"), consummated an acquisition of all of the issued and outstanding shares of Seed Genetics International Pty Ltd, an Australia corporation ("SGI"), from SGI's shareholders. In April 2018, SGI changed its name to S&W Seed Company Australia Pty Ltd ("S&W Australia").
Business Overview
Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding, growing, processing and selling agricultural seeds, primarily alfalfa seed. The Company owns seed cleaning and processing facilities, which are located in Five Points, California, Nampa, Idaho and Nampa, Idaho.Keith, South Australia. The Company's seed products are primarily grown under contract by farmers. The Company began its stevia initiative in fiscal year 2010 and is currently focused on breeding improved varieties of stevia and developing marketing and distribution programs for its stevia products.
The Company has also been actively engaged in expansion initiatives through a combination of organic growth and strategic acquisitions, including in December 31, 2014, when the Company purchased certain alfalfa research and production facilities and conventional (non-GMO) alfalfa germplasm assets and assumed certain related liabilities ("the Pioneer Acquisition") of Pioneer Hi-Bred International, Inc. ("DuPont Pioneer").
More recently,The Asset Purchase and Sale Agreement for the Pioneer Acquisition previously contemplated that, subject to the satisfaction of certain conditions, the Company would acquire certain GMO germplasm varieties and other related assets from DuPont Pioneer for a purchase price of $7.0 million. The conditions for this additional acquisition were not satisfied by the required date, and DuPont Pioneer has informed the Company that it does not intend to extend the deadline or complete the transaction at this point in time. As a result, the Company does not expect to close the acquisition of DuPont Pioneer's GMO germplasm varieties and related assets in the previously disclosed structure or pay the $7,000,000 purchase price.
The Company has a long-term distribution agreement with DuPont Pioneer regarding conventional (non GMO) varieties, the term of which extends into 2024. The Company's production and research agreements with DuPont Pioneer (relating to GMO-traited varieties) terminated on February 28, 2018. As a result, DuPont Pioneer's minimum purchase commitments from the Company will be reduced by approximately $6 million annually, commencing with the Company's Fiscal Year 2019. However, the Company expects that the DuPont Pioneer distribution agreement will continue to be a significant source of the Company's annual revenue through December 2024.
The Company is in discussions with DuPont Pioneer regarding the orderly transition of activities previously conducted by the Company under the production and research agreements, as well as the possibility of certain ongoing commercial relationships between the parties relating to GMO-traited varieties, among other things.
In May 2016, the Company acquired the assets and business of SV Genetics, a private Australian company specializing in the breeding and licensing of proprietary hybrid sorghum and sunflower seed germplasm, which represented the Company's initial effort to diversify its product portfolio beyond alfalfa seed and stevia.
9
The Company's operations span the world's alfalfa seed production regions with operations in the San Joaquin and Imperial Valleys of California, five other U.S. states, Australia, and three provinces in Canada, and the Company sells its seed products in more than 30 countries around the globe.
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 Australia,Holdings, which owns 100% of SGI,S&W Australia, and Stevia California, LLC. All significant intercompany balances and transactions have been eliminated.
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 ("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, 2017.2018. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2016,2017, 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, 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.
10
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 77%82% and 65%77% of its revenue for the three months ended March 31, 20172018 and 2016,2017, respectively. One customer accounted for 59%68% and 50%59% of its revenue for the nine months ended March 31, 20172018 and 2016,2017, respectively.
Two customersOne customer accounted for 56%38% of the Company's accounts receivable at March 31, 2017. One customer2018. Two customers accounted for 35%52% of the Company's accounts receivable at June 30, 2016.2017.
In addition, the Company sells a substantial portion of its products to international customers. Sales direct to international customersmarkets represented 20%16% and 34%20% of revenue during the three months ended March 31, 20172018 and 2016,2017, respectively. Sales direct to international customersmarkets represented 36%29% and 44%36% of revenue during the nine months ended March 31, 20172018 and 2016,2017, respectively. The net book value of fixed assets located outside the United States was 18%20% and 17%19% of total assets at March 31, 20172018 and June 30, 2016,2017, respectively. Cash balances located outside of the United States may not be insured and totaled $331,687$334,603 and $1,923,290$192,879 at March 31, 20172018 and June 30, 2016,2017, respectively.
The following table shows revenue from external sources by destination country:
Three Months Ended March 31, | Nine Months Ended March 31, | Three Months Ended March 31, | Nine Months Ended March 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
United States | $ | 16,850,655 | 80% | $ | 16,596,810 | 66% | $ | 36,633,044 | 64% | $ | 34,092,324 | 56% | $ | 19,258,699 | 84% | $ | 16,850,655 | 80% | $ | 38,523,953 | 71% | $ | 36,633,044 | 64% | ||||||||
Mexico | 301,390 | 1% | 549,420 | 3% | 4,682,016 | 9% | 4,294,447 | 7% | ||||||||||||||||||||||||
Argentina | 7,630 | 0% | 316,046 | 2% | 2,750,249 | 5% | 2,881,050 | 5% | ||||||||||||||||||||||||
Australia | 750,762 | 3% | 291,405 | 1% | 1,309,105 | 2% | 1,082,041 | 2% | ||||||||||||||||||||||||
Peru | 427,358 | 2% | 297,438 | 1% | 1,035,770 | 2% | 821,213 | 1% | ||||||||||||||||||||||||
Saudi Arabia | 1,051,593 | 5% | 3,821,011 | 15% | 6,273,365 | 11% | 13,452,368 | 22% | - | 0% | 1,051,593 | 5% | 844,908 | 2% | 6,273,365 | 11% | ||||||||||||||||
China | 790,486 | 4% | 211,967 | 1% | 889,834 | 2% | 431,288 | 1% | 374,824 | 2% | 790,486 | 4% | 748,748 | 1% | 889,834 | 2% | ||||||||||||||||
Mexico | 549,420 | 3% | 743,617 | 3% | 4,294,447 | 7% | 3,830,117 | 6% | ||||||||||||||||||||||||
Argentina | 316,046 | 2% | 704,059 | 3% | 2,881,050 | 5% | 2,272,120 | 4% | ||||||||||||||||||||||||
South Africa | 251,116 | 1% | 278,737 | 1% | 718,458 | 1% | 915,607 | 2% | ||||||||||||||||||||||||
Algeria | 308,700 | 1% | 330 | 0% | 308,700 | 1% | 562,778 | 1% | ||||||||||||||||||||||||
Egypt | 394,560 | 2% | 502,250 | 2% | 677,520 | 1% | 502,090 | 1% | 284,760 | 1% | 394,560 | 2% | 284,760 | 1% | 677,520 | 1% | ||||||||||||||||
Peru | 297,438 | 1% | 363,297 | 1% | 821,213 | 1% | 1,529,304 | 2% | ||||||||||||||||||||||||
Other | 762,045 | 3% | 2,070,768 | 9% | 5,017,087 | 9% | 5,300,337 | 8% | 983,931 | 5% | 191,573 | 1% | 2,987,015 | 5% | 2,456,661 | 4% | ||||||||||||||||
Total | $ | 21,012,243 | 100% | $ | 25,013,779 | 100% | $ | 57,487,560 | 100% | $ | 61,409,948 | 100% | $ | 22,949,170 | 100% | $ | 21,012,243 | 100% | $ | 54,193,682 | 100% | $ | 57,487,560 | 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.
11
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. No customer has a right of return.
The Company recognizes revenue from milling and other services provided according to the terms of the underlying agreementsales agreements and when delivery has occurred, performance is complete and pricing is fixed or determinable at the time of sale.
11
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 $177,295$526,495 at March 31, 20172018 and June 30, 2016.2017.
Inventories
Inventories consist of alfalfa seed and packaging materials.
Inventories are stated at the lower of cost or market,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.
12
The Company's subsidiary, SGI,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. SGIS&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.
12
Inventory is periodically reviewed to determine if it is marketable, obsolete or impaired. A reserve is recorded against inventoryInventory 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:
March 31, | June 30, | March 31, | June 30, | |||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
Raw materials and supplies | $ | 224,805 | $ | 241,268 | $ | 477,770 | $ | 266,551 | ||||
Work in progress and growing crops | 6,322,371 | 3,120,485 | ||||||||||
Work in progress | 9,780,874 | 5,603,825 | ||||||||||
Finished goods | 31,505,072 | 18,484,377 | 53,396,264 | 25,619,569 | ||||||||
$ | 38,052,248 | $ | 21,846,130 | $ | 63,654,908 | $ | 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 7-285-28 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 2-203-20 for other intangible assets. The weighted average estimated useful lives are 2426 years for technology/IP/germplasm, 18 years for customer relationships and 20 years for trade names and 19 years for other intangible assets.
13
Goodwill
Goodwill originated from acquisitions of Imperial Valley Seeds, Inc. ("IVS") and SGI during thein 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 Mayfiscal 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 a discounted cash flow methodologymarket capitalization to estimate the fair value of a reporting unit. A discounted cash flow analysis requires various judgmental assumptions including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company's budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in theits 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.
13
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, 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.
Loss on equity method investment totaled $95,591 and $28,916 for the three months ended March 31, 2017 and 2016, respectively. Loss on equity method investment totaled $144,841 and $252,619 for the nine months ended March 31, 2017 and 2016, respectively. This represents the Company's 50% share of losses incurred by the joint corporation (S&W Semillas S.A.) in Argentina during the two periods.
14
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 three and nine months ended March 31, 2018 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.
15
15
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.
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Numerator: | ||||||||||||
Net income (loss) | $ | 1,327,240 | $ | 567,873 | $ | (730,961) | $ | 55,426 | ||||
Numerator for basis EPS | 1,327,240 | 567,873 | (730,961) | 55,426 | ||||||||
Effect of dilutive securities: | ||||||||||||
Convertible debt | - | - | - | - | ||||||||
Warrants | (1,009,901) | - | (841,400) | - | ||||||||
(1,009,901) | - | (841,400) | - | |||||||||
Numerator for diluted EPS | $ | 317,339 | $ | 567,873 | $ | (1,572,361) | $ | 55,426 | ||||
Denominator: | ||||||||||||
Denominator for basic EPS - | ||||||||||||
weighted-average shares | 17,963,598 | 15,420,308 | 17,630,906 | 14,278,107 | ||||||||
Effect of dilutive securities: | ||||||||||||
Employee stock stock options | - | - | - | - | ||||||||
Employee restricted stock units | - | - | - | - | ||||||||
Convertible debt | - | - | - | - | ||||||||
Warrants | 15,579 | - | 87,337 | - | ||||||||
Dilutive potential common shares | 15,579 | - | 87,337 | - | ||||||||
Denominator for diluted EPS - | ||||||||||||
adjusted weighted average shares | ||||||||||||
and assumed conversions | 17,979,177 | 15,420,308 | 17,718,243 | 14,278,107 | ||||||||
Basic EPS | $ | 0.07 | $ | 0.04 | $ | (0.04) | $ | 0.00 | ||||
Diluted EPS | $ | 0.02 | $ | 0.04 | $ | (0.09) | $ | 0.00 |
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
Numerator: | ||||||||||||
Net income (loss) | $ | 1,778,453 | $ | 1,327,240 | $ | (438,942) | $ | (730,961) | ||||
Numerator for basis EPS | 1,778,453 | 1,327,240 | (438,942) | (730,961) | ||||||||
Effect of dilutive securities: | ||||||||||||
Warrants | - | (1,009,901) | - | (841,400) | ||||||||
- | (1,009,901) | - | (841,400) | |||||||||
Numerator for diluted EPS | $ | 1,778,453 | $ | 317,339 | $ | (438,942) | $ | (1,572,361) | ||||
Denominator: | ||||||||||||
Denominator for basic EPS - weighted-average shares | 24,335,821 | 17,963,598 | 21,861,038 | 17,630,906 | ||||||||
Effect of dilutive securities: | ||||||||||||
Employee stock options | - | - | - | - | ||||||||
Employee restricted stock units | 17,261 | - | - | - | ||||||||
Warrants | - | 15,579 | - | 87,337 | ||||||||
Dilutive potential common shares | 17,261 | 15,579 | - | 87,337 | ||||||||
Denominator for diluted EPS - | ||||||||||||
adjusted weighted average shares | ||||||||||||
and assumed conversions | 24,353,082 | 17,979,177 | 21,861,038 | 17,718,243 | ||||||||
Basic EPS | $ | 0.07 | $ | 0.07 | $ | (0.02) | $ | (0.04) | ||||
Diluted EPS | $ | 0.07 | $ | 0.02 | $ | (0.02) | $ | (0.09) |
16
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.
16
Derivative Financial Instruments
Foreign Exchange Contracts
The Company's subsidiary, SGI,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:
The assets acquired and liabilities assumed in the DuPont Pioneer Acquisition were valued at fair value on a non-recurring basis as of December 31, 2014. The assets acquired and liabilities assumed in the SV Genetics Acquisition were valued at fair value on a non-recurring basis as of May 26, 2016. 17
No assets or liabilities were valued at fair value on a non-recurring basis as of March 31, 20172018 or June 30, 2016.2017.
The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term borrowings, other than the convertible debentures, 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. At March 31, 2017, the fair value and carrying value of the convertible debentures was zero.
17
At June 30, 2016, the fair value and carrying value of the convertible debentures was $7,829,671 and $6,840,608 respectively. The fair value was calculated using a discounted cash flow model and utilized a 10% discount rate that is commensurate with market rates given the remaining term, principal repayment schedule and outstanding balance. The convertible debentures are categorized as Level 3 in the fair value hierarchy. 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 March 31, 2018 Using: | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||
Foreign exchange contract liability | $ | - | $ | 22,449 | $ | - | ||||||||||||
Contingent consideration obligations | - | - | - | |||||||||||||||
Total | $ | - | $ | 22,449 | $ | - | ||||||||||||
Fair Value Measurements as of March 31, 2017 Using: | Fair Value Measurements as of June 30, 2017 Using: | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||
Foreign exchange contract asset | $ | - | $ | 173,192 | $ | - | $ | - | $ | 166,629 | $ | - | ||||||
Contingent consideration obligations | - | - | 2,346,091 | - | - | 2,500,000 | ||||||||||||
Derivative warrant liabilities | - | - | 3,512,700 | - | - | 2,836,600 | ||||||||||||
Total | $ | - | $ | 173,192 | $ | 5,858,791 | $ | - | $ | 166,629 | $ | 5,336,600 |
Fair Value Measurements as of June 30, 2016 Using: | |||||||||
Level 1 | Level 2 | Level 3 | |||||||
Foreign exchange contract asset | $ | - | $ | 49,808 | $ | - | |||
Contingent consideration obligations | - | - | 2,268,416 | ||||||
Derivative warrant liabilities | - | - | 4,354,100 | ||||||
Total | $ | - | $ | 49,808 | $ | 6,622,516 |
There were no transfers in or out of Level 3 duringDuring the three and nine months ended March 31, 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, and 2016.
Reclassificationsthe warrants were reclassified from derivative warrant liabilities to equity.
Certain reclassifications have been madeDuring the nine months ended March 31, 2018, there was no change in the contingent consideration obligations. The DuPont contingent consideration was settled on December 1, 2017. Refer to prior period amounts to conform to current period presentation. The reclassifications had no effect on net income (loss), cash flows or stockholders' equity.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"). This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the Company beginning July 1, 2020. The adoption is not expected to have a material impact on the consolidated financial statements.
18
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for the Company beginning July 1, 2018 and the Company is currently evaluating the impact that ASU 2016-15 will have on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,Improvements to Employee Share-Based Payment Accounting("ASU 2016-09"). This standard was issued as part of the FASB's Simplification Initiative that involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The method of adoption is dependent on the specific aspect of accounting addressed in this new guidance. Early adoption is permitted in any interim or annual period. The Company is evaluatingadopted ASU 2016-09 in the impactfirst quarter of the adoption of ASU 2016-09 on its consolidated financial statements.
