S&W SEED COMPANY 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 the Annual Report, 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
We are a global multi-crop, middle-market agricultural company. We are market
leaders in the breeding, production and sale of alfalfa seed and sorghum seed.
We also have a growing commercial market presence in sunflower and maintain an
active stevia development program. In
Our seed platform develops and supplies high quality germplasm designed to
produce higher yields for farmers worldwide. We produce approximately 300 seed
products in the
Founded in 1980, we began our operations as a limited producer of non-dormant alfalfa seed varieties bred for warm climates and high-yields, including varieties that can thrive in poor, saline soils. Over the years we have built a diversified, global agricultural platform through a combination of organic growth and strategic acquisitions, including:
• Our 2012 acquisition of
expand production of non-GMO alfalfa seed into California's Imperial Valley,
thereby ensuring a non-GMO uncontaminated source of alfalfa seed due to the
prohibition on growing GMO crops in the Imperial Valley, as well as enabling
us to diversify our production areas and distribution channels;
• Our 2012 acquisition of a portfolio of dormant alfalfa germplasm, which
launched our entry into the dormant alfalfa market;
• Our 2013 acquisition of
Company Australia Pty Ltd ), the leading producer of non-dormant alfalfa seed inSouth Australia , which made us the largest non-dormant alfalfa seed company in the world, with production capabilities in both hemispheres;
• Our 2014 acquisition of alfalfa production and research facility assets and
conventional (non-GMO) alfalfa germplasm from Pioneer, which substantially
broadened and improved our dormant alfalfa germplasm portfolio and deepened
our production, research and product development capabilities;
• Our 2016 acquisition of the business and assets of
developer of proprietary hybrid sorghum and sunflower seed germplasm, which
expanded our crop focus into two areas which we believe have high global
growth potential;
• Our 2018 acquisition of the assets of
which positioned us to become a global leader in the hybrid sorghum seed
market and enhanced our distribution channels both internationally and within
a U.S. -based farmer-dealer network; and
• Our 2018 joint venture with
based in South Africa named SeedVision Proprietary Limited ("SeedVision").
SeedVision will leverage AGT's African-based production and processing
facilities to produce our hybrid sunflower, grain sorghum, and forage sorghum
to be sold by SeedVision in the African continent, Middle East countries, and
Europe .
• Our
Corteva Agriscience ("Corteva"), under which, among other things:
o We received $45.0 million in May 2019 , $5.55 million in September
2019 , $5.55 million in January 2020 , $5.55 million in February 2020 ,
and are entitled to receive an aggregate of $8.4 million in additional
payments on the dates and in the amounts as set forth below.
Payment
Date Amount
September 15, 2020 $ 3,750,927
January 15, 2021 $ 2,500,618
February 15, 2021 $ 2,100,519
Total: $ 8,352,064
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o Corteva received a fully pre-paid, exclusive license to produce and
distribute certain of our alfalfa varieties world-wide (except South
America ). The licensed varieties include certain of our existing
commercial conventional (non-GMO) alfalfa varieties and six
pre-commercial dormant alfalfa varieties. Corteva received no license
to our other commercial alfalfa varieties or pre-commercial alfalfa
pipeline products and no rights to any future products developed by
us.
o We assigned to Corteva grower production contract rights, and Corteva
assumed grower production contract obligations, related to the
licensed and certain other alfalfa varieties.
o Our prior Distribution Agreement, related to conventional (non-GMO)
alfalfa varieties, and Contract Alfalfa Production Services Agreement,
related to GMO-traited alfalfa varieties, with Corteva both
terminated. Under the Distribution Agreement, Corteva was obligated to
make minimum annual purchases from us.
• Our February 2020 acquisition of Pasture Genetics, the third largest pasture
seed company in Australia , which expanded and diversified our product
offerings and distribution channels in Australia . In fiscal year 2019,
Pasture Genetics had revenue of approximately $20 million , capturing an
estimated 15-20% of the $125 million Australian pasture seed market.
