Form 8-K/A S&W Seed Co For: Oct 22

January 2, 2019 5:11 PM


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 8-K/A


CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 22, 2018



S&W SEED COMPANY
(Exact name of registrant as specified in Its charter)

 

Nevada
001-34719
27-1275784
 (State or Other Jurisdiction of Incorporation)
 (Commission File Number)
(IRS Employer Identification Number)

 

106 K Street, Suite 300
Sacramento, California

95814

(Address of principal executive offices)

(Zip Code)

Registrant's telephone number, including area code: (559) 884-2535

Not Applicable
(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o  Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o  Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o  Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o  Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company      o     

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.      o     




EXPLANATORY NOTE

On October 26, 2018, S&W Seed Company (the "Company") filed with the Securities and Exchange Commission (the "SEC") a Current Report on Form 8-K (the "Original Form 8-K"), to disclose that it had completed its acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin"), as well as the assumption of certain contracts and limited specified liabilities of Chromatin, for an aggregate cash purchase price of approximately $26.5 million.

This Form 8-K/A amends the Original Form 8-K to include the financial information required by Item 9.01 of Form 8-K.

Item 9.01    Financial Statements and Exhibits.

(a) Financial Statements of Business Acquired.

The following audited special purpose financial statements are filed as Exhibit 99.1 attached hereto and are incorporated herein by reference:

(1) Independent Auditor's Report;

(2) Audited Special Purpose Statement of Assets Acquired and Liabilities Assumed as of September 30, 2018;

(3) Audited Special Purpose Statement of Revenues and Direct Expenses for the Nine Month Period Ended September 30, 2018;

(4) Notes to the Audited Special Purpose Financial Statements;

The following unaudited special purpose financial statements are filed as Exhibit 99.2 attached hereto and are incorporated herein by reference:

(1) Unaudited Special Purpose Statement of Assets Acquired and Liabilities Assumed as of December 31, 2017;

(2) Unaudited Special Purpose Statement of Revenues and Direct Expenses for the Year Ended December 31, 2017; and

(3) Notes to the Unaudited Special Purpose Financial Statements

Full financial statements specified in Rule 3-05 of Regulation S-X are not presented because Chromatin, prior to entering receivership, had engaged in a number of complex financing and tax transactions that are not relevant to the business purchased by the Company, and because preparing financial information for certain subsidiaries of Chromatin that were not acquired by the Company would be impracticable and of no relevance to the business acquired by the Company. Therefore, such full financial statements and other financial information could not be provided without unreasonable effort and expense.

The Special Purpose Statement of Revenues and Direct Expenses reflect only those sales and revenues directly attributable to the Chromatin business. The direct expenses of Chromatin presented in these statements include cost of goods sold related to the Chromatin's sales and other direct expenses. Depreciation expense of assets used in the Chromatin business is included, but depreciation associated with assets not acquired, interest expense, legal and professional fees and income taxes have been excluded from the financial statements.

Pursuant to a letter dated October 16, 2018, the staff of the SEC stated that it would permit the Company to provide the foregoing special purpose financial statements in lieu of the full financial statements required by Regulation S-X. These financial statements do not necessarily represent the assets sold or liabilities assumed or revenues and direct expenses as if the Chromatin business had been operating as a separate, stand-alone entity during the periods presented. In addition, the financial statements may not be indicative of the financial condition or results of operations of the Chromatin business going forward.


(b) Pro Forma Financial Information:

The following unaudited pro forma condensed combined financial information is filed as Exhibit 99.3 hereto and is incorporated herein by reference:

(1) Unaudited Pro Forma Combined Balance Sheet at September 30, 2018; and

(2) Unaudited Pro Forma Combined Statement of Operations for the Three Months Ended September 30, 2018 and the Fiscal Year Ended June 30, 2018.

(d) Exhibits.

Exhibit No.

Description

23.1

Consent of Crowe LLP

99.1

Audited special purpose financial statements

99.2

Unaudited special purpose financial statements

99.3

Unaudited pro forma combined financial information

 

 

 


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 hereunto duly authorized.

  S&W SEED COMPANY

Date: January 2, 2019

  By:   /s/ Matthew K. Szot
 
         Matthew K. Szot
         Executive Vice President of Finance and Administration and Chief Financial Officer

 

 


 

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITOR

We consent to the incorporation by reference in the registration statements on Forms S-3 (File Nos. 333-222916, 333-219726, 333-214883, 333-208679, and 333-201797) and Forms S-8 (File Nos. 333-169742 and 333-196067) of S&W Seed Company of our report dated January 2, 2019, on the Special Purpose Statement of Assets Acquired and Liabilities Assumed by S&W Seed Company of Chromatin, Inc. and Subsidiaries as of September 30, 2018 and the related Special Purpose Statement of Revenues and Direct Expenses for the nine month period ended September 30, 2018, which report is included in this Current Report on Form 8-K/A of S&W Seed Company dated January 2, 2019.

Our report dated January 2, 2019 contains an emphasis of matter paragraph describing that the basis of presentation of the statements of Assets Acquired and Liabilities Assumed and Revenues and Direct Expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Current Report on Form 8-K/A of S&W Seed Company and are not intended to be a complete presentation of the financial position, results of operations or cash flows of the Chromatin Business in accordance with accounting principles generally accepted in the United States of America.

