Form 10-Q S&W Seed Co For: Mar 31
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, 2019
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)
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(559) 884-2535
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, par value $0.001 per share |
SANW |
The Nasdaq Capital Market |
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 every Interactive Data File required to be submitted 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 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 the 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 x |
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 9, 2019, 33,278,219 shares of the registrant's common stock were outstanding.
S&W SEED COMPANY 1
This Quarterly Report on Form 10-Q contains 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"), which are subject to the "safe
harbor" created by those sections. These forward-looking statements include 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," "plan," "potential," "project," "seek," "should," "target," "will," "would," and similar
expressions or variations intended to identify forward-looking 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, 2018, 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 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 2019," "fiscal 2018" and "fiscal 2017" in this Quarterly Report on Form 10-Q refer to the respective fiscal year ended June 30, 2019, 2018 and
2017, 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
See notes to consolidated financial statements. 4
S&W SEED COMPANY
See notes to consolidated financial statements. 5
S&W SEED COMPANY
See notes to consolidated financial statements. 6
S&W SEED COMPANY
See notes to consolidated financial statements. 7
S&W SEED COMPANY
See notes to consolidated financial statements. 8
S&W SEED COMPANY 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 Holdings Australia Pty Ltd, an Australia corporation (f/k/a S&W 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"). On September 19, 2018, the Company and AGT Foods Africa Proprietary Limited (AGT) formed a venture based in South Africa named SeedVision Proprietary Limited (SeedVision).
SeedVision will leverage AGT's African-based production and processing facilities to produce S&W's hybrid sunflower, grain sorghum, and forage sorghum to be sold by SeedVision in the
African continent, Middle East countries, and Europe. Business Overview Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding, growing, processing and selling agricultural seeds. The Company
owns seed cleaning and processing facilities, which are located in Five Points, California, Nampa, Idaho, Dumas, Texas, New Deal, Texas and 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"). 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
agreement with DuPont Pioneer (relating to GMO-traited varieties) terminates on May 31, 2019. 9
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. In October 2018, the Company acquired substantially all of the assets of Chromatin, Inc., a U.S.-based sorghum genetics and seed company, as part of the Company's efforts to expand its
penetration into the hybrid sorghum market. The Company's operations span the world's seed production regions with operations in the San Joaquin and Imperial Valleys of California, Texas, 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 consolidated financial statements include the accounts of S&W Seed Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements were prepared in accordance with U.S. GAAP and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and
majority-owned subsidiaries over which the Company's exercises control. Outside stockholders' interests in subsidiaries are shown on the condensed consolidated financial statements as
Noncontrolling interests. The Company owns 50.1% of SeedVision, which is a variable interest entity as defined in ASC 810-10, Consolidation, because no substantive equity contributions have been made to
it, and SeedVision is being funded through advances, as needed, from its investors. The Company has concluded that it is the primary beneficiary of SeedVision because it has the power,
through a tie-breaking vote on the board of directors, to direct the sales and marketing activities of SeedVision, which are considered to be the activities that have the greatest impact on the future
economic performance of SeedVision. Because the Company is its primary beneficiary, SeedVision's financial results are included in these financial statements. 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, 2019. 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, 2018, as filed with the SEC. 10
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, revenue recognition, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable
to farmers who grow seed for the Company), contingent consideration obligations, derivative liabilities, contingencies and litigation. Significant estimates and assumptions are also used to
establish the fair value and useful lives of depreciable tangible and certain intangible assets, goodwill as well as valuing stock-based compensation. Actual results may differ from those estimates
and assumptions, and such results may affect income, financial position or cash flows. Certain Risks and Concentrations The Company's revenue is principally derived from the sale of seed, the market for which is highly competitive. One customer accounted for 44% and 82% of its revenue for the three
months ended March 31, 2019 and 2018, respectively. One customer accounted for 59% and 68% of its revenue for the nine months ended March 31, 2019 and 2018, respectively. One customer accounted for 18% of the Company's accounts receivable at March 31, 2019. One customer accounted for 35% of the Company's accounts receivable at June 30, 2018. In addition, the Company sells a substantial portion of its products to international customers. Sales to international markets represented 27% and 16% of revenue during the three months
ended March 31, 2019 and 2018, respectively. Sales to international markets represented 25% and 29% of revenue during the nine months ended March 31, 2019 and 2018, respectively. The net
book value of fixed assets located outside the United States was 11% of total assets at March 31, 2019. The net book value of fixed assets located outside the United States was 20% of total
assets at June 30, 2018. Cash balances located outside of the United States may not be insured and totaled $300,293 and $369,803 at March 31, 2019 and June 30, 2018, respectively. The following table shows revenue from external sources by destination country: 11
International Operations The Company translates its foreign operations' assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet date
and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation
account, a component of accumulated other comprehensive income (loss). Gains or losses from foreign currency transactions are included in the consolidated statement of operations. Revenue Recognition The Company adopted the provisions of ASC Topic 606, Revenue from Contracts with Customers ("Topic 606") as of July 1, 2018. See Note 3 for further
discussion. 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 $1,035,525 and $584,202 at
March 31, 2019 and June 30, 2018, respectively. Inventories Inventories consist of seed and packaging materials. Inventories are stated at the lower of cost or net realizable value, and an inventory reserve permanently reduces the cost basis of inventory. Inventories are valued as follows: Actual cost is
used to value raw materials such as packaging materials, as well as goods in process. Costs for substantially all finished goods, which include the cost of carryover crops from the previous year,
are valued at actual cost. Actual cost for finished goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing overhead costs based on normal
capacity. The Company records abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) as current period charges and allocates fixed production overhead
to the costs of finished goods based on the normal capacity of the production facilities. 12
The Company's subsidiary, S&W Australia, does not fix the final price for seed payable to its growers until the completion of a given year's sales cycle pursuant to its standard contract
production agreement. S&W Australia records an estimated unit price; accordingly, inventory, cost of revenue and gross profits are based upon management's best estimate of the final
purchase price to growers. Inventory is periodically reviewed to determine if it is marketable, obsolete or impaired. Inventory that is determined to be obsolete or impaired is written off to expense at the time the
impairment is identified. Inventory quality is a function of germination percentage. Our experience has shown that our alfalfa seed quality tends to be stable under proper storage conditions;
therefore, we do not view inventory obsolescence for alfalfa seed as a material concern. Hybrid crops (sorghum and sunflower) seed quality may be affected by warehouse storage pests
such as insects and rodents. The Company maintains a strict pest control program to mitigate risk and maximize hybrid seed quality. The Company sells its inventory to distributors, dealers and directly to growers. Components of inventory are: Property, Plant and Equipment Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset - periods of 5-35 years for buildings, 3-20 years for machinery
and equipment, and 2-5 years for vehicles. Intangible Assets Intangible assets acquired in business acquisitions are reported at their initial fair value less accumulated amortization. Intangible assets are amortized using the straight-line method
over the estimated useful life of the asset. Periods of 10-30 years for technology/IP/germplasm, 5-20 years for customer relationships and trade names and 3-20 for other intangible assets. The
weighted average estimated useful lives are 26 years for technology/IP/germplasm, 17 years for customer relationships and 18 years for trade names and 19 years for other intangible assets. Goodwill Goodwill is assessed at least annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant
change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The Company first
assesses qualitative factors to determine whether it is more likely than not that the fair value 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 then develops a detailed estimate of the reporting unit's fair value. The Company uses
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market capitalization and an estimate of a control premium, as well as a discounted cash flow analysis to estimate the fair value of its one reporting unit. Management then compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the
carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The Company performed a qualitative assessment of goodwill at
March 31, 2019 and determined that goodwill was not impaired. Equity Method Investments Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not
the Company exercises significant influence with respect to an investee depends on an evaluation of several factors including, among others, representation on the investee company's board of
directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company's accounts
are not reflected within the Company's consolidated balance sheets and statements of operations; however, the Company's share of the earnings or losses of the investee company is reflected in
the caption "Loss on equity method investment" in the consolidated statements of operations. The Company's carrying value in an equity method investee company is included in the
Company's consolidated balance sheets. When the Company's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company's
consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports
income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Cost Method Investments Investee companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the
Company's share of the earnings or losses of such investee companies is not included in the consolidated balance sheet or statement of operations. However, impairment charges are recognized
in the consolidated statement of operations. If circumstances suggest that the value of the investee company has subsequently recovered, such recovery is not recorded. Research and Development Costs The Company is engaged in ongoing research and development ("R&D") of proprietary seed and stevia varieties. All R&D costs must be charged to expense as
incurred. Accordingly, internal R&D costs are expensed as incurred. Third-party R&D costs are expensed when the contracted work has been performed or as milestone results have
been achieved. The costs associated with equipment or facilities acquired or constructed for R&D activities that have alternative future uses are capitalized and depreciated on a straight-line
basis over the estimated useful life of the asset. 14
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, 2019 and 2018
has been affected by the valuation allowance on the Company's deferred tax assets. Net Income (Loss) Per Common Share Data Basic net income (loss) per common share ("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 convertible preferred stock, options, restricted stock awards, and common stock warrants. The treasury stock method is used for common stock warrants, stock options, and restricted stock awards. Under this method, consideration that would be received upon exercise (as
well as remaining compensation cost to be recognized for awards not yet vested) is assumed to be used to repurchase shares of stock in the market, with net number of shares assumed to be
issued added to the denominator. The calculation of Basic and Diluted EPS is shown in the table below. 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. 15
Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability
of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future
discounted cash flows resulting from the use and ultimate disposition of the asset. Derivative Financial Instruments Foreign Exchange Contracts The Company's subsidiary, S&W Australia, is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company at times manages
through the use of foreign currency forward contracts. 16
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, preferred 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 Chromatin acquisition were valued at fair value on a non-recurring basis as of October 25, 2018. No assets or liabilities were valued at fair
value on a non-recurring basis as of March 31, 2019 or June 30, 2018. The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term borrowings, as reflected in the consolidated balance sheets, approximate fair value because of
the short-term maturity of these instruments or interest rates commensurate with market rates. There have been no changes in operations and/or credit characteristics since the date of issuance
that could impact the relationship between interest rate and market rates. Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as follows: 17
Recently Adopted Accounting Pronouncements The Company adopted Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04") effective July 1, 2018. 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. The adoption did not have a material impact on the consolidated financial statements. The Company adopted Topic 606 as of July 1, 2018. This ASC topic outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most previously existing revenue recognition guidance under U.S. GAAP. The core principle of Topic 606 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. The Company adopted Topic 606 using the modified retrospective approach, in which the cumulative effect of applying the new standards to open contracts as of July 1, 2018 was to be
recognized as a cumulative effect adjustment. The adoption did not result in a cumulative effect adjustment as of July 1, 2018. The adoption of Topic 606 had a significant effect on the Company's accounting for its distribution and production agreements with Pioneer for the three and nine months ended March 31,
2019. There were no other changes in the Company's accounting as a result of the adoption of Topic 606. The change in the accounting for the distribution and production agreements with Pioneer arises from the provisions of Topic 606 regarding the determination of whether a performance
obligation is satisfied at a point in time or over time. Under those provisions, a performance obligation is considered to be satisfied over time if the company's performance creates an asset that
the customer controls as the asset is created or enhanced; or the work to satisfy the performance obligation does not create an asset with alternative future use to the vendor and the customer has
an obligation to pay for work completed. Under the agreements, Pioneer submits a demand plan to the Company in advance of the growing season specifying the amount of seed that it intends to
order for the upcoming sales year. Once the demand plan is submitted, Pioneer cannot cancel or reduce the amount of seed that it is obligated to purchase under the agreements. In addition, the
Company is not permitted to sell products produced for Pioneer under the agreements to other customers. Therefore, under Topic 606, the performance obligation is satisfied, and revenue is
recognized, over time, as the Company takes delivery of, processes, and packages the seed. The Company has concluded that cost is the best measure of progress under the Pioneer contracts because no other measure adequately reflects the value added to the product by each of
the Company's major tasks - having the crop grown, processing, and packaging. As the Company contracts out the growing of seed to third parties, the vast majority of the Company's costs
under these agreements are incurred, and therefore the vast majority of the revenue from such agreements is recognized, when the raw seed is purchased from the third-party contract growers.
The rest of the costs are incurred, and therefore the rest of the revenue is recognized, as the Company processes and packages the product. Because revenue is recognized as costs are
incurred, no inventory costs related to performance under the Pioneer contract are capitalized as inventory - instead, they are recognized as expenses as they are incurred. 18
Prior to the adoption of Topic 606, revenue related to the Pioneer agreement was recognized when seed was delivered to Pioneer. Costs incurred to purchase and process seed were
capitalized as inventory until the product was delivered. As the Company adopted Topic 606 using the modified retrospective approach, figures for fiscal 2018 have not been adjusted and
continue to reflect the prior accounting policies. The change in accounting for the Pioneer contract did not result in a cumulative effect adjustment, because all seed produced for Pioneer in previous growing seasons had been delivered, and
revenue recognized, prior to July 1, 2018, and no seed had been received prior to July 1, 2018 related to the current growing season. However, the change materially affected the amount of
revenue and costs recognized during the three and nine months ended March 31, 2019. The effects of the new accounting for the Pioneer contracts on the Company's financial statements are
shown below: 19
Topic 606 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers.
Those disclosures can also be found in Note 3. Recently Issued, but Not Yet Adopted, Accounting Pronouncements 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. 20
NOTE 3 - REVENUE RECOGNITION The Company adopted the provisions of Topic 606 as of July 1, 2018. As the Company adopted Topic 606 using the modified retrospective approach, comparative figures have not been
revised and are still reported under prior accounting standards. The Company derives its revenue from 1) the sale of seed, 2) milling services and 3) research and development services. The following table disaggregates the Company's revenue by type of contract1: 1Fiscal year 2019 information provided under ASC 605 to provide for comparison to fiscal year 2018. Distribution and Production Agreements with Pioneer Under the production and distribution agreements with Pioneer, the Company grows, processes, and delivers alfalfa seed for and to Pioneer. The Company has concluded that none of
the individual activities performed under these contracts are distinct, as the customer is contracting for processed and packaged product. Pioneer submits a demand plan to the Company in advance of the growing season specifying the amount of seed that it intends to order for the upcoming sales year. The Company is
required to use commercially reasonable efforts to arrange for the requisite amount of seed to be grown and to process and package the product as provided for in the contract. Once the demand
plan is submitted, Pioneer cannot cancel or reduce the amount of seed that it is obligated to purchase under the agreements. In addition, the Company is not permitted to sell products produced
for Pioneer under the agreements to other customers. Therefore, as provided in Topic 606, the Company recognizes revenue from these agreements over time, as it incurs costs to fulfill its
obligations. To the extent the Company produces more product than Pioneer has specified in its demand plan, the Company must first offer such product to Pioneer. If Pioneer does not purchase such
excess product, the Company may sell such product to other customers subject to certain limitations. Revenue from such excess product is recognized as other product revenue, as discussed
below. The agreements specify prices per finished unit which are adjusted each year, up or down, based on current market conditions, by a maximum of 4% per year. The prices for a given crop year
are determined one year in advance of the beginning of the sales season. The Company believes that cost is the best measure of progress under these contracts because no other measure adequately reflects the value added to the product by each of the
Company's major tasks - having the crop grown, processing, and packaging. As the Company typically contracts out the growing of seed to third parties, the vast majority of the Company's costs
under these agreements are incurred, and therefore the vast majority of the revenue from such agreements is recognized, when the raw seed is purchased from the third-party contract growers.
The rest of the costs are incurred, and therefore the rest of the revenue is recognized, as the Company processes and packages the product. Prior to the adoption of Topic 606, revenue from
these agreements was recognized when risk and title to the product was transferred, which generally occurs upon shipment. 21
Other Product Sales Revenue from other product sales is recognized at the point in time at which control of the product is transferred to the customer. Generally, this occurs upon shipment of the product.