18
In January 2017, the FASB issued Accounting Standards Update No. 2017-04,Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for the Company beginning July 1, 2020.fiscal year ended June 30, 2018. The adoption isdid not expected to have a material impact on the consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). This standard addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for the Company beginning July 1, 2018 and the Company is currently evaluating the impact that ASU 2016-15 will have on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02:Leases("ASU 2016-02"). This standard amends various aspects of existing accounting guidance for leases, including the recognition of a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. This standard also introduces new disclosure requirements for leasing arrangements. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective approach and provides for certain practical expedients. The Company is evaluating the impact of the adoption of ASU 2016-02 on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,ASC Topic 606,Revenue from Contracts with Customers(``ASU 2014-09'' ("Topic 606").,is mandatorily effective for the Company in the first quarter of its next fiscal year, which begins on July 1, 2018. This standardASC topic outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The FASB recently issued several amendments to the standard, including clarifications on disclosure of prior-period performance obligations and remaining performance obligations. Entities haveCompany has the option of adopting Topic 606 using either 1) a full retrospective approach, in which comparative periods presented would be adjusted to reflect the provisions of Topic 606, or 2) a modified retrospective approach, forin which the adoptioncumulative effect of applying the new standard. However, in August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers: Deferral of the Effective Datethat defers the effective date of ASU 2014-09 for all public business entities by one year. As a result, ASU 2014-09 is effective for fiscal years beginning after December 15, 2017 including interim periods within that reporting period. Earlier application is permitted onlystandards to open contracts as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. July 1, 2018 would be recognized as a cumulative effect adjustment.
19
The Company is evaluating the impact of the adoption of ASU 2014-09Topic 606 on its consolidated financial statements and related disclosures.
19
NOTE 3 - BUSINESS COMBINATIONS
SV Genetics Acquisition
On May 26, 2016, The Company has identified a need to potentially change the Company purchasedaccounting for revenue from the assets and business of SV Genetics Pty Ltd ("SV Genetics"), a private Australian company specializing in the breeding and licensing of proprietary hybrid sorghum and sunflower seed germplasm (the "SV Genetics Acquisition"). The acquisition expanded and diversified the Company's product offerings and provided access to newDupont Pioneer distribution channels.
As consideration for the SV Genetics Acquisition, the Company paid the following amounts at closing: $1.0 million in cash and 225,088 sharesagreement, which made up 68% of the Company's common stock. The fair valuerevenues in the nine months ended March 31, 2018. If the Company determines that the accounting for this contract should change, the result 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 shares ofseed, rather than upon delivery, which is the Company's common stock was determined based on the closing market price of the Company's common stock on the acquisition date and a 5% discount because of the lack of marketability that market participants would consider when estimating the fair value of the common stock issued. The terms of the SV Genetics Acquisition further provide for a potential earn-out payment of up to $3.3 million, payable in cash or the Company's common stock, in the sole discretion ofcurrent accounting. However, the Company based onis still considering whether such a change is appropriate.
Although the acquired business achieving 150% of a net income target of $4.2 millionevaluation is not yet complete, the Company has preliminarily concluded that the new standards will not result in changes to its revenue recognition policies for the combined 2018 and 2019 fiscal years. Any earn-out payment, if paid in stock,rest of its customer contracts. If the Company concludes that the accounting for the Pioneer contract will be based upondifferent under Topic 606, it will likely adopt the trailing volume weighted average price onnew standard using the day immediately precedingfull retrospective approach. If the paymentCompany concludes that the accounting for the Pioneer contract will not be affected, it is likely that the effects of the earn-out. The earn-out payment, if any,adopting Topic 606 will be made in September 2019.immaterial.
The SV Genetics Acquisition has been accounted for as a business combination, and the Company valued and recorded all assets acquired and liabilities assumed at their estimated fair values on the date of the SV Genetics Acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of May 26, 2016:
The acquisition-date fair value of the consideration transferred consisted of the following:
20
The excess of the purchase price over the fair value of the net assets acquired, amounting to $796,064, was recorded as goodwill on the consolidated balance sheet. The primary item that generated goodwill was the premium paid by the Company for the ability to control the acquired business and the technology / germplasm. Goodwill is not amortized for financial reporting purposes, but is amortized for tax purposes.
Management assigned fair values to the identifiable intangible assets through a combination of the relief from royalty method, the multi-period excess earnings method, and the with-and-without method. The contingent consideration requires the Company to pay up to an additional $3.3 million, if the acquired business achieves 150% of a net income target of $4.2 million for the combined 2018 and 2019 fiscal years. The fair value of the contingent consideration arrangement at the acquisition date was $135,324. The fair value of the contingent consideration was estimated using a Monte Carlo simulation model. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. The key assumptions in applying the Monte Carlo simulation were as follows: 40.0% present value discount factor and an underlying net income volatility of 87.9%. As of March 31, 2017, the estimated fair value of the contingent consideration was zero. The values and useful lives of the acquired SV Genetics intangibles are as follows:
Estimated Useful Life (Years) | Estimated Fair Value | ||||
Technology/IP - germplasm | 25 | $ | 479,000 | ||
Technology/IP - seed varieties | 15 | 57,000 | |||
Customer relationships | 10 | 462,000 | |||
Trade name | 10 | 45,000 | |||
Non-compete agreements | 5 | 30,000 | |||
Total identifiable intangible assets | $ | 1,073,000 |
NOTE 43 - GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the activity of goodwill for the nine months ended March 31, 20172018 and the year ended June 30, 2016,2017, respectively.
Balance at | Foreign Currency | Balance at | ||||||||||
July 1, 2016 | Additions | Translation | March 31, 2017 | |||||||||
Goodwill | $ | 10,292,265 | $ | - | $ | - | $ | 10,292,265 |
Balance at | Balance at | ||||||||
July 1, 2017 | Additions | March 31, 2018 | |||||||
Goodwill | $ | 10,292,265 | $ | - | $ | 10,292,265 |
Balance at | Foreign Currency | Balance at | ||||||||||
July 1, 2015 | Additions | Translation | June 30, 2016 | |||||||||
Goodwill | $ | 9,630,279 | $ | 796,064 | $ | (134,078) | $ | 10,292,265 |
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Balance at | Balance at | ||||||||
July 1, 2016 | Additions | June 30, 2017 | |||||||
Goodwill | $ | 10,292,265 | $ | - | $ | 10,292,265 |
Intangible assets consist of the following:
Balance at | Foreign Currency | Balance at | Balance at | Balance at | |||||||||||||||||||||||
July 1, 2016 | Additions | Amortization | Translation | March 31, 2017 | July 1, 2017 | Additions | Amortization | March 31, 2018 | |||||||||||||||||||
Trade name | $ | 1,328,786 | $ | - | $ | (63,360) | $ | - | $ | 1,265,426 | $ | 1,244,306 | $ | - | $ | (63,360) | $ | 1,180,946 | |||||||||
Customer relationships | 1,359,371 | - | (75,906) | - | 1,283,465 | 1,258,163 | - | (75,906) | 1,182,257 | ||||||||||||||||||
Non-compete | 198,999 | - | (72,723) | - | 126,276 | 102,035 | - | (37,815) | 64,220 | ||||||||||||||||||
GI customer list | 85,967 | - | (5,373) | - | 80,594 | 78,803 | - | (5,373) | 73,430 | ||||||||||||||||||
Supply agreement | 1,229,047 | - | (56,724) | - | 1,172,323 | 1,153,415 | - | (56,724) | 1,096,691 | ||||||||||||||||||
Distribution agreement | 7,113,253 | - | (288,375) | - | 6,824,878 | 6,728,753 | - | (288,375) | 6,440,378 | ||||||||||||||||||
Production agreement | 335,002 | - | (167,499) | - | 167,503 | 111,670 | - | (111,670) | - | ||||||||||||||||||
Grower relationships | 1,964,024 | - | (79,056) | - | 1,884,968 | 1,858,616 | - | (79,056) | 1,779,560 | ||||||||||||||||||
Intellectual property | 22,870,760 | - | (858,916) | - | 22,011,844 | 21,725,539 | - | (858,915) | 20,866,624 | ||||||||||||||||||
Internal use software | 521,593 | 118,122 | - | - | 639,715 | 677,779 | - | (50,832) | 626,947 | ||||||||||||||||||
$ | 34,939,079 | $ | - | $ | (1,628,026) | $ | 33,311,053 | ||||||||||||||||||||
$ | 37,006,802 | $ | 118,122 | $ | (1,667,932) | $ | - | $ | 35,456,992 |
Balance at | Foreign Currency | Balance at | Balance at | Balance at | |||||||||||||||||||||||
July 1, 2015 | Additions | Amortization | Translation | June 30, 2016 | July 1, 2016 | Additions | Amortization | June 30, 2017 | |||||||||||||||||||
Trade name | $ | 1,377,840 | $ | 45,000 | $ | (82,208) | $ | (11,846) | $ | 1,328,786 | $ | 1,328,786 | $ | - | $ | (84,480) | $ | 1,244,306 | |||||||||
Customer relationships | 968,619 | 462,000 | (60,314) | (10,934) | 1,359,371 | 1,359,371 | - | (101,208) | 1,258,163 | ||||||||||||||||||
Non-compete | 301,354 | 30,000 | (125,815) | (6,540) | 198,999 | 198,999 | - | (96,964) | 102,035 | ||||||||||||||||||
GI customer list | 93,131 | - | (7,164) | - | 85,967 | 85,967 | - | (7,164) | 78,803 | ||||||||||||||||||
Supply agreement | 1,304,679 | - | (75,632) | - | 1,229,047 | 1,229,047 | - | (75,632) | 1,153,415 | ||||||||||||||||||
Distribution agreement | 7,497,750 | - | (384,497) | - | 7,113,253 | 7,113,253 | - | (384,500) | 6,728,753 | ||||||||||||||||||
Production agreement | 558,334 | - | (223,332) | - | 335,002 | 335,002 | - | (223,332) | 111,670 | ||||||||||||||||||
Grower relationships | 2,183,485 | - | (120,481) | (98,980) | 1,964,024 | 1,964,024 | - | (105,408) | 1,858,616 | ||||||||||||||||||
Intellectual property | 23,719,724 | 536,000 | (1,159,656) | (225,308) | 22,870,760 | 22,870,760 | - | (1,145,221) | 21,725,539 | ||||||||||||||||||
Internal use software | 162,417 | 359,176 | - | - | 521,593 | 521,593 | 156,186 | - | 677,779 | ||||||||||||||||||
$ | 38,167,333 | $ | 1,432,176 | $ | (2,239,099) | $ | (353,608) | $ | 37,006,802 | $ | 37,006,802 | $ | 156,186 | $ | (2,223,909) | $ | 34,939,079 |
Amortization expense totaled $555,977$499,634 and $558,358$555,977 for the three months ended March 31, 20172018 and 2016,2017, respectively. Amortization expense totaled $1,667,932$1,628,026 and $1,673,048$1,667,932 for the nine months ended March 31, 20172018 and 2016,2017, respectively. Estimated aggregate remaining amortization is as follows:
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||
Amortization expense | $ | 555,977 | $ | 2,054,597 | $ | 1,909,612 | $ | 1,909,612 | $ | 1,909,612 | $ | 27,117,582 |
2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | |||||||||||||
Amortization expense | $ | 494,347 | $ | 1,977,388 | $ | 1,977,388 | $ | 1,977,388 | $ | 1,977,388 | $ | 24,907,154 |
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NOTE 54 - PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment were as follows:
March 31, | June 30, | March 31, | June 30, | |||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
Land and improvements | $ | 3,091,558 | $ | 2,908,501 | $ | 2,083,687 | $ | 2,223,674 | ||||
Buildings and improvements | 6,391,988 | 6,192,522 | 8,930,265 | 6,401,277 | ||||||||
Machinery and equipment | 5,156,871 | 4,781,586 | 5,718,765 | 5,435,542 | ||||||||
Vehicles | 1,080,354 | 1,080,354 | 1,159,636 | 1,005,455 | ||||||||
Construction in progress | 1,149,349 | 256,935 | 143,506 | 2,196,513 | ||||||||
Total property, plant and equipment | 16,870,120 | 15,219,898 | 18,035,859 | 17,262,461 | ||||||||
Less: accumulated depreciation | (3,404,315) | (2,619,792) | (4,538,937) | (3,680,885) | ||||||||
Property, plant and equipment, net | $ | 13,465,805 | $ | 12,600,106 | $ | 13,496,922 | $ | 13,581,576 |
Depreciation expense totaled $242,582$338,951 and $237,704$242,582 for the three months ended March 31, 20172018 and 2016,2017, respectively. Depreciation expense totaled $807,778$969,792 and $703,053$807,778 for the nine months ended March 31, 20172018 and 2016,2017, respectively.
NOTE 65 - DEBT
Total debt outstanding, excluding convertible debt addressed in Note 7,6, are presented on the consolidated balance sheet as follows:
March 31, | June 30, | March 31, | June 30, | |||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
Working capital lines of credit | ||||||||||||
KeyBank | $ | 28,975,875 | $ | 12,308,828 | $ | 19,434,357 | $ | 18,695,896 | ||||
National Australia Bank Limited | 7,190,622 | 4,378,645 | 5,838,320 | 8,703,888 | ||||||||
Total working capital lines of credit | 36,166,497 | 16,687,473 | ||||||||||
Debt issuance costs | (143,988) | - | ||||||||||
Total working capital lines of credit, net | $ | 25,128,689 | $ | 27,399,784 | ||||||||
Current portion of long-term debt | ||||||||||||
Capital lease | $ | 28,737 | $ | 26,648 | ||||||||
Keith facility (building loan) - National Australia Bank Limited | - | 37,205 | 3,841 | - | ||||||||
Keith facility (machinery & equipment loans) - National Australia Bank Limited | 161,411 | 137,889 | 203,232 | 183,016 | ||||||||
Unsecured subordinate promissory note - related party | 100,000 | 100,000 | ||||||||||
Unsecured subordinate promissory note | 100,000 | 100,000 | ||||||||||
Promissory note - DuPont Pioneer | 10,000,000 | - | - | 10,000,000 | ||||||||
Total current portion | 10,261,411 | 275,094 | ||||||||||
Secured real estate note - Conterra | 229,789 | - | ||||||||||
Debt issuance costs | (77,272) | - | ||||||||||
Secured equipment note - Conterra | 37,824 | - | ||||||||||
Debt issuance costs | (16,854) | - | ||||||||||
Total current portion, net | 509,297 | 10,309,664 | ||||||||||
Long-term debt, less current portion | ||||||||||||
Capital lease | - | 26,648 | ||||||||||
Keith facility (building loan) - National Australia Bank Limited | 496,828 | 446,454 | 437,874 | 499,524 | ||||||||
Keith facility (machinery & equipment loans) - National Australia Bank Limited | 543,586 | 567,879 | 500,556 | 569,983 | ||||||||
Unsecured subordinate promissory note - related party | - | 100,000 | ||||||||||
Promissory note - DuPont Pioneer | - | 10,000,000 | ||||||||||
Total long-term portion | 1,040,414 | 11,114,333 | ||||||||||
Total debt | $ | 11,301,825 | $ | 11,389,427 | ||||||||
Secured real estate note - Conterra | 10,170,211 | - | ||||||||||
Debt issuance costs | (119,765) | - | ||||||||||
Secured equipment note - Conterra | 2,062,176 | - | ||||||||||
Debt issuance costs | (12,531) | - | ||||||||||
Total long-term portion, net | 13,038,521 | 1,096,155 | ||||||||||
Total debt, net | $ | 13,547,818 | $ | 11,405,819 |
22
On September 22, 2015, the Company and KeyBank National Association ("KeyBank") entered into a credit and securitiessecurity agreement and related agreements with respect to a $20,000,000 aggregate principal amount revolving credit facility (the "KeyBank Credit Facility"). All amounts of unpaid principal and interest due under the KeyBank Credit Facility must be paid in full on or before September 21, 2017.
