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 II, Item 8, "Financial Statements" of this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in Part I, Item 1A, "Risk Factors."
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, 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 25 new products during the 2021-2022 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 ;
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• Our May 2019 restructuring of our relationship with Pioneer, a subsidiary
of Corteva, which we jointly refer to as 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 ,
$3.75 million in September 2020 and are entitled to receive an
aggregate of $4.6 million in additional payments on the dates and in
the amounts as set forth below.
Payment
Date Amount
January 15, 2021 $ 2,500,618
February 15, 2021 $ 2,100,519
Total $ 4,601,137
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 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
As a result of the 2018 Chromatin acquisition, the 2019 restructuring of our
relationship with Corteva and our
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COVID-19 Update
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 voluntary 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.
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.
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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
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
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the estimated useful life of the asset, consisting of periods of 5-35 years for buildings, 2-20 years for machinery and equipment and 2-5 years for vehicles.
Other (Income) Expense
Other expense consists primarily of foreign currency gains and losses, change in
contingent consideration obligation, government grant income, 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
Fiscal Year Ended
Revenue and Cost of Revenue
Revenue for the year 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
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million, representing an increase of 58%. Included in Core Revenue for the year
ended
The increase in Core Revenue for the year ended
Sales into international markets represented 54% and 20% of our total revenue
during the year ended
The following table shows revenue from external sources by destination country:
Years Ended June 30,
2020 2019
United States $ 36,724,591 46 % $ 88,176,809 80 %
Australia 15,079,996 19 % 2,787,128 3 %
Saudi Arabia 9,189,291 12 % 4,745,993 4 %
Mexico 2,454,504 3 % 2,264,827 2 %
South Africa 2,182,553 3 % 797,722 1 %
Pakistan 2,124,038 3 % 1,009,120 1 %
Italy 1,400,641 2 % 326,364 0 %
Sudan 1,308,874 2 % 717,317 1 %
Libya 1,142,920 1 % 2,629,750 2 %
France 1,040,744 1 % 845,172 1 %
Other 6,934,046 8 % 5,422,309 5 %
Total $ 79,582,198 100 % $ 109,722,511 100 %
Cost of revenue of
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Total gross profit margin for the fiscal year ended
Excluding the
Selling, General and Administrative Expenses
Selling, General and Administrative, or SG&A expense for the year ended
Research and Development Expenses
Research and development expenses for the year ended
Depreciation and Amortization
Depreciation and amortization expense for the year ended
Goodwill Impairment Charges
During the year ended
The termination of the production and distribution agreements with Pioneer was, in our view, a potential indicator of impairment due to the significant reduction in future forecasted revenues. As a result, we initiated an impairment test and concluded that the entire goodwill balance was impaired.
Intangible Asset Impairment Charges
During the year ended
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termination of the distribution agreement with Pioneer. The intangible asset write-off related to the carrying value of the distribution agreement, which previously was being amortized over the contractual life of the agreement.
Change in Estimated Value of Assets Held for Sale
The Company recorded
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 year ended
Interest Expense
Interest expense for the year ended
Provision for Income Taxes
Our income tax expense totaled
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Liquidity and Capital Resources
Our working capital and working capital requirements fluctuate from quarter to
quarter depending on the phase of the growing and sales cycle that falls during
a particular quarter. Our need for cash has historically been highest in the
second and third fiscal quarters (October through March) because we historically
have paid our North American contracted growers progressively, starting in the
second fiscal quarter. In fiscal year 2020, we paid our North American growers
approximately 50% of amounts due in the fall of 2019 and the balance was paid in
the spring of 2020. This payment cycle to our growers was similar in fiscal year
2019, and we expect it to be similar for fiscal year 2021. S&W Australia and
Pasture Genetics, our Australian-based subsidiaries, have production cycles that
are counter-cyclical to
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
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:
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• 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 , discussed below; (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 1.0% per annum or (ii) LIBOR
Rate plus 3.0% 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 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
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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.
As of
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. If we were to seek additional or alternative financing, any such financing may not be available to us on commercially reasonable terms or at all. 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.
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.
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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 providing
for up to 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 line having a credit limit of AUD $2,000,000 (USD
$1,369,800 at June 30, 2020 ) and (ii) a borrowing base line having a
credit limit of AUD $16,000,000 (USD $10,958,400 at June 30, 2020 ). The
seasonal credit facility expires on March 31, 2022 . As of June 30, 2020 ,
the Borrowing Base Line accrued interest on Australian dollar drawings at
approximately 3.7% 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 June 30, 2020 , the Overdraft Facility
accrued interest at approximately 5.47% per annum calculated daily. As of
June 30, 2020 , AUD $14,000,000 (USD $9,588,600 ) 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 June 30, 2020 .