Pricing for such transactions is negotiated and determined at the time the contracts are signed. We have elected the practical expedient that allows us to account for shipping and handling
activities as a fulfillment cost, and we accrue those costs when the related revenue is recognized. The Company has certain contracts with customers that offer a limited right of return on certain branded products. The products must be in an unopened and undamaged state and must be
resalable in the sole opinion of the Company to qualify for refund. Returns are only accepted on product received by August 31st of the current sales year. The
Company uses the three-year historical returns percentage to estimate the refund liability and records a reduction of revenue in the period in which revenue is recognized. Services Revenue from milling services, which are performed on the customer's product, is recognized as services are completed and the milled product is delivered to the customer. Revenue from research and development services is recognized over time as the services are performed. R&D services are generally paid for in advance. In fiscal 2019, R&D
revenue relates to a single contract in which the customer may decide annually whether to continue the arrangement. Revenue is recognized straight-line over time, as services are expected to be
provided roughly evenly throughout the year. Payment Terms and Related Balance Sheet Accounts Accounts receivable represent amounts that are payable to the Company by its customers subject only to the passage of time. Payment terms on invoices are generally 30 to 120 days.
As the period between the transfer of goods and/or services to the customer and receipt of payment is less than one year, the Company does not separately account for a financing component in
its contracts with customers. Unbilled receivables represent contract assets that arise when the Company has partially performed under a contract, but is not yet able to invoice the customer until the Company has made
additional progress. Unbilled receivables arise from the distribution and production agreements with Pioneer for which the Company recognizes revenue over time, as the Company bills for these
arrangements upon product delivery, while revenue is recognized, as described above, as costs are incurred. Unbilled receivables may arise as much as three months before billing is expected to
occur. Unbilled receivables are generally expected to be generated in the first and second fiscal quarters, and to be billed in the second, third and fourth fiscal quarters. Losses on accounts receivable and unbilled receivables are recognized if and when it becomes probable that amounts will not be paid. These losses are reversed in subsequent periods if
these amounts are paid. During the nine months ended March 31, 2019, the Company recognized bad debt expense of $336,583 associated with impaired accounts receivable. Deferred revenue represents payments received from customers in advance of completion of the Company's performance obligation. 22
Transaction Price Allocated to Remaining Performance Obligations Total estimated revenue remaining on uncompleted contracts is $86.1 million. This is comprised of $1.2 million remaining on the Pioneer distribution and production agreements which is
expected to be recognized in fiscal 2019, and an estimated $84.9 million related to fiscal years 2020 - 2023 based on the minimum purchase requirements in the Pioneer distribution
agreement. NOTE 4 - BUSINESS COMBINATIONS On October 25, 2018, the Company completed the 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 (the "Acquisition"),
pursuant to the terms of its Asset Purchase Agreement, dated September 14, 2018, with Novo Advisors, solely in its capacity as the receiver for, and on behalf of, Chromatin ("Novo"). The acquisition expanded the Company's sorghum production capabilities, diversified its product offerings and provided access to new distribution channels. The 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 Acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of October 25, 2018: 23
Management determined that one of the facilities acquired as part of the Chromatin acquisition would not be operated and is being held for sale. The components of that facility are: Management expects the sale to be completed within 12 months and plans to pay down a portion of the Company's short-term debt with the proceeds, accordingly,
these held for sale assets are presented as current assets. The estimated fair value of accounts receivable acquired is $947,015, with the gross contractual amount totaling $2,164,476, less $1,217,461 expected to be uncollectible. The current
liabilities assumed relate to inventory acquired in the acquisition as well as customer deposits. The excess of the purchase price over the fair value of the net assets acquired, amounting to
$1,573,546, 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, technology, and the distribution channels. 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 replacement cost method.
In-process research and development costs are being accounted for as an indefinite lived intangible asset subject to impairment testing until completion or abandonment of research and development efforts
associated with the in-process projects. Upon successful completion of each project, the Company will make a determination about the then remaining useful life of the intangible asset and begin amortization. The values and useful lives of the acquired intangibles are as follows: The Company incurred acquisitions costs of $147,337 and $1,142,653 during the three and nine months ended March 31, 2019 that have been recorded in selling,
general and administrative expenses on the consolidated statement of operations. The results of the Chromatin acquisition are included in our consolidated financial
statements from the date of acquisition through March 31, 2019. The revenue and net loss (including transaction costs) of Chromatin operations included in our consolidated statements of
operations were $6.7 million and $0.9 million, for the period from October 25, 2018 through March 31, 2019. 24
The following unaudited pro forma financial information presents results as if the Acquisition occurred on July 1, 2017. For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended March 31, 2019 include: (i) the elimination of acquisition
charges of $1,142,653; (ii) amortization of acquired intangibles of $132,222; and (iii) depreciation of acquired property, plant and equipment of $358,273. For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended March 31, 2018 include: (i) amortization of acquired intangibles of $297,500; and (ii)
depreciation of acquired property, plant and equipment of $806,085. NOTE 5 - GOODWILL AND INTANGIBLE ASSETS The following table summarizes the activity of goodwill for the nine months ended March 31, 2019 and the year ended June 30, 2018, respectively. 25
Intangible assets consist of the following: Amortization expense totaled $595,203 and $499,634 for the three months ended March 31, 2019 and 2018, respectively. Amortization expense totaled $1,654,788
and $1,628,026 for the nine months ended March 31, 2019 and 2018, respectively. Estimated aggregate remaining amortization is as follows: 26
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Components of property, plant and equipment were as follows: Depreciation expense totaled $575,854 and $338,951 for the three months ended March 31, 2019 and 2018, respectively. Depreciation expense totaled $1,406,983
and $969,792 for the nine months ended March 31, 2019 and 2018, respectively. NOTE 7 - DEBT Total debt outstanding is presented on the consolidated balance sheet as follows: 27
On September 22, 2015, the Company entered into a credit and security agreement (the "KeyBank Credit Facility") with KeyBank. Key provisions of the
KeyBank Credit Facility, as amended, include: At March 31, 2019, the Company was not in compliance with the fixed charge coverage ratio covenant under the KeyBank Credit Facility. The Company subsequently obtained a
waiver from KeyBank, curing the failure to comply with this debt covenant for the fiscal quarter ended March 31, 2019. The Company is currently in discussions with KeyBank to potentially
modify the KeyBank Credit Facility in a manner acceptable to both the Company and KeyBank so that the Company maintains compliance with all debt covenants for the foreseeable future. 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 accrued interest at 3% per annum. Interest was 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 required the Company to increase the principal amount of the Pioneer Note by up to an additional
$5,000,000 if the Company met certain performance metrics during the three-year period following December 31, 2014. The earn 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 Pioneer Note in October 2017. 28
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: On August 15, 2018, the Company completed a sale and leaseback transaction with American AgCredit involving certain equipment located at the Company's Five Points, California and
Nampa, Idaho production facilities. Due to its terms, the sale and leaseback transaction is required to be accounted for as a financing arrangement. Accordingly, the proceeds received from
American AgCredit were accounted for as proceeds from a debt financing. Under the terms of the transaction: S&W Australia finances the purchase of most of its seed inventory from growers pursuant to seasonal credit facilities with National Australia Bank Ltd ("NAB"). The current
facilities (the "2016 NAB Facilities") were amended as of April 13, 2018 and expire on March 30, 2020. As of March 31, 2019, AUD $10,270,000 (USD $7,287,592) was outstanding
under the 2016 NAB Facilities. The 2016 NAB Facilities, as currently in effect, comprise two distinct facility lines: (i) an overdraft facility (the "Overdraft Facility"), having a credit limit of AUD $1,000,000 (USD
$709,600 at March 31, 2019) and a borrowing base facility (the "Borrowing Base Facility"), having a credit limit of AUD $12,000,000 (USD $8,515,200 at March 31, 2019). 29
The Borrowing Base Facility permits S&W Australia to borrow funds for periods of up to 180 days, at S&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, 2019, the Borrowing Base Facility accrued interest on Australian dollar
drawings at approximately 4.75% per annum calculated daily. The Borrowing Base Facility is secured by a lien on all the present and future
rights, property and undertakings of S&W Australia, the mortgage on S&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 S&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, 2019, the Overdraft Facility accrued interest at
approximately 6.77% per annum 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 agreements, 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 S&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 S&W Australia's outstanding obligations, all as set forth in the NAB facility agreements. S&W Australia was in compliance with all NAB debt covenants at March
31, 2019. In January 2015, NAB and S&W Australia entered into a new business markets - flexible rate loan (the "Keith Building Loan") and a separate machinery and equipment facility
(the "Keith Machinery and Equipment Facility"). In February 2016, NAB and S&W Australia also entered into a master asset finance facility (the "Master Assets
Facility"). The Master Asset Facility has various maturity dates through 2021 and have interest rates ranging from 4.86% to 5.31%. The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a building on S&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 (6.41% as of March 31, 2019). Interest
is payable each month in arrears. The Keith Machinery and Equipment Facility
30
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 S&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
S&W Australia, the Company's corporate guarantee and a mortgage on S&W Australia's Keith, South Australia property. The annual maturities of short-term and long-term debt are as follows: NOTE 8 - WARRANTS The following table summarizes the total warrants outstanding at March 31, 2019: Exercise Price Expiration Outstanding as Outstanding as of Issue Date Per Share Date of June 30, 2018 New Issuances Expired March 31, 2019 Warrants Dec 2014 $ 4.32 June 2020 2,699,999 - - 2,699,999 2,699,999 - - 2,699,999 The following table summarizes the total warrants outstanding at June 30, 2018: Exercise Price Expiration Outstanding as Outstanding as Issue Date Per Share Date of June 30, 2017 New Issuances Expired of June 30, 2018 Warrants Dec 2014 $ 4.32 June 2020 2,699,999 - - 2,699,999 2,699,999 - - 2,699,999 On September 5, 2018, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with MFP Partners, L.P. ("MFP"), pursuant to which the
Company sold to MFP 1,607,717 shares of common stock of the Company (the "Common Shares") at a purchase price of $3.11 per share at an initial closing, and agreed to sell, subject to the
satisfaction of certain conditions, 7,235 shares of newly designated Series A Convertible Preferred Stock of the Company ("Preferred Shares") to MFP at a purchase price of $3,110 per share at a
second closing (the "Second Closing"). The Second Closing was completed on October 23, 2018, for aggregate gross proceeds of approximately $22.5 million, which was used primarily to fund the Chromatin Acquisition. The
Preferred Shares carried no voting rights and were automatically convertible into shares of common stock at the rate of 1,000 shares of common
31
stock per Preferred Share upon the approval of
the Company's stockholders for the issuance of the requisite shares of common stock. Pursuant to the Securities Purchase Agreement, the Company agreed to use its reasonable best efforts to
solicit the approval of its shareholders for the issuance of stock upon the conversion of the Preferred Shares at a special meeting of shareholders, and at each annual meeting of shareholders
thereafter, if necessary. Approval was obtained at a Special Meeting of Stockholders held on November 20, 2018, and the Preferred Shares automatically converted into 7,235,000 shares
of common stock on that same day. NOTE 10 - FOREIGN CURRENCY CONTRACTS The Company's subsidiary, S&W Australia, is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company 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 $3,571,233 at March 31, 2019 and their maturities range from April 2019 to September 2019. 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 liabilities totaled $41,819
at March 31, 2019 and $100,138 at June 30, 2018. The Company recorded a gain on foreign exchange contracts of $56,990 and a loss of $91,811, which is reflected in cost of revenue for the
three months ended March 31, 2019 and 2018, respectively. The Company recorded a gain on foreign exchange contracts of $53,650 and a loss of $192,360, which is reflected in cost of revenue
for the nine months ended March 31, 2019 and 2018, respectively. NOTE 11 - COMMITMENTS AND CONTINGENCIES 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. NOTE 12 - RELATED PARTY TRANSACTIONS 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 D. Straus, a member of the Company's Board since January 9, 2018, is a Portfolio Manager at
Wynnefield. 32
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. On September 5, 2018, the Company entered into the Securities Purchase Agreement with MFP, pursuant to which the Company sold the Common Shares at the Initial Closing and the
Preferred Shares at the Second Closing. The Initial Closing was completed on September 5, 2018 and the Second Closing was completed on October 23, 2018. See Note 9 for further discussion
on the Second Closing. On December 18, 2018, the Company entered into a Loan and Security Agreement (the "MFP Loan Agreement") with MFP, pursuant to which the Company was able to borrow up to
$5,000,000, in minimum increments of $1,000,000, from MFP during the period beginning on December 18, 2018 and ending on the earlier to occur of (i) March 18, 2019 and (ii) certain specified
events of default. Pursuant to the MFP Loan Agreement, interest accrued on outstanding principal at a fixed per annum rate of 6.0%. In addition, the Company was obligated to pay to MFP a fee
equal to 2.0% of each advance under the MFP Loan Agreement. Concurrently with the execution of the MFP Loan Agreement, the Company drew down $1,000,000 under the MFP Loan
Agreement, which was disbursed to the Company on December 21, 2018. On December 31, 2018, the Company repaid in full the $1,000,000 disbursed to the Company. As of March 31, 2019, no
amounts remained outstanding under the MFP Loan Agreement. NOTE 13 - EQUITY-BASED COMPENSATION 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 an amendment of the 2009 Plan to increase 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 an amendment of the 2009 Plan to
increase the number of shares available for issuance as grants and awards under the Plan to 2,450,000 shares. 33
In January 2019, the Company's Board of Directors and stockholders approved the 2019 Equity Incentive Plan ("2019 Plan") as a successor to and continuation of the Company's
2009 Plan. Subject to adjustment for certain changes in the Company's capitalization, the aggregate number of shares of the Company's common stock that may be issued under the 2019 Plan
will not exceed 4,243,790 shares, which is the sum of (i) 2,750,000 new shares, plus (ii) 350,343 shares that remained available for grant under the 2009 Plan as of January 16, 2019, plus (iii)
1,143,447 shares subject to outstanding stock awards granted under the 2009 Plan. The term of incentive stock options granted under the 2019 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 2019 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. 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. Weighted average assumptions used in the Black-Scholes-Merton model for awards granted during the period are set forth below: During the nine months ended March 31, 2019, the Company granted options to purchase 429,678 shares of its common stock to certain of its Directors, members
of the executive management team and other employees at exercise prices ranging from $2.19 - $3.30. These options vest in either quarterly or annual periods over one to three years, and expire
ten years from the date of grant. 34
A summary of stock option activity for the nine months ended March 31, 2019 and the year ended June 30, 2018 is presented below: The weighted average grant date fair value of options granted and outstanding at March 31, 2019 was $1.42. At March 31, 2019, the Company had $472,498 of
unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the 2019 Plan, which will be recognized over the weighted average remaining service period of
1.9 years. The Company settles employee stock option exercises with newly issued shares of common stock. During the nine months ended March 31, 2019, the Company issued 175,758 restricted stock units to certain members of the executive management team and other employees. The restricted
stock units vest immediately, in annual installments over one-year or quarterly periods over three-years. The fair value of the awards totaled $472,171 and was based on the closing stock price on
the date of grants. The Company recorded $300,933 and $397,309 of stock-based compensation expense associated with grants of restricted stock units during the nine months ended March 31, 2019 and
2018, respectively. A summary of activity related to non-vested restricted stock units is presented below: At March 31, 2019, the Company had $375,949 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the
weighted average remaining service period of 1.56 years. At March 31, 2019, there were 3,021,719 shares available under the 2019 Plan for future grants and awards. 35
Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the three months ended March 31, 2019 and 2018, totaled $156,175 and
$149,198, respectively. Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the nine months ended March 31, 2019 and 2018,
totaled $533,633 and $600,231, respectively. NOTE 14 - 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, 2019 and
2018, respectively. 36
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 2 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, 2018, particularly
in Part I, Item 1A, "Risk 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 Sacramento, 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 been granted four patents by the U.S. Patent and Trademark Office (the "USPTO").
