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 our
Annual Report on Form 10-K for the fiscal year ended
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 commercial market presence in sunflower, wheat and pasture seed and maintain an active stevia development program.
Our seed platform develops and supplies high quality germplasm designed to produce higher yields for farmers worldwide. We sell over 500 seed products in more than 40 countries. We maintain an active product pipeline and expect to introduce more than 20 new products during the 2022-2023 fiscal years.
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 and collaborations, including:
• Our 2012 acquisition of Imperial Valley Seeds, Inc. , which enabled us to
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 Seed Genetics International Pty Ltd (now S&W Seed
Company Australia Pty Ltd , or S&W Australia), the leading producer of
non-dormant alfalfa seed in South 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 Hi-Bred
International, Inc. , or Pioneer (now a subsidiary of Corteva Agriscience,
Inc. , or Corteva), 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 SV Genetics Pty Ltd , a
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 Chromatin, Inc. and related
companies, 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;
• Our 2018 joint venture with AGT Foods Africa Proprietary Limited and 2019
joint venture with Zaad Holdings Limited , both based in South Africa ,
each of which were formed to produce our hybrid sunflower, grain sorghum
and forage sorghum seed in Africa for sale in Africa , the Middle East and
Europe ;
• Our 2019 license of commercialized and developmental wheat germplasm from
Corteva, through which we entered the largest grain crop market in
Australia ;
• Our 2020 acquisition of Pasture Genetics Ltd. , or Pasture Genetics, the
third largest pasture seed company in Australia , which further
diversified our product offerings in Australia and strengthened our
Australian sales team and distribution relationships;
• Our 2020 collaboration with ADAMA Ltd., or ADAMA, a subsidiary of China
National Chemical Engineering Co Ltd., or ChemChina, to bring to the U.S.
sorghum market the DoubleTeam™ grassy weed management system, consisting
of ADAMA's proprietary herbicides and our non-GMO, herbicide tolerant
sorghum hybrids; and
• Our 2020 licensing agreement with The Agricultural Alumni Seed
Improvement Association, Inc. , an affiliate of Purdue University in West
Lafayette, IN , to develop and commercialize worldwide a non-GMO,
dhurrin-free trait in sorghum species, which essentially eliminates
potential livestock death from hydrogen cyanide poisoning when grazing
sorghum.
In 2019, we restructured our relationship with Corteva, under which, among other things:
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• We received $45.0 million in fiscal 2019, $16.7 million in fiscal 2020,
and approximately $8.3 million in fiscal 2021.
• 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.
• We assigned to Corteva grower production contract rights, and Corteva
assumed grower production contract obligations, related to the licensed
and certain other alfalfa varieties.
• 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.
As a result of the 2018 Chromatin acquisition, the 2019 restructuring of our
relationship with Corteva, and our
Strategic Review
We recently undertook a strategic review of our operations and future growth
opportunities to determine areas we believe are key centers of value, including
our
With respect to specialty crops, we intend to initially focus on stevia and
camelina. We believe that an opportunity exists to bring to market new stevia
varieties that can both meet consumer taste requirements and have yield quality
that would enable farmers to profitably grow stevia in
We have also begun working to align our cost structure to support these centers
of value while assessing other potential value-generating transactions and means
to strengthen our balance sheet. On
In addition, we intend to reduce annual operating expenses by approximately
Global Economic Conditions
The COVID-19 pandemic, military conflicts and other global events have had and
may continue to have an adverse impact on our business, operations and the
markets and communities in which we, our partners and customers operate. The
COVID-19 pandemic continues to rapidly evolve and cause disruptions in the
various markets in which we operate. In addition, although we have not been
materially impacted to date, the military conflict in
The COVID-19 pandemic has negatively impacted our operations and financial
results. Beginning in 2021 and continuing into 2022, ongoing strong demand for
consumer goods and the effects of COVID-19 mitigation strategies have led to
broad-based supply chain disruptions across the
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As the COVID-19 pandemic continues to affect the areas in which we operate, we believe the outbreak has and will continue to 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.
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, or concerns about our ability to timely fulfill their orders. If our customers delay or decrease their orders due to potential disruptions in our distribution and supply channels, this will adversely affect our product revenue.
During the year ended
The ultimate impact that COVID-19 will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic, including broad-based supply chain disruptions, rising levels of inflation, the spread of COVID-19 variance or resurgences, as well as the economic recovery and actions taken in response to local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of those potential and evolving impacts to our business and consolidated financial statements.
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, and pasture seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into 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 of novel, non-GMO product lines, potential entry into gene-edited product markets, potential entry into specialty crop markets, including stevia and biofuels, and additional strategic transactions.
Our revenue will fluctuate depending on the timing of orders from our customers
and distributors and the extent to which markets are impacted by sources of
instability and volatility in global markets and industries, including, among
other things, the COVID-19 pandemic, the conflict between
Our specialty crops, including our stevia breeding program and biofuels program, have yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various opportunities to monetize the results of our research and development efforts. Such potential opportunities include possible collaborations, licensing agreements and royalty-based agreements.