Crowe LLP

Elkhart, Indiana
January 2, 2019

 

 

 


 

EXHIBIT 99.1

 

 

 

Chromatin Business
Special Purpose Financial Statements
September 30, 2018

 

 

 

 


Chromatin Business
Index


 

Page(s)

Independent Auditor's Report

1-2

Special Purpose Financial Statements

 

Special Purpose Statement of Assets Acquired and Liabilities Assumed as of September 30, 2018

3

Special Purpose Statement of Revenue and Direct Expenses for the Nine Months Ended September 30, 2018

4

Notes to the Special Purpose Financial Statements

5-10

 

 

 

i


INDEPENDENT AUDITOR'S REPORT

Board of Directors
S&W Seed Company
Sacramento, California

Report on the Special Purpose Financial Statements

We have audited the accompanying special purpose statement of assets acquired and liabilities assumed by S&W Seed Company, pursuant to an Asset Purchase Agreement ("APA") dated September 14, 2018, of Chromatin Inc. and Subsidiaries as of September 30, 2018, and the related special purpose statement of revenue and direct expenses for the nine month period ended September 30, 2018 and the related notes to the special purpose financial statements. The assets acquired and liabilities assumed pursuant to the APA are referred to as the "Chromatin Business."

Management's Responsibility for the Special Purpose Financial Statements

Management is responsible for the preparation and fair presentation of these special purpose financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on the special purpose financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the special purpose financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the special purpose financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the special purpose financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the special purpose financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

In our opinion, the special purpose financial statements of the Chromatin Business referred to above present fairly, in all material respects, the assets acquired and liabilities assumed as of September 30, 2018 and the revenue and direct expenses for the nine months then ended in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

The accompanying special purpose financials statements referred to above were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the Current Report on Form 8-K/A of S&W Seed Company and are not intended to be a complete presentation of the financial position, results of operations, or cash flows of the Chromatin Business in accordance with accounting principles generally accepted in the United States of America, as described in Note 1. Our opinion is not modified with respect to this matter.

Crowe LLP

Elkhart, Indiana
January 2, 2019

2


Chromatin Business
Special Purpose Statement of Assets Acquired and Liabilities Assumed
September 30, 2018


       
      September 30,
      2018
       
ASSETS      
       
ASSETS ACQUIRED      
     Cash and cash equivalents   $ 97,122 
     Accounts receivable, net     1,601,811 
     Inventories, net     7,362,046 
     Prepaid expenses and other current assets     37,647 
          TOTAL CURRENT ASSETS     9,098,626 
       
Property, plant and equipment, net     7,908,223 
          TOTAL ASSETS ACQUIRED   $ 17,006,849 
       
LIABILITIES ASSUMED      
     Accounts payable   $ 211,557 
     Deferred revenue     755,303 
     Accrued expenses and other current liabilities     1,290 
          TOTAL LIABILITIES ASSUMED     968,150 
       
NET ASSETS ACQUIRED   $ 16,038,699 

The accompanying notes are integral to these special purpose financial statements.

3


Chromatin Business
Special Purpose Statement of Revenue and Direct Expenses
Nine-Months Ended September 30, 2018


       
      Nine Months
      Ended
      September 30,
      2018
       
       
Revenue   $ 12,762,051 
       
Cost of revenue     12,592,648 
       
Gross profit     169,403 
       
Other direct expenses      
     Selling, general and administrative expenses     4,292,043 
     Research and development expenses     2,105,320 
     Depreciation expense     1,581,681 
     Disposal of property, plant and equipment gain     (11,286)
       
          Total other direct expenses     7,967,758 
       
Deficit of revenue over direct expenses     (7,798,355)
       
Revenue over direct expenses attributable to non-controlling interest     8,552 
       
Deficit of revenue over direct expenses attributable to Chromatin business   $ (7,806,907)

The accompanying notes are integral to these special purpose financial statements.

4


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


1.    Description of Business and Basis of Presentation

On October 25, 2018, S&W Seed Company ("S&W") completed the acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin", "the Company", and "the Chromatin Business"), as well as the assumption of certain contracts and limited specified liabilities of Chromatin, for an aggregate cash purchase price of approximately $26.5 million (the "Acquisition"), pursuant to the terms of an Asset Purchase Agreement dated September 14, 2018, with Novo Advisors (f/k/a Turnaround Advisory Group Inc.), solely in its capacity as the receiver for, and on behalf of, Chromatin.

Under the terms of the Asset Purchase Agreement, S&W Seed Company acquired assets which include accounts receivable, inventory and the related grower's compensation liability, germplasm, production facilities and equipment as well as research equipment. With the exception of the grower's compensation liability and customer deposits, no other liabilities, contingent or otherwise, were assumed by S&W Seed Company.

Basis of Presentation

These special purpose financial statements ("financial statements") present the assets acquired and liabilities of Chromatin assumed by S&W as of September 30, 2018 and the revenue and direct expenses of Chromatin for the nine months then ended and have been prepared for inclusion in S&W's filings with the Securities and Exchange Commission to comply with Rule 8-04 of Regulation S-X. 

