S&W SEED COMPANY

SANW
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S&W SEED : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/13/2021 | 08:20am

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 June 30, 2020, particularly
in Part I, Item 1A, "Risk Factors".



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.


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In 2019, we restructured our relationship with Corteva, under which, among other
things:



• We received $45.0 million in fiscal 2019, approximately $16.7 million in



fiscal 2020 and approximately $8.3 million in fiscal 2021.





• Corteva received a fully pre-paid, exclusive license to produce and



distribute certain of our alfalfa varieties world-wide (except South
America
). The licensed varieties include certain of our existing commercial
conventional (non-GMO) alfalfa varieties and six pre-commercial dormant
alfalfa varieties. Corteva received no license to our other commercial
alfalfa varieties or pre-commercial alfalfa pipeline products and no rights
to any future products developed by us.



• We assigned to Corteva grower production contract rights, and Corteva assumed



grower production contract obligations, related to the licensed and certain



other alfalfa varieties.



• Our prior Distribution Agreement, related to conventional (non-GMO) alfalfa



varieties, and Contract Alfalfa Production Services Agreement, related to
GMO-traited alfalfa varieties, with Corteva both terminated. Under the
Distribution Agreement, Corteva was obligated to make minimum annual
purchases from us.



As a result of the 2018 Chromatin acquisition, the 2019 restructuring of our
relationship with Corteva, and our February 2020 acquisition of Pasture
Genetics, we expect that our results of operations for fiscal 2021 and future
periods will differ significantly from prior periods as the mix of our product
portfolio rebalances away from a reliance on alfalfa sales (sales of alfalfa
seed to Corteva totaled $19.7 million and $37.6 million during the year ended
June 30, 2020 and 2019) to a more diverse product mix. We have generated alfalfa
seed revenue of $14.2 million from Corteva in fiscal 2021 through March 2021. We
do not expect any other significant revenue from sales to Corteva in the future.



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 the
United States
and Australia are typically concentrated between March and June
each year. If ongoing measures designed to protect against COVID-19 remain in
effect throughout the 2021 sales season, we may experience similar negative
impacts that we experienced during the 2020 sales season.



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
March 31, 2021, we experienced numerous logistical challenges due to limited
availability of trucks for product deliveries, congestion at the ports, and
overall rising costs of shipping and transportation costs. We expect these
logistical challenges to persist for the remainder of fiscal 2021 and
potentially into fiscal 2022.



Given these uncertainties, at this time we cannot reasonably estimate the
overall impact of the COVID-19 pandemic on our business, operating results and
financial condition.




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Components of Our Statements of Operations Data



Revenue and Cost of Revenue



Product and Other Revenue



We derive most of our revenue from the sale of our proprietary seed varieties
and hybrids. We expect that over the next several years, a substantial majority
of our revenue will be generated from the sale of alfalfa, sorghum, sunflower
and pasture seed, although we are continually assessing other possible product
offerings or means to increase revenue, including expanding into other, higher
margin crops.



The mix of our product offerings will continue to change over time with the
introduction of new seed varieties and hybrids resulting from our robust
research and development efforts, including our potential expansion into
gene-edited products in future periods, 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 May 2016, using the
straight-line method over the estimated useful life of the asset, consisting of
periods of 3-30 years for technology/IP/germplasm, 5-20 years for customer
relationships and trade names and 3-20 years for other intangible assets.
Property,




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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 Conterra Agricultural Capital, LLC, or Conterra.