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
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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, proprietary herbicide tolerance traits and improved safety and palatability in forage products. We expect our research and development expenses will fluctuate from period to period as a result of the timing of various research and development projects.
Our internal research and development costs are expensed as incurred, while third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or construed for research and development activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses consist primarily of employee costs, including salaries, employee benefits and share-based compensation, as well as professional service fees, insurance, marketing, travel and entertainment expense, public company expense and other overhead costs. We proactively take steps on an ongoing basis to control selling, general and administrative expense as much as is reasonably possible.
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, change in
contingent consideration obligation 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
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Revenue for the three months ended
Core Revenue (which we define as total revenue, excluding product revenue
attributable to Pioneer) for the three months ended
Sales into international markets represented 60% and 52% of our total revenue
during the three months ended
The following table shows revenue from external sources by destination country:
Three Months Ended March 31,
2022 2021
United States $ 9,270,851 40 % $ 15,672,861 48 %
Australia 8,846,660 38 % 11,426,369 35 %
Saudi Arabia 1,168,502 5 % 324,000 1 %
Pakistan 602,060 3 % 444,353 1 %
China 929,335 4 % 1,366,381 4 %
South Africa 265,292 1 % 946,631 3 %
Argentina - 0 % - 0 %
Libya - 0 % 306,000 1 %
Egypt 557,510 2 % 79,890 0 %
Sudan - 0 % - 0 %
Other 1,546,667 7 % 1,810,212 7 %
Total $ 23,186,877 100 % $ 32,376,697 100 %
Cost of revenue of
Gross profit margin for the three months ended
Selling, General and Administrative Expenses
Selling, General and Administrative, or SG&A, expense for the three months ended
Research and Development Expenses
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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
Change in Contingent Consideration Obligation
The contingent consideration obligation is considered a level 3 fair value
financial instrument and will be measured at each reporting period. The
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the three months ended
Interest Expense
Interest expense for the three months ended
Provision for Income Taxes
Income tax expense totaled
Nine months ended
Revenue and Cost of Revenue
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Revenue for the nine months ended
Core Revenue (which we define as total revenue, excluding product revenue
attributable to Pioneer) for the nine months ended
Sales into international markets represented 70% and 55% of our total revenue
during the nine months ended
The following table shows revenue from external sources by destination country:
Nine Months Ended March 31,
2022 2021
United States $ 15,340,257 30 % $ 27,773,152 45 %
Australia 14,526,512 28 % 16,268,261 27 %
Saudi Arabia 6,316,258 12 % 2,383,192 4 %
Pakistan 2,833,622 6 % 2,041,548 3 %
China 1,668,044 3 % 1,847,007 3 %
South Africa 1,644,073 3 % 1,923,525 3 %
Argentina 1,409,147 3 % 1,183,667 2 %
Libya 1,088,000 2 % 718,960 1 %
Egypt 959,810 2 % 472,970 1 %
Sudan 819,618 2 % 484,645 1 %
Other 4,744,626 9 % 6,186,487 10 %
Total $ 51,349,967 100 % $ 61,283,414 100 %
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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
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Foreign Currency Loss
We recorded a foreign currency loss of
Change in Contingent Consideration Obligation
The contingent consideration obligation is considered a level 3 fair value
financial instrument and will be measured at each reporting period. The
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 2022, we paid our North American growers
approximately 50% of amounts due in the fall of 2021 and the balance was paid in
the spring of 2022. This payment cycle to our growers was similar in fiscal year
2021, and we expect it to be similar for fiscal year 2023. S&W Australia and
Pasture Genetics, our
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.
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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
Capital Resources and Requirements
We are not profitable and have had negative cash flow from operations for the last several years. To help fund our operations, we have relied on equity and debt financings, and we will need to obtain additional funding to finance our operations in the future. Accordingly, we are actively evaluating financing and strategic alternatives, including debt and equity financings and potential sales of assets or certain lines of business.
Our loan and security agreement with CIBC and our secured promissory note with
Conterra, which mature on
Our future liquidity and capital requirements will be influenced by numerous factors, including:
• the maturity and repayment of our debt;
• the extent and sustainability of future operating income;
• the level and timing of future sales and expenditures;
• timing for when we are able to recognize revenue;
• working capital required to support our growth;
• investment capital for plant and equipment;
• investment in our sales and marketing programs;
• investment capital for potential acquisitions;
• our ability to renew and/or refinance our debt on acceptable terms;
• our ability to raise equity financing, in order to secure refinancing as
well as support our operations, among other things;
• competition;
• market developments; and
• developments related to the COVID-19 pandemic.