These financial statements have been prepared to reflect the assets acquired and liabilities assumed by the Buyer in accordance with a waiver obtained by the Buyer from the Securities and Exchange Commission ("SEC Waiver").

These financial statements are presented in lieu of full financial statements of the Chromatin business because Chromatin, prior to entering receivership, had engaged in a number of complex financing and tax transactions that are not relevant to the business purchased by S&W, and because preparing financial information for certain subsidiaries of Chromatin, Inc. which were not acquired by S&W would be impracticable and of no relevance to the business acquired by S&W.

These financial statements have been derived from the accounting records of Chromatin using its historical financial information. The financial statements do not necessarily represent the assets sold or liabilities assumed or revenue and direct expenses as if the Chromatin Business had been operating as a separate, stand-alone entity during the period presented. In addition, the financial statements may not be indicative of the financial condition or results of operations of the Chromatin Business going forward.

The Statement of revenue and Direct Expenses reflect only those sales and revenue directly attributable to the Chromatin Business for the nine months ended September 30, 2018 and do not reflect a full annual operating cycle. The direct expenses of the Chromatin Business presented in these statements include cost of goods sold related to the Chromatin Business' sales and other direct expenses. Depreciation expense of assets used in the Chromatin Business is included, but depreciation associated with assets not acquired, interest expense, legal and professional fees and income taxes have been excluded from the financial statements.

5


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


The financial statements include the balances and activity of Sorghum Solutions Africa, a South African company of which a 51% ownership interest was acquired under the Asset Purchase Agreement. All significant intercompany balances and transactions have been eliminated.

2.    Summary of Significant Accounting Policies

Basis of Presentation

The Company maintains its accounting records on an accrual basis in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Business Overview

The Chromatin business is a sorghum genetics and seed company in the business of breeding, growing, processing and selling hybrid sorghum seed.

International Operations

The financial information of Chromatin's foreign operations involved in the Chromatin Business has been translated into U.S. dollars at the exchange rates as follows: (i) asset and liability accounts at end-of-period rates, and (ii) revenue and expense accounts at the average exchange rates in effect during the period.

Use of Estimates

The preparation of the financial statements requires management to make estimates and assumptions that may affect the reported amounts of the assets acquired, liabilities assumed, revenue, direct expenses and related disclosures during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions include the allowance for doubtful accounts receivables and inventory valuation and expected realization. Actual results may differ from management's assumptions.

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 $1,217,461 at September 30, 2018.

6


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


Inventories

Inventories consist of seed and packaging materials.

Inventories are stated at the lower of cost or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories consist of raw materials, work in process and finished goods. Depending on market conditions, the actual amount received on sale could differ from the Company's estimated value of inventory. In order to determine the value of inventory at the balance sheet date, the Company evaluates a number of factors to determine the adequacy of provisions for inventory. The factors include the age of inventory, the quality and germination rates, the amount of inventory held by type, future demand for products and the expected future selling price the Company expects to realize by selling the inventory. These estimates are judgmental in nature and are made at a point in time, using available information, expected business plans and expected market conditions.

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.

Components of inventory are:

      September 30,
      2018
Raw materials and supplies   $ 466,602 
Work in progress     3,667,004 
Finished goods, net     3,228,440 
    $ 7,362,046 

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5-39 years for buildings, 3-27 years for machinery and equipment, and 5-7 years for vehicles.  Repairs and maintenance expenditures are expensed as incurred.

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.

7


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


Revenue Recognition

The Company recognizes revenue when the earnings process is complete.  Revenue for product sales is recognized upon delivery, when title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable.  Estimates are made for sales returns and other allowances based on the Company's experience.  Amounts to be billed to customers for shipping and handling fees are included in net sales and costs incurred by the Company for the delivery of goods are classified as direct costs of revenue.

These financial statements do not reflect the provisions of ASC Topic 606, Revenue from Contracts with Customers, which would have been mandatorily effective for the Company in 2019, absent the acquisition by S&W.  This ASC 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. Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

After the acquisition, the Company will, as part of S&W, report its revenue under the requirements of ASC Topic 606.

Direct Cost of revenue

The Company records purchasing and receiving costs, inspection costs and warehousing costs in direct 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 direct cost of revenue.

Research and Development

Research and development costs are expensed as incurred.  Research and development expenses include costs (primarily consisting of employee costs, materials, contract services, research agreements, and other external spend) relating to the discovery and development of new products, and enhancement of existing products.

8


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


3.    Property, Plant and Equipment

Components of property, plant and equipment were as follows:

      September 30,
      2018
Land and improvements   $ 299,024 
Buildings and improvements     6,136,133 
Machinery and equipment     13,447,294 
Vehicles     1,090,016 
Total property, plant and equipment     20,972,467 
       
Less: accumulated depreciation     (13,064,244)
       
Property, plant and equipment, net   $ 7,908,223 

Depreciation expense totaled $1,581,681 for the nine months ended September 30, 2018.

4.    Deferred Revenue

Deferred revenue represents deposits and prepayments from customers for products to be shipped in future periods.