Following our initial public offering in fiscal year 2010, we expanded certain pre-existing business initiatives and added new ones, including:
Table of Contents
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31,
June 30,
2019
2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
2,883,499
$
4,320,894
Accounts receivable, net
12,773,565
13,861,932
Unbilled accounts receivable, net
4,258,450
-
Inventories, net
87,317,928
60,419,276
Prepaid expenses and other current assets
1,458,569
1,279,794
Assets held for sale
1,930,400
-
TOTAL CURRENT ASSETS
110,622,411
79,881,896
Property, plant and equipment, net
22,366,775
13,180,132
Intangibles, net
39,227,992
33,109,780
Goodwill
11,865,811
10,292,265
Other assets
1,317,963
1,303,135
TOTAL ASSETS
$
185,400,952
$
137,767,208
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
$
14,323,176
$
5,935,454
Deferred revenue
420,739
212,393
Accrued expenses and other current liabilities
3,839,348
3,114,799
Lines of credit, net
49,828,458
32,630,559
Current portion of long-term debt, net
1,082,458
503,012
TOTAL CURRENT LIABILITIES
69,494,179
42,396,217
Long-term debt, net, less current portion
12,245,863
12,977,087
Other non-current liabilities
491,209
651,780
TOTAL LIABILITIES
82,231,251
56,025,084
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;
33,297,346 issued and 33,272,346 outstanding at March 31, 2019;
24,367,906 issued and 24,342,906 outstanding at June 30, 2018;
33,297
24,367
Treasury stock, at cost, 25,000 shares
(134,196)
(134,196)
Additional paid-in capital
136,599,137
108,803,991
Accumulated deficit
(27,248,401)
(21,161,376)
Accumulated other comprehensive loss
(6,079,707)
(5,790,662)
Noncontrolling interests
(429)
-
TOTAL STOCKHOLDERS' EQUITY
103,169,701
81,742,124
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
185,400,952
$
137,767,208
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
Nine Months Ended
March 31,
March 31,
2019
2018
2019
2018
Revenue
$
18,176,166
$
22,949,170
$
62,877,299
$
54,193,682
Cost of revenue
13,388,470
16,303,436
47,942,933
40,540,193
Gross profit
4,787,696
6,645,734
14,934,366
13,653,489
Operating expenses
Selling, general and administrative expenses
4,610,471
2,676,166
11,840,547
8,037,202
Research and development expenses
1,824,613
1,065,323
4,190,280
2,662,404
Depreciation and amortization
1,171,057
838,585
3,061,771
2,597,818
Disposal of property, plant and equipment loss (gain)
(97,483)
-
(94,020)
(81,776)
Total operating expenses
7,508,658
4,580,074
18,998,578
13,215,648
Income (loss) from operations
(2,720,962)
2,065,660
(4,064,212)
437,841
Other expense
Foreign currency (gain) loss
4,793
(27,939)
(53,638)
(5,908)
Change in derivative warrant liabilities
-
-
-
(431,300)
Reduction of anticipated loss on sub-lease land
(141,373)
-
(141,373)
-
Interest expense - amortization of debt discount
103,362
51,185
238,754
118,284
Interest expense
758,669
512,892
2,057,377
1,244,515
Income (loss) before income taxes
(3,446,413)
1,529,522
(6,165,332)
(487,750)
Provision for income taxes
(82,411)
(248,931)
(77,878)
(48,808)
Net income (loss) including noncontrolling interests
$
(3,364,002)
$
1,778,453
$
(6,087,454)
$
(438,942)
Net loss attributed to noncontrolling interest
(22,102)
-
(429)
-
Net income (loss) attributed to S&W Seed Company
$
(3,341,900)
$
1,778,453
$
(6,087,025)
$
(438,942)
Net income (loss) attributed to S&W Seed Company per common share:
Basic
$
(0.10)
$
0.07
$
(0.21)
$
(0.02)
Diluted
$
(0.10)
$
0.07
$
(0.21)
$
(0.02)
Weighted average number of common shares outstanding:
Basic
33,267,258
24,335,821
29,043,493
21,861,038
Diluted
33,267,258
24,353,082
29,043,493
21,861,038
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
Nine Months Ended
March 31,
March 31,
2019
2018
2019
2018
Net income (loss)
$
(3,364,002)
$
1,778,453
$
(6,087,454)
$
(438,942)
Foreign currency translation adjustment, net of income taxes
36,576
(97,123)
(289,045)
18,307
Comprehensive income (loss)
(3,327,426)
1,681,330
(6,376,499)
(420,635)
Comprehensive loss attributable to noncontrolling interests
(22,102)
-
(429)
-
Comprehensive income (loss) attributable to S&W Seed Company
$
(3,305,324)
$
1,681,330
$
(6,376,070)
$
(420,635)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Additional
Other
Preferred Stock
Common Stock
Treasury Stock
Paid-In
Accumulated
Comprehensive
Noncontrolling
Total
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Deficit
Loss
Interests
Equity
Balance, December 31, 2017
-
$
-
24,353,300
$
24,353
(25,000)
$
(134,196)
$
108,568,030
$
(18,653,681)
$
(5,422,955)
$
-
$
84,381,551
Stock-based compensation - options, restricted stock, and RSUs
-
-
-
-
-
-
149,198
-
-
-
149,198
Net issuance to settle RSUs
-
-
9,279
9
-
-
6,632
-
-
-
6,641
Proceeds from sale of common stock, net of fees and expenses
-
-
-
-
-
-
(59,877)
-
-
-
(59,877)
Other comprehensive loss
-
-
-
-
-
-
-
-
(97,123)
-
(97,123)
Net income
-
-
-
-
-
-
-
1,778,453
-
-
1,778,453
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
Balance, December 31, 2018
-
$
-
33,246,141
$
33,246
(25,000)
$
(134,196)
$
136,495,216
$
(23,906,501)
$
(6,116,283)
$
21,673
$
106,393,155
Stock-based compensation - options, restricted stock, and RSUs
-
-
-
-
-
-
156,175
-
-
-
156,175
Net issuance to settle RSUs
-
-
51,205
51
-
-
(5,634)
-
-
-
(5,583)
Proceeds from sale of common stock, net of fees and expenses
-
-
-
-
-
-
(46,620)
-
-
-
(46,620)
Other comprehensive income
-
-
-
-
-
-
-
-
36,576
-
36,576
Net loss
-
-
-
-
-
-
-
(3,341,900)
-
(22,102)
(3,364,002)
Balance, March 31, 2019
-
$
-
33,297,346
$
33,297
(25,000)
$
(134,196)
$
136,599,137
$
(27,248,401)
$
(6,079,707)
$
(429)
$
103,169,701
Accumulated
Additional
Other
Preferred Stock
Common Stock
Treasury Stock
Paid-In
Accumulated
Comprehensive
Noncontrolling
Total
Shares
Amount
Shares
Amount
Shares
Amount
Capital
Deficit
Loss
Interests
Equity
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
Balance, June 30, 2018
-
$
-
24,367,906
$
24,367
(25,000)
$
(134,196)
$
108,803,991
$
(21,161,376)
$
(5,790,662)
$
-
$
81,742,124
Stock-based compensation - options, restricted stock, and RSUs
-
-
-
-
-
-
533,633
-
-
-
533,633
Net issuance to settle RSUs
-
-
86,723
87
-
-
(31,168)
-
-
-
(31,081)
Proceeds from sale of preferred stock, net of fees and expenses
7,235
7
-
-
-
-
22,373,835
-
-
-
22,373,842
Conversion of preferred stock to common stock
(7,235)
(7)
7,235,000
7,235
-
-
(7,228)
-
-
-
-
Proceeds from sale of common stock, net of fees and expenses
-
-
1,607,717
1,608
-
-
4,926,074
-
-
-
4,927,682
Other comprehensive loss
-
-
-
-
-
-
-
-
(289,045)
-
(289,045)
Net loss
-
-
-
-
-
-
-
(6,087,025)
-
(429)
(6,087,454)
Balance, March 31, 2019
-
$
-
33,297,346
$
33,297
(25,000)
$
(134,196)
$
136,599,137
$
(27,248,401)
$
(6,079,707)
$
(429)
$
103,169,701
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$
(6,087,454)
$
(438,942)
Adjustments to reconcile net loss from operating activities to net cash used in operating activities
Stock-based compensation
533,633
600,231
Change in allowance for doubtful accounts
336,583
20,547
Depreciation and amortization
3,061,771
2,597,818
Gain on disposal of property, plant and equipment
(94,020)
(81,776)
Change in foreign exchange contracts
(53,650)
192,360
Change in derivative warrant liabilities
-
(431,300)
Reduction of anticipated loss on sub-lease land
(141,373)
-
Amortization of debt discount
238,754
118,284
Changes in:
Accounts receivable
1,584,152
8,663,419
Unbilled accounts receivable
(4,258,450)
-
Inventories
(20,442,220)
(32,191,993)
Prepaid expenses and other current assets
(177,526)
(461,883)
Other non-current asset
(15,608)
259,683
Accounts payable
6,569,031
5,236,255
Accounts payable - related parties
-
(216,449)
Deferred revenue
(564,204)
(561,615)
Accrued expenses and other current liabilities
853,767
396,478
Other non-current liabilities
(112,424)
(79,096)
Net cash used in operating activities
(18,769,238)
(16,377,979)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
(836,983)
(1,062,406)
Additions to internal use software
(43,000)
-
Proceeds from disposal of property, plant and equipment
423,762
46,218
Acquisition of business, net of cash acquired
(26,354,951)
-
Net cash used in investing activities
(26,811,172)
(1,016,188)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock
4,927,682
22,459,339
Net proceeds from sale of preferred stock
22,373,842
-
Taxes paid related to net share settlements of stock-based compensation awards
(31,081)
(107,047)
Borrowings and repayments on lines of credit, net
17,768,886
(2,371,486)
Payment of contingent consideration obligation
-
(2,500,000)
Borrowings of long-term debt
2,776,973
12,836,896
Debt issuance costs
(411,315)
(257,964)
Repayments of long-term debt
(3,075,170)
(10,470,302)
Net cash provided by financing activities
44,329,817
19,589,436
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(186,802)
48,122
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS
(1,437,395)
2,243,391
CASH AND CASH EQUIVALENTS, beginning of the period
$
4,320,894
$
745,001
CASH AND CASH EQUIVALENTS, end of period
$
2,883,499
$
2,988,392
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
$
1,989,637
$
1,121,977
Income taxes
16,280
(118,224)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31,
Nine Months Ended March 31,
2019
2018
2019
2018
United States
$
13,346,894
73%
$
19,258,699
84%
$
47,133,287
75%
$
38,523,953
71%
Saudi Arabia
1,494,815
9%
-
0%
3,065,089
5%
844,908
2%
Australia
767,044
4%
750,762
3%
2,137,194
3%
1,309,105
2%
Mexico
666,452
4%
301,390
1%
2,045,705
3%
4,682,016
9%
Libya
21,000
0%
183,750
1%
1,819,750
3%
936,423
2%
Peru
196,085
1%
427,358
2%
905,580
1%
1,035,770
2%
Argentina
279,804
2%
7,630
0%
841,969
1%
2,750,249
5%
South Africa
241,797
1%
251,116
1%
490,492
1%
718,458
1%
Germany
245,898
1%
271,460
1%
499,734
1%
271,460
1%
China
199,595
1%
374,824
2%
368,623
1%
748,748
1%
Algeria
18,900
0%
308,700
1%
18,900
0%
308,700
1%
Other
697,882
4%
813,481
4%
3,550,976
6%
2,063,892
3%
Total
$
18,176,166
100%
$
22,949,170
100%
$
62,877,299
100%
$
54,193,682
100%
March 31,
June 30,
2019
2018
Raw materials and supplies
$
725,195
$
344,620
Work in progress
10,719,340
2,775,398
Finished goods
75,873,393
57,299,258
$
87,317,928
$
60,419,276
Three Months Ended
Nine Months Ended
March 31,
March 31,
2019
2018
2019
2018
Numerator:
Net income (loss) attributed to S&W Seed Company
$
(3,341,900)
$
1,778,453
$
(6,087,025)
$
(438,942)
Numerator for basis EPS
(3,341,900)
1,778,453
(6,087,025)
(438,942)
Effect of dilutive securities:
Warrants
-
-
-
-
-
-
-
-
Numerator for diluted EPS
$
(3,341,900)
$
1,778,453
$
(6,087,025)
$
(438,942)
Denominator:
Denominator for basic EPS -
weighted-average shares
33,267,258
24,335,821
29,043,493
21,861,038
Effect of dilutive securities:
Employee stock options
-
-
-
-
Employee restricted stock units
-
17,261
-
-
Warrants
-
-
-
-
Dilutive potential common shares
-
17,261
-
-
Denominator for diluted EPS -
adjusted weighted average shares
and assumed conversions
33,267,258
24,335,821
29,043,493
21,861,038
Basic EPS
$
(0.10)
$
0.07
$
(0.21)
$
(0.02)
Diluted EPS
$
(0.10)
$
0.07
$
(0.21)
$
(0.02)
Fair Value Measurements as of March 31, 2019 Using:
Level 1
Level 2
Level 3
Foreign exchange contract liability
$
-
$
41,819
$
-
Total
$
-
$
41,819
$
-
Fair Value Measurements as of June 30, 2018 Using:
Level 1
Level 2
Level 3
Foreign exchange contract liability
$
-
$
100,138
$
-
Total
$
-
$
100,138
$
-
Three Months Ended
Nine Months Ended
March 31, 2019
March 31, 2019
Balances Without
Balances Without
As Reported
Adjustments
Adoption of ASC 606
As Reported
Adjustments
Adoption of ASC 606
Revenue
$
18,176,166
$
4,626,427
$
22,802,593
$
62,877,299
$
(6,424,061)
$
56,453,238
Cost of revenue
13,388,470
2,252,241
15,640,711
47,942,933
(4,905,797)
43,037,136
Gross profit
4,787,696
2,374,186
7,161,882
14,934,366
(1,518,264)
13,416,102
Operating expenses
Selling, general and administrative expenses
4,610,471
-
4,610,471
11,840,547
-
11,840,547
Research and development expenses
1,824,613
-
1,824,613
4,190,280
-
4,190,280
Depreciation and amortization
1,171,057
-
1,171,057
3,061,771
-
3,061,771
Disposal of property, plant and equipment gain
(97,483)
-
(97,483)
(94,020)
-
(94,020)
Total operating expenses
7,508,658
-
7,508,658
18,998,578
-
18,998,578
Income (loss) from operations
(2,720,962)
2,374,186
(346,776)
(4,064,212)
(1,518,264)
(5,582,476)
Other expense
Foreign currency (gain) loss
4,793
-
4,793
(53,638)
-
(53,638)
Change in derivative warrant liabilities
-
-
-
-
-
-
Reduction of anticipated loss on sub-lease land
(141,373)
-
(141,373)
(141,373)
-
(141,373)
Interest expense - amortization of debt discount
103,362
-
103,362
238,754
-
238,754
Interest expense
758,669
-
758,669
2,057,377
-
2,057,377
Income (loss) before income taxes
(3,446,413)
2,374,186
(1,072,227)
(6,165,332)
(1,518,264)
(7,683,596)
Provision for income taxes
(82,411)
(37,561)
(119,972)
(77,878)
(80,558)
(158,436)
Net income (loss) before noncontrolling interests
$
(3,364,002)
$
2,411,747
$
(952,255)
$
(6,087,454)
$
(1,437,706)
$
(7,525,160)
Net loss attributed to noncontrolling interest
(22,102)
-
(22,102)
(429)
-
(429)
Net loss attributed to S&W Seed Company
$
(3,341,900)
$
2,411,747
$
(930,153)
$
(6,087,025)
$
(1,437,706)
$
(7,524,731)
Net income (loss) per common share:
Basic
$
(0.10)
$
0.07
$
(0.03)
$
(0.21)
$
(0.05)
$
(0.26)
Diluted
$
(0.10)
$
0.07
$
(0.03)
$
(0.21)
$
(0.05)
$
(0.26)
Weighted average number of common shares outstanding:
Basic
33,267,258
-
33,267,258
29,043,493
-
29,043,493
Diluted
33,267,258
-
33,267,258
29,043,493
-
29,043,493
March 31, 2019
Balances Without
As Reported
Adjustments
Adoption of ASC 606
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
2,883,499
$
-
$
2,883,499
Accounts receivable, net
12,773,565
-
12,773,565
Unbilled accounts receivable, net
4,258,450
(4,258,450)
-
Inventories, net
87,317,928
4,905,797
92,223,725
Prepaid expenses and other current assets
1,458,569
-
1,458,569
Assets held for sale
1,930,400
-
1,930,400
TOTAL CURRENT ASSETS
110,622,411
647,347
111,269,758
Property, plant and equipment, net
22,366,775
-
22,366,775
Intangibles, net
39,227,992
-
39,227,992
Goodwill
11,865,811
-
11,865,811
Other assets
1,317,963
-
1,317,963
TOTAL ASSETS
$
185,400,952
$
647,347
$
186,048,299
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
$
14,323,176
$
-
$
14,323,176
Deferred revenue
420,739
2,368,827
2,789,566
Accrued expenses and other current liabilities
3,839,348
(203,216)
3,636,132
Lines of credit, net
49,828,458
-
49,828,458
Current portion of long-term debt, net
1,082,458
-
1,082,458
TOTAL CURRENT LIABILITIES
69,494,179
2,165,611
71,659,790
Long-term debt, net, less current portion
12,245,863
-
12,245,863
Other non-current liabilities
491,209
(80,558)
410,651
TOTAL LIABILITIES
82,231,251
2,085,053
84,316,304
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;
33,297,346 issued and 33,272,346 outstanding at March 31, 2019;
24,367,906 issued and 24,342,906 outstanding at June 30, 2018;
33,297
-
33,297
Treasury stock, at cost, 25,000 shares
(134,196)
-
(134,196)
Additional paid-in capital
136,599,137
-
136,599,137
Accumulated deficit
(27,248,401)
(1,437,706)
(28,686,107)
Accumulated other comprehensive loss
(6,079,707)
-
(6,079,707)
Noncontrolling interest
(429)
-
(429)
TOTAL STOCKHOLDERS' EQUITY
103,169,701
(1,437,706)
101,731,995
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
185,400,952
$
647,347
$
186,048,299
Three Months Ended
Nine Months Ended
March 31,
March 31,
2019
2018
2019
2018
ASC 606
ASC 605
ASC 605
ASC 606
ASC 605
ASC 605
Distribution and production agreements - Pioneer
$
7,868,654
$
12,495,081
$
18,688,623
$
37,054,268
$
30,630,207
$
36,790,423
Other product sales
10,225,275
10,225,275
4,215,599
25,497,136
25,497,136
16,768,880
Services
82,237
82,237
44,948
325,895
325,895
634,379
$
18,176,166
$
22,802,593
$
22,949,170
$
62,877,299
$
56,453,238
$
54,193,682
October 25,
2018
Cash
$
95,049
Accounts receivable
947,015
Inventory
6,959,936
Prepaid expenses
16,501
Property, plant and equipment