23
On October 4, 2016, the Company and KeyBank entered into a Second Amendment Agreement effective September 30, 2016 (the "Second Amendment"). The purpose of the Second Amendment was to provide certain temporary changes to the terms with KeyBank. Key provisions of the KeyBank Credit Facility, including: (i) temporarily increasing the borrowing capacity from $20.0 million to (a) up to $25.0 million between October 1, 2016 and November 30, 2016 and (b) up to $30.0 million from February 1, 2017 through March 31, 2017; (ii) temporarily allowing for a $4.0 million over-advance beyond the amounts otherwise available based on the borrowing base calculations, which will be available through February 28, 2017; and (iii) temporarily expanding the borrowing base by reducing the reservesas amended, include:
On March 13, 2017, the Company entered into a Third Amendment Agreement (the " Third Amendment"). The purpose of the Third Amendment was to provide certain temporary changes to the terms of the KeyBank Credit Facility, including: (i) further extending the temporary period during which the Company may borrow, repay and reborrow, of up to $30.0$35.0 million in the aggregate, undersubject to a requirement that the credit facility until April 21, 2017;Company maintain a reduced loan balance of (i) not more than $20.0 million for at least 30 consecutive days over the prior twelve months (measured each quarter on a trailing 12 month basis) and (ii) retroactivelynot more than $25.0 million for at least 60 consecutive days over the prior twelve months (measured each quarter on a trailing 12 month basis).
Subject to the temporary changes effected by the Second Amendment, the KeyBank Credit Facility generally establishes aSeptember 12, 2019.
24
On October 1, 2012, the Company issued a five-year subordinated promissory note to IVS in the principal amount of $500,000 (the "IVS Note"), with a maturity date of October 1, 2017. The IVS Note accrues interest at a rate equal to one-month LIBOR at closing plus 2%, which equals 2.2%. Interest is payable in five annual installments, in arrears, on October 1 of each year. Amortizing payments of the principal of $100,000 will also be made on each October 1, with any remaining outstanding principal and accrued interest payable on the maturity date of the IVS Note. The outstanding balance on the IVS Note was $100,000 at March 31, 2017.
On December 31, 2014, the Company issued a three-year secured promissory note to DuPont Pioneer in the initial principal amount of $10,000,000 (the "Pioneer Note"), with a maturity date of December 31, 2017. The Pioneer Note accruesaccrued interest at 3% per annum. Interest iswas payable in three annual installments, in arrears, commencing on December 31, 2015. On December 31, 2014, the Company also issued contingent consideration to DuPont Pioneer which requiresrequired the Company to increase the principal amount of the Pioneer Note by up to an additional $5,000,000 if the Company meetsmet certain performance metrics during the three-year period following December 31, 2014. The fair valueearn out payment to DuPont Pioneer was finalized in October 2017 and this amount of $2,500,000 was added to the Pioneer Note in October 2017. On December 1, 2017, the Company repaid the Pioneer Note. The repayment amount included the $2.5 million earn-out payment related to the Pioneer Acquisition that was added to the principal amount of the contingent consideration arrangement was $2,290,850Pioneer Note in October 2017.
23
On November 30, 2017, the Company entered into a secured note financing transaction (the "Loan Transaction") with Conterra Agricultural Capital, LLC ("Conterra") for $12.5 million in gross proceeds. Pursuant to the Loan Transaction, the Company issued two secured promissory notes (the "Notes") to Conterra as follows:
The Notes and related documents include customary representations and warranties in addition to customary affirmative and negative covenants (including financial covenants), and customary events of default that permit Conterra to accelerate the Company's obligations under the Notes, including, among other things, that a default under one of the Notes would constitute a default under the other Note. On December 1, 2017, the Company used the proceeds from the Loan Transaction to repay the Pioneer Note.
SGIS&W Australia finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank Ltd ("NAB"). The current facility, referred to as the 2016 NAB Facilities, was amended as of March 30, 2017April 13, 2018 and expires on March 30, 2019.31, 2020. As of March 31, 2017,2018, AUD $9,407,499$7,600,000 (USD $7,190,622)$5,838,320) was outstanding under the 2016 NAB Facilities.
The 2016 NAB Facilities, as currently in effect, comprises two distinct facility lines: (i) an overdraft facility (the "Overdraft Facility"), having a credit limit of AUD $980,000$1,000,000 (USD $749,063$768,200 at March 31, 2017)2018) and a borrowing base facility (the "Borrowing Base Facility"), having a credit limit of AUD $12,000,000 (USD $9,172,200$9,218,400 at March 31, 2017)2018).
24
The Borrowing Base Facility permits SGIS&W Australia to borrow funds for periods of up to 180 days, at SGI'sS&W Australia's discretion, provided that the term is consistent with its trading terms. Interest for each drawdown is set at the time of the drawdown as follows: (i) for Australian dollar drawings, based on the Australian Trade Refinance Rate plus 1.5% per annum and (ii) for foreign currency drawings, based on the British Bankers' Association Interest Settlement Rate for the relevant foreign currency for the relevant period, or if such rate is not available, the rate reasonably determined by NAB to be the appropriate equivalent rate, plus 1.5% per annum. As of March 31, 2017,2018, the Borrowing Base Facility accrued interest on Australian dollar drawings at approximately 4.90%5.18% calculated daily. The Borrowing Base Facility is secured by a lien on all the present and future rights, property and undertakings of SGI,S&W Australia, the mortgage on SGI'sS&W Australia's Keith, South Australia property and the Company's corporate guarantee (up to a maximum of AUD $15,000,000).
The Overdraft Facility permits SGIS&W Australia to borrow funds on a revolving line of credit up to the credit limit. Interest accrues daily and is calculated by applying the daily interest rate to the balance owing at the end of the day and is payable monthly in arrears. As of March 31, 2017,2018, the Overdraft Facility accrued interest at approximately 6.77% calculated daily.
25
For both the Overdraft Facility and the Borrowing Base Facility, interest is payable each month in arrears. In the event of a default, as defined in the NAB Facility Agreement, the principal balance due under the facilities will thereafter bear interest at an increased rate per annum above the interest rate that would otherwise have been in effect from time to time under the terms of each facility (i.e., the interest rate increases by 4.5% per annum under the Borrowing Base Facility and the Overdraft Facility rate increases to 13.92% per annum upon the occurrence of an event of default).
Both facilities constituting the 2016 NAB Facilities are secured by a fixed and floating lien over all the present and future rights, property and undertakings of SGIS&W Australia and are guaranteed by the Company as noted above. The 2016 NAB Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate SGI'sS&W Australia's outstanding obligations, all as set forth in the NAB facility agreements. SGIS&W Australia was in compliance with all NAB debt covenants at March 31, 2017.2018.
In January 2015, NAB and SGIS&W Australia entered into a new business markets - flexible rate loan (the "Keith Building Loan") in the amount of AUD $650,000 (USD $496,828 at March 31, 2017). Since entering into the Keith Building Loan, the limit has been changed on two occasions, with the current limit being AUD $750,000 (USD $573,263 at March 31, 2017), and a separate machinery and equipment facility (the "Keith Machinery and Equipment Facility") has been added of up to AUD $1,200,000 (USD $917,220 at March 31, 2017). At March 31, 2017,2018, the principal balance on the Keith Building Loan was AUD $650,000$575,000 (USD $496,828)$441,715) with unused availability of AUD $100,000 (USD $76,436)$76,820). At March 31, 2017,2018, the principal balance on the Keith Machinery and Equipment Facility was AUD $746,183$569,275 (USD $570,345)$437,317) with no unused availability of AUD $271,851 (USD $207,789).availability. In February 2016, NAB and SGIS&W Australia also entered into a master asset finance facility (the "Master Assets Facility)Facility"). At March 31, 2017,2018, the principal balance on the Master Assets Facility was AUD $176,165$346,877 (USD $134,652)$266,471) with unused availability of AUD $23,835$403,123 (USD $18,218)$309,679). The Master Asset Facility has various maturity dates through 2021 and have interest rates ranging from 4.86%4.89% to 5.31%.
25
The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a building on SGI'sS&W Australia's Keith, South Australia property, purchase of adjoining land and for the machinery and equipment for use in the operations of the building. The Keith Building Loan matures on November 30, 2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such period approximately 30 days), based on the weighted average of a specified basket of interest rates (5.96%(6.15% as of March 31, 2017)2018). Interest is payable each month in arrears. The Keith Machinery and Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate quoted by NAB at the time of the drawdown, plus 2.9%. The Keith Credit Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate SGI'sS&W Australia's outstanding obligations, all as set forth in the facility agreement. They are secured by a lien on all the present and future rights, property and undertakings of SGI,S&W Australia, the Company's corporate guarantee and a mortgage on SGI'sS&W Australia's Keith, South Australia property.
26
The annual maturities of short-term and long-term debt excluding convertible debt addressed in Note 7, are as follows:
Fiscal Year | Amount | Amount | ||||
2017 | $ | 39,601 | ||||
2018 | 10,263,438 | $ | 149,864 | |||
2019 | 252,059 | 505,969 | ||||
2020 | 277,018 | 2,660,221 | ||||
2021 | 203,360 | 10,171,291 | ||||
2022 | 91,004 | |||||
Thereafter | 266,349 | 195,891 | ||||
Total | $ | 11,301,825 | $ | 13,774,240 |
NOTE 76 - SENIOR CONVERTIBLE NOTES AND WARRANTS
On December 31, 2014, the Company consummated the sale of senior secured convertible debentures (the "Debentures") and common stock purchase warrants (the "Warrants") to various institutional investors ("Investors") pursuant to the terms of a securities purchase agreement among the Company and the Investors. At closing, the Company received $27,000,000 in gross proceeds. Offering expenses of $1,931,105 attributed to the Debentures were recorded as deferred financing fees and recorded as a debt discount and offering expenses of $424,113 attributed to the Warrants were expensed during the year ended June 30, 2015. The net proceeds were paid directly to DuPont Pioneer in partial consideration for the purchase of certain DuPont Pioneer assets, the closing for which also took place on December 31, 2014.
Debentures
At the date of issuance, the Debentures were due and payable on November 30, 2017, unless earlier converted or redeemed. The Debentures bear interest on the aggregate unconverted and then outstanding principal amount at 8% per annum, payable in arrears monthly beginning February 2, 2015. Commencing on the occurrence of any Event of Default (as defined in the Debentures) that results in the eventual acceleration of the Debentures, the interest rate will increase to 18% per annum. The monthly interest is payable in cash, or in any combination of cash or shares of the Company's common stock at the Company's option, provided certain "equity conditions" defined in the Debentures are satisfied.
26
Beginning on July 1, 2015, the Company was required to make monthly payments of principal as well, payable in cash or any combination of cash or shares of its common stock at the Company's option, provided all of the applicable equity conditions are satisfied. The Debentures contain certain rights of acceleration and deferral at the holder's option in the event a principal payment is to be made in stock and contains certain limited acceleration rights of the Company, provided certain conditions are satisfied.
During Fiscal Year 2016, the Company accelerated three redemption payments totaling $2,830,049.
27
Total convertible debt outstanding, excluding debt addressed in Note 6, is presented on the consolidated balance sheet as follows:
As of March 31, 2017, the Debentures were fully retired and had no outstanding balance.
The Debentures were initially convertible, at the holder's option, into the Company's common stock at a conversion price of $5.00. Pursuant to the terms of the Debentures, the conversion price was reset to $4.63 on September 30, 2015.
During the nine monthsyear ended March 31,June 30, 2017, certain holders of the Debentures converted an aggregate of $3,168,342 of principal and interest into 684,321 shares of the Company's common stock in accordance with the terms of the Debentures. Upon conversion, the Company recognized interest expense of $194,939 related to unamortized debt discount on the Debentures and incurred $7,070 of stock issuance costs.
As of June 30, 2017, the Debentures were fully retired and had no outstanding balance.
Warrants
The Warrants entitle the holders to purchase, in the aggregate, 2,699,999 shares of the Company's common stock. The Warrants are exercisable through their expiration on June 30, 2020, unless earlier redeemed. The Warrants were initially exercisable at an exercise price equal to $5.00. On September 30, 2015, pursuant to the terms of the Warrants, the exercise price was reset to $4.63. In addition, if the Company issues or is deemed to have issued securities at a price lower than the then applicable exercise price during the three-year period ending December 31, 2017, the exercise price of the Warrants will adjust based on a weighted average anti-dilution formula ("down-round protection"). On November 24, 2015, the Company closed on a private placement transaction in which 1,180,722 common shares were sold at $4.15 per share. Pursuant to the down-round protection terms of the Warrants, the exercise price was adjusted to $4.59 on November 24, 2015. On February 29, 2016, the Company completed a rights offering and accompanying noteholders' participation rights offering in which an aggregate of 2,125,682 shares of common stock were sold at $4.15 per share, triggering an adjustment of the exercise price of the Warrants to $4.53. On July 19, 2017, the Company completed a private placement transaction in which an aggregate of 2,685,000 shares of common stock were sold at $4.00 per share, triggering an adjustment of the exercise price of the Warrants to $4.46. On December 22, 2017, the Company completed a rights offering and backstop commitment in which an aggregate of 3,500,000 shares of common stock were sold at $3.50 per share, triggering an adjustment of the exercise price of the Warrants to $4.32. The down-round protection provision of the warrants expired on December 31, 2017.
The Warrants may be exercised for cash, provided that, if there is no effective registration statement available registering the exercise of the Warrants, the Warrants may be exercised on a cashless basis. At any time that (i) all equity conditions set forth in the Warrants have been satisfied, and (ii) the closing sales price of the common stock equals or exceeds $12.00 for 15 consecutive trading days (subject to adjustment for stock splits, reverse stock splits and other similar recapitalization events), the Company may redeem all or any part of the Warrants then outstanding for cash in an amount equal to $0.25 per Warrant.
2827
Accounting for the Conversion Option and Warrants
Due to the down-round price protection included in the terms of the Warrants, the Warrants are treated as a derivative liability in the consolidated balance sheet, measured at fair value and marked to market each reporting period until the earlier of the Warrants being fully exercised or December 31, 2017, when the down-round protection expires. The down-round price protection expired on December 31, 2017, accordingly, the fair value of the Warrants as of December 31, 2017 was reclassified to additional paid in capital within the equity section of the balance sheet. The initial fair value of the Warrants on December 31, 2014 was $4,862,000. At MarchDecember 31, 2017 and June 30, 2016,2017, the fair value of the Warrants was estimated at $3,512,700$2,405,300 and $4,354,100,$2,836,600, respectively. The Warrants were valued at MarchDecember 31, 2017 using the Monte Carlo simulation model, under the following assumptions: (i) remaining expected life of 3.252.5 years, (ii) volatility of 46.5%39.0%, (iii) risk-free interest rate of 1.92% and (iv) dividend rate of zero. The aggregate fair value of the Warrants derived via the Monte Carlo analysis were also weighted by a prior third-party market transaction and third-party indications of fair value. The prior third-party market transaction was provided a weighting of 10.0% while the third-party indications of fair value were provided a 50% weighting in the fair value analysis.
The Warrants were valued at June 30, 2017 using the Monte Carlo simulation model, under the following assumptions: (i) remaining expected life of 3 years, (ii) volatility of 45.6%, (iii) risk-free interest rate of 1.54% and (iv) dividend rate of zero. The aggregate fair value of the Warrants derived via the Monte Carlo analysis were also weighted by a prior third partythird-party market transaction and third partythird-party indications of fair value. The prior third partythird-party market transaction was provided a weighting of 10.0% while the third partythird-party indications of fair value were provided a 50% weighting in the fair value analysis. The Warrants were valued at June 30, 2016 using the Monte Carlo simulation model, under the following assumptions: (i) remaining expected life of 4.0 years, (ii) volatility of 49.9%, (iii) risk-free interest rate of 0. 86% and (iv) dividend rate of zero. The aggregate fair value of the Warrants derived via the Monte Carlo analysis were also weighted by a prior third party market transaction. The prior third party market transaction was provided a weighting of 10.0% in the fair value analysis.