9


Chromatin Business
Notes to Special Purpose Financial Statements
September 30, 2018


5.    Selected Cash Flows

The preparation of complete statements of cash flows was not practical since the historical operations were funded with various debt and equity transactions and these historical financing arrangements are not related to the assets acquired and liabilities assumed. Accordingly, it is impractical to identify and include investing or financing cash flows associated with the Business. The following selected cash flow information has been prepared by changes in the specific assets and liabilities comprising the Chromatin Business.

      Nine Months
      Ended
      September 30,
      2018
       
Deficit of revenue over direct expenses attributable to Chromatin business   $ (7,806,907)
       
Change in accounts receivable     2,649,979 
Change in inventories     5,839,936 
Change in accounts payable     (6,979,515)
Change in deferred revenue     (172,667)
       
     Selected operating cash flows   $ (6,469,174)

6.    Subsequent Events

The Company has evaluated subsequent events after the balance sheet date through January 2, 2019, which is the date the financial statements were available to be issued.

Please refer to Note 1 for further discussion on the closing of the Acquisition.

 

10


 

EXHIBIT 99.2

 

 

 

Chromatin Business
Unaudited Special Purpose Financial Statements
December 31, 2017

 

 

 

 


Chromatin Business
Unaudited Special Purpose Financial Statements
December 31, 2017
Index


 

Page(s)

Unaudited Special Purpose Financial Statements

 

Special Purpose Statement of Assets Acquired and Liabilities Assumed as of December 31, 2017

1

Special Purpose Statement of Revenue and Direct Expenses for the Year Ended December 31, 2017

2

Notes to the Special Purpose Financial Statements

3-8

 

 

 

i


Chromatin Business
Unaudited Special Purpose Statement of Assets Acquired and Liabilities Assumed
December 31, 2017


       
      December 31,
      2017
      (unaudited)
ASSETS      
       
ASSETS ACQUIRED      
     Cash and cash equivalents   $ 87,844 
     Accounts receivable, net     4,251,790 
     Inventories, net     13,201,982 
     Prepaid expenses and other current assets     55,248 
          TOTAL CURRENT ASSETS     17,596,864 
       
Property, plant and equipment, net     9,740,176 
          TOTAL ASSETS ACQUIRED   $ 27,337,040 
       
LIABILITIES ASSUMED      
     Accounts payable   $ 7,191,072 
     Deferred revenue     927,970 
     Accrued expenses and other current liabilities     101,366 
          TOTAL LIABILITIES ASSUMED     8,220,408 
       
NET ASSETS ACQUIRED   $ 19,116,632 

The accompanying notes are integral to these special purpose financial statements.

1


Chromatin Business
Unaudited Special Purpose Statement of Revenue and Direct Expenses
Year Ended December 31, 2017


       
       
      Year Ended
      December 31,
      2017
      (unaudited)
       
Revenue   $ 19,694,247 
       
Cost of revenue     33,454,598 
       
Gross profit     (13,760,351)
       
Other direct expenses      
     Selling, general and administrative expenses     8,986,538 
     Research and development expenses     3,742,253 
     Depreciation expense     2,539,724 
     Disposal of property, plant and equipment gain     (87,355)
       
          Total other direct expenses     15,181,160 
       
Deficit of revenue over direct expenses     (28,941,511)
       
Deficit of revenue over direct expenses attributable to non-controlling interest     (3,998)
       
Deficit of revenue over direct expenses attributable to Chromatin business   $ (28,937,513)

The accompanying notes are integral to these special purpose financial statements.

2


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


1.    Description of Business and Basis of Presentation

On October 25, 2018, S&W Seed Company ("S&W") completed the acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin", "the Company", and "the Chromatin Business"), as well as the assumption of certain contracts and limited specified liabilities of Chromatin, for an aggregate cash purchase price of approximately $26.5 million (the "Acquisition"), pursuant to the terms of an Asset Purchase Agreement dated September 14, 2018, with Novo Advisors (f/k/a Turnaround Advisory Group Inc.), solely in its capacity as the receiver for, and on behalf of, Chromatin.

Under the terms of the Asset Purchase Agreement, S&W Seed Company acquired assets which include accounts receivable, inventory and the related grower's compensation liability, germplasm, production facilities and equipment as well as research equipment. With the exception of the grower's compensation liability and customer deposits, no other liabilities, contingent or otherwise, were assumed by S&W Seed Company.

Basis of Presentation

These statements present the assets acquired and liabilities of Chromatin assumed by S&W as of December 31, 2017 and the revenue and direct expenses of Chromatin for the year then ended and have been prepared for inclusion in S&W's filings with the Securities and Exchange Commission to comply with Rule 8-04 of Regulation S-X. 

These financial statements have been prepared to reflect the assets acquired and liabilities assumed by the Buyer in accordance with a waiver obtained by the Buyer from the Securities and Exchange Commission ("SEC Waiver").

These financial statements are presented in lieu of full financial statements of the Chromatin business because Chromatin, prior to entering receivership, had engaged in a number of complex financing and tax transactions that are not relevant to the business purchased by S&W, and because preparing financial information for certain subsidiaries of Chromatin, Inc. which were not acquired by S&W would be impracticable and of no relevance to the business acquired by S&W.

