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 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. , which we jointly refer to as 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.
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In 2019, we restructured our relationship with Corteva, under which, among other things:
• We received
million in January 2020 , $5.55 million in February 2020 , $3.75 million in
September 2020 , $2.5 million in January 2021 and are entitled to receive an
aggregate of $2.1 million in February 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
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
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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, and our strategic acquisitions.
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 can 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.
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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Other Expense
Other expense consists primarily of foreign currency gains and losses, change in
contingent consideration obligation, 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
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Revenue and Cost of Revenue
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 55% and 51% of our total revenue
during the three months ended
The following table shows revenue from external sources by destination country:
Three Months Ended December 31,
2020 2019
United States $ 6,738,493 45 % $ 6,098,755 49 %
Australia 2,059,429 14 % 527,063 4 %
Saudi Arabia 860,282 6 % 2,095,140 17 %
Mexico 652,766 4 % 787,624 6 %
Pakistan 1,292,105 9 % 464,537 4 %
Argentina 1,183,752 8 % 137,405 1 %
South Africa 312,819 2 % 343,997 3 %
Peru 136,635 1 % - 0 %
Sudan - 0 % - 0 %
China 480,626 3 % 213,168 2 %
Other 1,334,424 8 % 1,685,411 14 %
Total $ 15,051,331 100 % $ 12,353,100 100 %
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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
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 gain 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
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Interest Expense
Interest expense for the three months ended
Provision for Income Taxes
Income tax expense totaled
Six Months Ended
Revenue and Cost of Revenue
Revenue for the six months ended
Core Revenue (which we define as total revenue, excluding product revenue
attributable to Pioneer) for the six months ended
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Sales into international markets represented 58% and 48% of our total revenue
during the six months ended
The following table shows revenue from external sources by destination country:
Six Months Ended December 31,
2020 2019
United States $ 12,100,270 42 % $ 12,803,301 52 %
Australia 4,841,892 17 % 1,293,514 5 %
Saudi Arabia 2,059,192 7 % 2,285,140 9 %
Mexico 1,788,856 6 % 1,818,416 7 %
Pakistan 1,597,195 6 % 1,243,467 5 %
Argentina 1,183,667 4 % 137,405 1 %
South Africa 976,894 3 % 458,444 2 %
Peru 635,669 2 % 65,534 0 %
Sudan 484,645 2 % 823,128 3 %
China 480,626 2 % 379,270 2 %
Other 2,757,811 9 % 3,317,938 14 %
Total $ 28,906,717 100 % $ 24,625,557 100 %
Cost of revenue of
Total gross profit margin for the six months ended
Selling, General and Administrative Expenses
SG&A expense for the six months ended
Research and Development Expenses
Research and development expenses for the six months ended
Depreciation and Amortization
Depreciation and amortization expense for the six months ended
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Foreign Currency Gain
We recorded a foreign currency gain 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 six months ended
Interest Expense
Interest expense for the six 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 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.
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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.
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:
• 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.
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• 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), with a 1.0%
LIBOR floor, 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 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. 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.
Australia Facilities
At
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 Facility having a credit limit of AUD $2,000,000
(USD $1,544,600 at December 31, 2020 ) and (ii) a Borrowing Base Line having
a credit limit of AUD $26,000,000 (USD $20,079,800 at December 31, 2020 ).
The seasonal credit facility expires on March 31, 2022 . As of December 31,
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 December 31, 2020 , the Overdraft Facility
accrued interest at approximately 5.47% per annum calculated daily. As of
December 31, 2020 , AUD $26,654,838 (USD $20,585,532 ) 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 $4.5 million (USD $3,475,350 at December 31, 2020 ). Required annual
principal payments of AUD $500,000 on the Term Loan commenced 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.
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• 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
$1,544,600 ) at December 31, 2020 . As of December 31, 2020 , AUD $487,626 (USD
$376,594 ) 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 December 31, 2020 , AUD $34,804 (USD $26,880 ) 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
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 to
In
Equity Issuances
On
From
As of
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