10,193,620
Assets held for sale
1,930,400
In-process research and development
380,000
Technology/IP - germplasm
7,200,000
Trade names
150,000
Goodwill
1,573,546
Current liabilities
(2,881,198)
Noncurrent liabilities
(114,869)
Total acquisition cost allocated
$
(26,450,000)
Land and improvements
$
320,000
Buildings and improvements
1,380,000
Machinery and equipment
332,000
Less: Costs to sell
(101,600)
Assets held for sale
$
1,930,400
Estimated
Useful Life
(Years)
Estimated
Fair Value
In-process research and development
n/a
$
380,000
Technology/IP - germplasm
30
7,200,000
Trade names
5
150,000
Total identifiable intangible assets
$
7,730,000
Nine Months Ended
March 31,
(unaudited)
2019
2018
Revenue
$
64,550,476
$
66,955,581
Net loss
$
(7,961,082)
$
(8,100,766)
Balance at
Balance at
July 1, 2018
Additions
March 31, 2019
Goodwill
$
10,292,265
$
1,573,546
$
11,865,811
Balance at
Balance at
July 1, 2017
Additions
June 30, 2018
Goodwill
$
10,292,265
$
-
$
10,292,265
Balance at
Balance at
July 1, 2018
Additions
Amortization
March 31, 2019
Trade name
$
1,159,826
$
150,000
$
(75,860)
$
1,233,966
Customer relationships
1,156,955
-
(75,906)
1,081,049
Non-compete
62,720
-
(25,662)
37,058
GI customer list
71,639
-
(5,373)
66,266
Supply agreement
1,077,783
-
(56,724)
1,021,059
Distribution agreement
6,344,253
-
(288,375)
6,055,878
Grower relationships
1,753,208
-
(79,056)
1,674,152
Intellectual property
20,873,393
7,200,000
(944,222)
27,129,171
In process research and development
-
380,000
(52,778)
327,222
Internal use software
610,003
43,000
(50,832)
602,171
$
33,109,780
$
7,773,000
$
(1,654,788)
$
39,227,992
Balance at
Balance at
July 1, 2017
Additions
Amortization
June 30, 2018
Trade name
$
1,244,306
$
-
$
(84,480)
$
1,159,826
Customer relationships
1,258,163
-
(101,208)
1,156,955
Non-compete
102,035
-
(39,315)
62,720
GI customer list
78,803
-
(7,164)
71,639
Supply agreement
1,153,415
-
(75,632)
1,077,783
Distribution agreement
6,728,753
-
(384,500)
6,344,253
Production agreement
111,670
-
(111,670)
-
Grower relationships
1,858,616
-
(105,408)
1,753,208
Intellectual property
21,725,539
295,034
(1,147,180)
20,873,393
Internal use software
677,779
-
(67,776)
610,003
$
34,939,079
$
295,034
$
(2,124,333)
$
33,109,780
2019
2020
2021
2022
2023
Thereafter
Amortization expense
$
595,203
$
2,378,471
$
2,359,648
$
2,275,199
$
2,227,688
$
29,391,783
March 31,
June 30,
2019
2018
Land and improvements
$
2,534,021
$
2,068,742
Buildings and improvements
11,308,562
8,888,196
Machinery and equipment
12,489,581
5,731,293
Vehicles
1,895,083
1,130,276
Construction in progress
353,144
220,089
Total property, plant and equipment
28,580,391
18,038,596
Less: accumulated depreciation
(6,213,616)
(4,858,464)
Property, plant and equipment, net
$
22,366,775
$
13,180,132
March 31,
June 30,
2019
2018
Working capital lines of credit
KeyBank
$
42,957,578
$
25,050,464
National Australia Bank Limited
7,287,592
7,697,040
Debt issuance costs
(416,712)
(116,945)
Total working capital lines of credit, net
$
49,828,458
$
32,630,559
Current portion of long-term debt
Capital leases
$
527,907
$
27,241
Keith facility (building loan) - National Australia Bank Limited
78,056
3,701
Keith facility (machinery & equipment loans) - National Australia Bank Limited
216,364
198,251
Unsecured subordinate promissory note
100,000
100,000
Secured real estate note - Conterra
247,942
229,789
Secured equipment note - Conterra
-
37,824
Debt issuance costs
(87,811)
(93,794)
Total current portion, net
1,082,458
503,012
Long-term debt, less current portion
Capital leases
1,761,683
-
Keith facility (building loan) - National Australia Bank Limited
255,456
421,857
Keith facility (machinery & equipment loans) - National Australia Bank Limited
367,762
431,754
Secured real estate note - Conterra
9,922,269
10,170,211
Secured equipment note - Conterra
-
2,062,176
Debt issuance costs
(61,307)
(108,911)
Total long-term portion, net
12,245,863
12,977,087
Total debt, net
$
13,328,321
$
13,480,099
Fiscal Year
Amount
2019
$
329,965
2020
1,112,892
2021
10,741,452
2022
692,294
2023
565,356
Thereafter
35,480
Total
$
13,477,439
March 31,
2019
2018
Risk free rate
2.5% - 3.0%
1.9% - 2.3%
Dividend yield
0%
0%
Volatility
34.5% - 41.5%
45.5%
Average forfeiture assumptions
1.4%
1.4%
Weighted-
Weighted -
Average
Average
Remaining
Aggregate
Number
Exercise Price
Contractual
Intrinsic
Outstanding
Per Share
Life (Years)
Value
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
(252,737)
6.46
-
-
Outstanding at June 30, 2018
792,074
4.55
6.3
10,413
Granted
429,678
2.84
-
-
Exercised
-
-
-
-
Canceled/forfeited/expired
(166,500)
-
-
-
Outstanding at March 31, 2019
1,055,252
3.60
8.1
37,169
Options vested and exercisable at March 31, 2019
568,817
4.10
7.1
-
Options vested and expected to vest as of March 31, 2019
1,053,509
$
3.60
8.1
$
36,842
Nine Months Ended March 31, 2019
Weighted -
Number of
Weighted-
Average
Nonvested
Average
Remaining
Restricted
Grant Date
Contractual
Stock Units
Fair Value
Life (Years)
Beginning nonvested restricted units outstanding
89,193
$
3.98
1.1
Granted
175,758
2.69
2.8
Vested
(98,800)
3.79
-
Forfeited
-
-
-
Ending nonvested restricted units outstanding
166,151
$
2.72
1.6
Nine Months Ended
March 31,
2019
2018
Fair value of assets acquired
$
29,446,067
$
-
Cash paid for the acquisition
(26,450,000)
-
Liabilities assumed
(2,996,067)
-
37
We have accomplished these expansion initiatives through a combination of organic growth and strategic acquisitions, foremost among them:
- the acquisition in July 2011 of certain intangible assets, including the customer information, related to the field seed and small grain business of Genetics International, Inc., which had previously operated in the Middle East and North Africa ("MENA") and which began our transition into selling directly to MENA distributors;
- the acquisition of Imperial Valley Seeds, Inc. ("IVS") in October 2012, which enabled us to expand production of non-GMO seed into California's Imperial Valley, thereby ensuring a non-GMO source of seed due to the prohibition on GMO crops in the Imperial Valley, as well as enabling us to diversify our production areas and distribution channels;
- the acquisition of a portfolio of dormant alfalfa seed germplasm in August 2012 to launch our entry into the dormant market;
- the acquisition of the leading local producer of non-dormant alfalfa seed in South Australia, S&W Seed Company Australia Pty Ltd (f/k/a Seed Genetics International Pty Ltd, "S&W Australia") in April 2013, which greatly expanded our production capabilities and geographic diversity;
- the acquisition of the alfalfa production and research facility assets and conventional (non-GMO) alfalfa germplasm from DuPont Pioneer in December 2014 (the "Pioneer Acquisition"), thereby substantially expanding upon our initial entrance into the dormant alfalfa seed market that began in 2012 and enabling us to greatly expand our production and research and product development capabilities;
- the acquisition, in May 2016, of 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, which represents our initial effort to diversify our product portfolio beyond alfalfa seed breeding and production and stevia R&D; and
- the acquisition of a portfolio of sorghum germplasm in April 2018 to expand our portfolio of sorghum products to include biofuel types.
- the acquisition of substantially all of the assets of Chromatin in October 2018, to accelerate and substantially expand our penetration into the hybrid sorghum market, and enable us to expand our production and research and our product development capabilities.
We believe our 2013 combination with S&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.
Our May 2016 acquisition of the hybrid sorghum and sunflower germplasm business and assets of SV Genetics, our April 2018 acquisition of a portfolio of sorghum germplasm, and our October 2018 acquisition of the assets and business of Chromatin signal management's commitment to our strategy of identifying opportunities to diversify our product lines and improve our gross margins.
38
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 agreement with DuPont Pioneer (relating to GMO-traited varieties) terminates on May 31, 2019. As a result, DuPont Pioneer's minimum purchase commitments from us will be reduced by approximately $6 million annually, commencing with our Fiscal Year 2020.
We are in discussions with DuPont Pioneer regarding the orderly transition of activities previously conducted by us under the production and research agreements (relating to GMO-traited varieties), 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 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. In October 2018, we continued this expansion with our acquisition of the assets and business of Chromatin. Revenue from the 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. Revenue from the Chromatin transaction is expected to be derived from the sale of hybrid sorghum seed.
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 gene edited varieties in future periods.
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.
39
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.
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 the assets of Chromatin in October 2018, additional costs are now being incurred as we continue the research and development efforts in the development of new sorghum hybrids. 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 four patents covering stevia plant varieties SW 107, SW 201, SW 129 and SW 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 October 2018 acquisition of the assets of Chromatin that we expect will factor into an overall increase in R&D expense. Overall, we have been focused on controlling research and development 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 constructed 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.
40
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, SV Genetics in May 2016, and Chromatin in October 2018 using the straight-line method over the estimated useful life of the asset, consisting of periods of 10-30 years for technology/IP/germplasm, 5-20 years for customer relationships and trade names and 3-20 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 5-35 years for buildings, 3-20 years for machinery and equipment and 2-5 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 primarily consists of interest costs related to outstanding borrowings on our credit facilities, including our current KeyBank revolving line of credit and on S&W Australia's credit facilities, our three-year secured promissory note issued in December 2014 in connection with the DuPont Pioneer Acquisition which was paid off on December 1, 2017, and our secured promissory note with Conterra Agricultural Capital, LLC ("Conterra").
Provision (Benefit) for Income 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 from 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.
41
Results of Operations
Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018
Revenue and Cost of Revenue
Revenue for the three months ended March 31, 2019 was $18.2 million compared to $22.9 million for the three months ended March 31, 2018. The $4.8 million decrease in revenue for the three months ended March 31, 2019 was primarily due to a $10.8 million decrease in revenues from DuPont Pioneer primarily attributable to timing of revenue recognition pursuant to our adoption Topic 606. The decrease in revenues to Pioneer was partially offset by increases of other product revenue of $6.0 million; including $5.2 million from the recently acquired sorghum operations, coupled with a $1.5 million increase in sales directed to the Saudi Arabia market. We expect full year revenues from DuPont Pioneer in fiscal 2019 to be down by $0.8 million compared to fiscal year 2018.
We recorded sales of approximately $7.9 million from our distribution and production agreements with DuPont Pioneer during the three months ended March 31, 2019, which was a decrease of $10.8 million from the comparable period in the prior year amount of $18.7 million. Our production agreement with DuPont Pioneer (relating to GMO-traited varieties) terminates on May 31, 2019.
The following table disaggregates our revenue by type of contract. The current period information is presented under both ASC 606 and ASC 605 to provide comparison to the third quarter of fiscal 2018.
Three Months Ended March 31, | |||||||||
2019 | 2018 | ||||||||
ASC 606 | ASC 605 | ASC 605 | |||||||
Distribution and production agreements - Pioneer | $ | 7,868,654 | $ | 12,495,081 | $ | 18,688,623 | |||
Other product sales | 10,225,275 | 10,225,275 | 4,215,599 | ||||||
Services | 82,237 | 82,237 | 44,948 | ||||||
$ | 18,176,166 | $ | 22,802,593 | $ | 22,949,170 |
Sales into international markets represented 27% and 16% of revenue during the three months ended March 31, 2019 and 2018, respectively. Domestic revenue accounted for 73% and 84% of our total revenue for the three months ended March 31, 2019 and 2018, respectively. The decrease in domestic revenue as a percentage of total revenue is primarily attributable to timing of revenue recognition associated with our distribution and production agreements with DuPont Pioneer.
42
The following table shows revenue from external sources by destination country:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
United States | $ | 13,346,894 | 73% | $ | 19,258,699 | 84% | ||
Saudi Arabia | 1,494,815 | 9% | - | 0% | ||||
Australia | 767,044 | 4% | 750,762 | 3% | ||||
Mexico | 666,452 | 4% | 301,390 | 1% | ||||
Libya | 21,000 | 0% | 183,750 | 1% | ||||
Peru | 196,085 | 1% | 427,358 | 2% | ||||
Argentina | 279,804 | 2% | 7,630 | 0% | ||||
South Africa | 241,797 | 1% | 251,116 | 1% | ||||
Germany | 245,898 | 1% | 271,460 | 1% | ||||
China | 199,595 | 1% | 374,824 | 2% | ||||
Algeria | 18,900 | 0% | 308,700 | 1% | ||||
Other | 697,882 | 4% | 813,481 | 4% | ||||
Total | $ | 18,176,166 | 100% | $ | 22,949,170 | 100% |
Cost of revenue of $13,388,470 for the three months ended March 31, 2019 was 73.7% of revenue, while the cost of revenue of $16,303,436 for the three months ended March 31, 2018 was 71.0% of revenue. Cost of revenue decreased on a dollar basis primarily due to the decrease in revenue discussed above.
Total gross profit margin for the three months ended March 31, 2019 was 26.3% compared to 29.0% in the three months ended March 31, 2018. The decrease in gross profit margins was primarily due to product sales mix during the current period where we had a lower concentration of higher margin dormant alfalfa seed sales.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expense for the three months ended March 31, 2019 totaled $4,610,471 compared to $2,676,166 for the three months ended March 31, 2018. We incurred non-recurring transactions expenses of $147,337 during the three months ended March 31, 2019 related to the acquisition of Chromatin. Excluding transaction costs from the three months ended March 31, 2019 and 2018, SG&A expenses increased $1,810,335 from the comparable period of the prior year. The increase in SG&A expense was primarily due to a $972,000 increase from the recent Chromatin acquisition, provision for bad debt expense of $490,946 as well as other increases in sales and management personnel and related costs as we focus on the anticipated growth in operations in the United States and Australia.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2019 totaled $1,824,613 compared to $1,065,323 for the three months ended March 31, 2018. The $759,290 increase in research and development expense versus the comparable period of the prior year is driven by additional research and development activities in connection with the recent Chromatin acquisition coupled with additional investment in our hybrid programs. We expect our research and development spend for fiscal 2019 to increase as we expand our hybrid sorghum and sunflower programs.