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 U.S. GAAP, if we determine that a tax position is more likely than not of
being sustained upon audit, based solely on the technical merits of the
position, we recognize the benefit. Tax regulations require certain items to be
included in the tax return at different times than when those items are required
to be recorded in the consolidated financial statements. As a result, our
effective tax rate reflected in our consolidated financial statements is
different from that reported in our tax returns. Some of these differences are
permanent, such as meals and entertainment expenses that are not fully
deductible on our tax return, and some are temporary differences, such as
depreciation expense. Temporary differences create deferred tax assets and
liabilities. Deferred tax assets generally represent items that can be used as a
tax deduction or credit in our tax return in future years for which we have
already recorded the tax benefit in our consolidated statements of operations.
In the fourth quarter of fiscal year 2017, we recorded a valuation allowance
against all our deferred tax assets. The full valuation allowance was recorded
during the fiscal year 2017 because of changes to our operating results and
future projections, resulting from a decline in export sales to Saudi Arabia. As
a result, we do not believe that it is more likely than not that our deferred
tax assets will be realized.



Results of Operations



Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31,
2020




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Revenue and Cost of Revenue



Revenue for the three months ended March 31, 2021 was $32.4 million compared to
$29.1 million for the three months ended March 31, 2020. The $3.3 million
increase in revenue for the three months ended March 31, 2021 was primarily due
to the Pasture Genetics business acquired in February 2020 and partially offset
by a decrease in product revenue from Pioneer. During the three months ended
March 31, 2021 we recorded sales of $8.5 million to Pioneer, which was a
decrease of $2.7 million from recorded sales of $11.2 million for the three
months ended March 31, 2020. As of March 31, 2021, we have fully recorded all
revenue from Pioneer under its agreement announced in May 2019.



Core Revenue (which we define as total revenue, excluding product revenue
attributable to Pioneer) for the three months ended March 31, 2021 was $23.9
million
compared to Core Revenue for the three months ended March 31, 2020 of
$17.9 million, representing an increase of $6.0 million or 33.5%. Due to the
revised agreements with Pioneer in May 2019, we plan to provide Core Revenue as
a metric to track performance of our business until product revenue attributable
to our revised agreements with Pioneer is no longer reflected in comparisons
between fiscal periods. The increase in Core Revenue for the three months ended
March 31, 2021 can be primarily attributed to $5.4 million from the recently
acquired Pasture Genetics operations as well as growth in Asia and South Africa.



Sales into international markets represented 52% and 38% of our total revenue
during the three months ended March 31, 2021 and 2020, respectively. Domestic
revenue accounted for 48% and 62% of our total revenue for the three months
ended March 31, 2021 and 2020, respectively. The decrease in domestic revenue as
a percentage of total revenue is primarily attributable to the Pasture Genetics
operation which was acquired in February 2020.



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 %


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Cost of revenue of $26.2 million for the three months ended March 31, 2021 was
equal to 80.9% of total revenue for the three months ended March 31, 2021, while
the cost of revenue of $22.7 million for the three months ended March 31, 2020
was equal to 77.9% of total revenue for the three months ended March 31, 2020.
Cost of revenue for the three months ended March 31, 2021 and 2020 included
inventory write-downs of $0.3 million and $0.6 million, respectively. The
write-down of inventory during the three months ended March 31, 2021 and 2020
related to certain inventory lots that deteriorated in quality and germination
rates during the quarter.



Gross profit margin for the three months ended March 31, 2021 was 19.1% compared
to 22.1% in the three months ended March 31, 2020. The decrease in gross margin
for the three months ended March 31, 2021 is primarily driven by compressed
gross margins in Australia due to sales mix as the quarter had a higher
concentration of lower margin forage cereal products. During the three months
ended March 31, 2021, the Company experienced numerous logistical challenges due
to limited availability of trucks for product deliveries, congestion at the
ports, and overall rising costs increases of shipping and transportation
costs. The Company expects these logistical challenges to persist for the
remainder of fiscal 2021 and potentially into fiscal 2022.



Selling, General and Administrative Expenses



Selling, General and Administrative, or SG&A, expense for the three months ended
March 31, 2021 totaled $5.8 million compared to $5.9 million for the three
months ended March 31, 2020. The $0.1 million decrease in SG&A expense versus
the comparable period of the prior year was primarily due to various cost
reductions partially offset by $0.7 million from our newly acquired Pasture
Genetics operations which occurred in February 2020. As a percentage of revenue,
SG&A expenses were 17.9% for the three months ended March 31, 2021, compared to
20.3% for the three months ended March 31, 2020.