These financial statements have been derived from the accounting records of Chromatin using its historical financial information. The financial statements do not necessarily represent the assets sold or liabilities assumed or revenue and direct expenses as if the Chromatin Business had been operating as a separate, stand-alone entity during the period presented. In addition, the financial statements may not be indicative of the financial condition or results of operations of the Chromatin Business going forward.

The Statement of revenue and Direct Expenses reflect only those sales and revenue directly attributable to the Chromatin Business. The direct expenses of the Chromatin Business presented in these statements include cost of goods sold related to the Chromatin Business' sales and other direct expenses. Depreciation expense of assets used in the Chromatin Business is included, but depreciation associated with assets not acquired, interest expense, legal and professional fees and income taxes have been excluded from the financial statements.

The financial statements include the balances and activity of Sorghum Solutions Africa, a South African company of which a 51% ownership interest was acquired under the Asset Purchase Agreement. All significant intercompany balances and transactions have been eliminated.

3


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


2.    Summary of Significant Accounting Policies

Basis of Presentation

The Company maintains its accounting records on an accrual basis in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Unaudited Financial Information

These 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 financial statements for the periods presented.

Business Overview

The Chromatin business is a sorghum genetics and seed company in the business of breeding, growing, processing and selling hybrid sorghum seed.

International Operations

The financial information of Chromatin's foreign operations involved in the Chromatin Business has been translated into U.S. dollars at the exchange rates as follows: (i) asset and liability accounts at end-of-period rates, and (ii) revenue and expense accounts at the average exchange rates in effect during the period.

Use of Estimates

The preparation of the financial statements requires management to make estimates and assumptions that may affect the reported amounts of the assets acquired, liabilities assumed, revenue, direct expenses and related disclosures during the reporting periods. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions include the allowance for doubtful accounts receivables and inventory valuation and expected realization. Actual results may differ from management's assumptions.

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 $942,952 at December 31, 2017.

4


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


Inventories

Inventories consist of seed and packaging materials.

Inventories are stated at the lower of cost or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories consist of raw materials, work in process and finished goods. Depending on market conditions, the actual amount received on sale could differ from the Company's estimated value of inventory. In order to determine the value of inventory at the balance sheet date, the Company evaluates a number of factors to determine the adequacy of provisions for inventory. The factors include the age of inventory, the quality and germination rates, the amount of inventory held by type, future demand for products and the expected future selling price the Company expects to realize by selling the inventory. These estimates are judgmental in nature and are made at a point in time, using available information, expected business plans and expected market conditions.

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.

Components of inventory are:

      December 31,
      2017
Raw materials and supplies   $ 740,405 
Work in progress     9,410,915 
Finished goods, net     3,050,662 
    $ 13,201,982 

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation and is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5-39 years for buildings, 3-27 years for machinery and equipment, and 5-7 years for vehicles.  Repairs and maintenance expenditures are expensed as incurred.

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.

5


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


Revenue Recognition

The Company recognizes revenue when the earnings process is complete.  Revenue for product sales is recognized upon delivery, when title and risk of loss have been transferred, collectability is reasonably assured and pricing is fixed or determinable.  Estimates are made for sales returns and other allowances based on the Company's experience.  Amounts to be billed to customers for shipping and handling fees are included in net sales and costs incurred by the Company for the delivery of goods are classified as direct costs of revenue.

These financial statements do not reflect the provisions of ASC Topic 606, Revenue from Contracts with Customers, which would have been mandatorily effective for the Company in 2019, absent the acquisition by S&W.  This ASC 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. Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

After the acquisition, the Company will, as part of S&W, report its revenue under the requirements of ASC Topic 606.

Direct Cost of revenue

The Company records purchasing and receiving costs, inspection costs and warehousing costs in direct 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 direct cost of revenue.

Research and Development

Research and development costs are expensed as incurred.  Research and development expenses include costs (primarily consisting of employee costs, materials, contract services, research agreements, and other external spend) relating to the discovery and development of new products, and enhancement of existing products.

6


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


3.    Property, Plant and Equipment

Components of property, plant and equipment were as follows:

      December 31,
      2017
Land and improvements   $ 299,024 
Buildings and improvements     6,389,864 
Machinery and equipment     13,454,131 
Vehicles     1,090,016 
Total property, plant and equipment     21,233,035 
       
Less: accumulated depreciation     (11,492,859)
       
Property, plant and equipment, net   $ 9,740,176 

Depreciation expense totaled $2,539,724 for the year ended December 31, 2017.

4.    Deferred Revenue

Deferred revenue represents deposits and prepayments from customers for products to be shipped in future periods.

7


Chromatin Business
Notes to Unaudited Special Purpose Financial Statements
December 31, 2017


5.    Selected Cash Flows

The preparation of complete statements of cash flows was not practical since the historical operations were funded with various debt and equity transactions and these historical financing arrangements are not related to the assets acquired and liabilities assumed. Accordingly, it is impractical to identify and include investing or financing cash flows associated with the Business. The following selected cash flow information has been prepared by changes in the specific assets and liabilities comprising the Chromatin Business.