43
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2019 was $1,171,057 compared to $838,585 for the three months ended March 31, 2018. Included in the amount was amortization expense for intangible assets, which totaled $595,203 for the three months ended March 31, 2019 and $499,634 for the three months ended March 31, 2018. The $332,472 increase in depreciation and amortization expense over the third quarter of the prior year is primarily driven by additional depreciation and amortization of assets acquired from the recent Chromatin acquisition.
Foreign Currency (Gain) Loss
We incurred a foreign currency loss of $4,793 for the three months ended March 31, 2019 compared to a gain of $27,939 for the three months ended March 31, 2018. The foreign currency gains and losses are primarily associated with S&W Australia, our wholly-owned subsidiary in Australia as well as our foreign subsidiaries in South Africa and Hungry.
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the three months ended March 31, 2019 was $103,362 compared to $51,185 for the three months ended March 31, 2018. The expense in the current period represents the amortization of the debt issuance costs associated with our KeyBank and NAB working capital facilities, our secured property note, and our equipment capital leases. The expense in the comparable period in the prior year primarily represents the amortization of the debt issuance costs associated with our KeyBank working capital facility and our secured property note.
Interest Expense
Interest expense for the three months ended March 31, 2019 totaled $758,669 compared to $512,892 for the three months ended March 31, 2018. Interest expense for the three months ended March 31, 2019 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, and the secured property loan entered into in November 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 secured property loan entered into in November 2017. The $245,777 increase in interest expense for the three months ended March 31, 2019 is primarily driven by interest on the secured property and equipment loans as well as additional interest on the working capital credit facilities due to increased levels of borrowings and interest rates.
Income tax benefit totaled $82,411 for the three months ended March 31, 2019 compared to $248,931 for the three months ended March 31, 2018. Our effective tax rate for the three months ended March 31, 2019 was 2.4% compared to (16.3%) for the three months ended March 31, 2018. The primary driver of our effective tax rate for the three months ended March 31, 2019 is 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 the vast majority 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 do record tax expense related to certain other factors occurring
44
throughout the year. For example, we have certain intangible assets with indefinite lives for financial reporting purposes which historically produced deferred tax liabilities that could not be offset by deferred tax assets. The movement in these deferred tax liabilities would produce an impact on our income tax expense. All net operating losses generated in fiscal year 2018 and forward are now indefinite lived as well for U.S. federal income tax purposes. Due to this, we have reduced the deferred tax liability balance on the indefinite lived intangibles. Our effective tax rate is a function of the projected benefit from the decrease in our deferred tax liability over projected pre-tax book losses for the year. In addition, we recorded a small decrease to our tax provision in the quarter related to a decrease in projected future earnings for the year related to our newly formed joint ventures in South Africa. As a result, we have recorded a benefit in the U.S. as well as a small benefit for the decrease in our income tax expense related to our operations in South Africa, for the three months ended March 31, 2019.
Nine months Ended March 31, 2019 Compared to the Nine months Ended March 31, 2018
Revenue and Cost of Revenue
Revenue for nine months ended March 31, 2019 was $62,877,299 compared to $54,193,682 for the nine months ended March 31, 2018. The $8.7 million increase in revenue is primarily driven by $6.7 million in sales attributed to the recently acquired sorghum operations as well as an increase in sales to the MENA region.
The following table disaggregates our revenue by type of contract. The current period information is presented under both ASC 606 and ASC 605 to provide comparison to the nine months ended March 31, 2018.
Nine Months Ended March 31, | |||||||||
2019 | 2018 | ||||||||
ASC 606 | ASC 605 | ASC 605 | |||||||
Distribution and production agreements - Pioneer | $ | 37,054,268 | $ | 30,630,207 | $ | 36,790,423 | |||
Other product sales | 25,497,136 | 25,497,136 | 16,768,880 | ||||||
Services | 325,895 | 325,895 | 634,379 | ||||||
$ | 62,877,299 | $ | 56,453,238 | $ | 54,193,682 |
We recorded sales of approximately $37.1 million from our distribution and production agreements with DuPont Pioneer during the nine months ended March 31, 2019, which was an increase of $0.3 million from the prior year amount of $36.8 million.
The remaining increase in revenue from the comparable period in the prior year is attributable to $6.7 million of revenue from the recently acquired sorghum operations as well as increases in the MENA region.
Sales into international markets represented 25% and 29% of revenue during the nine months ended March 31, 2019 and 2018, respectively. Domestic revenue accounted for 75% and 71% of our total revenue for the nine months ended March 31, 2019 and 2018, respectively.
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The following table shows revenue from external sources by destination country:
Nine Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
United States | $ | 47,133,287 | 75% | $ | 38,523,953 | 71% | ||
Saudi Arabia | 3,065,089 | 5% | 844,908 | 2% | ||||
Australia | 2,137,194 | 3% | 1,309,105 | 2% | ||||
Mexico | 2,045,705 | 3% | 4,682,016 | 9% | ||||
Libya | 1,819,750 | 3% | 936,423 | 2% | ||||
Peru | 905,580 | 1% | 1,035,770 | 2% | ||||
Argentina | 841,969 | 1% | 2,750,249 | 5% | ||||
South Africa | 490,492 | 1% | 718,458 | 1% | ||||
Germany | 499,734 | 1% | 271,460 | 1% | ||||
China | 368,623 | 1% | 748,748 | 1% | ||||
Algeria | 18,900 | 0% | 308,700 | 1% | ||||
Other | 3,550,976 | 6% | 2,063,892 | 3% | ||||
Total | $ | 62,877,299 | 100% | $ | 54,193,682 | 100% |
Cost of revenue of $47,942,933 for the nine months ended March 31, 2019 was 76.2% of revenue, while the cost of revenue of $40,540,193 for the nine months ended March 31, 2018 was 74.8% of revenue. Cost of revenue increased on a dollar basis primarily due to the increase in revenue discussed above.
Total gross profit margin for the nine months ended March 31, 2019 was 23.8% compared to 25.2% in the nine months ended March 31, 2018. The decrease in gross profit margins was primarily due to product sales mix. The sales pricing under our production agreement expiring in May 2019 is lower in fiscal 2019 than in the prior year.
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expense for the nine months ended March 31, 2019 totaled $11,840,547 compared to $8,037,202 for the nine months ended March 31, 2018. We incurred non-recurring transactions expenses of $1,142,653 during the nine months ended March 31, 2019 related to the acquisition of Chromatin. Excluding transaction costs from the nine months ended March 31, 2019 and 2018, SG&A expenses increased $2,719,006 from the comparable period of the prior year. The increase in SG&A expense was primarily due to a $1,435,000 increase from the recent Chromatin acquisition, provision for bad debt expense of $337,000, increases in sales and management personnel and related costs of $849,000 as we focus on the anticipated growth in operations in the United States, as well as other operating expenses.
Research and Development Expenses
Research and development expenses for the nine months ended March 31, 2019 totaled $4,190,280 compared to $2,662,404 for the nine months ended March 31, 2018. The $1,527,876 increase in research and development expense versus the comparable period of the prior year is driven by additional research and development activities in connection with the recent Chromatin acquisition coupled with additional investment in our programs. We expect our research and development spend for fiscal 2019 to increase as we expand our hybrid sorghum and sunflower programs.
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Depreciation and Amortization
Depreciation and amortization expense for the nine months ended March 31, 2019 was $3,061,771 compared to $2,597,818 for the nine months ended March 31, 2018. Included in the amount was amortization expense for intangible assets, which totaled $1,654,788 for the nine months ended March 31, 2019 and $1,628,026 for the nine months ended March 31, 2018. The $463,953 increase in depreciation and amortization expense over the prior year is primarily driven by additional depreciation and amortization of assets acquired from the recent Chromatin acquisition.
Foreign Currency (Gain) Loss
We incurred a foreign currency gain of $53,638 for the nine months ended March 31, 2019 and 5,908 for the nine months ended March 31, 2018. The foreign currency gains and losses are primarily associated with S&W Australia, our wholly-owned subsidiary in Australia as well as our foreign subsidiaries in South Africa and Hungry.
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the nine months ended March 31, 2019 was $238,754 compared to $118,284 for the nine months ended March 31, 2018. The expense in the current period represents the amortization of the debt issuance costs associated with our working capital facilities, our secured property note, and our equipment capital leases. The expense in the comparable period in the prior year primarily represents the amortization of the debt issuance costs associated with our working capital facilities and our secured property note.
Interest Expense
Interest expense for the nine months ended March 31, 2019 totaled $2,057,377 compared to $1,244,515 for the nine months ended March 31, 2018. Interest expense for the nine months ended March 31, 2019 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, the secured property loan entered into in November 2017, and equipment capital leases. Interest expense for the nine months ended March 31, 2018 primarily consisted of interest incurred on the working capital credit facilities with KeyBank and NAB, interest on the note payable issued to DuPont Pioneer which was paid off in November 2017, the secured property loan entered into in November 2017 and equipment capital leases. The $812,862 increase in interest expense for the nine months ended March 31, 2019 is primarily driven by interest on the secured property and equipment loans as well as additional interest on the working capital credit facilities due to increased levels of borrowings and interest rates.
Provision for Income Taxes
The Company's tax provision or benefit is determined using an estimate of our annual effective tax rate, which is adjusted for discrete items that are taken into account in the relevant period. Income tax benefit totaled $77,878 for the nine months ended March 31, 2019 compared to $48,808 for the nine months ended March 31, 2018. Our effective tax rate was 1.3% during the nine months ended March 31, 2019 compared to 10% for the nine months ended March 31, 2018. The primary driver of the effective tax rate for the nine months ended March 31, 2019 is 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
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expense or benefit related to the vast majority 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 do 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 that produce deferred tax liabilities that cannot always be offset with the Company's deferred tax assets. All net operating losses generated subsequent to the passage of tax reform in December 2017 do not expire for US federal tax purposes and thus are indefinite lived as well. Due to this, we have reduced our U.S. federal deferred tax liability balance on the indefinite lived intangibles. Our effective tax rate is a function of the projected benefit from the decrease in our deferred tax liability over projected pre-tax book losses for the year. In addition, we recorded a small impact to our tax provision related to our newly formed joint ventures in South Africa. As a result, we have recorded a benefit in the U.S. which is offset partially by an income tax expense that we have recorded related to our operations in South Africa, resulting in a small year to date tax benefit for the nine months ended March 31, 2019.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate ("federal tax rate") from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries.
In December 2017, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which addresses how a company recognizes provisional estimates when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Act. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act in 2018. At June 30, 2018, we had not yet completed our accounting for all of the enactment-date income tax effects of the Act under ACS 740, Income Taxes, including the accounting for the following aspects: remeasurement of deferred tax assets and liabilities and the one-time transition tax. As of the second quarter of our fiscal year ending June 30, 2019, we completed our accounting for all of the enactment-date income tax effects of the Act, with no changes to our net deferred tax balances or income tax provision. We had previously calculated a provisional income inclusion of approximately $2.1 million related to the transition tax on accumulated foreign earnings. As of the second quarter of fiscal 2019, we concluded our analysis with respect to the transition tax accounting, recording an income inclusion of approximately $2.0 million. However, due to the Company's valuation allowance, there is no impact to the Company's net deferred tax balance or income tax expense. There was no net impact to our tax balances for the re-measurement of our deferred tax balances from the provisional estimates to the final calculations.
The Tax Act also includes a Global Intangible Low-Taxed Income ("GILTI") provision that imposes U.S. tax on certain foreign subsidiary income in the year it is earned. Our accounting policy is to treat tax on GILTI as a current period cost included in tax expense in the year incurred.
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 2018, we paid our North American growers approximately 50% of amounts owed to them in October 2017 and the
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balance was paid in February 2018. This payment cycle is similar in fiscal year 2019. 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.
Historically, due to the concentration of sales to certain distributors, our month-to-month and quarter-to-quarter sales and associated cash receipts are highly dependent upon the timing of deliveries to and payments from these distributors, which varies significantly from year to year. The timing of collection of receivables from DuPont Pioneer, which is our largest customer, is defined in the distribution agreement with DuPont Pioneer and consists of three installment payments, the first on September 15th, the second on January 15th, and the third payment on February 15th.
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 recent periods, we have consummated the following equity and debt financings:
On December 31, 2014, in connection with the 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 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 in October 2017. The Pioneer Note accrued interest at 3% per annum. Interest was payable in three annual installments, in arrears, commencing on December 31, 2015. On 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.
On November 30, 2017, we entered into a secured note financing transaction (the "Loan Transaction") with 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:
- Secured Real Estate Note. We issued one Note in the principal amount of $10.4 million (the "Secured Real Estate Note") that is secured by a first priority security interest in the property, plant and fixtures (the "Real Estate Collateral") located at our Five Points, California and Nampa, Idaho production facilities and our Nampa, Idaho and Arlington, Wisconsin research facilities (the "Facilities"). The Secured Real Estate Note matures on November 30, 2020, which, subject to Conterra's approval, may be extended to November 30, 2022. The Secured Real Estate Note bears interest of 7.75% per annum.
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We have agreed to make semi-annual payments of interest and amortized principal on a 20-year amortization schedule, for a combined payment of $515,711, starting July 1, 2018, in addition to a one-time interest only payment on January 1, 2018. We may prepay the Secured Real Estate Note, in whole or in part, at any time after we have paid a minimum of twelve months of interest on the Secured Real Estate Note.
- Secured Equipment Note. We issued a second Note in the principal amount of $2.1 million (the "Secured Equipment Note") that was secured by a first priority security interest in certain equipment not attached to real estate located at the Facilities. The Secured Equipment Note was also secured by the Real Estate Collateral. The Secured Equipment Note had a maturity date of November 30, 2019. The Secured Equipment Note bore an interest rate of 9.5% per annum. We agreed to make semi-annual payments of interest and amortized principal on a 20-year amortization schedule, for a combined payment of $118,223, starting July 1, 2018, in addition to a one-time interest only payment on January 1, 2018. We may prepay the Secured Equipment Note, in whole or in part, at any time.
On December 1, 2017, we used the proceeds from the Loan Transaction to repay the Pioneer Note.
On August 15, 2018, we closed on a sale and leaseback transaction with American AgCredit involving certain equipment located at our Five Points, California and Nampa, Idaho production facilities. Under the terms of the transaction:
- We sold the equipment to American AgCredit for $2,106,395 million in proceeds. The proceeds were used to pay off in full the Secured Equipment Note mentioned above.
- We entered into a lease agreement with American AgCredit relating to the equipment. The lease agreement has a five-year term and provides for monthly lease payments of $40,023 (representing an annual interest rate of 5.6%). At the end of the lease term, we will repurchase the equipment for $1.
On September 22, 2015, we entered into a credit and security agreement (the "KeyBank Credit Facility") with KeyBank. Key provisions of the KeyBank Credit Facility, as amended, include:
- An aggregate principal amount that we may borrow, repay and reborrow, of up to $45.0 million in the aggregate, subject to a requirement that we 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) not 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).
- All amounts due and owing, including, but not limited to, accrued and unpaid principal and interest, will be payable in full on December 31, 2020.
- A borrowing base of up to 85% of eligible domestic accounts receivable and 90% of eligible foreign accounts receivable, plus up to the lesser of (i) 75% of the cost eligible inventory (provided that eligible inventory acquired by us in our recent Chromatin acquisition is initially subject to a rate of 25%, potentially increasing to 75% if we deliver an appraisal of the acquired inventory that is satisfactory to KeyBank) or (ii) 90% of the net orderly liquidation value of the inventory, subject to lender reserves.
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- Loans may be based on a Base Rate or Eurodollar Rate (which is increased by an applicable margin of 2.9% per annum for Eurodollar Loans and 1.0% for Base Rate Loans) (both as defined in the KeyBank Credit Facility), generally at our option. In the event of a default, at the option of KeyBank, the interest rate on all obligations owing will increase by 3% per annum over the rate otherwise applicable.