Research and Development Expenses



Research and development expenses for the three months ended March 31, 2021
totaled $2.4 million compared to $2.0 million for the three months ended March
31, 2020
. The $0.4 million increase in research and development expense versus
the comparable period of the prior year was driven by additional research and
development activities incurred in due to our additional investment in wheat,
hybrid sunflower and sorghum programs.



Depreciation and Amortization



Depreciation and amortization expense for the three months ended March 31, 2021
was $1.3 million compared to $1.2 million for the three months ended March 31,
2020
. Included in these amounts was amortization expense for intangible assets,
which totaled $0.5 million for the three months ended March 31, 2021 and $0.5
million
for the three months ended March 31, 2020. The $0.1 million increase in
depreciation and amortization expense over the comparable period of the prior
year was primarily driven by $0.1 million of expense associated with our
February 2020 acquisition of Pasture Genetics.



Foreign Currency Loss



We recorded a foreign currency loss of $0.1 million for the three months ended
March 31, 2021 compared to a loss of $0.1 million for the three months ended
March 31, 2020. The foreign currency gains and losses are primarily associated
with S&W Australia and S&W Hungary, our wholly-owned subsidiaries.



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 $0.7
million
non-cash change in contingent consideration obligation for the quarter
ended March 31, 2021 represents the decrease in the estimated fair value of the
contingent consideration obligation associated with the February 2020 Pasture
Genetics acquisition.



Interest Expense - Amortization of Debt Discount




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Non-cash amortization of debt discount expense for the three months ended March
31, 2021
was $0.1 million compared to $0.1 million for the three months ended
March 31, 2020. The expense in both periods represents the amortization of the
debt issuance costs associated with our working capital facilities, our secured
property note, and our equipment finance leases.



Interest Expense



Interest expense for the three months ended March 31, 2021 totaled $0.6 million
compared to $0.4 million for the three months ended March 31, 2020. Interest
expense for the three months ended March 31, 2021 primarily consisted of
interest incurred on the working capital credit facilities with CIBC and NAB,
the secured property loan entered in November 2017, and equipment finance
leases. Interest expense for the three months ended March 31, 2020 primarily
consisted of interest incurred on the working capital credit facilities with
CIBC and NAB, the secured property loan entered in November 2017, and equipment
finance leases. The $0.2 million increase in interest expense for the three
months ended March 31, 2021 was primarily driven by higher interest resulting
from increased levels of borrowing on the working capital credit facilities.



Provision for Income Taxes



Income tax benefit totaled $0.3 million for the three months ended March 31,
2021
compared to income tax expense of $7,296 for the three months ended March
31, 2020
. Our effective tax rate expense was 11.8% for the three months ended
March 31, 2021 compared to 0.2% for the three months ended March 31, 2020. Our
effective tax rate for the three months ended March 31, 2021 was 11.8% due to
the full valuation allowance established against our deferred tax assets which
was recorded during the fourth quarter of fiscal year 2017. Due to the valuation
allowance, we do not record the income tax expense or benefit related to
substantially all of our current year operating results, as such results are
generally incorporated in our net operating loss deferred tax asset position,
which has a full valuation allowance against it. Our effective tax rate for the
quarter is driven by minor state taxes, as well as the benefit from the
reduction in projected income from our South African operations over worldwide
projected pre-tax book losses for the year. Additionally, the rate for the
period is driven by the Australian return to provision booked during the
quarter. The change in estimated taxable income impacted the provision, as the
deferred impact is eliminated due to the valuation allowance at Australia.