As a result of the 2018 Chromatin acquisition, the 2019 restructuring of our
relationship with Corteva and our
We also anticipate that international sales as a percentage of our total revenue will significantly increase for the remainder of fiscal 2020 and fiscal 2021 as a result of the acquisition of Pasture Genetics and our expanded Australian market footprint.
COVID-19 Overview
We are closely monitoring the impact of the COVID-19 global pandemic on our business and have implemented measures designed to protect the health and safety of our workforce, including a mandatory work-from-home policy for employees who can perform their jobs offsite. We are continuing our activities and are taking precautionary measures to protect our employees working in our facilities.
As the COVID-19 pandemic continues to affect the areas in which we operate, we believe the outbreak could have a negative impact on our sales, operating results and financial condition. The extent of the impact of the COVID-19 pandemic on our sales, operating results and financial condition will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors, all of which are uncertain and cannot be predicted.
In particular, our sales cycle is highly seasonal, and the majority of our sales
season activities for
In addition, our product revenue is predicated on our ability to timely fulfill customer orders, which depends in large part upon the consistent availability and operation of shipping and distribution networks operated by third parties. Farmers typically have a limited window during which they can plant seed, and their buying decisions can be shaped by actual or perceived disruptions in our distribution and supply channels. If our customers delay or decrease their orders due to potential disruptions in our distribution and supply channels, this would adversely affect our product revenue.
Given these uncertainties, at this time we cannot reasonably estimate the overall impact of the COVID-19 pandemic on our business, operating results and financial condition.
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Components of Our Statements of Operations Data
Revenue and Cost of Revenue
Product and Other Revenue
We derive most of our revenue from the sale of our proprietary seed varieties and hybrids. We expect that over the next several years, a substantial majority of our revenue will be generated from the sale of alfalfa, sorghum, sunflower and pasture seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into other, higher margin crops.
The mix of our product offerings will continue to change over time with the introduction of new seed varieties and hybrids resulting from our robust research and development efforts, including our potential expansion into gene-edited products 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.
Licensing Revenue
During the year ended
Cost of Revenue
Cost of revenue relates to sale of our seed products 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.
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 intend to focus our resources on high value activities. For alfalfa seed, we plan to invest in further development of differentiating forage quality traits. For sorghum, we plan to invest in higher value grain products as well as development of proprietary herbicide tolerance traits. We expect our research and development expenses will increase in 2020 and 2021 and fluctuate from period to period as a result of the timing of various research and development projects.
Our internal research and development costs are expensed as incurred, while third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or construed for research and development activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses consist primarily of employee costs, including salaries, employee benefits and share-based compensation, as well as professional service fees, insurance, marketing, travel and entertainment expense, public company expense and other overhead costs. We proactively take steps on an ongoing basis to control selling, general and administrative expense as much as is reasonably possible.
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Depreciation and Amortization
We amortize intangible assets, including those acquired from Pasture Genetics in
2020, Chromatin in 2018 and from SV Genetics in
Other Expense
Other expense consists primarily of foreign currency gains and losses, changes
in the estimated fair value of assets held for sale and interest expense in
connection with amortization of debt discount. Interest expense primarily
consists of interest costs related to outstanding borrowings on our working
capital credit facilities and our financing with
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
Results of Operations
Three Months Ended
Revenue and Cost of Revenue
Revenue for the three months ended
Core Revenue (excluding product revenue attributable to Pioneer) for the three
months ended
The increase in Core Revenue for the three months ended
Sales into international markets represented 38% and 27% of our total revenue
during the three months ended
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The following table shows revenue from external sources by destination country:
Three Months Ended March 31,
2020 2019
United States $ 17,971,919 62 % $ 13,346,894 73 %
Australia 6,657,668 23 % 767,044 4 %
France 863,511 3 % 45,091 0 %
Italy 722,027 2 % - 0 %
Mexico 520,614 2 % 666,452 4 %
South Africa 482,414 2 % 241,797 1 %
Saudi Arabia 373,560 1 % 1,494,815 8 %
Pakistan 301,515 1 % - 0 %
Other 1,198,656 4 % 1,614,073 10 %
Total $ 29,091,884 100 % $ 18,176,166 100 %
Cost of revenue of
Total gross profit margin for the three months ended
Selling, General and Administrative Expenses
Selling, General and Administrative ("SG&A") expense for the three months ended
Research and Development Expenses
Research and development expenses for the three months ended
Depreciation and Amortization
Depreciation and amortization expense for the three months ended
Foreign Currency Gain
We recorded a foreign currency loss of
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the three months ended
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Interest Expense
Interest expense for the three months ended
Provision for Income Taxes
Income tax benefit totaled
Nine Months Ended
Revenue and Cost of Revenue
Revenue for the nine months ended
As part of the termination, Corteva agreed to purchase certain quantities of
seed held by us as of the date of the termination, which Pioneer was not
previously obligated to purchase. Those quantities of seed will be delivered to
Corteva periodically through
The
The increase in Core Revenue for the nine months ended
Sales into international markets represented 41% and 25% of our total revenue
during the nine months ended
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The following table shows revenue from external sources by destination country:
Nine Months Ended March 31,
2020 2019
United States $ 31,606,370 59 % $ 47,133,287 75 %
Australia 7,720,707 14 % 2,137,194 3 %
Saudi Arabia 2,728,791 5 % 3,065,089 5 %
Mexico 2,339,030 4 % 2,045,705 3 %
Pakistan 1,544,982 3 % 730,583 1 %
Italy 1,400,641 3 % 82,880 0 %
South Africa 1,101,243 2 % 490,492 1 %
France 898,885 2 % 753,937 1 %
Other 4,376,793 8 % 6,438,132 11 %
Total $ 53,717,442 100 % $ 62,877,299 100 %
Cost of revenue of
Total gross profit margin for the nine months ended
Selling, General and Administrative Expenses
SG&A expense for the nine months ended
Research and Development Expenses
Research and development expenses for the nine months ended
Depreciation and Amortization
Depreciation and amortization expense for the nine months ended
Foreign Currency Gain
We recorded a foreign currency loss of
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Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the nine months ended
Interest Expense
Interest expense for the nine months ended
Provision for Income Taxes
Income tax expense totaled
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 2019, we paid our North American growers
approximately 50% of amounts due in
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.
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.
On
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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
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; • market developments; and • developments related to the COVID-19 pandemic.
As a result of the COVID-19 pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. It is possible that further deterioration in credit and financial markets and confidence in economic conditions will occur. If equity and credit markets deteriorate, it may affect our ability to raise equity capital, borrow on our existing facilities or make any additional necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. In addition, while we are currently in compliance with our loan agreements, the COVID-19 pandemic may compromise our ability to comply with the terms of our loan agreements and could result in an event of default. If an event of default were to occur, our lenders could accelerate our repayment obligations or enforce their other rights under our agreements with them. Any such default may also require us to seek additional or alternative financing, which may not be available on commercially reasonable terms or at all.
In recent periods, we have consummated the following equity and debt financings:
Debt Financings
Loan and Security Agreement with CIBC
On
• Advances under the CIBC Credit Facility are to be used: (i) to refinance
indebtedness to KeyBank ; (ii) to finance our ongoing working capital
requirements; and (iii) for general corporate purposes. We may also use a
portion of the CIBC Credit Facility to finance permitted acquisitions and
related costs.
• All amounts due and owing, including, but not limited to, accrued and unpaid
principal and interest due under the CIBC Credit Facility, will be payable
in full on December 23, 2022 .
• The Credit Facility generally establishes a borrowing base of up to 85% of
eligible domestic accounts receivable (90% of eligible foreign accounts
receivable) plus up to the lesser of (i) 65% of eligible inventory, (ii) 85%
of the appraised net orderly liquidation value of eligible inventory, and
(iii) an eligible inventory sublimit as more fully set forth in the Loan
Agreement, in each case, subject to lender reserves.