- Subject to certain exceptions, the KeyBank Credit Facility is secured by a first priority perfected security interest in all our now owned and after acquired tangible and intangible assets and our domestic subsidiaries, which have guaranteed our obligations under the KeyBank Credit Facility. The KeyBank Credit Facility is further secured by a lien on, and a pledge of, 65% of the stock of our wholly-owned subsidiary, S&W Holdings Australia Pty Ltd.
At March 31, 2019, the Company was not in compliance with the fixed charge coverage ratio covenant under the KeyBank Credit Facility. The Company subsequently obtained a waiver from KeyBank, curing the failure to comply with this debt covenant for the fiscal quarter ended March 31, 2019. The Company is currently in discussions with KeyBank to potentially modify the KeyBank Credit Facility in a manner acceptable to both the Company and KeyBank so that the Company maintains compliance with all debt covenants for the foreseeable future.
S&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 April 13, 2018 and expires on March 30, 2020. As of March 31, 2019, AUD $10,270,000 (USD $7,287,592) 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 $1,000,000 (USD $709,600 at March 31, 2019) and a borrowing base facility (the "Borrowing Base Facility"), having a credit limit of AUD $12,000,000 (USD $8,515,200 at March 31, 2019).
The Borrowing Base Facility permits S&W Australia to borrow funds for periods of up to 180 days, at S&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, 2019, the Borrowing Base Facility accrued interest on Australian dollar drawings at approximately 4.75% per annum calculated daily. The Borrowing Base Facility is secured by a lien on all the present and future rights, property and undertakings of S&W Australia, the mortgage on S&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 S&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, 2019, the Overdraft Facility accrued interest at approximately 6.77% per annum 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 agreements, 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).
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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 S&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 S&W Australia's outstanding obligations, all as set forth in the NAB facility agreements. S&W Australia was in compliance with all NAB debt covenants at March 31, 2019.
In January 2015, NAB and S&W Australia entered into a new business markets - flexible rate loan (the "Keith Building Loan") and a separate machinery and equipment facility (the "Keith Machinery and Equipment Facility"). In February 2016, NAB and S&W Australia also entered into a master asset finance facility (the "Master Assets Facility"). The Master Asset Facility has various maturity dates through 2021 and have interest rates ranging from 4.86% to 5.31%.
The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a building on S&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 (6.41% as of March 31, 2019). 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 S&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 S&W Australia, the Company's corporate guarantee and a mortgage on S&W Australia's Keith, South Australia property.
On July 19, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to which 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 closing of our rights offering of 3,500,000 shares of our Common Stock. At the closing, 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 closing of rights offering, we sold and issued the remaining 905,077 shares of our Common Stock not purchased in the rights offering to MFP at the subscription price of $3.50 per share. Combined, we sold and issued an aggregate of 3,500,000 shares of our common stock for aggregate gross proceeds of $12.25 million.
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On September 5, 2018, we entered into a Securities Purchase Agreement (the "2018 Securities Purchase Agreement") with MFP, pursuant to which we sold 1,607,717 shares of our common stock to MFP at a purchase price of $3.11 per share at an initial closing held on September 5, 2018, for gross proceeds of approximately $5.0 million.
On October 23, 2018, we completed the second closing under the 2018 Securities Purchase Agreement with MFP. At the second closing, we issued to MFP 7,235 shares of a newly designated Series A Convertible Preferred Stock (the "Preferred Shares") at a purchase price of $3,110 per share, for aggregate gross proceeds of approximately $22.5 million. The Preferred Shares carried no voting rights and were automatically convertible into shares of our common stock at the rate of 1,000 shares of common stock per Preferred Share upon the approval of the Company's stockholders for the issuance of the requisite shares of common stock. Pursuant to the 2018 Securities Purchase Agreement, we agreed to use reasonable best efforts to solicit the approval of our shareholders for the issuance of stock upon the conversion of the Preferred Shares at a special meeting of shareholders, and at each annual meeting of shareholders thereafter, if necessary. Approval was obtained at a Special Meeting of Stockholders on November 20, 2018, and the Preferred Shares were converted to 7,235,000 shares of our common stock on that same day.
Summary of Cash Flows
The following table shows a summary of our cash flows for the nine months ended March 31, 2019 and 2018:
Nine Months Ended | ||||||
March 31, | ||||||
2019 | 2018 | |||||
Cash flows from operating activities | $ | (18,769,238) | $ | (16,377,979) | ||
Cash flows from investing activities | (26,811,172) | (1,016,188) | ||||
Cash flows from financing activities | 44,329,817 | 19,589,436 | ||||
Effect of exchange rate changes on cash | (186,802) | 48,122 | ||||
Net (decrease) increase in cash and cash equivalents | (1,437,395) | 2,243,391 | ||||
Cash and cash equivalents, beginning of period | 4,320,894 | 745,001 | ||||
Cash and cash equivalents, end of period | $ | 2,883,499 | $ | 2,988,392 |
Operating Activities
For the nine months ended March 31, 2019, operating activities used $18,769,238 in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of cash flows used $2,205,756 in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used $16,563,482 in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by increases in inventories of $20,442,220, increases in unbilled accounts receivable of $4,258,450, partially offset by an increase in accounts payable of $6,569,031 and a decrease in accounts receivable of $1,584,152.
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, partially offset by an increase in accounts payable of $5,236,255.
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Investing Activities
Investing activities during the nine months ended March 31, 2019 used $26,811,172 in cash. The Chromatin Acquisition accounted for $26,354,951 of the cash used in investing activities. We also had additions to property, plant and equipment of $836,983 consisting primarily of equipment purchases for our facility in Keith, Australia and replacements of our vehicle fleet in the US.
Investing activities during the nine months ended March 31, 2018 used $1,016,188 in cash. These activities consisted primarily of additions to a build out of a new research and development facility in Nampa, Idaho.
Financing Activities
Financing activities during the nine months ended March 31, 2019 provided $44,329,817 in cash. During the nine months ended March 31, 2019, we completed a private placement of common stock which raised net proceeds of $4,927,682 in cash and a private placement of preferred stock which raised net proceeds of $22,373,842. During the nine months ended March 31, 2019, we also had net borrowings on the working capital lines of credit of $17,768,886. On August 15, 2018, we closed on a sale and leaseback transaction involving certain equipment located at our Five Points, California and Nampa, Idaho production facilities. Under the terms of the transaction, we sold the equipment for $2,106,395 million in proceeds. The proceeds were used to pay off in full the Secured Equipment Note mentioned above.
Financing activities during the nine months ended March 31, 2018 provided $19,589,436 in cash. We completed two separate private placements of common 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 the rights offering and backstop 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 secured 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 Pioneer Note in October 2017.
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, 2019.
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Capital Resources and Requirements
Our future liquidity and capital requirements will be influenced by numerous factors, including:
- the extent and duration of future operating income;
- the level and timing of future sales and expenditures;
- working capital required to support our growth;
- investment capital for plant and equipment;
- our sales and marketing programs;
- investment capital for potential acquisitions;
- our ability to renew and/or refinance our debt on acceptable terms;
- competition; and
- market developments.
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.
Revenue Recognition
We adopted the provisions of ASC Topic 606, Revenue from Contracts with Customers ("Topic 606") as of July 1, 2018. Prior to the adoption of Topic 606, we had recognized revenue from product sales primarily when product was shipped. However, Topic 606 requires that companies evaluate their contracts with customers to determine whether any of three criteria is met with relation to an obligation to transfer goods or services to the customer. If so, revenue is recognized over time, generally during performance of the service or production of the goods, rather than only upon completion of the service or delivery of the goods. One criterion that requires recognition of revenue over time is met if i) the vendor's performance does not create an asset with an alternative use to the vendor, and ii) the customer does not have the ability to cancel its order without payment to the vendor for all work performed.
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We have determined that our production and distribution agreements with Pioneer meet this criterion. Once Pioneer submits a demand plan for a particular growing season, we are required to use commercially reasonable efforts to arrange for the requested quantity of seed to be produced, and we are not permitted to sell the ordered seed to other customers. In addition, once Pioneer submits a demand plan, Pioneer cannot cancel or reduce the amount of seed that it is obligated to purchase under the contracts and must pay us for the requested quantity as long as we comply with the contracts. Therefore, the seed produced to meet Pioneer's demand plan has no alternative use to us, and Pioneer has an obligation to pay us for all seed ordered. As such, we began recognizing revenue under the Pioneer agreement over time as of July 1, 2018. This requires us to estimate our progress toward satisfying our obligation to produce and deliver seed to Pioneer. We have concluded that cost is the best measure of progress under the Pioneer contract because no other measure adequately reflects the value added to the product by each of our major tasks - having the crop grown, processing, and packaging. As we contract out the growing of seed to third parties, the vast majority of our costs under these agreements are incurred, and therefore the vast majority of the revenue from such agreements is recognized, when the raw seed is purchased from the third-party contract growers. The rest of the costs are incurred, and therefore the rest of the revenue is recognized, as we process and package the product. Changes in estimates of costs to process and package seed, as well as changes in the timing of purchase of raw seed from third-party growers, could result in significant changes to the timing of revenue recognition, although they will not alter the total amount of revenue recognized under the contract in a growing season.
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.
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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.
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 net realizable value. Inventories consist of raw materials and finished 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, 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 S&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
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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.
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.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019 (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, 2019, our Principal Executive Officer and Principal 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 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 that have significantly affected, or are reasonably likely to significantly affect, our internal control over financial reporting.
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Part II
OTHER INFORMATION
None.
You should carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018, which could materially affect our business, financial condition, cash flows or future results. Except for the risk factors set forth below, there have been no material changes in our risk factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018. 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, 2018 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.
Raising additional capital may cause dilution to our stockholders or restrict our operations.
From time to time, we expect to finance our cash needs through a combination of equity and debt financings, as well as potentially entering into collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest could be diluted and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may be secured by all or a portion of our assets.
For example, on September 5, 2018, we entered into the September SPA with MFP, pursuant to which we have issued the Common Shares and Preferred Shares for aggregate gross proceeds of approximately $27.5 million. As a result of these issuances, our investors other than MFP experienced substantial dilution of their ownership interests.
As part of our growth strategy, we have acquired and may continue to acquire additional businesses, product lines or other assets. We may not be able to locate or make suitable acquisitions on acceptable terms, and future acquisitions may not be effectively and profitably integrated into our business. Our failure to successfully complete the integration of the businesses we acquire could have an adverse effect on our prospects, business activities, cash flow, financial condition, results of operations and stock price. Integration challenges may include the following:
- assimilating the acquired operations, products and personnel with our existing operations, products and personnel;
- estimating the capital, personnel and equipment required for the acquired businesses based on the historical experience of management with the businesses with which they are familiar;
- minimizing potential adverse effects on existing business relationships with other suppliers and customers;
- developing and marketing the new products and services;
- entering markets in which we have limited or no prior experience; and
- coordinating our efforts throughout various distant localities and time zones.
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In connection with any such transactions, we may also issue equity securities, incur additional debt, assume contractual obligations or liabilities or expend significant cash. Such transactions could harm our operating results and cash position and negatively affect the price of our stock.
For example, on October 25, 2018, we completed the 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 (the "Acquisition"), pursuant to the terms of our previously disclosed 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 ("Novo"). To fund the Chromatin Acquisition, cover transaction expenses and provide additional working capital, we entered into a Securities Purchase Agreement (the "September SPA") with MFP Partners, L.P. ("MFP"), pursuant to which we agreed to sell and issue to MFP 1,607,717 shares of our common stock (the "Common Shares") for approximate gross proceeds of $5.0 million at an initial closing (the "Initial Closing") and, subject to the satisfaction of certain conditions, 7,235 shares of newly designated Series A Convertible Preferred Stock of the Company ("Preferred Shares") for aggregate gross proceeds of $22.5 million at a second closing (the "Second Closing"), each in a private placement. The Initial Closing was completed on September 5, 2018 and the Second Closing was completed on October 23, 2018.
We cannot guarantee that the Chromatin Acquisition will yield the results we have anticipated. In addition, there can be no assurance that we will achieve the revenues, growth prospects and synergies expected from this acquisition, our prior acquisitions or any future acquisitions, or that we will achieve such revenue, growth prospects and synergies in a manner consistent with our expectations. Our failure to do so could adversely affect our business, operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
At March 31, 2019, we were not in compliance with the fixed charge coverage ratio covenant under our KeyBank Credit Facility. However, we subsequently obtained a waiver from KeyBank, curing the failure to comply with this debt covenant for the fiscal quarter ended March 31, 2019. For more information regarding this default and this waiver, see Note 7 to the consolidated financial statements "Debt" included elsewhere in this Quarterly Report on Form 10-Q.
Item 4. Mine Safety Disclosures.
Not applicable.
None.
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Exhibit No. |
Description |
|
3.1(1) |
||
3.2(2) |
||
3.3(3) |
Registrant's Amended and Restated Bylaws, together with Amendments One, Two and Three thereto |
|
4.1 |
Reference is made to Exhibits 3.1, 3.2 and 3.3 |
|
4.2(4) |
||
4.3(5) |
||
10.1(6) * |
||
10.2(7)* |
Form of Stock Option Grant Notice, Option Agreement and Notice of Exercise under the Plan. |
|
10.3(8)* |
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the Plan. |
|
10.4* |
Employment Agreement between the Registrant and Matthew K. Szot, dated April 24, 2019. |
|
31.1 |
||
31.2 |
||
32.1** |
||
32.2** |
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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 Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on December 19, 2011 (File No. 001-34719).
(2) Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K, filed on October 25, 2018 (File No. 001-34719).
(3) Incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K, filed on September 28, 2015 (File No. 001-34719).
(4) Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-3, filed on August 4, 2017 (File No. 333-219726).
(5) Incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K, filed on December 31, 2014 (File No. 001-34719).
(6) Incorporated by reference to Exhibit 99.1 to the Registrant's Registration Statement on Form S-8, filed on February 12, 2019 (File No. 333-229625).
(7) Incorporated by reference to Exhibit 99.2 to the Registrant's Registration Statement on Form S-8, filed on February 12, 2019 (File No. 333-229625).
(8) Incorporated by reference to Exhibit 99.3 to the Registrant's Registration Statement on Form S-8, filed on February 12, 2019 (File No. 333-229625).
* Management contract or compensatory plan or arrangement.
** This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.
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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.
|
S&W SEED COMPANY |
|
|
Date: May 9, 2019 |
By: /s/ Matthew K. Szot |
|
Executive Vice President of Finance and |
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Exhibit 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of April 24, 2019 by and between S&W Seed Company, a Nevada corporation (the "Company") and Matthew K. Szot ("Executive"). Together, Executive and the Company are sometimes referred to as the "Parties."
WHEREAS, the Executive serves as the Company's Executive Vice President of Finance and Administration and Chief Financial Officer;
WHEREAS, the Parties previously entered into and operated under the terms of that certain Employment Agreement dated as of March 18, 2016, which expired pursuant to its terms on December 31, 2018; and
WHEREAS, the Company and Executive both desire to memorialize the terms of Executive's employment arrangement, effective as of January 1, 2019 (the "Effective Date").
NOW THEREFORE, in consideration of the material advantages accruing to the two Parties and the mutual covenants contained herein, and intending to be legally and ethically bound hereby, the Company and Executive:
- Duties and Scope of Employment.
- Positions and Duties. Executive will continue to serve, at the pleasure of the Board, as Executive Vice President of Finance and Administration and Chief Financial Officer of the Company and shall report to the Company's Chief Executive Officer and the Company's Board of Directors (the "Board"). In the capacities of Executive Vice President of Finance and Administration and Chief Financial Officer, Executive will render such business and professional services in the performance of Executive's duties, consistent with Executive's position within the Company. Executive will have the full powers, responsibilities and authorities customary for the chief financial officer of public corporations of the size, type and nature of the Company, together with such other powers, authorities and responsibilities as may reasonably be assigned to him by the Chief Executive Officer and/or the Board. Executive will report solely and directly to the Chief Executive Officer and/or the Board. The period Executive is employed by the Company under this Agreement is referred to herein as the "Employment Term."