Of the $27,000,000 in principal amount of Debentures sold in December 2014, $22,138,000 of the initial proceeds was allocated to the Debentures. The required redemption contingent upon the real estate sale was determined to be an embedded derivative not clearly and closely related to the borrowing. As such, it was bifurcated and treated as a derivative liability, recorded initially at its fair value of $150,000, leaving an allocation to the host debt of $21,988,000. The difference between the initial amount allocated to the borrowing and the face value of the Debentures is beingwas amortized over the term of the Debentures using the effective interest method. Debt issuance costs totaling $1,931,105 arewere also being amortized over the term of the Debentures using the effective interest method. In addition, the reduction in the conversion price of the Debentures as of September 30, 2015 resulted in a beneficial conversion feature of $871,862, which was recognized as additional debt discount and an increase to additional paid-in capital.
NOTE 87 - WARRANTS
The following table summarizes the total warrants outstanding at March 31, 2017:2018:
Issue Date | Exercise Price Per Share | Expiration Date | Outstanding as of June 30, 2016 | New Issuances | Expired | Outstanding as of March 31, 2017 | |||||||||
Underwriter warrants | May 2012 | $ | 6.88 | Feb 2017 | 50,000 | - | (50,000) | - | |||||||
Warrants | Dec 2014 | $ | 4.53 | Jun 2020 | 2,699,999 | - | - | 2,699,999 | |||||||
2,749,999 | - | (50,000) | 2,699,999 |
|
|
|
|
|
| Exercise Price |
|
| Expiration |
|
| Outstanding as |
|
|
|
|
|
|
|
| Outstanding as |
|
|
| Issue Date |
|
| Per Share |
|
| Date |
|
| of June 30, 2017 |
|
| New Issuances |
|
| Expired |
|
| of March 31, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
| Dec 2014 |
| $ | 4.32 |
|
| Jun 2020 |
|
| 2,699,999 |
|
| - |
|
| - |
|
| 2,699,999 |
|
|
|
|
|
|
|
|
|
|
|
| 2,699,999 |
|
| - |
|
| - |
|
| 2,699,999 |
28
The following table summarizes the total warrants outstanding at June 30, 2016:2017:
|
|
|
| Exercise Price |
| Expiration |
| Outstanding as |
|
|
|
|
| Outstanding as | ||||||||||||||||||||||
Issue Date | Exercise Price Per Share | Expiration Date | Outstanding as of June 30, 2015 | New Issuances | Expired | Outstanding as of June 30, 2016 |
| Issue Date |
| Per Share |
| Date |
| of June 30, 2016 |
| New Issuances |
| Expired |
| of June 30, 2017 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Underwriter warrants | May 2012 | $ | 6.88 | Feb 2017 | 50,000 | - | - | 50,000 |
| May 2012 |
| $ | 6.88 |
| Feb 2017 |
| 50,000 |
| - |
| (50,000) |
| - | |||||||||||||
Warrants | Dec 2014 | $ | 4.53 | Jun 2020 | 2,699,999 | - | - | 2,699,999 |
| Dec 2014 |
| $ | 4.53 |
| Jun 2020 |
| 2,699,999 |
| - |
| - |
| 2,699,999 | |||||||||||||
2,749,999 | - | - | 2,749,999 |
|
|
|
|
|
|
| 2,749,999 |
| - |
| (50,000) |
| 2,699,999 |
The warrants issued in December 2014 arewere subject to down-round price protection.protection until December 31, 2017. See Note 7 under the heading "Warrants"6 for further discussion.
29
NOTE 98 - FOREIGN CURRENCY CONTRACTS
The Company's subsidiary, SGI,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 $9,244,230$3,579,325 at March 31, 20172018 and their maturities range from April 2018 to August 2017.July 2018.
The Company records an asset or liability on the consolidated balance sheet for the fair value of the foreign currency forward contracts. The foreign currency contract assetsliability totaled $173,192$22,449 at March 31, 2017 compared to2018 and the foreign currency contract assets of $49,808asset totaled $166,629 at June 30, 2016.2017. The Company recorded a gainloss on foreign exchange contracts of $360,216$91,811 and $110,346,a gain of $360,216, which is reflected in cost of revenue, for the three months ended March 31, 20172018 and 2016,2017, respectively. The Company recorded a loss on foreign exchange contracts of $212,859$192,360 and $275,123,$212,859, which is reflected in cost of revenue for the nine months ended March 31, 2018 and 2017, and 2016, respectively.
NOTE 109 - COMMITMENTS AND CONTINGENCIES
Commitments
In the DuPont Pioneer Acquisition, DuPont Pioneer retained ownership of its GMO (genetically modified) alfalfa germplasm and related intellectual property assets, as well as the right to develop new GMO-traited alfalfa germplasm. The retained GMO germplasm assets incorporate certain GMO traits that are licensed to DuPont Pioneer from third parties (the "Third Party GMO Traits").
Pursuant to the terms of the Asset Purchase and Sale Agreement for the DuPont Pioneer Acquisition, if required third party consents are received prior to November 30, 2017 and subject to the satisfaction of certain other conditions specified in the Asset Purchase and Sale Agreement, either the Company or DuPont Pioneer has the right to enter into (and require the other party to enter into) on December 29, 2017 (or such earlier date as the parties agree) a proposed form of asset purchase and sale agreement, as the same may be updated in accordance with the terms of the Asset Purchase and Sale Agreement, pursuant to which Company would acquire additional GMO germplasm varieties and other related assets from DuPont Pioneer for a purchase price of $7,000,000.
Contingencies
Based on information currently available, management is not aware of any other matters that would have a material adverse effect on the Company's financial condition, results of operations or cash flows.
Legal Matters
The Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and regardless of 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.
29
NOTE 1110 - RELATED PARTY TRANSACTIONS
Glen D. Bornt, a member of the Company's Board of Directors until January 9, 2018, is the founder and President of Imperial Valley Milling Co. ("IVM"). He is itsIVM's majority shareholder and a member of its Board of Directors. Fred Fabre, the Company's Vice President of Sales and Marketing,Glen D. Bornt is also a minoritymajority shareholder of IVM.
30
Kongal Seeds Pty. Ltd. ("Kongal"). IVM had a 15-year supply agreement with IVS, and this agreement was assigned by IVS to the Company when it purchased the assets of IVS in October 2012. IVM contracts with alfalfa seed growers in California's Imperial Valley and sells its growers' seed to the Company pursuant to a supply agreement. Under the terms of the supply agreement, IVM's entire certified and uncertified alfalfa seed production must be offered and sold to the Company, and the Company has the exclusive option to purchase all or any portion of IVM's seed production. The Company paid $8,232,216$2,458,889 to IVM during the nine months ended March 31, 2017.2018. Amounts due to IVM totaled $77,599$120,081 and $396,027$326,941 at March 31, 20172018 and June 30, 2016,2017, respectively. The Company paid $155,215 to Kongal during the nine months ended March 31, 2018. Amounts due to Kongal totaled $0 and $4,753 at March 31, 2018 and June 30, 2017, respectively.
On July 19, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers, including MFP Partners, L.P. ("MFP"), a stockholder of the Company, and certain entities related to Wynnefield Capital Management LLC (collectively, "Wynnefield"), pursuant to which MFP purchased approximately $3.7 million of shares of its common stock and Wynnefield purchased approximately $3.0 million of shares of its common stock. Each of MFP and Wynnefield is a beneficial owner of more than 5% of the Company's common stock. Alexander C. Matina, a member of the Company's Board, is Vice President, Investments of MFP. Robert Straus, a member of the Company's Board since January 9, 2018, is a Portfolio Manager and Analyst at Wynnefield.
30
On October 11, 2017, the Company entered into a Securities Purchase Agreement with Mark W. Wong, the Company's President and Chief Executive Officer, pursuant to which the Company sold and issued an aggregate of 75,000 shares of its Common Stock at a purchase price of $3.50 per share, for aggregate gross proceeds of $262,500.
On December 22, 2017, the Company completed the closing of its previously announced rights offering. At the closing, the Company sold and issued an aggregate of 2,594,923 shares of its Common Stock at a subscription price of $3.50 per share pursuant to the exercise of subscriptions and oversubscriptions in the rights offering from its existing stockholders. Pursuant to an Investment Agreement, dated October 3, 2017, between the Company and MFP, MFP agreed to purchase, at the subscription price, all of the shares not purchased in the Rights Offering (the "Backstop Commitment"). Accordingly, on December 22, 2017, the Company and MFP completed the closing of the Backstop Commitment, in which the Company sold and issued 905,077 shares of its Common Stock to MFP. Combined, the Company sold and issued an aggregate of 3,500,000 shares of its common stock for aggregate gross proceeds of $12.25 million.
NOTE 1211 - EQUITY-BASED COMPENSATION
2009 Equity Incentive Plan
In October 2009 and January 2010, the Company's Board of Directors and stockholders, respectively, approved the 2009 Equity Incentive Plan (as amended and/or restated from time to time, the "2009 Plan"). The 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 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.
The term of incentive stock options granted under the 2009 Plan 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 2009 Plan 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.
31
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.
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.
31
Weighted average assumptions used in the Black-Scholes-Merton model are set forth below:
March 31, | June 30, | March 31, | ||||||
2017 | 2016 | 2018 | 2017 | |||||
Risk free rate | 1.2% - 1.9% | 1.5% - 1.6% | 1.9% - 2.3% | 1.2% - 1.9% | ||||
Dividend yield | 0% | 0% | 0% | 0% | ||||
Volatility | 39.2% - 51.6% | 50.4% - 50.8% | 45.5% | 39.2% - 51.6% | ||||
Average forfeiture assumptions | 2.4% | 6.1% | 1.4% | 2.4% |
During the nine months ended March 31, 2017,2018, the Company granted 80,610103,283 options to its directorsthe Directors, certain members of the executive management team and officersother employees at exercise prices ranging from $4.75 - $4.86.$3.00 to $4.03. These options vest in either quarterly or annual periods ranging fromover one year annually to quarterly over three years, and expire ten years from the date of grant.
A summary of stock option activity for the nine months ended March 31, 20172018 and year ended June 30, 20162017 is presented below:
Weighted - | Weighted- | |||||||||||||||||||||
Weighted - | Average | Weighted - | Average | |||||||||||||||||||
Average | Remaining | Aggregate | Average | Remaining | Aggregate | |||||||||||||||||
Number | Exercise Price | Contractual | Intrinsic | Number | Exercise Price | Contractual | Intrinsic | |||||||||||||||
Outstanding | Per Share | Life (Years) | Value | Outstanding | Per Share | Life (Years) | Value | |||||||||||||||
Outstanding at June 30, 2015 | 901,697 | $ | 5.33 | 4.1 | $ | 392,850 | ||||||||||||||||
Granted | 203,500 | 4.56 | 9.7 | - | ||||||||||||||||||
Exercised | (14,582) | 3.95 | - | - | ||||||||||||||||||
Canceled/forfeited/expired | (69,197) | 6.08 | - | - | ||||||||||||||||||
Outstanding at June 30, 2016 | 1,021,418 | 5.14 | 4.2 | 142,381 | 1,021,418 | $ | 5.14 | 4.2 | 142,381 | |||||||||||||
Granted | 80,610 | 4.81 | - | - | 230,610 | 4.19 | - | - | ||||||||||||||
Exercised | (232,000) | 4.20 | - | - | (232,000) | 4.20 | - | - | ||||||||||||||
Canceled/forfeited/expired | (29,500) | 5.95 | - | - | (29,500) | 5.95 | - | - | ||||||||||||||
Outstanding at March 31, 2017 | 840,528 | 5.34 | 4.7 | 293,619 | ||||||||||||||||||
Options vested and exercisable at March 31, 2017 | 650,694 | 5.57 | 4.2 | 218,448 | ||||||||||||||||||
Options vested and expected to vest as of March 31, 2017 | 840,180 | $ | 5.34 | 4.7 | $ | 293,493 | ||||||||||||||||
Outstanding at June 30, 2017 | 990,528 | 5.12 | 4.3 | 100,344 | ||||||||||||||||||
Granted | 103,283 | 3.45 | - | - | ||||||||||||||||||
Exercised | (49,000) | 3.95 | - | - | ||||||||||||||||||
Canceled/forfeited/expired | (214,000) | 6.72 | - | - | ||||||||||||||||||
Outstanding at March 31, 2018 | 830,811 | 4.57 | 6.2 | 32,378 | ||||||||||||||||||
Options vested and exercisable at March 31, 2018 | 592,873 | 4.86 | 5.1 | 4,394 | ||||||||||||||||||
Options vested and expected to vest as of March 31, 2018 | 830,053 | $ | 4.57 | 6.2 | $ | 32,140 |
The weighted average grant date fair value of options granted and outstanding at March 31, 20172018 was $1.45.$1.52. At March 31, 2017,2018, the Company had $298,860$333,457 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the 2009 Plan, which will be recognized over the weighted average remaining service period of 1.41.84 years. The Company settles employee stock option exercises with newly issued shares of common stock.
On July 15, 2015, the Company issued 88,333 restricted stock units to certain members of the executive management team. The restricted stock units have varying vesting periods whereby 13,250 restricted stock units vest on October 1, 2015 and the remaining 75,083 restricted stock units vest quarterly in equal installments over a three-year period, commencing on July 1, 2015. The fair value of the award was $420,465 and was based on the closing stock price on the date of grant.
On December 11, 2015, the Company issued 28,059 restricted stock units to certain members of the executive management team and other employees. The restricted stock units have varying vesting periods whereby 500 restricted stock units vest on December 11, 2015, 4,259 restricted stock units vest in quarterly installments over a one-year period, and the remaining 23,300 restricted stock units vest annually in equal installments over a three-year period. The fair value of the award was $119,251 and was based on the closing stock price on the date of grant.
On March 18, 2016, the Company issued 3,000 restricted stock units. The restricted stock units have varying vesting periods whereby 1,000 restricted stock units vested on March 18, 2016; and the remaining 2,000 restricted stock units vest annually in equal installments over a three-year period. The fair value of the award was $12,180 and was based on the closing stock price on the date of grant.
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During the nine monthsyear ended March 31,June 30, 2017, the Company issued 76,08577,275 restricted stock units to its directors, certain members of the executive management team, and other employees. The restricted stock units have varying vesting periods ranging from immediate vesting to annual installments over a three-year period. The fair value of the awards totaled $369,531$374,530 and was based on the closing stock price on the date of grants.
During the nine months ended March 31, 2018, the Company issued 78,642 restricted stock units to its directors, certain members of the executive management team and other employees. The restricted stock units vest in either quarterly or annual periods and vest in either quarterly or annual periods over three-years. The fair value of the awards totaled $279,611 and was based on the closing stock price on the date of grants.
The Company recorded $239,579$397,309 and $192,719 of stock-based compensation expense associated with grants of restricted stock units during the three months ended March 31, 2017 and 2016, respectively. The Company recorded $674,076 and $586,564 of stock-based compensation expense associated with grants of restricted stock units during the nine months ended March 31, 20172018 and 2016,2017, respectively. A summary of activity related to non-vested restricted stock units is presented below:
Nine Months Ended March 31, 2017 | ||||||||||||||||||||
Weighted - | Weighted - | |||||||||||||||||||
Number of | Weighted - | Average | Number of | Weighted- | Average | |||||||||||||||
Nonvested | Average | Remaining | Nonvested | Average | Remaining | |||||||||||||||
Restricted | Grant Date | Contractual | Restricted | Grant Date | Contractual | |||||||||||||||
Stock Units | Fair Value | Life (Years) | Stock Units | Fair Value | Life (Years) | |||||||||||||||
Beginning nonvested restricted units outstanding | 170,879 | $ | 7.51 | 1.5 | 120,971 | $ | 5.59 | 1.5 | ||||||||||||
Granted | 76,085 | 4.86 | 1.7 | 78,642 | 3.56 | 1.3 | ||||||||||||||
Vested | (79,700) | 7.75 | - | (98,358) | 5.57 | - | ||||||||||||||
Forfeited | - | - | - | (4,435) | 4.45 | - | ||||||||||||||
Ending nonvested restricted units outstanding | 167,264 | $ | 6.19 | 1.1 | 96,820 | $ | 4.01 | 1.2 |
At March 31, 2017,2018, the Company had $777,295$291,932 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the weighted average remaining service period of 1.11.18 years.
