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 seed 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.
30
--------------------------------------------------------------------------------
In 2019, we restructured our relationship with Corteva, under which, among other things:
• We received
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
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.
Our sales efforts historically involved significant in-person interaction with
potential customers and distributors. Throughout the COVID-19 pandemic, many
national, state and local governments in our target markets implemented various
stay-at-home, shelter-in-place and other quarantine measures in response to the
COVID-19 pandemic. As a result, we have shifted our sales activities to video
conferencing and similar customer interaction models and we continue to evaluate
our sales approach, but we have found these alternative approaches to generally
be less effective than in-person sales efforts. 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. During the three months ended
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.
31
--------------------------------------------------------------------------------
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, 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
32
--------------------------------------------------------------------------------
plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset, consisting of periods of 5-35 years for buildings, 2-20 years for machinery and equipment and 2-5 years for vehicles.
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
33
--------------------------------------------------------------------------------
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 52% and 38% 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,
2021 2020
United States $ 15,672,861 48 % $ 17,971,919 62 %
Australia 11,426,369 35 % 6,657,668 23 %
Saudi Arabia 324,000 1 % 373,560 1 %
Pakistan 444,353 1 % 301,515 1 %
South Africa 946,631 3 % 482,414 2 %
Mexico 70,000 0 % 520,614 2 %
China 1,366,381 4 % 281,287 1 %
Argentina - 0 % 220,372 1 %
France - 0 % 863,511 3 %
Libya 306,000 1 % 152,980 1 %
Other 1,820,102 7 % 1,266,044 3 %
Total $ 32,376,697 100 % $ 29,091,884 100 %
34
--------------------------------------------------------------------------------
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 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
35
--------------------------------------------------------------------------------
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 benefit totaled
Nine Months Ended
Revenue and Cost of Revenue
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
36
--------------------------------------------------------------------------------
Sales into international markets represented 55% and 41% 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,
2021 2020
United States $ 27,773,152 45 % $ 31,606,370 59 %
Australia 16,268,261 27 % 7,720,707 14 %
Saudi Arabia 2,383,192 4 % 2,728,791 5 %
Pakistan 2,041,548 3 % 1,544,982 3 %
South Africa 1,923,525 3 % 1,101,243 2 %
Mexico 1,858,856 3 % 2,339,030 4 %
China 1,847,007 3 % 660,558 1 %
Argentina 1,183,667 2 % 357,777 1 %
France 739,670 1 % 898,885 2 %
Libya 718,960 1 % 782,940 1 %
Other 4,545,576 8 % 3,976,159 8 %
Total $ 61,283,414 100 % $ 53,717,442 100 %
Cost of revenue of
Total gross profit margin for the nine months ended
Additionally, we experienced logistical challenges during the third quarter
including, but not limited to, higher freight / shipping costs in
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
37
--------------------------------------------------------------------------------
million for the nine 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 nine months ended
Interest Expense
Interest expense for the nine months ended
Provision for Income Taxes
Income tax benefit 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 2021, we paid our North American growers approximately 50% of amounts due in the fall of 2020
38
--------------------------------------------------------------------------------
and the balance will be paid in the spring of 2021. This payment cycle to our
growers was similar in fiscal year 2020, and we expect it to be similar for
fiscal year 2022. S&W Australia, our Australian-based subsidiary, has 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:
• 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;
39
--------------------------------------------------------------------------------
• our sales and marketing programs; • investment capital for potential acquisitions; • our ability to renew and/or refinance our debt on acceptable terms; • timing of repayment of our debt; • 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.
Below is a summary of our material sources of capital in recent periods:
Debt Financings
Loan and Security Agreement with CIBC
On
• 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 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,
40
--------------------------------------------------------------------------------
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 $1,522,800 at March 31, 2021 ) and (ii) a Borrowing Base Line having a
credit limit of AUD $26,000,000 (USD $19,796,400 at March 31, 2021 ). In
March 2021 , S&W Australia entered into an amendment with NAB which
temporarily increased the Overdraft Facility to AUD $3,000,000 (USD
$2,284,200 ) for a three-month period and extended the maturity data of the
seasonal credit facility to June 30, 2022 . As of March 31, 2021 , the
Borrowing Base Line accrued interest on Australian dollar drawings at
approximately 3.2% 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, 2021 , the Overdraft Facility
accrued interest at approximately 5.47% per annum calculated daily. As of
March 31, 2021 , AUD $26,000,000 (USD $19,796,400 ) 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 $3,426,300 at March 31, 2021 ). 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.
• 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 2.86% to
5.31%. The credit limit under the facility is AUD $2,000,000 (USD
$1,522,800 ) at March 31, 2021 . As of March 31, 2021 , AUD $649,995 (USD
$494,906 ) 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
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.
In
Equity Issuances
41
--------------------------------------------------------------------------------
On
From
As of
© Edgar Online, source