• Loans may be based on (i) a Base Rate plus 0.5% per annum or (ii) LIBOR Rate
plus 2.5% per annum (both as defined in the Loan Agreement), generally at
our option. In the event of a default, at the option of CIBC, the interest
rate on all obligations owing will increase by 2% per annum over the rate
otherwise applicable.
• The CIBC Credit Facility is secured by a first priority perfected security
interest in substantially all of the Borrowers' assets (subject to certain
exceptions), including intellectual property.
• The Loan Agreement contains customary representations and warranties,
affirmative and negative covenants and customary events of default that
permit CIBC to accelerate our outstanding obligations under the Credit
Facility, all as set forth in the Loan Agreement and related documents. The
CIBC Credit Facility also contains customary and usual financial covenants
imposed by CIBC.
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Termination of KeyBank Credit Facility
In connection with the consummation of the Loan Agreement with CIBC described
above, we terminated the Credit and Security Agreement, dated
Conterra Transaction
In
We may prepay the note, in whole or in part, at any time.
Equipment Sale-Leaseback
In
• We sold the equipment to American AgCredit for $2.1 million in proceeds.
The proceeds were used to pay off in full the Conterra promissory 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 .
Australian Facilities
S&W Australia and Pasture Genetics both have debt facilities with NAB, all of
which are guaranteed by us up to a maximum of AUD
S&W Australia. S&W Australia has a series of debt facilities with NAB, the key
terms of which were amended in
• S&W Australia finances the purchase of most of its seed inventory from
growers pursuant to a seasonal credit facility comprised of two facility
lines: (i) an overdraft line having a credit limit of AUD $2,000,000 (USD
$1,229,200 at March 31, 2020 ) and a borrowing base line having a credit
limit of AUD $16,000,000 (USD $9,833,600 at March 31, 2020 ). The seasonal
credit facility expires on March 31, 2022 . As of March 31, 2020 , the
Borrowing Base Line accrued interest on Australian dollar drawings at
approximately 4.3% per annum calculated daily. 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, 2020 , the Overdraft Facility
accrued interest at approximately 5.97% per annum calculated daily. As of
March 31, 2020 , AUD $12,700,000 (USD $7,805,420 ) was outstanding under S&W
Australia's seasonal credit facility with NAB. The seasonal credit facility
is secured by a fixed and floating lien over all the present and future
rights, property and undertakings of S&W Australia. S&W Australia was in
compliance with all debt covenants under the seasonal credit facility at
March 31, 2020 .
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• S&W Australia has a flexible rate loan (the "Term Loan") in the amount of
AUD $5.0 million (USD $3,073,000 at March 31, 2020 ). Required annual
principal payments of AUD $500,000 on the Term Loan will commence on
November 30, 2020 , with the remainder of any unpaid balance becoming due on
March 31, 2025 . Monthly interest amounts outstanding under the Term Loan
will be payable in arrears at a floating rate quoted by NAB for the
applicable pricing period, plus 2.6%. The Term Loan is secured by a lien on
all the present and future rights, property and undertakings of S&W
Australia .
• S&W Australia finances certain equipment purchases under a master asset
finance facility with NAB. The master asset finance facility has various
maturity dates through 2023 and have interest rates ranging from 3.64% to
5.31%. The credit limit under the facility is AUD $1,200,000 (USD $737,520 )
at March 31, 2020 . As of March 31, 2020 , AUD $950,634 (USD $584,259 ) was
outstanding under S&W Australia's master asset finance facility.
• S&W Australia has a Keith Machinery and Equipment Facility for the machinery
and equipment used in the operations of the Keith building. 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%. As of March 31, 2020 , AUD $187,901 (USD $115,485 ) was
outstanding under the Keith Machinery and Equipment Facility.
S&W Australia was in compliance with all debt covenants under its debt
facilities with NAB at
Pasture Genetics. Pasture Genetics has a working capital facility with NAB with
a credit limit of AUD
Pasture Genetics was in compliance with all debt covenants under its debt
facility with NAB at
Paycheck Protection Program
On
The Loan is scheduled to mature on
Equity Issuances
In
In
In
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In
In
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