At March 31, 2017,2018, there were 705,914671,844 shares available under the 2009 Plan for future grants and awards.
Stock-based compensation expense recorded for stock options restricted stock grants and restricted stock units for the three months ended March 31, 2018 and 2017, totaled $149,198 and 2016, totaled $306,800, and $289,314, respectively. Stock- basedStock-based compensation expense recorded for stock options restricted stock grants and restricted stock units for the nine months ended March 31, 2018 and 2017, totaled $600,231 and 2016, totaled $885,459 and $917,489,$885,456, respectively.
NOTE 1312 - NON-CASH ACTIVITIES FOR STATEMENTS OF CASH FLOWS
The below table represents supplemental information to the Company's consolidated statements of cash flows for non-cash activities during the nine months ended March 31, 2018 and 2017, and 2016, respectively.
Nine Months Ended | ||||||
March 31, | ||||||
2017 | 2016 | |||||
Issuance of common stock upon conversion of principal and interest of convertible debentures | $ | 3,168,342 | $ | - |
Nine Months Ended | ||||||
March 31, | ||||||
2018 | 2017 | |||||
Issuance of common stock upon conversion of principal and interest of convertible debentures | $ | - | $ | 3,168,342 |
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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 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 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 on page 12 of 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, 2016,2017, particularly in Part I, Item 1A, "Risk Factors."Factors", as updated in Part II, Item 1A. "Risks Factors" of this Quarterly Report on Form 10-Q.
Executive Overview
Founded in 1980 and headquartered in the Central Valley ofSacramento, California, we are a global agricultural company. Grounded in our historical expertise and what we believe is our present leading position in the breeding, production and sale of alfalfa seed, we continue to build towards our goal of being recognized as the world's preferred proprietary forage, grain and specialty crop seed company. In addition to our primary activities in alfalfa seed, we have recently expanded our product portfolio by adding hybrid sorghum and sunflower seed, which complement our alfalfa seed offerings by allowing us to leverage our infrastructure, research and development expertise and our distribution channels, as we begin to diversify into what we believe are higher margin opportunities. We also continue to conduct our stevia breeding program, having filed two additional patent applications in fiscal 2016.four patents granted.
Following our initial public offering in fiscal year 2010, we expanded certain pre-existing business initiatives and added new ones, including:
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We have accomplished these expansion initiatives through a combination of organic growth and strategic acquisitions, foremost among them:
We believe our 2013 combination with SGIS&W Australia created the world's largest non-dormant alfalfa seed company and gave us the competitive advantages of year-round production in that market. With the completion of the acquisition of dormant alfalfa seed assets from DuPont Pioneer in December 2014, we believe we have become the largest alfalfa seed company worldwide (by volume), with industry-leading research and development, as well as production and distribution capabilities in both hemispheres and the ability to supply proprietary dormant and non-dormant alfalfa seed. Our operations span the world's alfalfa seed production regions, with operations in the San Joaquin and Imperial Valleys of California, five additional Western states, Australia and three provinces in Canada.
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Our May 2016 acquisition of the hybrid sorghum and sunflower germplasm business and assets of SV Genetics signals management's commitment to our strategy of identifying opportunities to diversify our product lines and improve our gross margins.
The Asset Purchase and Sale Agreement for the Pioneer Acquisition previously contemplated that, subject to the satisfaction of certain conditions, we would acquire certain GMO germplasm varieties and other related assets from DuPont Pioneer for a purchase price of $7.0 million. The conditions for this additional acquisition were not satisfied by the required date, and DuPont Pioneer has informed us that it does not intend to extend the deadline or complete the transaction at this point in time. As a result, we do not expect to close the acquisition of DuPont Pioneer's GMO germplasm varieties and related assets in the previously disclosed structure or pay the $7,000,000 purchase price.
We continue to have a long-term distribution agreement with DuPont Pioneer regarding conventional (non GMO) varieties, the term of which extends into 2024. Our production and research agreements with DuPont Pioneer (relating to GMO-traited varieties) terminated on February 28, 2018. As a result, DuPont Pioneer's minimum purchase commitments from us will be reduced by approximately $6 million annually, commencing with our Fiscal Year 2019. However, we expect that the DuPont Pioneer distribution agreement will continue to be a significant source of our annual revenue through December 2024.
We are in discussions with DuPont Pioneer regarding the orderly transition of activities previously conducted by us under the production and research agreements, as well as the possibility of certain ongoing commercial relationships between us relating to GMO-traited varieties, among other things.
Components of Our Statements of Operations Data
Revenue and Cost of Revenue
Revenue
We derive most of our revenue from the sale of our proprietary alfalfa seed varieties. We expect that over the next several years, a substantial majority of our revenue will continue to be generated from the sale of alfalfa seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into other, higher margin crops. In late fiscal year 2016, we began that expansion with the acquisition of the hybrid sorghum and sunflower business and assets of SV Genetics. Revenue from the newly-acquired SV Genetics germplasm will be primarily derived from the sale of sorghum and sunflower seed as well as royalty-based payments set forth in various licensing agreements.
Fiscal year 2016 was the first full fiscal year in which we had a full range of non-dormant and dormant alfalfa seed varieties. This is expected to enable us to significantly expand the geographic reach of our sales efforts. The mix of our product offerings will continue to change over time with the introduction of new alfalfa seed varieties resulting from our robust research and development efforts, including our potential expansion into genetically- modifiedgene edited varieties in future periods. Currently, we have a long-term distribution agreement with DuPont Pioneer, which we expect will be the source of a significant portion of our annual revenue through December 2024.
Our revenue will fluctuate depending on the timing of orders from our customers and distributors. Because some of our large customers and distributors order in bulk only one or two times per year, our product revenue may fluctuate significantly from period to period. However, some of this fluctuation is offset by having operations in both the northern and southern hemispheres.
Our stevia breeding program has yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various means to monetize the results of our effort to breed new, better tasting stevia varieties. Such potential opportunities include possible licensing agreements and royalty-based agreements.
Cost of Revenue
Cost of revenue relates to sale of our seed varieties and consists of the cost of procuring seed, plant conditioning and packaging costs, direct labor and raw materials and overhead costs.
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Operating Expenses
Research and Development Expenses
Seed and stevia 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. With the acquisition of SV Genetics in late fiscal 2016, similar costs are now being incurred as we continue the research and development efforts begun by SV Genetics in the development of new varieties of hybrid sorghum and sunflower seed germplasm. Because we have been in the alfalfa seed breeding business since our inception in 1980, we have expended far more resources in development of our proprietary alfalfa seed varieties throughout our history than on our stevia breeding program, which we commenced in fiscal year 2010.
In fiscal year 2013, we made the decision to shift the focus of our stevia program away from commercial production and towards the breeding of improved varieties of stevia. We have continued that effort, which has resulted in the granting by the USPTO of twofour patents covering stevia plant varieties SW 107, SW 201, SW 129 and SW 201. Additionally, we have applied for patent protection with the U.S. Patent and Trademark Office for SW 227 for the fresh and dry leaf market, and SW 129 for the commercial processing market.227.
Our research and development expenses increased significantly with the acquisition of the alfalfa research and development assets of DuPont Pioneer in December 2014. We also have expanded our genetics research both internally and in collaboration with third parties. In addition, we acquired additional research and development operations in connection with our May 2016 acquisition of SV Genetics that we expect will factor into an overall increase in R&D expense. Overall, we have been focused on reducingcontrolling research and development expense,expenses, while balancing that objective against the recognition that continued advancement in product development is an important part of our strategic planning. 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 construed 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.
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Depreciation and Amortization
Most of the depreciation and amortization expense on our statement of operations consists of amortization expense. We amortize intangible assets, including those acquired from DuPont Pioneer in December 2014 and from SV Genetics in May 2016, using the straight-line method over the estimated useful life of the asset, consisting of periods of 10-30 years for technology/IP/germplasm, 20 years for customer relationships and trade names and 2-20 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 15-285-28 years for buildings, 3-20 years for machinery and equipment and 3-5 years for vehicles.
Other Expense
Other expense consists primarily of foreign currency gains and losses, changes in the fair value of derivative liabilities related to our warrants, changes in the fair value of our contingent consideration obligations and interest expense in connection with amortization of debt discount. In addition, interest expense consists of interest costs related to outstanding borrowings on our credit facilities, including our current KeyBank revolving line of credit and on SGI'sS&W Australia's credit facilities in South Australia, our 8% senior secured convertible debentures that were issued in December 2014 andwhich were fully paid off on March 1, 2017, our three-year secured promissory note issued in December 2014 in connection with the DuPont Pioneer acquisition,Acquisition which was paid off on December 1, 2017, and our five-year subordinatednewly issued secured promissory note that matures in October 2017 that was issued in connectionnotes with the IVS acquisition.Conterra.
Provision (Benefit) for Income Tax Expense (Benefit)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. 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 consolidated financial statements. As a result, our effective tax rate reflected in our consolidated financial statements is different thanfrom 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 consolidated statements of operations. In the fourth quarter of fiscal year 2017, we recorded a valuation allowance against all of our deferred tax assets. The full valuation allowance was recorded during the fiscal year 2017 as a result of changes to our operating results and future projections, resulting from a recent decline in export sales to Saudi Arabia. In addition, our available tax planning strategies are currently not expected to overcome the uncertainty of the Saudi Arabian market. As a result of these factors, we don't believe that it is more likely than not that our deferred tax assets will be realized.
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Results of Operations
Three Months Ended March 31, 20172018 Compared to the Three Months Ended March 31, 20162017
Revenue and Cost of Revenue
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Sales into international markets represented 16% and 20% of revenue during the three months ended March 31, 2018 and 2017, respectively. Domestic revenue accounted for 84% and 80% of our total revenue for the three months ended March 31, 2018 and 2017, respectively. The increase in domestic revenue as a percentage of total revenue is primarily attributed to timing differences in shipments to our largest customer.
We recorded sales of approximately $16.2$18.7 million from our distribution and production agreements with DuPont Pioneer during the three months ended March 31, 2017,2018, which was relatively consistent withan increase of $2.5 million from the prior periodyear amount of $16.1$16.2 million. The decrease in revenue for the third quarter of fiscal 2017 was primarily due to a decrease in our export business due to delayed shipments into Saudi Arabia. Recent regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage producers is causing certain customers in the region to defer purchases and/or reduce inventory carrying levels in the near-term. Based on information currently available to management, we believe that such regulatory uncertainty will be resolved or clarified in the coming months.
Sales to international customers (by destination country) represented 20% and 34% of revenue during the three months ended March 31, 2017 and 2017, respectively. Domestic revenue accounted for 80% and 66% of our total revenue for the three months ended March 31, 2017 and 2016, respectively. The increase in domestic revenue as a percentage of revenue is directly attributed to an increase inWe expect sales concentration to DuPont Pioneer during the third quarter. We expect DuPont Pioneerunder our distribution agreement will continue to represent a significant portion of our domestic sales, as well as overall sales, for the foreseeable future.
The following table shows revenue from external sources by destination country:
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
United States | $ | 19,258,699 | 84% | $ | 16,850,655 | 80% | ||
Mexico | 301,390 | 1% | 549,420 | 3% | ||||
Argentina | 7,630 | 0% | 316,046 | 2% | ||||
Australia | 750,762 | 3% | 291,405 | 1% | ||||
Peru | 427,358 | 2% | 297,438 | 1% | ||||
Saudi Arabia | - | 0% | 1,051,593 | 5% | ||||
China | 374,824 | 2% | 790,486 | 4% | ||||
South Africa | 251,116 | 1% | 278,737 | 1% | ||||
Algeria | 308,700 | 1% | 330 | 0% | ||||
Egypt | 284,760 | 1% | 394,560 | 2% | ||||
Other | 983,931 | 5% | 191,573 | 1% | ||||
Total | $ | 22,949,170 | 100% | $ | 21,012,243 | 100% |
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Cost of revenue of $16,303,436 for the three months ended March 31, 2018 was 71.0% of revenue, while the cost of revenue of $15,208,896 for the three months ended March 31, 2017 was 72.4% of revenue, while the costrevenue. Cost of revenue of $19,500,605 forincreased on a dollar basis primarily due to the three months ended March 31, 2016 was 78.0% ofincrease in revenue.
Total gross profit margin for the three months ended March 31, 20172018 was 27.6%29.0% compared to 22.0%27.6% in the third quartercomparable period of fiscal 2016.the prior year. The increase in gross profit margins was primarily due to product sales mix during the quartercurrent period where we had a higher concentration of sales, as a percentage of total revenue, to DuPont Pioneer which are higher margin sales. Additionally, the product costs of proprietary seed are lower in the current year due to more favorable production contracts and arrangements.
While there will continue to be quarterly fluctuations in gross profit margin based on product sales mix, we anticipate improved gross margins in fiscal 2018 as a result of a number of initiatives we are deploying.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expense for the three months ended March 31, 20172018 totaled $2,720,131$2,676,166 compared to $2,459,737$2,720,131 for the three months ended March 31, 2016.2017. The $260,394 increase$43,965 decrease in SG&A expense versus the third quarter of the prior year was primarily due to bad debt expensea decrease in stock-based compensation of $100,000,$157,602 partially offset by an increase in professional fees and personnel and related costs to accommodate the anticipated growth in operations.consulting expense. As a percentage of revenue, SG&A expenses were 12.9%11.7% in the current quarter compared to 9.8%12.9% in the third quarter of the prior year.three months ended March 31, 2017.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 20172018 totaled $714,512$1,065,323 compared to $626,316$714,512 for the three months ended March 31, 2016.2017. The $350,811 increase of $88,196 in the third quarter of fiscal 2017 was primarilyresearch and development expense is driven by additional researchinvestment in our hybrid sorghum and development activities in connection with the recent SVG Acquisition partially offset by reductions in thesunflower programs as well as our stevia and alfalfa programs.program.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 20172018 was $798,559$838,585 compared to $796,062$798,559 for the three months ended March 31, 2016.2017. Included in the amount was amortization expense for intangible assets, which totaled $499,634 in the three months ended March 31, 2018 and $555,977 in the three months ended March 31, 20172017. The $40,026 increase in depreciation and $558,358 inamortization expense over the three months ended March 31, 2016.
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Impairment Charges
Duringcomparable period of the nine months ended March 31, 2017, we recorded an impairment charge of $319,001. The impairment charge related to the carrying value of certain stand establishment assets which were deemed impaired and uncollectible from a certain sub-leasee.prior year is primarily driven by additional depreciation expense associated with fixed asset additions.
Foreign Currency (Gain) Loss
We incurred a foreign currency gain of $27,939 for the three months ended March 31, 2018 compared to a loss of $2,125 for the three months ended March 31, 2017 compared to a loss of $87,342 for the three months ended March 31, 2016.2017. The foreign currency gains and losses are associated with SGI,S&W Australia, our wholly-owned subsidiary in Australia.
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Change in Derivative Warrant Liability
The derivative warrant liability iswas considered a level 3 fair value financial instrument and iswas measured at each reporting period.period until December 31, 2017 at which time the warrants were reclassified to equity due to the expiration of the down-round price protection provision. We recorded a non-cash change in derivative warrant liability gain of $1,009,901 in the three months ended March 31, 2017 compared to a2017.