      Year Ended
      December 31,
      2017
      (unaudited)
       
Deficit of revenue over direct expenses attributable to Chromatin business   $ (28,937,513)
       
Change in accounts receivable     2,544,742 
Change in inventories     15,055,395 
Change in accounts payable     1,689,687 
Change in deferred revenue     (115,849)
       
     Selected operating cash flows   $ (9,763,538)

6.    Subsequent Events

The Company has evaluated subsequent events after the balance sheet date through January 2, 2019, which is the date the financial statements were available to be issued.

Please refer to Note 1 for further discussion on the closing of the Acquisition.

 

8


 

EXHIBIT 99.3

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

On October 25, 2018, S&W Seed Company (" the Company or S&W") completed the acquisition of substantially all of the assets of Chromatin, Inc. (together with certain of its subsidiaries and affiliates in receivership, "Chromatin" and "the Chromatin Business"), as well as the assumption of certain contracts and limited specified liabilities of Chromatin, for an aggregate cash purchase price of approximately $26.5 million (the "Acquisition"), pursuant to the terms of an Asset Purchase Agreement dated September 14, 2018, with Novo Advisors (f/k/a Turnaround Advisory Group Inc.), solely in its capacity as the receiver for, and on behalf of, Chromatin.

Under the terms of the Asset Purchase Agreement, S&W Seed Company acquired assets which primarily include accounts receivable, inventory and the related grower's compensation liability, germplasm and technology, trade names, production facilities and equipment as well as research equipment. With the exception of the grower's compensation liability and customer deposits, no other liabilities, contingent or otherwise, were assumed by S&W Seed Company.

The following unaudited pro forma combined financial information gives effect to the Chromatin Acquisition and is provided for informational purposes only. The unaudited pro forma combined financial information was based on and should be read in conjunction with the (i) historical consolidated financial statements of S&W included in its Annual Report on Form 10-K for the year ended June 30, 2018; (ii) the historical consolidated financial statements of S&W for the three months ended September 30, 2018 included in its Form 10-Q; (iii) and the audited special purpose statement of assets acquired and liabilities assumed as of September 30, 2018 and the audited special purpose statement of revenue and direct expenses for the nine months ended September 30, 2018.

The unaudited pro forma combined consolidated balance sheet as of September 30, 2018, and the unaudited pro forma combined statements of operations for the year ended June 30, 2018 and three months ended September 30, 2018, are presented herein. The unaudited pro forma combined balance sheet gives effect to the Chromatin Acquisition as if it had been completed on September 30, 2018, and combines the unaudited consolidated balance sheet of S&W and Chromatin's audited special purpose statement of assets acquired and liabilities assumed. The unaudited pro forma combined balance sheet gives effect to the Acquisition as well as the sale of preferred stock on October 23, 2018, the proceeds of which were used to fund the Acquisition. The unaudited pro forma combined statements of operations for the year ended June 30, 2018 and three months ended September 30, 2018 give effect to the Chromatin Acquisition as if it had occurred on July 1, 2017.

S&W's fiscal year ended June 30, 2018 and Chromatin's historical fiscal year was December 31, 2017. The unaudited pro forma combined statements of operations for the year ended June 30, 2018 were prepared using the historical statements of operations of S&W and the special purpose statement of revenue and direct expenses of the Chromatin business for the nine months ended September 30, 2018. The unaudited pro forma combined statements of operations for the three months ended September 30, 2018 were prepared using the historical statements of operations of S&W and Chromatin's special purpose statement of revenue and direct expenses for the three months ended September 30, 2018. The Chromatin business's audited results for the nine months ended September 30, 2018 were adjusted to exclude the six months ended June 30, 2018 to reflect three months of operations ending September 30, 2018.


The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the acquisitions, are factually supportable and are expected to have a continuing impact on the combined results. The unaudited pro forma combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma combined financial statements, and is not necessarily indicative of the combined results of operations or financial condition had the acquisitions been completed as of the dates indicated. In addition, the unaudited pro forma combined financial information does not purport to project the future results of operations or financial position of the combined company.

The unaudited pro forma combined financial information has been prepared by S&W using the acquisition method of accounting in accordance with U.S. generally accepted accounting principles. The acquisition accounting is dependent upon certain valuation and other studies that have yet to be completed. The pro forma adjustments reflected below are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial statements prepared in accordance with the rules and regulations of the SEC. Differences between the preliminary estimates reflected herein and the final acquisition accounting will occur, and those differences could have a material impact on the accompanying unaudited pro forma combined financial statements.