- Obligations. During the Employment Term, Executive will devote Executive's full business efforts and time to the Company and will use good faith efforts to discharge Executive's obligations under this Agreement to the best of Executive's ability. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation, or consulting activity for any direct or indirect remuneration without the prior approval of the Chief Executive Officer or Board; provided, however, that Executive may, without the approval of the Board, serve in any capacity with any civic, educational, or charitable organization and serve on the board(s) set forth on Schedule A attached hereto, provided such services do not materially interfere with Executive's obligations to the Company. After the date of this Agreement, Executive shall seek the approval of the Company's Compensation Committee before accepting or seeking any further positions. Executive shall also do the same with any outside paid employment/consulting positions. Executive represents that Executive is not subject to any non-competition, confidentiality, trade secrets or other agreement(s) that would preclude, or restrict in any way, Executive from fully performing Executive's services hereunder during Executive's employment with the Company.
- At-Will Employment. Executive and the Company agree that Executive's employment with the Company constitutes "at-will" employment. Executive and the Company acknowledge that this employment relationship may be terminated at any time, with or without Cause (as defined below) or advance notice.
- Term of Agreement. This Agreement is effective as of January 1, 2019 and will expire on December 31, 2020, unless terminated earlier pursuant to Sections 7 and 8 below. No later than June 30, 2020, the Company will notify Executive whether it intends to renew this Agreement (the "Renewal Notice").
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- Compensation.
- Base Salary. Effective retroactive to October 25, 2018, the Company will pay Executive an annual salary of $310,000 as compensation for Executive's services (such annual salary, as is then effective, to be referred to herein as "Base Salary"). The Base Salary will be paid periodically in accordance with the Company's normal payroll practices and be subject to the usual, required withholdings. Executive's annual salary will be subject to review by the Compensation Committee of the Board, or any successor thereto (the "Compensation Committee") not less than annually, and increases will be made in the discretion of the Compensation Committee. Subsequent changes in Executive's Base Salary shall not require an amendment to this Agreement, provided that the change is documented in a resolution duly adopted by the Compensation Committee.
- Bonus Compensation. In the sole discretion of the Compensation Committee, Executive may receive periodic bonuses in acknowledgment of Executive's and the Company's achievements and efforts from time to time. Such bonuses may be payable in the future in alignment with stated performance goals or otherwise in the Compensation Committee's discretion. Beginning with the Company's fiscal year ended June 30, 2019, Executive shall be eligible to receive an annual incentive bonus of up to 110% of the Base Salary (the "Target Bonus Amount"), with a maximum potential bonus of up to 135% of the Base Salary. Executive's annual incentive bonus, if any, shall be payable 50% in cash and 50% in equity (the "Equity Component"). The Equity Component will in turn be allocated 50% in the form of a restricted stock unit award (the "RSU Component") and 50% in the form of a stock option award (the "Stock Option Component"). The number of shares subject to the RSU Component will be determined by dividing the dollar value of the RSU Component by the per share closing sales price of the Company's common stock on the date of grant, and the number of shares subject to the Stock Option Component will be determined by dividing the dollar value of the Stock Option Component by per share "fair value" of an option on the date of grant, using the same Black-Scholes-Merton option pricing model as is utilized by the Company to estimate the fair value of employee stock option grants for financial accounting purposes. The exact amount of the bonus shall be determined by the Compensation Committee, taking into account the achievement of personal and Company financial goals mutually agreed upon by the Compensation Committee and Executive. Annual target goals will be memorialized in a writing to be maintained by the Company's Human Resources Department. The amount of bonus compensation, the allocation between cash and equity and the target goals will be subject to review annually. Such changes shall not require an amendment to this Agreement, provided that any such change is documented in a resolution duly adopted by the Compensation Committee. The bonus, if any, including the Equity Component, will be paid on such date as determined by the Board or Compensation Committee (the "Bonus Payment Date"), subject to Executive's continued service through such date.
- Equity Incentive Compensation. Executive shall be eligible to participate in the Company's equity incentive plans, as in effect from time to time, and shall be considered for grants and awards at such times and in such amounts as shall be deemed appropriate by the Compensation Committee, as the administrator of such plans, in its sole discretion.
- Stock Ownership Guidelines. Executive shall be subject to, and shall comply with, the Company's stock ownership guidelines, including compliance with its Insider Trading Policy, including the Addendum thereto, and with Section 16 of the Securities Exchange Act of 1934, as amended.
- Executive Benefits
- Generally. Executive will be eligible to participate in accordance with the terms of all Company employee benefit plans, policies, and arrangements that are applicable to other executive officers of the Company, as such plans, policies, and arrangements may exist from time to time.
- Vacation. Executive will be entitled to receive paid annual vacation in accordance with Company policy.
- Life Insurance. The Company shall maintain a term life insurance policy for the benefit of Executive's beneficiaries in the event of Executive's death with the following policy limits: In the event Executive dies while employed by the Company but not at a time when Executive is engaged in Company-related business, the policy shall provide for a death benefit equal to Executive's salary at the time of death; and in the event Executive dies while on Company-related business, the death benefit will equal two times Executive's salary at the time of death.
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- Expenses. The Company will reimburse Executive for reasonable travel, business entertainment and other expenses incurred by Executive in the furtherance of the performance of Executive's duties hereunder, in accordance with the Company's expense reimbursement policy as in effect from time to time.
- Termination of Employment. In addition to any other compensation payable to the Executive pursuant to this Agreement, in the event Executive's employment with the Company terminates for any reason, Executive will be entitled to any (a) unpaid Base Salary accrued up to the effective date of the termination of Executive's employment with the Company (the "Date of Termination"), (b) pay for accrued but unused vacation, (c) benefits or compensation as provided under the terms of any employee benefit and compensation agreements or plans applicable to Executive and under which Executive has a vested right (including any right that vests in connection the termination of Executive's employment), (d) unreimbursed business expenses to which Executive is entitled to reimbursement under the Company's expense reimbursement policy, and (e) rights to indemnification Executive may have under the Company's Articles of Incorporation, as amended, the Company's Amended and Restated Bylaws, as amended, this Agreement, or Executive's separate indemnification agreement, as applicable, including any rights Executive may have under directors and officers insurance policies.
- Severance.
- Non-Renewal of Agreement. If the Company fails to deliver a Renewal Notice in the time period specified in Section 3 above, then, if Executive resigns his employment with the Company prior to the 45th day immediately following the expiration of this Agreement, and provided that such resignation constitutes a Separation from Service (as defined below), and further subject to the Release Requirement (as defined below), Executive will be eligible to receive a lump sum cash payment in an amount equal to six months of the Base Salary as in effect immediately before the Date of Termination, subject to required payroll deductions and tax withholdings, to be paid as soon as practicable following the Release Effective Date (as defined herein). Other than the acceleration of vesting provided for in Section 8(e) below, the severance provided for in this Section 8(a) shall be the exclusive severance that Executive is eligible to receive in connection with any resignation due to the Company's failure to deliver the Renewal Notice.
- Termination for Failure to Relocate. If the Company requests that Executive relocate Executive's primary residence to the geographical region in which the Company's headquarters are located and Executive fails to complete such relocation within six months of the Company's delivery of such request, and the Company terminates Executive's employment within the 45 day period immediately following the end of such 6-month period, and provided such termination constitutes a Separation from Service, then, subject to the Release Requirement, Executive will be eligible to receive a lump sum cash payment in an amount equal to 12 months of the Base Salary as in effect immediately before the Date of Termination, subject to required payroll deductions and tax withholdings, to be paid as soon as practicable following the Release Effective Date (as defined herein). Other than the acceleration of vesting provided for in Section 8(e) below, the severance provided for in this Section 8(b) shall be the exclusive severance that Executive is eligible to receive in connection with the Company's termination of Executive's employment under the circumstances described in this Section 8(b). For clarity: any termination pursuant to this Section 8(b) shall not qualify as an involuntary termination of Executive's employment without Cause; a request to relocate prior to a Change of Control shall not give Executive the right to resign for Good Reason; and this Section 8(b) shall apply only to the Company's termination of Executive's employment under the circumstances described in this Section 8(b).
- Termination Without Cause or Resignation for Good Reason Unrelated to Change of Control. If (i) Executive's employment with the Company is terminated by the Company without Cause (other than (x) as a result of Executive's death or Disability (as defined below) or (y) under the circumstances described in Sections 8(a) or (b) above or Section 8(d) below), or (ii) Executive resigns for Good Reason (as defined below), then, subject to compliance with the Release Requirement, and provided such termination or resignation constitutes a Separation from Service, Executive will be eligible to receive the following severance benefits, to be paid as soon as practical following the Release Effective Date:
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- A lump sum cash payment in an amount equal to 12 months of the Base Salary as in effect immediately before the Date of Termination, subject to required payroll deductions and tax withholdings. For such purposes, Executive's Base Salary will be calculated prior to giving effect to any reduction in Base Salary that would give rise to Executive's right to resign for Good Reason; and
- A lump sum cash payment in an amount equal to 100% of the Target Bonus Amount, subject to required payroll deductions and tax withholdings. For purposes of calculating the Target Bonus Amount, Executive's final Base Salary will be calculated prior to giving effect to any reduction in Base Salary that would give rise to Executive's right to resign for Good Reason.
- Termination Without Cause or Resignation for Good Reason During Change of Control Period. If, at any time during the Change of Control Period, (i) Executive's employment with the Company is terminated by the Company without Cause (other than (x) as a result of Executive's death or Disability or (y) under the circumstances described in Section 8(a) above), or (ii) Executive resigns for Good Reason, then, subject to compliance with the Release Requirement, and provided such termination or resignation constitutes a Separation from Service, Executive will be eligible to receive the following severance benefits in lieu of (and not in addition to) the severance benefits described in Section 8(c) above, and provided that Executive satisfies the Release Requirement and remains in compliance with the terms of this Agreement, to be paid as soon as practical following the Release Effective Date:
- A lump sum cash payment in an amount equal to 18 months of the Base Salary as in effect immediately before the Date of Termination, subject to required payroll deductions and tax withholdings; provided, however, that such payment shall be increased to 24 months of the Base Salary if the per share consideration payable in connection with the Change of Control (the "Transaction Price") is at least $10. For such purposes, Executive's Base Salary will be calculated prior to giving effect to any reduction in Base Salary that would give rise to Executive's right to resign for Good Reason;
- A lump sum cash payment in an amount equal to 150% of the Target Bonus Amount, subject to required payroll deductions and tax withholdings; provided, however, that such payment shall be increased to 200% of the Target Bonus Amount in the event the Transaction Price is at least $10.00. For purposes of calculating the Target Bonus Amount, Executive's final Base Salary will be calculated prior to giving effect to any reduction in Base Salary that would give rise to Executive's right to resign for Good Reason; and
- If Executive timely elects continued coverage under COBRA, the Company will pay Executive's COBRA premiums to continue Executive's coverage (including coverage for Executive's eligible dependents, if applicable) ("COBRA Premiums") through the period starting on the Date of Termination and ending 18 months after the Date of Termination (the "COBRA Premium Period"); provided, however, that such COBRA Premium Period shall be extended to 24 months if the Transaction Price is at least $10.00; and provided, further, that the Company's provision of the COBRA Premium benefits will immediately cease if during the COBRA Premium Period Executive becomes eligible for group health insurance coverage through a new employer or Executive ceases to be eligible for COBRA continuation coverage for any reason, including plan termination. In the event Executive becomes covered under another employer's group health plan or otherwise ceases to be eligible for COBRA during the COBRA Premium Period, Executive must immediately notify the Company of such event. Notwithstanding the foregoing, if the Company determines, in its sole discretion, that it cannot pay the COBRA Premiums without potentially incurring financial costs or penalties under applicable law (including, without limitation, Section 2716 of the Public Health Service Act), regardless of whether Executive or Executive's dependents elect or are eligible for COBRA coverage, the Company instead shall pay to Executive, on the first day of each calendar month following the termination date, a fully taxable cash payment equal to the applicable COBRA premiums for that month (including the amount of COBRA premiums for Executive's eligible dependents), subject to applicable tax withholdings (such amount, the "Special Cash Payment"), for the remainder of the COBRA Premium Period. Executive may, but is not obligated to, use such Special Cash Payments toward the cost of COBRA premiums.
- Accelerated Vesting. In addition to the benefits provided for in this Section 8, upon (X) any termination of Executive's employment with the Company under the circumstances described in Sections 8(a), 8(b), or 8(c)(i), or (Y) a Change of Control, then, effective as of the Release Effective Date, the vesting and exercisability
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- Termination for Cause. If Executive's employment is terminated for Cause by the Company, then, (i) all further vesting of Executive's outstanding equity awards will terminate immediately; and (ii) all payments of compensation by the Company to Executive hereunder will terminate immediately.
- Covenants; Conditions to Receipt of Severance; Mitigation.
- Non-disparagement. During the Employment Term and for the 12 months thereafter, Executive will not, and will cause Executive's relatives, agents and representatives to not, knowingly disparage, criticize or otherwise make any derogatory statements regarding the Company, its directors, or its officers, and the Company will not knowingly disparage, criticize or otherwise make any derogatory statements regarding Executive. The Company's obligations under the preceding sentence shall be limited to communications by its senior corporate executives having the rank of Vice President or above and members of the Board. The foregoing restrictions will not apply to any statements that are made truthfully in response to a subpoena or other compulsory legal process. Payments of severance to Executive, in accordance with Section 8 above, shall immediately cease, and no further payments shall be made, in the event that Executive breaches the provisions of this Section 9(a).
- Release of Claims. To be eligible for any of the severance benefits provided in this Agreement, Executive must satisfy the following release requirement (the "Release Requirement"): return to the Company a signed and dated general release of all known and unknown claims in a termination agreement acceptable to the Company (the "Release") within the applicable deadline set forth therein, but in no event later than 45 calendar days following Executive's termination date, and permit the Release to become effective and irrevocable in accordance with its terms (such effective date of the Release, the "Release Effective Date"). Notwithstanding the foregoing, if the period for satisfaction of the Release Requirement begins in one taxable year and ends in another taxable year, then the Release Effective Date shall occur no sooner than the first date of such second taxable year. No severance benefits pursuant to this Agreement will be paid prior to the Release Effective Date. Accordingly, if Executive breaches the preceding sentence and/or refuses to sign and deliver to the Company an executed Release or signs and delivers to the Company the Release but exercises Executive's right, if any, under applicable law to revoke the Release (or any portion thereof), then Executive will not be entitled to any severance, payment or benefit under this Agreement, other than as set forth in Section 7 above.
- Mitigation. Payments of severance to Executive, in accordance with Section 8 above, shall immediately cease, and no further payments shall be made, in the event that Executive materially breaches the PIAA (as defined in Section 12(d) below) (provided, however, that Executive's right to future payments will be restored, and any omitted payments will be made to Executive promptly, if the Board in its reasonable good faith judgment determines that such breach is curable, and Executive cures the breach to the reasonable satisfaction of the Board within 30 days of having been notified thereof). Executive agrees to cooperate with the Company and to provide timely notice as to Executive's activities following a termination without Cause so that the Company may monitor its obligation under Section 8 above.
- Definitions.
- "Cause" means the occurrence of any one or more of the following: (i) Executive's willful gross misconduct that is materially adverse to the Company; (ii) Executive's willful violation of a federal or state law, rule or regulation applicable to the business of the Company that is materially adverse to the Company; (iii) Executive's conviction for, or entry of a guilty or no contest plea to, a felony; (iv) Executive's material breach of this Agreement or the PIAA. Executive's termination of employment will not be considered to be for Cause unless it is approved by a majority vote of the members of the Board of Directors or an independent committee thereof. It is understood that
of all unvested time-based vesting equity awards then held by Executive shall accelerate such that all shares become immediately vested and exercisable, if applicable, by Executive upon such termination or Change of Control, as applicable, and shall remain exercisable, if applicable, following Executive's termination as set forth in the applicable equity award documents. If Executive's employment terminates for any other reason, including but not limited to, death or Disability, then, Executive's outstanding equity awards will be treated in accordance with the terms and conditions of the applicable award agreement(s). With respect to any performance-based vesting equity award, such award shall continue to be governed in all respects by the terms of the applicable equity award documents.
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- "Change of Control" means the sale of all or substantially all of the assets of the Company or the acquisition of the Company by another entity by means of consolidation or merger after which the then current stockholders of the Company hold less than 50% of the voting power of the surviving corporation; provided, however, that a reincorporation of the Company shall not be deemed a Change of Control.
- "Change of Control Period" means the time period commencing three months before the effective date of a Change of Control and ending on the date that is 12 months after the effective date of a Change of Control.