Change in Contingent Consideration Obligations
The contingent consideration obligations are considered level 3 fair value financial instruments and will be measured at each reporting period. The $0 and $86,688 gain of $694,800from non-cash change in contingent consideration obligations for the three months ended March 31, 2016.2018 and 2017, respectively; represents the decrease in the estimated fair value of the contingent consideration obligations during that respective period. The earn-out payment to DuPont Pioneer was finalized in the amount of $2,500,000 and this was added to the Pioneer Note in October 2017 and subsequently paid off in December 2017.
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the three months ended March 31, 2018 was $51,185 compared to $150,875 for the three months ended March 31, 2017. The expense in the current quarter represents the amortization of the debt issuance costs associated with our KeyBank working capital facility and our secured property and equipment notes with Conterra. The expense in the prior year represents the amortization of the debt discount, beneficial conversion feature and debt issuance costs associated with the convertible debentures issued December 31, 2014 and the debt issuance costs associated with our KeyBank working capital facility.
Interest Expense
Interest expense during the three months ended March 31, 2018 totaled $512,892 compared to $300,627 for the three months ended March 31, 2017. Interest expense for the three months ended March 31, 2018 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, and the new secured property and equipment loans entered into in November 2017. Interest expense for the three months ended March 31, 2017 primarily consisted of interest incurred on the convertible debentures issued on December 31, 2014, on the note payable issued to DuPont Pioneer as part of the purchase consideration for the DuPont Pioneer Acquisition and the working capital credit facilities with KeyBank and NAB. The $212,265 increase in interest expense for the three months ended March 31, 2018 is primarily driven by $251,375 of interest on the new secured property and equipment loans partially offset by a $75,000 reduction in interest expense from the pay-off of the DuPont Pioneer note.
Provision (Benefit) for Income Taxes
Income tax benefit totaled $248,931 for the three months ended March 31, 2018 compared to an income tax expense of $463,509 for the three months ended March 31, 2017. Our effective tax rate was (16.3%) for the three months ended March 31, 2018 compared to 25.9% for the three months ended March 31, 2017. The decrease in our effective tax rate for the three months ended March 31, 2018 is attributable to
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the full valuation allowance established against our deferred tax assets which was recorded during the fourth quarter of fiscal 2017. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operating results, as such results are generally incorporated in our net operating loss deferred tax asset position, which has a full valuation allowance against it. However, we did record tax expense related to certain other factors occurring throughout the year. For example, we have certain intangible assets with indefinite lives for financial reporting purposes. The write down of these assets cannot be assumed and thus, the deferred tax liability created by the difference in the basis in these assets for financial reporting and tax purposes cannot be used as a source of taxable income against our deferred tax assets. The increase in the deferred tax liability due the yearly tax amortization on these intangible assets is recorded as income tax expense. We also analyzed additional information on our tax return filings in the third quarter of fiscal 2018. To the extent that differences arise from the estimates of tax return filings, these differences are generally recorded in the quarter that they arise and are commonly referred to as provision to return adjustments. Such adjustments related to our Australian tax return filings also generated additional income tax expense for the quarter ended March 31, 2018.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act reduced the corporate tax rate from the maximum federal statutory rate of 35% to 21%. The Tax Act states that the 21% corporate tax rate is effective for tax years beginning on or after January 1, 2018. However, existing tax law, which was not amended under the Tax Act, governs when a change in tax rate is effective. Existing tax law provides that if the taxable year includes the effective date of any rate change (unless the change is the first date of the taxable year), taxes should be calculated by applying a blended rate to the taxable income for the year. Our blended federal rate is 27.6%. As a result of the new law, we have concluded that our deferred tax assets will need to be revalued. Our deferred tax assets represent a reduction in corporate taxes that are expected to be paid in the future. As a result of the Tax Act, we have estimated a reduction to the value of our deferred tax assets which is almost entirely offset by a reduction to our valuation allowance in the second quarter of the year ending June 30, 2018. The net impact of the decrease to both the deferred tax assets and the valuation allowance will be a remeasuring of our net deferred tax liability associated with indefinite lived intangibles for which we cannot predict a reversal into taxable income. In conjunction with the tax law changes, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. We have recognized the provisional tax impacts related to deemed repatriated earnings, the potential impact of new section 162(m) rules on our deferred tax balances, and the revaluation of deferred tax assets and liabilities and included these amounts in our consolidated financial statements for the quarter ended March 31, 2018. The ultimate impact, which is expected to be recorded by June 30, 2018, may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act, and the fact that we cannot definitively predict what our deferred tax balance will ultimately be as of June 30, 2018. The Tax Act allows for one hundred percent expensing of the cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. We do not plan to take advantage of this provision for the near term and have the option of opting out of this provision. In addition, net operating losses incurred
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in tax years beginning after December 31, 2017 are only allowed to offset a taxpayer's taxable income by eighty percent, but those net operating losses are allowed to be carried forward indefinitely with no expiration. Also, as part of the Tax Act, our net interest expense deductions are limited to 30% of earnings before interest, taxes, depreciation, and amortization through 2021 and of earnings before interest and taxes thereafter. This provision also takes effect for tax years beginning after 2017 and isn't expected to have a material impact to our deferred tax asset position. The Tax Act also incorporates changes to certain international tax provisions. There is a one-time transition tax on foreign income earned by subsidiaries at a rate of 15.5% for cash and cash equivalents and at a rate of 8% for the remainder of the foreign earnings. There is a provision for the current inclusion in US taxable income of global intangible low-tax income and also the imposition of a tax equal to its base erosion minimum tax amount. The new laws incorporate a potential benefit for foreign derived intangible income, but the benefit only applies if the foreign derived sales and services income exceeds a calculated 'routine return' and if we have taxable income. We do not currently anticipate that any of the foreign provisions will have an impact to our tax accounts.
Nine Months Ended March 31, 2018 Compared to the Nine Months Ended March 31, 2017
Revenue and Cost of Revenue
Revenue for the nine months ended March 31, 2018 was $54,193,682 compared to $57,487,560 for the nine months ended March 31, 2017. The $3,293,878 decrease in revenue for the nine months ended March 31, 2018 was primarily due to a decrease of sales to the Saudi Arabia markets of approximately $5.4 million. Regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage producers caused customers in the region to defer purchases and/or reduce inventory carrying levels. The outlook for demand for our non-dormant varieties in Saudi Arabia over the next two to four years continues to be uncertain because of the potential for water use restrictions and further regulations from the Saudi Arabian government on water usage. If there continues to be an absence of demand from our customers in Saudi Arabia, we would experience a material decline in revenue and earnings in the absence of growth in other regions and other products. The decrease in revenue directed to the Saudi Arabia markets was partially offset by an increase in sales to the domestic market.
Sales into international markets represented 29% and 36% of revenue during the nine months ended March 31, 2018 and 2017, respectively. Domestic revenue accounted for 71% and 64% of our total revenue for the nine months ended March 31, 2018 and 2017, respectively. The increase in domestic revenue as a percentage of total revenue is primarily attributable to reduced sales to customers in Saudi Arabia and timing of shipments to our largest customer Dupont Pioneer.
We recorded sales of approximately $36.9 million from our distribution and production agreements with DuPont Pioneer during the nine months ended March 31, 2018, which was an increase of $3.0 million from the prior year amount of $33.9 million. We expect sales to DuPont Pioneer under our distribution agreement will continue to represent a significant portion of our domestic sales, as well as overall sales, for the foreseeable future.
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The following table shows revenue from external sources by destination country:
Nine Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
United States | $ | 38,523,953 | 71% | $ | 36,633,044 | 64% | ||
Mexico | 4,682,016 | 9% | 4,294,447 | 7% | ||||
Argentina | 2,750,249 | 5% | 2,881,050 | 5% | ||||
Australia | 1,309,105 | 2% | 1,082,041 | 2% | ||||
Peru | 1,035,770 | 2% | 821,213 | 1% | ||||
Saudi Arabia | 844,908 | 2% | 6,273,365 | 11% | ||||
China | 748,748 | 1% | 889,834 | 2% | ||||
South Africa | 718,458 | 1% | 915,607 | 2% | ||||
Algeria | 308,700 | 1% | 562,778 | 1% | ||||
Egypt | 284,760 | 1% | 677,520 | 1% | ||||
Other | 2,987,015 | 5% | 2,456,661 | 4% | ||||
Total | $ | 54,193,682 | 100% | $ | 57,487,560 | 100% |
Cost of revenue of $40,540,193 for the nine months ended March 31, 2018 was 74.8% of revenue, while the cost of revenue of $44,520,476 for the nine months ended March 31, 2017 was 77.4% of revenue. Cost of revenue decreased on a dollar basis primarily due to the decrease in revenue as well as a reduction in product costs.
Total gross profit margin for the nine months ended March 31, 2018 was 25.2% compared to 22.6% in the comparable period of the prior year. The increase in gross profit margins was primarily due to product sales mix during the current period where we had a higher concentration of sales, as a percentage of total revenue, to DuPont Pioneer which are higher margin sales. Additionally, the product costs of proprietary seed are lower in the current year due to more favorable production contracts and arrangements.
While there will continue to be quarterly fluctuations in gross profit margin based on product sales mix, we anticipate improved gross margins in fiscal 2018 as a result of a number of initiatives we are deploying.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expense for the nine months ended March 31, 2018 totaled $8,037,202 compared to $7,767,530 for the nine months ended March 31, 2017. The $269,672 increase in SG&A expense versus the comparable period of the prior year was primarily due to an increase in sales personnel and related costs, as well as an increase in consulting fees of approximately $319,000, partially offset by other expense reductions. As a percentage of revenue, SG&A expenses were 14.8% in the nine months ended March 31, 2018, compared to 13.5% in the nine months ended March 31, 2017.
Research and Development Expenses
Research and development expenses for the nine months ended March 31, 2018 totaled $2,662,404 compared to $2,204,625 for the nine months ended March 31, 2017. The $457,779 increase in research and development expense versus the comparable period of the prior year is driven by additional investment in our hybrid sorghum and sunflower programs as well as our stevia program. We expect our research and development spend for fiscal 2018 to total approximately $3.5 million.
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Depreciation and Amortization
Depreciation and amortization expense for the nine months ended March 31, 2018 was $2,597,818 compared to $2,475,710 for the nine months ended March 31, 2017. Included in the amount was amortization expense for intangible assets, which totaled $1,628,026 for the nine months ended March 31, 2018 and $1,667,932 for the nine months ended March 31, 2017. The $122,108 increase in depreciation and amortization expense over the comparable period of the prior year is primarily driven by additional depreciation expense associated with fixed asset additions.
Foreign Currency (Gain) Loss
We incurred a foreign currency gain of $5,908 for the nine months ended March 31, 2018 compared to a gain of $4,358 for the nine months ended March 31, 2017. The foreign currency gains and losses are associated with S&W Australia, our wholly-owned subsidiary in Australia.
Change in Derivative Warrant Liability
The derivative warrant liability was considered a level 3 fair value financial instrument and was measured at each reporting period until December 31, 2017 at which time the warrants were reclassified to equity due to the expiration of the down-round price protection provision. We recorded a non-cash change in derivative warrant liability gain of $431,300 in the nine months ended March 31, 2018 compared to a gain of $841,400 in the nine months ended March 31, 2017. The gain represents the decrease in fair value of the outstanding warrants issued in December 2014.
Change in Contingent Consideration Obligations
The contingent consideration obligations are considered level 3 fair value financial instruments and will be measured at each reporting period. The $86,688 gain from the non-cash change in contingent consideration obligations expense for the three months ended March 31, 2017 represents the decrease in the estimated fair value of the contingent consideration obligations during that respective period. The $48,963 loss from non-cash change in contingent consideration obligation during the third quarter of fiscal 2016 represents the increase in the estimated fair value of the contingent consideration obligation during that respective period.
Loss on Equity Method Investment
Loss on equity method investment totaled $95,591$0 and $28,916 for the three months ended March 31, 2017 and 2016, respectively. This represents our 50% share of losses incurred by our joint corporation (S&W Semillas S.A.) in Argentina.
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the three months ended March 31, 2017 was $150,875 compared to $1,150,412 for the three months ended March 31, 2016. The expense represents the amortization of the debt discount, beneficial conversion feature and debt issuance costs associated with the convertible debentures issued December 31, 2014 and the debt issuance costs associated with our KeyBank working capital facility. The discount is amortized using the effective interest method and the quarterly expense decreases as the net carrying value of the convertible debentures decrease. As of March 1, 2017, the convertible debentures have been fully retired and accordingly, the amortization of debt discount associated with the convertible debentures is complete.
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Interest Expense - Convertible Debt and Other
Interest expense during the three months ended March 31, 2017 totaled $300,627 compared to $438,879 for the three months ended March 31, 2016. Interest expense for the third quarter of fiscal 2017 primarily consisted of interest incurred on the note payable issued to DuPont Pioneer as part of the purchase consideration for the DuPont Pioneer acquisition and the working capital credit facilities with KeyBank and NAB. The $138,252 decrease in interest expense in the third quarter of fiscal 2017 is primarily driven by a $246,000 decrease of interest on the convertible debentures as the principal amount of the convertible debentures continues to be redeemed by us and converted by the holders, partially offset by an increase in interest expense attributed to higher levels of working capital resulting in more borrowings on the working capital facilities.
Provision (Benefit) from Income Taxes
Income tax provision totaled $463,509 for the three months ended March 31, 2017 compared to income tax provision of $5,901 for the three months ended March 31, 2016. Our effective tax rate was 25.9% during the quarter ended March 31, 2017 compared to 1.0% in third quarter of fiscal 2016. The increase in our effective tax rate for the three months ended March 31, 2017 is primarily attributed to the increase in pre-tax book income in combination with the permanent impact of the gain associated with the change in the valuation of our warrants this year compared to the same period in the prior year. The gain associated with the warrant fair value adjustments are not taxable for federal income tax purposes. Our effective tax rate differs from the U.S. federal statutory rate as a result of this nontaxable item and the lower statutory rate of our foreign subsidiary.
Nine Months Ended March 31, 2017 Compared to the Nine Months Ended March 31, 2016
Revenue and Cost of Revenue
Revenue for nine months ended March 31, 2017 was $57,487,560 compared to $61,409,948 for the nine months ended March 31, 2016. We recorded sales of approximately $33.9 million from our distribution and production agreements with DuPont Pioneer during the nine months ended March 31, 2017, which was an increase of $3.2 million from the prior period amount of $30.6 million. The increase in revenue to DuPont Pioneer was offset by a decrease in our export business due to delayed shipments into Saudi Arabia. Recent regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage producers is causing certain customers in the region to defer purchases and/or reduce inventory carrying levels in the near-term. Based on information currently available to management, we believe that such regulatory uncertainty will be resolved or clarified in the coming months.
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Sales to international customers (by destination country) represented 36% and 44% of revenue during the nine months ended March 31, 2017 and 2016, respectively. Domestic revenue accounted for 64% and 56% of our total revenue for the nine months ended March 31, 2017 and 2016, respectively. The increase in domestic revenue is directly attributed to an increase in sales to DuPont Pioneer during fiscal 2017 period. We expect DuPont Pioneer to represent a significant portion of our domestic sales, as well as overall sales, for the foreseeable future.
Cost of revenue of $44,520,476 for the nine months ended March 31, 2017 was 77.4% of revenue, while the cost of revenue of $49,890,460 for the nine months ended March 31, 2016 was 81.2% of revenue.
Total gross profit margin for the nine months ended March 31, 2017 was 22.6% compared to 18.8% for the nine months ended March 31, 2016. The increase in gross profit margins was primarily due to product sales mix during the current period where we had a higher concentration of sales to DuPont Pioneer which are higher margin sales. Additionally, the product costs of proprietary seed are lower in the current year due to more favorable production contracts and arrangements.