We cannot assure you that we will be successful in refinancing our existing debt, raising additional capital, securing future waivers and/or amendments from CIBC, Conterra or our other lenders, renewing or refinancing our existing debt, or securing new financing. If we are unsuccessful in doing so, we may need to reduce the scope of our operations, repay amounts owing to our lenders, finance our cash needs through a combination of equity and debt financings, enter into collaborations, strategic alliances and licensing arrangements, sell certain assets or divest certain operations.
If we are required or desire to raise additional capital in the future, whether as a condition to loan refinancing or separately, such additional financing may not be available on favorable terms, or available at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest would be diluted and the terms of these securities could 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, and may be on terms less favorable than our existing loans. If we fail to obtain additional capital as and when required, such failure could have a material impact on our business, results of operations and financial condition.
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As a result of the COVID-19 pandemic and actions taken to slow its spread, the
ongoing military conflict between
Below is a summary of our material sources of capital in recent periods:
Debt Financings
Loan and Security Agreement with CIBC
On
The key terms of the amended Loan Agreement include the following:
• Advances under the CIBC Credit Facility are to be used: (i) to finance our
ongoing working capital requirements; and (ii) 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 CIBC 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 are based on a Base Rate plus 2.0% per annum. 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 our 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.
Pursuant to the
We cannot guarantee that we will be able to comply with our covenants in the Loan Agreement in the future, or secure additional waivers if or when required. If we are unable to comply with or obtain a waiver of any noncompliance under the Loan Agreement, CIBC could declare an event of default or require us to further renegotiate the Loan Agreement on terms that may be significantly less favorable to us, or we may be required to seek additional or alternative financing.
We are actively engaging with potential lenders to refinance the Loan Agreement
prior to its maturity on
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whether such terms may be more restrictive than the provisions governing the Loan Agreement. In addition, we cannot assure you that we will not experience an event of default or be required to further renegotiate with, or seek additional waivers from, CIBC, including on terms that may be significantly less favorable to us, before we are able to refinance the Loan Agreement, if ever. Any declaration by CIBC of an event of default could significantly harm our liquidity, financial condition, operating results, business, and prospects and cause the price of our securities to decline.
Debt Facilities with National Australia Bank
At
On
• the borrowing base line credit limit under the seasonal credit facility
increased from AUD $26,000,000 (USD $18,722,600 at September 30, 2021 ), to
AUD $32,000,000 (USD $23,958,400 at March 31, 2022 );
• the overdraft credit limit under the seasonal credit facility decreased from
AUD $3,000,000 (USD $2,160,300 at September 30, 2021 ) to AUD $2,000,000 (USD
$1,497,400 at March 31, 2022 ). It then further decreased to AUD $1,000,000
(USD $748,700 ) on April 1, 2022 and will decrease to zero on June 30, 2022 ;
• the credit limit under the master asset finance facility increased from AUD
$2,000,000 (USD $1,440,200 at September 30, 2021 ) to AUD $3,000,000 (USD
$2,246,100 at March 31, 2022 ); and
• the month in which annual principal repayments are required on the flexible
rate loan was adjusted from November to May of each fiscal year.
After the amendment, the consolidated debt facilities with NAB provide for up to
an aggregate of AUD
• 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 Facility having a credit limit of AUD $2,000,000
(USD $1,497,400 at March 31, 2022 ) and (ii) a Borrowing Base Line having a
credit limit of AUD $32,000,000 (USD $23,958,400 at March 31, 2022 ). The
seasonal credit facility expires on March 31, 2022 . As of March 31, 2022 ,
the Borrowing Base Line accrued interest on Australian dollar drawings at
approximately 3.61% 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, 2022 , the Overdraft Facility
accrued interest at approximately 5.47% per annum calculated daily. As of
March 31, 2022 , AUD $32,816,100 (USD $24,569,414 ) 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 has a flexible rate loan, or the Term Loan, in the amount of
AUD $4,500,000 (USD $3,369,150 at March 31, 2022 ). Required annual principal
payments of AUD $500,000 (USD $374,350 at March 31, 2022 ) on the Term Loan
commenced on November 30, 2020 , with the remainder of any unpaid balance
becoming due on March 31, 2025 . As part of the amendment, the November 2021
repayment was deferred to May 2022 , with the remaining repayments due in May
of each year. 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 2029 and have interest rates ranging from 2.86% to
4.29%. The credit limit under the facility is AUD $3,000,000 (USD
$2,246,100 at March 31, 2022 ). As of March 31, 2022 , AUD $1,826,855 (USD
$1,367,766 ) was outstanding under S&W Australia's master asset finance
facility.
S&W Australia was in compliance with all debt covenants under its debt
facilities with NAB at
Secured Note with Conterra
In
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7.75% per annum and is secured by a first priority security interest in the
property, plant and fixtures located at our
Equity Issuances
On
For the nine months ended
shares of our common stock pursuant to the ATM Agreement. For the year ended
On
The Purchasers included
On
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