- Executive shall have "Good Reason" for resignation from employment with the Company if any of the following actions are taken by the Company without Executive's prior written consent: (i) a material diminution of Executive's Base Salary; (ii) a material diminution of Executive's duties, authority or responsibilities, taken as a whole, other than if asked to assume substantially similar duties and responsibilities in a larger entity after a Change of Control (provided, that a change in job position (including a change in title) or reporting line shall not be deemed a "material reduction" in and of itself unless Executive's new duties are materially reduced from the prior duties; or (iii) following a Change of Control, either (a) an involuntary relocation of Executive's primary work location outside of San Diego County, or (b) an involuntary increase in Executive's commute to the Company's headquarters on a materially more frequent basis than what was historically required prior to such increase. In order for Executive to resign for Good Reason, each of the following requirements must be met: (w) Executive must provide written notice to the Board within 90 calendar days after the first occurrence of the event giving rise to Good Reason, setting forth the basis for Executive's resignation; (x) the Company has not reasonably cured such event within 30 calendar days following receipt of such written notice (the "Cure Period"); and (z) Executive must resign from all positions Executive then holds with the Company not later than 90 calendar days after the expiration of the Cure Period.
- "Disability" means Executive's absence from Executive's responsibilities with the Company on a full-time basis for 180 calendar days in any consecutive 12-month period as a result of Executive's mental or physical illness or injury.
- "Separation from Service" has the meaning set forth in Treasury Regulation Section 1.409A-1(h), without regard to any alternative definition thereunder.
- Indemnification. Subject to applicable law, Executive will be provided indemnification to the maximum extent permitted by the Company's bylaws and Articles of Incorporation, including coverage, if applicable, under any directors and officers insurance policies, with such indemnification determined by the Board or any of its committees in good faith based on principles consistently applied (subject to such limited exceptions as the Board may approve in cases of hardship) and on terms no less favorable than provided to any other Company executive officer or director.
- Confidential Information, etc.
- Non-Disclosure of Information. It is understood that the business of the Company is of a confidential nature. During the period of Executive's employment with the Company, Executive may receive and/or may secure confidential information concerning the Company or any of the Company's affiliates which, if known to competitors thereof, would damage the Company or its said affiliates. Executive agrees that during and after Executive's employment, Executive will not, directly or indirectly, divulge, disclose or appropriate to Executive's own use, or to the use of any third party, any secret, proprietary or confidential information or knowledge obtained by him during his employment concerning such confidential matters of the Company or its affiliates, including, but not limited to, information pertaining to contact information, financial information, research, product plans, products, services, customers, markets, developments, processes, designs, drawings, business plans, business strategies or arrangements, or intellectual property or trade secrets. Upon termination of Executive's employment, Executive shall promptly deliver to the Company all materials of a secret or confidential nature relating to the business of the Company or any of its affiliates that are, directly or indirectly, in the possession or under the control of Executive. Notwithstanding the foregoing, pursuant to 18 U.S.C. Section 1833(b), Executive shall not be held
good faith decisions of the Executive relating to the conduct of the Company's business or the Company's business strategy will not constitute Cause.
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- Trade Secrets. Executive acknowledges and agrees that during Executive's employment and in the course of the discharge of Executive's duties, Executive shall have access to and become acquainted with information concerning the operation and processes of the Company, including without limitation, proprietary, technical, financial, personnel, sales and other information that is owned by the Company and regularly used in the operation of the Company's business, and that such information constitutes the Company's trade secrets. Executive specifically agrees that Executive shall not misuse, misappropriate, or disclose any such trade secrets, directly or indirectly, to any other person or use them in any way, either during Executive's employment or at any other time thereafter, except as is required in the course of Executive's employment hereunder. Executive acknowledges and agrees that the sale or unauthorized use or disclosure of any of the Company's trade secrets obtained by Executive during the course of Executive's employment, including information concerning the Company's current or any future and proposed work, services, or products, the fact that any such work, services, or products are planned, under consideration, or in production, as well as any descriptions thereof, constitute unfair competition. Executive promises and agrees not to engage in any unfair competition with the Company, either during his employment or at any other time thereafter. Executive further agrees that all files, records, documents, specifications, and similar items relating to the Company's business, whether prepared by Executive or others, are and shall remain exclusively the property of the Company and that they shall be removed from the premises of the Company only with the express prior written consent of the Company's Chief Executive Officer or his designee.
- Cooperation. Executive agrees to cooperate with and provide assistance to the Company and its legal counsel in connection with any litigation (including arbitration or administrative hearings) or investigation affecting the Company, in which, in the reasonable judgment of the Company's counsel, Executive's assistance or cooperation is needed. Executive shall, when requested by the Company, provide testimony or other assistance and shall travel at the Company's reasonable request and expense in order to fulfill this obligation.
- Proprietary Inventions and Assignment Agreement. Executive has previously executed and delivered to the Company the Company's Proprietary Inventions and Assignment Agreement (the "PIAA"). Executive reaffirms each and every statement, representation and commitment stated therein.
- Notwithstanding the foregoing or anything to the contrary in this Agreement or any other agreement between the Company and Executive, nothing in this Agreement shall limit Executive's right to (i) discuss his employment or report possible violations of law or regulation with any federal government agency or similar state or local agency, or (ii) discuss or disclose information with others regarding the terms and conditions of his employment or unlawful acts in the Company's workplace, including but not limited to sexual harassment.
- Assignment. This Agreement will be binding upon and inure to the benefit of (a) the heirs, executors, and legal representatives of Executive upon Executive's death, and (b) any successor of the Company. Any such successor of the Company will be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, "successor" means any person, firm, corporation, or other business entity, which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company. None of the rights of Executive to receive any form of compensation payable pursuant to this Agreement may be assigned or transferred except by will or the laws of descent and distribution. Any other attempted assignment, transfer, conveyance, or other disposition of Executive's right to compensation or other benefits will be null and void.
- Notices. All notices, requests, demands, and other communications called for hereunder will be in writing and will be deemed given (a) on the date of delivery if delivered personally, (b) one day after being sent overnight by a well-established commercial overnight service, or (c) four days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing:
criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (1) is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (2) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.
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- Severability. If any provision hereof becomes or is declared by a court of competent jurisdiction or an arbitrator to be illegal, unenforceable, or void, this Agreement will continue in full force and effect without said provision.
- Governing Law; Arbitration.
- This Agreement will be deemed to be made in and in all respects will be interpreted, construed and governed by and in accordance with the law of the State of California without regard to any applicable principles of conflicts of law. This Agreement shall not be interpreted or construed with any presumption against the party causing this Agreement to be drafted.
- To ensure the rapid and economical resolution of disputes that may arise in connection with Executive's employment with the Company, the Parties agree that any and all disputes, claims, or causes of action, in law or equity, including but not limited to statutory claims, arising from or relating to the enforcement, breach, performance, or interpretation of this Agreement, Executive's employment with the Company, or the termination of Executive's employment with the Company, will be resolved pursuant to the Federal Arbitration Act, 9 U.S.C. 1-16, and to the fullest extent permitted by law, by final, binding and confidential arbitration conducted in San Diego, California by JAMS, Inc. ("JAMS") or its successors before a single arbitrator, under JAMS' then applicable rules and procedures for employment disputes (which will be provided to Executive upon request); provided that the arbitrator shall: (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (ii) issue a written arbitration decision including the arbitrator's essential findings and conclusions and a statement of the award. Executive and the Company shall be entitled to all rights and remedies that either would be entitled to pursue in a court of law. Questions of whether a claim is subject to arbitration under this Agreement shall be decided by the arbitrator. Likewise, procedural questions which grow out of the dispute and bear on the final disposition are also matters for the arbitrator. The Parties acknowledge that by agreeing to this arbitration procedure, they waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. The Company shall pay all filing fees in excess of those which would be required if the dispute were decided in a court of law, and shall pay the arbitrator's fee. Nothing in this Agreement is intended to prevent either of the Parties from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.
If to the Company:
Attn: Chairman of the Compensation Committee
c/o Corporate Secretary
S&W Seed Company
106 K Street, Suite 300
Sacramento, CA 95814
If to Executive:
at the last residential address known by the Company
Notwithstanding the foregoing, the Parties shall continue performing their respective obligations under this Agreement while any dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof.
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- Integration. This Agreement, together with the PIAA and the standard forms of equity award grants that describe Executive's outstanding equity awards, represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in a writing and is signed by duly authorized representatives of the parties hereto. In entering into this Agreement, no party has relied on or made any representation, warranty, inducement, promise or understanding that is not in this Agreement.
- Waiver of Breach. The waiver of a breach of any term or provision of this Agreement, which must be in writing, will not operate as or be construed to be a waiver of any other previous or subsequent breach of this Agreement.
- Survival. The PIAA and the Company's and Executive's responsibilities under Sections 7, 8(a), 9, 10, 11, 13, 14, 15 and 16 will survive the termination of this Agreement.
- Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.
- Tax Withholding. All payments and awards contemplated or made pursuant to this Agreement will be subject to withholdings of applicable taxes in compliance with all relevant laws and regulations of all appropriate government authorities. Executive acknowledges and agrees that the Company has neither made any assurances nor any guarantees concerning the tax treatment of any payments or awards contemplated by or made pursuant to this Agreement. Executive has had the opportunity to retain a tax and financial advisor and fully understands the tax and economic consequences of all payments and awards made pursuant to this Agreement.
- Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from Executive's private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.
- Internal Revenue Code Section 409A. It is intended that all of the severance benefits and other payments payable under this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Code Section 409A provided under Treasury Regulations 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) ("Section 409A"), and this Agreement will be construed to the greatest extent possible as consistent with those provisions, and to the extent not so exempt, this Agreement (and any definitions hereunder) will be construed in a manner that complies with Section 409A. For purposes of Section 409A (including, without limitation, for purposes of Treasury Regulation Section 1.409A-2(b)(2)(iii)), Executive's right to receive any installment payments under this Agreement (whether severance payments, reimbursements or otherwise) shall be treated as a right to receive a series of separate payments and, accordingly, each installment payment hereunder shall at all times be considered a separate and distinct payment. Notwithstanding any provision to the contrary in this Agreement, if Executive is deemed by the Company at the time of Executive's Separation from Service to be a "specified Executive" for purposes of Section 409A(a)(2)(B)(i), and if any of the payments upon Separation from Service set forth herein and/or under any other agreement with the Company are deemed to be "deferred compensation," then to the extent delayed commencement of any portion of such payments is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) and the related adverse taxation under Section 409A, such payments shall not be provided to Executive prior to the earliest of (i) the expiration of the six-month and one day period measured from the date of Executive's Separation from Service, (ii) the date of Executive's death or (iii) such earlier date as permitted under Section 409A without the imposition of adverse taxation. Upon the first business day following the expiration of such applicable Section 409A(a)(2)(B)(i) period, all payments deferred pursuant to this Section 23 shall be paid in a lump sum to Executive, and any remaining payments due shall be paid as otherwise provided herein or in the applicable agreement. No interest shall be due on any amounts so deferred. If the Company determines that any severance benefits provided under this Agreement constitutes "deferred compensation" under Section 409A, for purposes of determining the schedule for payment of the severance benefits, the effective date of the Release will not be deemed to have occurred any earlier than the 60th day following the Separation from Service, regardless of when the Release actually becomes effective. To the extent required to avoid accelerated taxation and/or tax penalties under Section 409A, amounts reimbursable to Executive under this Agreement shall be paid to Executive on or before the last day of the year following the year in which the expense was incurred and the amount of
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- Section 280G; Limitations on Payment.
- If any payment or benefit Executive will or may receive from the Company or otherwise (a "280G Payment") would (i) constitute a "parachute payment" within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then any such 280G Payment provided pursuant to this Agreement (a "Payment") shall be equal to the Reduced Amount. The "Reduced Amount" shall be either (x) the largest portion of the Payment that would result in no portion of the Payment (after reduction) being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount (i.e., the amount determined by clause (x) or by clause (y)), after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive's receipt, on an after-tax basis, of the greater economic benefit notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in a Payment is required pursuant to the preceding sentence and the Reduced Amount is determined pursuant to clause (x) of the preceding sentence, the reduction shall occur in the manner (the "Reduction Method") that results in the greatest economic benefit for Executive. If more than one method of reduction will result in the same economic benefit, the items so reduced will be reduced pro rata (the "Pro Rata Reduction Method").
- Notwithstanding any provision of Section 24(a) above to the contrary, if the Reduction Method or the Pro Rata Reduction Method would result in any portion of the Payment being subject to taxes pursuant to Section 409A that would not otherwise be subject to taxes pursuant to Section 409A, then the Reduction Method and/or the Pro Rata Reduction Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A as follows: (1) as a first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for Executive as determined on an after-tax basis; (2) as a second priority, Payments that are contingent on future events (e.g., being terminated without Cause), shall be reduced (or eliminated) before Payments that are not contingent on future events; and (3) as a third priority, Payments that are "deferred compensation" within the meaning of Section 409A shall be reduced (or eliminated) before Payments that are not deferred compensation within the meaning of Section 409A.
- Unless the Parties agree on an alternative accounting firm or law firm, the accounting firm engaged by the Company for general tax compliance purposes as of the day prior to the effective date of the Change in Control transaction shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting or law firm to make the determinations required by this Section 24. The Company shall bear all expenses with respect to the determinations by such accounting or law firm required to be made hereunder. The Company shall use commercially reasonable efforts to cause the accounting or law firm engaged to make the determinations hereunder to provide its calculations, together with detailed supporting documentation, to Executive and the Company within fifteen (15) calendar days after the date on which Executive's right to a 280G Payment becomes reasonably likely to occur (if requested at that time by Executive or the Company) or such other time as requested by Executive or the Company.
- If Executive receives a Payment for which the Reduced Amount was determined pursuant to clause (x) of Section 24(a) above and the Internal Revenue Service determines thereafter that some portion of the Payment is subject to the Excise Tax, Executive agrees to promptly return to the Company a sufficient amount of the Payment (after reduction pursuant to clause (x) of Section 24(a) above) so that no portion of the remaining Payment is subject to the Excise Tax. For the avoidance of doubt, if the Reduced Amount was determined pursuant to clause (y) of Section 24(a) above, Executive shall have no obligation to return any portion of the Payment pursuant to the preceding sentence.
expenses eligible for reimbursement (and in-kind benefits provided to Executive) during any one year may not effect amounts reimbursable or provided in any subsequent year. The Company makes no representation that any or all of the payments described in this Agreement will be exempt from or comply with Section 409A and makes no undertaking to preclude Section 409A from applying to any such payment.
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- Counterparts. This Agreement may be executed in counterparts, and each counterpart will have the same force and effect as an original and will constitute an effective, binding agreement on the part of each of the undersigned.
[Signature Page Follows]
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IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by a duly authorized officer, on the day and year written below.
Company:
S&W SEED COMPANY
By: /s/ Mark Wong
Name: Mark Wong
Title: CEO
Date: 4/24/19
Executive:
/s/ Matthew K. Szot
Matthew K. Szot
SCHEDULE A
- SenesTech, Inc.
- Eastside Distilling, Inc.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark W. Wong, certify that:
1. I have reviewed this report on Form 10-Q of S&W Seed Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated: May 9, 2019 |
|
|
|
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/s/ Mark W. Wong |
Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Matthew K. Szot, certify that: 1. I have reviewed this report on Form 10-Q of S&W Seed Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions): a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting. Dated: May 9, 2019 /s/ Matthew K. Szot
Exhibit 32.1 CERTIFICATION PURSUANT TO In connection with the Quarterly Report on Form 10-Q of S&W Seed Company (the "Company") for the quarter ended March 31, 2019 as filed with the Securities and Exchange
Commission on the date hereof (the "Report") I, Mark W. Wong, Chief Executive Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. Dated: May 9, 2019 /s/ Mark W. Wong
Exhibit 32.2 CERTIFICATION PURSUANT TO In connection with the Quarterly Report on Form 10-Q of S&W Seed Company (the "Company") for the quarter ended March 31, 2019 as filed with the Securities and Exchange
Commission on the date hereof (the "Report") I, Matthew K. Szot, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. § 1350, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. Dated: May 9, 2019 /s/ Matthew K. Szot
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Executive Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)
18 U.S.C. SECTION 1350
Mark W. Wong
President and Chief Executive Officer
(Principal Executive Officer)
18 U.S.C. SECTION 1350
Matthew K. Szot
Executive Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)