Selling, General and Administrative Expenses
SG&A expense for the nine months ended March 31, 2017 totaled $7,767,530 compared to $7,239,821 for the nine months ended March 31, 2016. The $527,709 increase in SG&A expense versus the comparable period of the prior year was primarily due to bad debt expense of $100,000, an increase in professional fees and personnel and related costs to accommodate the anticipated growth in operations. As a percentage of revenue, SG&A expenses were 13.5% in the current period compared to 11.8% in the nine months ended March 31, 2016.
Research and Development Expenses
Research and development expenses for the nine months ended March 31, 2017 totaled $2,204,625 compared to $2,049,332 for the nine months ended March 31, 2016. The increase during the nine months ended March 31, 2017 was primarily driven by additional research and development activities in connection with the recent SVG Acquisition partially offset by reductions in the stevia and alfalfa programs.
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended March 31, 2017 was $2,475,710 compared to $2,376,101 for the nine months ended March 31, 2016. Included in the amount was amortization expense for intangible assets, which totaled $1,667,932 in the nine months ended March 31, 2017 and $1,673,048 in the nine months ended March 31, 2016. The $99,609 increase in depreciation and amortization expense over the comparable period of the prior year is primarily driven by amortization of intangible assets acquired from SVG Acquisition in May 2016.
Impairment Charges
During the nine months ended March 31, 2017, we recorded an impairment charge of $319,001. The impairment charge related to the carrying value of certain stand establishment assets which were deemed impaired and uncollectible from a certain sub-leasee.
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Foreign Currency (Gain) Loss
We incurred a foreign currency gain of $4,358 for the nine months ended March 31, 2017 compared to a gain of $164,471 for the nine months ended March 31, 2016. The foreign currency gains and losses are associated with SGI, our wholly-owned subsidiary in Australia.
Change in Derivative Warrant Liability
The derivative warrant liability is considered a level 3 fair value financial instrument and is measured at each reporting period. We recorded a non-cash change in derivative warrant liability gain of $841,400 in the nine months ended March 31, 2017 compared to a gain of $2,176,800 in the nine months ended March 31, 2016. The gain represents the decrease in fair value of the outstanding warrants issued in December 2014.
Change in Contingent Consideration Obligations
The contingent consideration obligations are considered level 3 fair value financial instruments and will be measured at each reporting period. The $77,675 chargecharges to non-cash change in contingent consideration obligations expense for the nine months ended March 31, 2018 and 2017, respectively; represents the increase in the estimated fair value of the contingent consideration obligations during that respective period due to the decrease in the present value discount factor used to estimate the fair value of the contingent consideration obligations. The $1,490 chargeearn-out payment to non-cash change in contingent consideration obligation during the nine months ended March 31, 2016 represents the decreaseDuPont Pioneer was finalized in the estimated fair valueamount of $2,500,000 and this was added to the contingent consideration obligation during that respective period.Pioneer Note in October 2017.
Loss on Equity Method Investment
Loss on equity method investment totaled $144,841$0 and $252,619$144,841 for the nine months ended March 31, 20172018 and 2016,2017, respectively. This represents our 50% share of losses incurred by our joint corporation (S&W Semillas S.A.) in Argentina. Our carrying value in the equity method investee company has been reduced to zero, accordingly, no further losses will be recorded in our consolidated financial statements related to this equity method investment.
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Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the nine months ended March 31, 20172018 was $1,131,994$118,284 compared to $3,111,866$1,131,994 for the nine months ended March 31, 2016.2017. The expense in the current period represents the amortization of the debt issuance costs associated with our KeyBank working capital facility and our secured property and equipment notes with Conterra. The expense in the prior year period represents the amortization of the debt discount, beneficial conversion feature and debt issuance costs associated with the convertible debentures issued December 31, 2014. The discount is amortized using the effective interest method2014 and the quarterly expense will decrease as the net carrying value of the convertible debentures decrease.debt issuance costs associated with our KeyBank working capital facility. As of March 1, 2017, the convertible debentures have been fully retired and accordingly, the amortization of debt discount associated with the convertible debentures is complete.
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Interest expense during the nine months ended March 31, 20172018 totaled $948,211$1,244,515 compared to $1,672,863$948,211 for the nine months ended March 31, 2016.2017. Interest expense for the nine months ended March 31, 2018 primarily consisted of interest incurred on the note payable issued to DuPont Pioneer as part of the purchase consideration for the DuPont Pioneer Acquisition, the working capital credit facilities with KeyBank and NAB, and the new secured property and equipment loans entered into in November 2017. Interest expense for the nine months ended March 31, 2017 primarily consisted of interest incurred on the convertible debentures issued on December 31, 2014, on the note payable issued to DuPont Pioneer as part of the purchase consideration for the DuPont Pioneer acquisitionAcquisition and the working capital credit facilities with KeyBank and NAB. The $724,652 decrease$296,304 increase in interest expense for the nine months ended March 31, 20172018 is primarily driven by a $850,000 decrease$344,878 of interest on the convertible debentures assecured property and equipment loans partially offset by a $100,000 reduction in interest expense from the principal amountpay-off of the DuPont Pioneer note and a $169,000 reduction in interest expense from the pay-off of the convertible debentures continued to be redeemed by us and converted by the holders, partially offset with an increase in interest expense attributed to higher levels of working capital resulting in more borrowings on the working capital facilities.debentures.Provision
Benefit fromProvision (Benefit) for Income Taxes
Income tax benefit totaled $48,808 for the nine months ended March 31, 2018 compared to $533,414 for the nine months ended March 31, 2017 compared to income2017. Our effective tax benefit of $2,773,294rate was (10.0%) for the nine months ended March 31, 2016. Our2018 compared to 42.2% for the nine months ended March 31, 2017. The decrease in our effective tax rate for the nine months ended March 31, 2018 was 42.2% duringprimarily attributable to the full valuation allowance recorded against substantially all of our deferred tax assets in the fourth quarter of the year ended June 30, 2017. For the nine months ended March 31, 2017 compared to 102.0%we recorded a benefit associated with the tax losses incurred in that period. However, for the nine months ended March 31, 2016.2018, we have not recorded a benefit related to our losses due to the valuation allowance. The decrease in our effective tax rate benefit recorded for the nine months ended March 31, 20172018 is primarily attributed to aadditional deferred tax benefitliabilities recorded during the nine months ended March 31, 2016 related to an unrealized foreign currency exchange lossyear on an inter-company loan toindefinite lived intangible assets and the recording of additional tax expense on our subsidiaryprior year Australian tax return, which was filed in Australia. We had previously treated the inter-company loan as long-term in investment nature and during the secondthird quarter of fiscal 2016 we determined that the inter-company note would be settled in the foreseeable future. The change in this determination resulted in us recording a tax benefit during the second quarter of fiscal 2016 as the inter-company loan was denominated in Australian dollars and had devalued since the issuance of the loan. The tax benefit related to this foreign exchange loss was recorded in the period that we changed our determination of whether the loan was of long-term investment nature. The benefit was recorded on a pre-tax loss, thus increasing our effective tax rate during the nine months ended March 31, 2016. The reduction in the rate is also attributable to a decrease in the recorded gain associated with the valuation of our warrants in the current period versus the comparable period in the prior year. The gains associated with the warrant fair value adjustments are not taxable for federal income tax purposes. Our effective tax rate differs from the U.S. federal statutory rate as a result of this nontaxable item and the lower statutory rate of our foreign subsidiary.2018.
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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 paid our North American contracted growers progressively, starting in the second fiscal quarter. In fiscal year 2017, we paid our North American growers approximately 50% in October 2016 and the balance was paid in February 2017. SGI,This payment cycle to our growers is similar in fiscal year 2018. S&W Australia, our Australian-based subsidiary, has a production cycle that is counter-cyclical to North America; however, this 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. As a result of the DuPont Pioneer acquisition, which substantially increased our production and therefore our working capital demands, we anticipate our working capital demands to be highest in second and third fiscal quarters due to the payment schedule of our North American grower base.
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Historically, due to the concentration of sales to certain distributors, which typically represented a significant percentage of seed sales, our month-to-month and quarter-to-quarter sales and associated cash receipts were highly dependent upon the timing of deliveries to and payments from these distributors, which varied significantly from year to year. The timing of collection of receivables from DuPont Pioneer, which is our largest customer, is defined in the distribution and production agreementsagreement with DuPont Pioneer and consists of three installment payments, one in each of the first on September 15th, the second on January 15th, and the third and fourth fiscal quarters.payment on February 15th. Our future revenue and cash collections pertaining to the production and distribution agreementsagreement with DuPont Pioneer areis expected to provide us with greater predictability, as sales to DuPont Pioneer are expected to be primarily concentrated in our second, third and fourth fiscal quarters, and payments will be received in three installments over the September to mid-Aprilmid-February time period.
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 expense 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.
In the prior two fiscal years,recent periods, we have consummated the following equity and debt financings:
On December 31, 2014, we raised an aggregate of $31,658,400 in gross proceeds in two separate private placements.
In the first of these two financings, we sold 1,294,000 shares of our common stock at $3.60 per share for gross proceeds of $4,658,400.
On the same day, we also sold $27,000,000 aggregate principal amount of 8% Senior Secured Convertible Debentures due November 30, 2017, together with warrants to purchase an aggregate of 2,699,999 shares of our common stock that expire on June 30, 2020. The offering expenses of the debenture and warrant offering totaled approximately $2,355,218, yielding net proceeds of approximately $24,644,782. The net proceeds from these two December 2014 financing transactions were used primarily to fund the cash portion of the purchase price of the DuPont Pioneer Acquisition, with the balance available for working capital and general corporate purposes.
The monthly interest on the debentures was payable cash, in shares of our common stock, provided all of the applicable "equity conditions" defined in the debentures were satisfied, or in any combination of cash and shares, at our option. We have made all monthly redemption payments in cash. Through March 31, 2017, we have reduced the principal amount of the debentures by $7,830,049 through accelerated redemption payments. The principal amount of the debentures has been further reduced by monthly cash redemption payments and optional conversions of the debentures by certain of the holders. A total of 684,321 shares of our common stock, respectively, have been issued upon conversion of the debentures in lieu of payments of principal and accrued interest, totaling an aggregate of $3,168,342. As of March 31, 2017, the Debentures were fully retired and had no outstanding balance.
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On December 31, 2014, in connection with the DuPont Pioneer Acquisition, we issued a secured promissory note (the "Pioneer Note") payable by us to DuPont Pioneer in the initial principal amount of $10,000,000 (issued at closing), and a potential earn-out payment (payable as an increase in the principal amount of the Pioneer Note) of up to $5,000,000 based on our sales under the distribution and production agreements entered into in connection with the DuPont Pioneer Acquisition, as well as other sales of products we consummate containing the acquired germplasm in the three-year period following the closing. The earn-out payment of $2,500,000 to DuPont Pioneer was finalized in October 2017 and this amount was added to the Pioneer Note accruesin October 2017. The Pioneer Note accrued interest at a rate of 3% per annum, and interest isannum. Interest was payable in three annual installments, in arrears, commencing on December 31, 2015. OurOn December 1, 2017, we repaid the Pioneer Note. The repayment amount included the $2.5 million earn-out payment related to the Pioneer Acquisition that was added to the principal amount of the Pioneer Note in October 2017.
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On November 30, 2017, we entered into a secured note financing transaction (the "Loan Transaction") with Conterra Agricultural Capital, LLC ("Conterra") for $12.5 million in gross proceeds. Pursuant to the Loan Transaction, we issued two secured promissory notes (the "Notes") to Conterra as follows:
The Notes and related documents include customary representations and warranties in addition to customary affirmative and negative covenants (including financial covenants), and customary events of default that permit Conterra to accelerate our obligations under the Pioneer Note are secured by certainNotes, including, among other things, that a default under one of the assets purchased inNotes would constitute a default under the DuPontother Note. On December 1, 2017, we used the proceeds from the Loan Transaction to repay the Pioneer Acquisition and are subject to the Intercreditor Agreement. The Pioneer Note matures on December 31, 2017.
On November 23, 2015, we completed a private placement transaction with our largest shareholder, MFP Partners, L.P. ("MFP"). In this financing, we sold 1,180,722 shares of our common stock at $4.15 per share for gross proceeds of $4,899,996. The proceeds were used, in part, to partially redeem our outstanding 8% Senior Secured Convertible Debentures issued in December 2014, as well as for working capital and general corporate purposes.
On February 29, 2016, we completed a rights offering that was made to the holders of common stock, convertible debentures and warrants, with an accompanying contractual participation rights offering made to the holders of the convertible debentures. We issued an aggregate of 1,930,654 shares of common stock at $4.15 per share in the rights offering and an additional 195,028 shares of common stock, also at $4.15 per share, in the accompanying participation rights offering to the debenture holders, for aggregate gross proceeds of $8,821,580. The proceeds were used, in part, to accelerate payments on the convertible debentures and for working capital and general corporate purposes.Note.
On September 22, 2015, we entered into an up to $20,000,000 aggregate principal amounta credit and security agreement (the "KeyBank Credit Facility") with KeyBank. On October 4, 2016, we entered into an amendment to the KeyBank Credit Facility effective as of September 30, 2016, temporarily increasing the borrowing limit and certain other credit facility terms as follows: (i) temporarily increasing the borrowing capacity from $20.0 million to (a) up to $25.0 million between October 1, 2016 and November 30, 2016 and (b) up to $30.0 million from February 1, 2017 through March 31, 2017; (ii) temporarily allowing for a $4.0 million over-advance beyond the amounts otherwise available based on the borrowing base calculations, which will be available through February 28, 2017; and (iii) temporarily expanding the borrowing base by reducing the reserves that KeyBank may establish with respect to grower payables to 75% between August 31, 2016 and February 28, 2017. On March 13, 2017, we entered into a Third Amendment Agreement (the "Third Amendment") with respect to the KeyBank Credit Facility. The purpose of the Third Amendment was to provide certain temporary changes to the termsKey provisions of the KeyBank Credit Facility, including: (i) further extending the temporary period during whichas amended, include:
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Subject to the temporary amended terms provided for in the amendment terms described above, key provisions of the KeyBank Credit Facility include:
The KeyBank Credit Facility generally establishes a12, 2019.
SGIS&W Australia finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank Ltd ("NAB"). The current facility, referred to as the 2016 NAB Facilities, was amended as of March 30,April 13, 2017 and expires on March 30, 2019.31, 2020. As of March 31, 2017,2018, AUD $9,407,499$7,600,000 (USD $7,190,622)$5,838,320) was outstanding under the 2016 NAB Facilities.
The 2016 NAB Facilities, as currently in effect, comprises two distinct facility lines: (i) an overdraft facility (the "Overdraft Facility"), having a credit limit of AUD $980,000$1,000,000 (USD $749,063$768,200 at March 31, 2017)2018) and a borrowing base facility (the "Borrowing Base Facility"), having a credit limit of AUD $12,000,000 (USD $9,172,200$9,218,400 at March 31, 2017)2018).
The Borrowing Base Facility permits SGIS&W Australia to borrow funds for periods of up to 180 days, at SGI'sS&W Australia's discretion, provided that the term is consistent with its trading terms. Interest for each drawdown is set at the time of the drawdown as follows: (i) for Australian dollar drawings, based on the Australian Trade Refinance Rate plus 1.5% per annum and (ii) for foreign currency drawings, based on the British Bankers' Association Interest Settlement Rate for the relevant foreign currency for the relevant period, or if such rate is not available, the rate reasonably determined by NAB to be the appropriate equivalent rate, plus 1.5% per annum. As of March 31, 2017,2018, the Borrowing Base Facility accrued interest on Australian dollar drawings at approximately 4.90%5.18% calculated daily. The Borrowing Base Facility is secured by a lien on all the present and future rights, property and undertakings of SGI,S&W Australia, the mortgage on SGI'sS&W Australia's Keith, South Australia property and the Company'sour corporate guarantee (up to a maximum of AUD $15,000,000).