 

 

 

 

 


S&W SEED COMPANY
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2018
                                   
      Historical     Pro Forma Adjustments     Pro
      S&W Seed
Company
    Chromatin                     Forma
              Acquisition     Financing   Notes     Combined
ASSETS                                  
                                   
CURRENT ASSETS                                  
     Cash and cash equivalents   $ 4,034,127    $ 97,122    $ (26,900,000)   $ 22,420,226    A, B, C   $ (348,525)
     Accounts receivable, net     13,868,575      1,601,811                  15,470,386 
     Unbilled accounts receivable, net     9,530,970                      9,530,970 
     Inventories, net     76,058,981      7,362,046      305,481        A     83,726,508 
     Prepaid expenses and other current assets     3,548,903      37,647                  3,586,550 
          TOTAL CURRENT ASSETS     107,041,556      9,098,626      (26,594,519)     22,420,226          111,965,889 
                                   
Property, plant and equipment, net     12,966,314      7,908,223      4,141,777        A     25,016,314 
Intangibles, net     32,639,162          4,650,000        A     37,289,162 
Goodwill     10,292,265          1,364,043        A     11,656,308 
Other assets     1,302,904                      1,302,904 
          TOTAL ASSETS   $ 164,242,201    $ 17,006,849    $ (16,438,699)   $ 22,420,226        $ 187,230,577 
                                   
LIABILITIES AND STOCKHOLDERS' EQUITY                                  
                                   
CURRENT LIABILITIES                                  
     Accounts payable   $ 36,949,282    $ 211,557    $   $       $ 37,160,839 
     Deferred revenue     104,355      755,303                  859,658 
     Accrued expenses and other current liabilities     3,031,163      1,290                  3,032,453 
     Lines of credit, net     23,569,003                      23,569,003 
     Current portion of long-term debt, net     861,877                      861,877 
          TOTAL CURRENT LIABILITIES     64,515,680      968,150                  65,483,830 
                                   
Long-term debt, net, less current portion     12,424,048                      12,424,048 
Other non-current liabilities     645,493                      645,493 
                                   
          TOTAL LIABILITIES     77,585,221      968,150                  78,553,371 
                                   
STOCKHOLDERS' EQUITY                                  
     Series A Convertible Preferred stock;                        
          no shares issued and outstanding at September 30, 2018                       22,420,226    C     22,420,226 
     Common stock, $0.001 par value; 50,000,000 shares authorized;                          
          25,981,252 issued and 25,956,252 outstanding at September 30, 2018;     25,981                      25,981 
     Treasury stock, at cost, 25,000 shares     (134,196)                     (134,196)
     Additional paid-in capital     113,878,725                      113,878,725 
     Accumulated deficit     (21,140,445)         (400,000)       B     (21,540,445)
     Accumulated other comprehensive loss     (5,973,085)                     (5,973,085)
          TOTAL STOCKHOLDERS' EQUITY     86,656,980          (400,000)     22,420,226          108,677,206 
          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 164,242,201    $ 968,150    $ (400,000)   $ 22,420,226        $ 187,230,577 

 


S&W SEED COMPANY
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended September 30, 2018
                                   
      Historical     Pro Forma Adjustments     Pro
      S&W Seed
Company
                          Forma
          Chromatin     Acquisition     Financing   Notes     Combined
Revenue   $ 26,120,137    $ 1,673,177    $   $       $ 27,793,314 
                                   
Cost of revenue     20,657,008      2,824,675                  23,481,683 
                                   
Gross profit     5,463,129      (1,151,498)                 4,311,631 
                                   
Operating expenses                                  
     Selling, general and administrative expenses     2,887,378      904,882      (408,516)       B     3,383,744 
     Research and development expenses     992,113      597,804                  1,589,917 
     Depreciation and amortization     855,108      513,984      (253,984)       D,E     1,115,108 
     Disposal of property, plant and equipment gain         (5,336)                 (5,336)
                                   
          Total operating expenses     4,734,599      2,011,334      (662,500)             6,083,433 
                                   
Income (loss) from operations     728,530      (3,162,832)     662,500              (1,771,802)
                                   
Other expense                                  
     Foreign currency (gain) loss     (25,443)                     (25,443)
     Interest expense - amortization of debt discount     66,478                      66,478 
     Interest expense      657,230                      657,230 
                                   
Income (loss) before income taxes     30,265      (3,162,832)     662,500              (2,470,067)
     Provision for income taxes     9,334                F     9,334 
Net income (loss)   $ 20,931    $ (3,162,832)   $ 662,500    $       $ (2,479,401)
                                   
     Net income attributed to minority interest         8,828                  8,828 
Net income (loss) attributed to S&W Seed Company   $ 20,931    $ (3,171,660)   $ 662,500    $       $ (2,488,229)
                                   
Net income (loss) per common share:                                  
     Basic   $ 0.00                          $ (0.08)
     Diluted   $ 0.00                          $ (0.08)
                                   
Weighted average number of common shares outstanding:                                  
     Basic     24,790,215                  7,235,000    C     32,025,215 
     Diluted     24,791,437                  7,235,000    C     32,025,215 

 


S&W SEED COMPANY
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended June 30, 2018
                                   
      Historical     Pro Forma Adjustments     Pro
      S&W Seed
Company
                          Forma
          Chromatin     Acquisition     Financing   Notes     Combined
                                   
Revenue   $ 64,085,510    $ 12,762,051    $   $       $ 76,847,561 
                                   
Cost of revenue     49,332,052      12,592,648                  61,924,700 
                                   
Gross profit     14,753,458      169,403                  14,922,861 
                                   
Operating expenses                                  
     Selling, general and administrative expenses     10,503,020      4,292,043                  14,795,063 
     Research and development expenses     3,887,723      2,105,320                  5,993,043 
     Depreciation and amortization     3,439,287      1,581,681      (802,792)       D,E     4,218,176 
     Disposal of property, plant and equipment gain     (82,980)     (11,286)                 (94,266)
                                   