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• S&W Australia has a flexible rate loan, or the Term Loan, in the amount of
AUD $5.0 million (USD $3,424,500 at June 30, 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 3.47% to
5.31%. The credit limit under the facility is AUD $2,000,000 (USD
$1,369,800 ) at June 30, 2020 . As of June 30, 2020 , AUD $839,869 (USD
$575,226 ) 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 June 30, 2020 , AUD $137,503 (USD $94,176 )
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 and a facility with TOYOTA Finance to finance purchase of vehicles.
• Pasture Genetics has a working capital facility with NAB with a credit
limit of AUD $10.0 million (USD $6,849,000 at June 30, 2020 ) and a
borrowing base determined from qualified inventory and accounts
receivable. The facility will expire on March 31, 2022 . Interest will be
payable on amounts outstanding under the facility at a floating trade
refinance rate quoted by NAB plus 1.5% at the time of each drawdown. The
facility is secured by a fixed and floating lien over all the present and
future rights, property and undertakings of Pasture Genetics. As of June
30, 2020 , AUD $10.0 million (USD $6,849,000 ) was outstanding under Pasture
Genetics' working capital facility with NAB.
• Pasture Genetics finances certain vehicle purchases with TOYOTA Finance.
This facility has various maturity dates through 2023 and have interest
rates ranging from 4.04% to 5.83%. As of June 30, 2020 , AUD $750,839 (USD
$514,249 ) was outstanding under TOYOTA Finance facility.
Pasture Genetics was in compliance with all debt covenants at
Paycheck Protection Program
On
When we applied for the loan, we believed we would qualify to have the loan forgiven under the terms of PPP, and therefore considered the loan to be substantively a conditional government grant. We have performed initial calculations for PPP loan forgiveness, and expect that the PPP loan will be forgiven in full because 1) we have, prior
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to
We plan to submit the PPP loan forgiveness application in the near term. Although we believe it is probable that the PPP loan will be forgiven, our actions and information must be evaluated by the lender and SBA before forgiveness is formally granted.
Equity Issuances
In
In
Summary of Cash Flows
The following table shows a summary of our cash flows for the years endedJune 30, 2020 and 2019: Years Ended June 30, 2020 2019 Cash flows from operating activities$ (5,763,627 ) $ 21,295,831 Cash flows from investing activities (10,286,370 ) (26,566,353 ) Cash flows from financing activities 17,049,699 4,630,925 Effect of exchange rate changes on cash (308,410 ) (250,073 ) Net increase (decrease) in cash and cash equivalents 691,292 (889,092 ) Cash and cash equivalents, beginning of period 3,431,802 4,320,894 Cash and cash equivalents, end of period$ 4,123,094 $ 3,431,802 Operating Activities
For the year ended
For the year ended
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Investing Activities
Investing activities during the year ended
Investing activities during the year ended
Financing Activities
Financing activities during the year ended
Financing activities during the year ended
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 year ended
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;
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• 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.
Goodwill
The goodwill balance at
During the fourth quarter of the year ended
We compared the carrying value of our invested capital to estimated fair values
at
Upon completing the impairment test, we determined that the fair value of
invested capital was less than the carrying value by approximately 10%, thus
indicating an impairment. We recognized a goodwill impairment charge of
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Intangible Assets
All amortizable intangible assets are assessed for impairment whenever events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the intangible. If the review indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying amount of the intangible is compared to its fair value, with an impairment loss recognized if the fair value is below carrying value. Fair values are typically estimated using discounted cash flow techniques. 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.
In conjunction with the termination of the Pioneer production and distribution
agreements, we recorded a
Stock-Based Compensation
We account for stock-based compensation in accordance with FASB Accounting Standards Codification Topic 718 Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee's requisite service period (generally the vesting period of the equity grant).
We account for equity instruments, including stock options issued to non-employees, in accordance with authoritative guidance for equity-based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest.
We utilize the Black-Scholes-Merton option pricing model to estimate the fair
value of options granted under share-based compensation plans. The
Black-Scholes-Merton model requires us to estimate a variety of factors
including, but not limited to, the expected term of the award, stock price
volatility, dividend rate, risk-free interest rate. The input factors to use in
the valuation model are based on subjective future expectations combined with
management judgment. The expected term used represents the weighted-average
period that the stock options are expected to be outstanding. We have used the
historical volatility for our stock for the expected volatility assumption
required in the model, as it is more representative of future stock price
trends. We use a risk-free interest rate that is based on the implied yield
available on
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
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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 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.
During the fourth quarter of the year ended
During the year ended
Allowance for Doubtful Accounts
We regularly assess the collectability of receivables and provide an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer's trade accounts receivable. Our estimates are judgmental in nature and are made at a point in time. Management believes the allowance for doubtful accounts is appropriate to cover anticipated losses in our accounts receivable under current conditions; however, unexpected, significant deterioration in any of the factors mentioned above or in general economic conditions could materially change these expectations.
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