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The Overdraft Facility permits SGIS&W Australia to borrow funds on a revolving line of credit up to the credit limit. Interest accrues daily and is calculated by applying the daily interest rate to the balance owing at the end of the day and is payable monthly in arrears. As of March 31, 2017,2018, the Overdraft Facility accrued interest at approximately 6.77% calculated daily.
For both the Overdraft Facility and the Borrowing Base Facility, interest is payable each month in arrears. In the event of a default, as defined in the NAB Facility Agreement, the principal balance due under the facilities will thereafter bear interest at an increased rate per annum above the interest rate that would otherwise have been in effect from time to time under the terms of each facility (i.e., the interest rate increases by 4.5% per annum under the Borrowing Base Facility and the Overdraft Facility rate increases to 13.92% per annum upon the occurrence of an event of default).
Both facilities constituting the 2016 NAB Facilities are secured by a fixed and floating lien over all the present and future rights, property and undertakings of SGIS&W Australia and are guaranteed by the Companyus as noted above. The 2016 NAB Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate SGI'sS&W Australia's outstanding obligations, all as set forth in the NAB facility agreements. SGIS&W Australia was in compliance with all NAB debt covenants at March 31, 2017.2018.
In January 2015, NAB and SGIS&W Australia entered into a new business markets - flexible rate loan (the "Keith Building Loan") in the amount of AUD $650,000 (USD $496,827 at March 31, 2017). Since entering into the Keith Building Loan, the limit has been changed on two occasions, with the current limit being AUD $750,000 (USD $573,263 at March 31, 2017), and a separate machinery and equipment facility (the "Keith Machinery and Equipment Facility") has been added of up to AUD $1,200,000 (USD $917,220 at March 31, 2017). At March 31, 2017,2018, the principal balance on the Keith Building Loan was AUD $650,000$575,000 (USD $496,828)$441,715) with unused availability of AUD $100,000 (USD $76,435)$76,820). At March 31, 2017,2018, the principal balance on the Keith Machinery and Equipment Facility was AUD $746,183$569,275 (USD $570,345)$437,317) with no unused availability of AUD $271,851 (USD $207,789).availability. In February 2016, NAB and SGIS&W Australia also entered into a master asset finance facility (the "Master Assets Facility)Facility"). At March 31, 2017,2018, the principal balance on the Master Assets Facility was AUD $176,165$346,877 (USD $134,652)$266,471) with unused availability of AUD $23,835$403,123 (USD $18,218)$309,679). The Master Asset Facility has various maturity dates through 2021 and have interest rates ranging from 4.86%4.89% to 5.31%.
The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a building on SGI'sS&W Australia's Keith, South Australia property, purchase of adjoining land and for the machinery and equipment for use in the operations of the building. The Keith Building Loan matures on November 30, 2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such period approximately 30 days), based on the weighted average of a specified basket of interest rates (5.96%(6.15% as of March 31, 2017)2018). Interest is payable each month in arrears. The Keith Machinery and Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate quoted by NAB at the time of the drawdown, plus 2.9%. The Keith Credit Facilities contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate SGI'sS&W Australia's outstanding obligations, all as set forth in the facility agreement. They are secured by a lien on all the present and future rights, property and undertakings of SGI, the Company'sS&W Australia, our corporate guarantee and a mortgage on SGI'sS&W Australia's Keith, South Australia property.
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We are currently in discussions with several financial institutions regarding the refinance of the Pioneer Note and expect to enterOn July 19, 2017, we entered into a long-term secured promissory noteSecurities Purchase Agreement with certain purchasers, pursuant to fundwhich we sold and issued an aggregate of 2,685,000 shares of our Common Stock at a purchase price of $4.00 per share, for aggregate gross proceeds of $10.74 million.
On October 11, 2017, we entered into a Securities Purchase Agreement with Mark W. Wong, our President and Chief Executive Officer, pursuant to which we sold and issued an aggregate of 75,000 shares of our Common Stock at a purchase price of $3.50 per share, for aggregate gross proceeds of $262,500.
On December 22, 2017, we completed the pay-offclosing of our rights offering of 3,500,000 shares of our Common Stock. At the Pioneer Noteclosing, we sold and issued an aggregate of 2,594,923 shares of our Common Stock at a subscription price of $3.50 per share (the "Subscription Price"). Pursuant to a backstop commitment with MFP Partners, L.P. ("MFP"), concurrently with the contingent consideration obligation prior to those obligations becoming due. Similarly,closing of rights offering, we expect to renew or replacesold and issued the remaining 905,077 shares of our KeyBank Credit FacilityCommon Stock not purchased in the normal courserights offering to MFP at the subscription price of operations prior to those obligations becoming due. However,$3.50 per share. Combined, we cannot provide assurances that additional loans will be available at such times or in amounts needed by us.sold and issued an aggregate of 3,500,000 shares of our common stock for aggregate gross proceeds of $12.25 million.
Summary of Cash Flows
The following table shows a summary of our cash flows for the nine months ended March 31, 20172018 and 2016:2017:
Nine Months Ended | Nine Months Ended | |||||||||||
March 31, | March 31, | |||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||
Cash flows from operating activities | $ | (16,985,511) | $ | (3,333,662) | $ | (16,377,979) | $ | (16,985,511) | ||||
Cash flows from investing activities | (1,736,614) | (2,377,320) | (1,016,188) | (1,736,614) | ||||||||
Cash flows from financing activities | 14,979,288 | 8,434,719 | 19,589,436 | 14,979,288 | ||||||||
Effect of exchange rate changes on cash | 158,996 | 8,427 | 48,122 | 158,996 | ||||||||
Net (decrease) increase in cash and cash equivalents | (3,583,841) | 2,732,164 | ||||||||||
Net increase (decrease) in cash and cash equivalents | 2,243,391 | (3,583,841) | ||||||||||
Cash and cash equivalents, beginning of period | 6,904,500 | 3,535,458 | 745,001 | 6,904,500 | ||||||||
Cash and cash equivalents, end of period | $ | 3,320,659 | $ | 6,267,622 | $ | 2,988,392 | $ | 3,320,659 |
Operating Activities
For the nine months ended March 31, 2018, operating activities used $16,377,979 in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows provided $2,577,222 in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $18,955,201 in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by increases in inventory of $32,191,993 due to timing of the US harvest and an increase in production, partially offset by an increase in accounts payable of $5,236,255.
For the nine months ended March 31, 2017, operating activities used $16,985,511 in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows provided $3,171,661 in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $20,157,172 in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by an increase in inventories of $15,972,829 and a decrease in accounts payable (including related parties) of $7,642,270 partially offset by a decrease in accounts receivable of $4,481,129.
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Investing Activities
Investing activities during the nine months ended March 31, 2016, operating activities2018 used $3,333,662$1,016,188 in cash. Net income plusThese activities consisted primarily of additions to a build out of a new research and minus the adjustments for non-cash items as detailed on the statement of cash flows provided $1,090,408development facility in cash and changes in operating assets and liabilities as detailed on the statement of cash flows used $4,424,070 in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by increases in inventory of $16,946,534 attributed to the 2016 Australian harvest, partially offset by decreases in accounts receivable of $13,498,542.
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Investing Activities
Investing activities during the nine months ended March 31, 2017 used $1,736,614 in cash. These activities consisted primarily of additions to a build out of a new research and development facility in Nampa, Idaho and investment in internal use software.
InvestingFinancing Activities
Financing activities during the nine months ended March 31, 2016 used $2,377,3202018 provided $19,589,436 in cash. These activities consistedWe completed two separate private placements of additionscommon stock during the nine months ended March 31, 2018 which raised net proceeds of $10.7 million in cash. In December 2017, we also completed the closing of our rights offering and backstop commitment with MFP. Pursuant to property, plantthe rights offering and equipment, primarilybackstop commitment with MFP, we sold and issued an aggregate of 3,500,000 shares of our common stock in December 2017 for aggregate net proceeds of $11.8 million. On November 30, 2017, we entered into a secured note financing transaction for $12.5 million in gross proceeds. The proceeds from the build outsecured note financing were used to repay the Pioneer Note. The repayment amount included the $2.5 million earn-out payment related to the Pioneer Acquisition that was added to the principal amount of the new packaging and distribution facilityPioneer Note in Keith, Australia and a build out of a new research and development facility in Nampa, Idaho. In addition, we invested $439,038 in our 50% owned joint corporation, S&W Semillas S.A.October 2017.
Financing Activities
Financing activities during the nine months ended March 31, 2017 provided $14,979,288 in cash. We had net borrowings of $19.3 million on our lines of credit and made $4.7 million of redemptions on our convertible debentures. We also generated $0.6 million in net proceeds from the exercise of stock options during the nine months ended March 31, 2017.
Financing activities during the nine months ended March 31, 2016 provided $8,434,719 in cash. In February 2016, we completed a rights offering of common stock offered to holders of common stock, convertible debentures and warrants and an accompanying contractual participation rights offering made to the holders of the convertible debentures. We also completed a private placement of common stock in November 2015. These equity financings collectively raised net proceeds of $13.3 million in cash. We also had net borrowings of $7.8 million on our lines of credit and made $11.3 million of redemptions on our convertible debentures as well as $2.0 million of other debt payments.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations, including our revenue and income from continuing operations. However, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the three and nine months ended March 31, 2017.2018.
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Capital Resources and Requirements
Our future liquidity and capital requirements will be influenced by numerous factors, including:
Critical Accounting Policies
The accounting policies and the use of accounting estimates are set forth in the footnotes to our consolidated financial statements.
In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2 - Summary of Significant Accounting Policies of the footnotes to the consolidated financial statements. In order to apply our accounting policies, we often need to make estimates based on judgments about future events. 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.
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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 reduced by the estimated cash-flow shortfall on a discounted basis, and a corresponding loss is charged to the consolidated statement of operations. 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.
Stock-Based Compensation
We account for stock-based compensation in accordance with FASB Accounting Standards Codification 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). 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.
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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 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 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 market basis.net realizable value. Inventories consist of raw materials and finished goods as well as in the ground crop inventories.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. The factors include the age of inventory, the amount of inventory held by type, future demand for products and the 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.
Our subsidiary, SGI,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. We record 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 our SGIS&W Australia growers. To the extent the estimated purchase price varies from the final purchase price for seed, the adjustment to actual could materially impact the results in the period when the difference between estimates and actuals are identified. If the actual purchase price is in excess of our estimated purchase price, this would negatively impact our financial results including a reduction in gross profits and earnings.
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company and therefore, we are not required to provide information required by this item of Form 10-Q.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our ChiefPrincipal Executive Officer and our ChiefPrincipal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2017.2018 (the "Evaluation Date"). 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 March 31, 2017,2018, our ChiefPrincipal Executive Officer and ChiefPrincipal 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 or subsequent to the date we carried out our evaluation whichthat have materiallysignificantly affected, or are reasonably likely to materiallysignificantly affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
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Part II
OTHER INFORMATION
We are not a party to any material legal proceedings.None.
Our business and results of operations are subject to a number of risks and uncertainties. A description ofYou should carefully consider the risk factors associated with our business is included under the headingdiscussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2016,2017, which was filed with the SEC on September 15, 2016. The description below includes material changes tocould materially affect our business, financial condition, cash flows or future results. Except for the risk factors affecting our business that were previously disclosed in our Annual Report and supersedes the description of the relevant risk factor in our Annual Report. Other than the items discussedset forth below, there have been no material changes to thein our risk factors previously disclosedincluded in our Annual Report sinceon Form 10-K for the fiscal year ended June 30, 2017. The risks described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
DuPont Pioneer may purchase alfalfa seed from other sources and reduce its purchase commitments to us.
Under our distribution agreement with DuPont Pioneer, DuPont Pioneer has made minimum purchase commitments for our dormant alfalfa seed products that extend through September 30, 2024. However, there are circumstances under which DuPont Pioneer is permitted to purchase seed from other sources and reduce its purchase commitments to us, including:
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We are committed to sell dormant alfalfa seed to DuPont Pioneer at initial fixed prices with fixed subsequent maximum price increases per year. Increases in our costs of production at rates higher than our contractual ability to increase prices would erode our profit margins and could have a material adverse effect on our results of operations.
Under our distribution agreement with DuPont Pioneer, we were committed to sell dormant alfalfa seed at prices that can only increase by up to a fixed percentage per year by variety. Although DuPont Pioneer has agreed to discuss in good faith an increase in the fixed maximum percentage price increase cap for any sales year in which an increase in grower compensation costs due to changes in market conditions cause our total production costs to increase at a percentage exceeding the amount of the cap, we cannot be certain that any such filing.discussions will result in additional pricing flexibility for us. If our grower compensation costs or other productions costs increase at a rate greater than the fixed maximum percentage increase per year, our profit margins would erode, and we could potentially be required to sell product at a loss. Any such change in our cost structure would have a material adverse effect on our results of operations.
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The future demand forIf we fail to perform our non-dormantobligations under our distribution agreement with DuPont Pioneer, DuPont Pioneer could terminate the agreement and reduce or eliminate purchases of alfalfa seed varieties in Saudi Arabia is uncertain.from us, and we could be exposed to claims for damages.
Recent regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage producers is causing buyersThe DuPont Pioneer distribution agreement imposes numerous obligations on us relating to, among other things, product and service quality and compliance with laws and third party obligations. The distribution agreement permits DuPont Pioneer to terminate the agreement if we materially breach the agreement and fail to cure the breach within a 60-day notice period, or in the country tocase of certain bankruptcy or insolvency events. If DuPont Pioneer terminates the distribution agreement, DuPont Pioneer could reduce or eliminate altogether its purchase of alfalfa seed inventory levels in the near-term. Historically, sales to customers in Saudi Arabia have represented a significant portion of our revenue,from us, and one Saudi Arabia based customer still ranks among our largest two customers. Given the regulatory uncertainty, the outlook for demand for our non-dormant varieties in Saudi Arabia over the next two to four years is uncertain. If buyers in Saudi Arabia continue to reduce alfalfa seed inventory levels in the near-term, our revenue over the next three to twelve monthswe could be negatively impacted. If such regulatory uncertainty perseveres,left with inventory of seed that it would be difficult or if such regulations are clarified or resolved in a manner that unfavorably impacts the water usage rightsimpossible for us to dispose of large forage producers in Saudi Arabia,on commercially reasonable terms. In addition, we could experience abe exposed to significant decrease in demandclaims for damages to DuPont Pioneer if the termination of an agreement results from our customers in Saudi Arabia. Any such decrease in demand could result in a material decline in revenue and earnings inbreach of the absence of growth in other regions and other products.agreement.
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.
None.
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See the Exhibit Index immediately following the signature page of this Quarterly Report, which is incorporated herein by reference, for the exhibits filed as part of this Quarterly Report.
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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, on the 10th day of May, 2017.
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INDEX TO EXHIBITS
Exhibit | Description | |
3.1(1) | ||
3.2(2) | ||
4.1 | Reference is made to Exhibits 3.1 and 3.2. | |
4.2(3) | ||
4.3(4) | Form of Common Stock Purchase | |
| ||
| ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
_________
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 19, 2011.
(2) Incorporated by reference to the Registrants' Current Report on Form 8-K, filed on December 16, 2015.
(3) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-164588), filed on April 23, 2010.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on May 18, 2012.(5) Incorporated by referenceDecember 31, 2014.
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SIGNATURES
Pursuant to the Registrant's Current Reportrequirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on Form 8-K, filedits behalf by the undersigned, thereunto duly authorized, on December 31, 2014.(6) Incorporated by reference to the Registrant's Current Report on Form 8-K/A, filed on January 7, 2015.10th day of May, 2018.
S&W SEED COMPANY |
By: /s/ Matthew K. Szot |
Matthew K. Szot |
Executive Vice President of Finance and Administration and Chief Financial Officer |
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