          Total operating expenses     17,747,050      7,967,758      (802,792)             24,912,016 
                                   
Income (loss) from operations     (2,993,592)     (7,798,355)     802,792              (9,989,155)
                                   
Other expense                                  
     Foreign currency (gain) loss     (12,584)                     (12,584)
     Change in derivative warrant liabilities     (431,300)                     (431,300)
     Interest expense - amortization of debt discount     169,045                      169,045 
     Interest expense      1,863,288                      1,863,288 
                                   
Loss before income taxes     (4,582,041)     (7,798,355)     802,792              (11,577,604)
     Provision for income taxes     143,049                F     143,049 
Net loss   $ (4,725,090)   $ (7,798,355)   $ 802,792    $       $ (11,720,653)
                                   
     Net income attributed to minority interest         8,552                  8,552 
Net income (loss) attributed to S&W Seed Company   $ (4,725,090)   $ (7,806,907)   $ 802,792    $       $ (11,729,205)
                                   
Net loss per common share:                                  
     Basic   $ (0.21)                         $ (0.39)
     Diluted   $ (0.21)                         $ (0.39)
                                   
Weighted average number of common shares outstanding:                                  
     Basic     22,481,491                  7,235,000    C     29,716,491 
     Diluted     22,481,491                  7,235,000    C     29,716,491 

 


S&W Seed Company
Notes to Unaudited Pro Forma Combined Financial Statements

Notes to Unaudited Pro Forma Combined Financial Statements

A)    Reflects payment of the purchase price and estimated allocation of the purchase price to assets acquired and liabilities assumed, including certain intangible assets that had not previously been recognized by the Chromatin Business. A summary of the estimated allocation of the purchase price as if the Chromatin Acquisition was completed as of September 30, 2018 is presented below:

Cash   $ 97,122 
Accounts receivable     1,601,811 
Inventory     7,667,527 
Prepaid expenses     37,647 
Property, plant and equipment     12,050,000 
In-process research and development     200,000 
Technology/IP - germplasm     4,300,000 
Trade names     150,000 
Goodwill     1,364,043 
Current liabilities     (968,150)
     Total acquisition cost allocated   $ (26,500,000)

The actual purchase price allocation will be completed as of the Chromatin Acquisition date of October 25, 2018, accordingly, the allocation above is solely for purposes of preparing these Pro Forma financial statements. The Chromatin Acquisition will be accounted for as a business combination, accordingly, the assets acquired and liabilities assumed are required to be measured at their estimated fair values on the date of the Acquisition. S&W has estimated the fair values of the assets of the Chromatin Business, including certain intangible assets not previously recognized by Chromatin. Goodwill is calculated as the difference between the acquisition date fair value of the acquisition consideration transferred and the aggregate value assigned to the assets acquired and liabilities assumed.

As of the date of the filing of this document, S&W has not yet finished procedures to determine the fair value of the tangible and intangible assets acquired in the Acquisition. The estimates in the table above represent S&W's best estimates of those fair values as of the date of filing and assume an Acquisition date of September 30, 2018. The actual purchase price allocation will defer from the amounts presented within. The Company estimates the useful lives of acquired intangible assets as follows:

      Estimated Useful
      Life (Years)
       
In-process research and development     3
Technology/IP - germplasm     30
Trade names     5

B)    Reflects payment of $400,000 for the estimated remaining costs of the Acquisition that had not yet been accrued or paid as of September 30, 2018. An additional $408,516 of acquisition costs were incurred and booked as expenses prior to September 30, 2018. These one-time costs associated with the Acquisition have been excluded from the pro forma statement of operations as they are non-recurring in nature. These costs will be reflected in the operating results for the quarter ended December 31, 2018.

C)    Reflects the issuance, on October 23, 2018, of 7,235 shares of a newly designated Series A Convertible Preferred Stock at a purchase price of $3,110 per share, for aggregate gross proceeds of approximately $22.5 million. These proceeds are reflected net of estimated equity financing costs of $79,774. The Series A Preferred stock automatically converted into shares of the Company's Common Stock at a conversion price of $3.11 per share upon receipt of stockholder approval on November 20, 2018. The basic and diluted weighted average shares outstanding has been adjusted to reflect the conversion to 7,235,000 common shares.

D)    Reflects the estimated reduction in depreciation expense of $313,984 on a quarterly basis and ($1,255,936 annually) associated with the acquired property, plant and equipment. Depreciation expense is expected to decrease based on the revaluing of property, plant and equipment to fair value as of the acquisition date as well as an adjustment to estimated remaining useful lives. Depreciation expense is estimated to be approximately $200,000 on a quarterly basis ($800,000 annually).

E)    Reflects the estimated amortization expense associated with the acquired identifiable intangible assets. Amortization expense is estimated to be approximately $60,000 on a quarterly basis ($240,000 annually).

F)    An adjustment to pro forma income tax expense (benefit) is not necessary given the Company's valuation reserve against its deferred tax asset.

 


 

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