Nine Months Ended March 31, 2021 Compared to the Nine Months Ended March 31,
2020






Revenue and Cost of Revenue




Revenue for the nine months ended March 31, 2021 was $61.3 million compared to
$53.7 million for the nine months ended March 31, 2020. The $7.6 million
increase in revenue for the nine months ended March 31, 2021 was primarily due
to the Pasture Genetics business acquired in February 2020 and partially offset
by a decrease in revenue received from Pioneer. During the nine months ended
March 31, 2021 we recorded sales of $14.2 million to Pioneer, which was a
decrease of $3.4 million from recorded sales of $17.6 million for the nine
months ended March 31, 2020.



Core Revenue (which we define as total revenue, excluding product revenue
attributable to Pioneer) for the nine months ended March 31, 2021 was $47.1
million
compared to Core Revenue for the nine months ended March 31, 2020 of
$36.1 million, representing an increase of $11.0 million or 30.5%. Due to
revised agreements with Pioneer in May 2019 we plan to provide Core Revenue as a
metric to track performance of our business until product revenue attributable
to our revised agreements with Pioneer is no longer reflected in comparisons
between fiscal periods. The increase in Core Revenue for the nine months ended
March 31, 2021 can be attributed to $9.7 million from recently acquired Pasture
Genetics operations as well as an increase in alfalfa revenues in Argentina, as
well as Asia and South Africa.




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Sales into international markets represented 55% and 41% of our total revenue
during the nine months ended March 31, 2021 and 2020, respectively. Domestic
revenue accounted for 45% and 59% of our total revenue for the nine months ended
March 31, 2021 and 2020, respectively. The decrease in domestic revenue as a
percentage of total revenue was primarily attributable to Pasture Genetics
Acquisition in February 2020 that increased sales in Australia.



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 $51.3 million for the nine months ended March 31, 2021 was
equal to 83.7% of total revenue for the nine months ended March 31, 2021, while
the cost of revenue of $42.0 million for the nine months ended March 31, 2020
was equal to 78.2% of total revenue for the nine months ended March 31, 2020.
Cost of revenue for the nine months ended March 31, 2021 and 2020 included
inventory write-downs of $1.3 million and $1.4 million, respectively. The
write-down of inventory during the nine months ended March 31, 2021 related to
certain inventory lots that deteriorated in quality and germination rates during
the period.



Total gross profit margin for the nine months ended March 31, 2021 was 16.3%
compared to 21.8% in the nine months ended March 31, 2020. The decrease in gross
profit margins was primarily due to strategic lower margin alfalfa sales
completed earlier in the fiscal year to gain market share in certain regions and
low margin sales to clear excess alfalfa seed. In addition, we experienced
compressed gross margins in Australia due to sales mix as the period had a
higher concentration of lower margin forage cereal products.



Additionally, we experienced logistical challenges during the third quarter
including, but not limited to, higher freight / shipping costs in Australia.
During the nine months ended March 31, 2021, the Company experienced numerous
logistical challenges due to limited availability of trucks for product
deliveries, congestion at the ports, and overall rising costs increases in of
shipping and transportation costs. The Company expects these logistical
challenges to persist for the remainder of fiscal 2021 and potentially into
fiscal 2022.



Selling, General and Administrative Expenses



SG&A expense for the nine months ended March 31, 2021 totaled $16.4 million
compared to $15.7 million for the nine months ended March 31, 2020. The $0.7
million
increase in SG&A expense versus the comparable period of the prior year
was primarily due to $1.6 million from our Pasture Genetics operations acquired
in February 2020 partially offset by various other cost reductions. As a
percentage of revenue, SG&A expenses were 26.8% for the nine months ended March
31, 2021
, compared to 29.2% for the nine months ended March 31, 2020.



Research and Development Expenses



Research and development expenses for the nine months ended March 31, 2021
totaled $6.5 million compared to $5.3 million for the nine months ended March
31, 2020
. The $1.2 million increase in research and development expense versus
the comparable period of the prior year was driven by additional research and
development activities incurred due to our additional investment in wheat,
hybrid sunflower and sorghum programs.



Depreciation and Amortization



Depreciation and amortization expense for the nine months ended March 31, 2021
was $4.1 million compared to $3.6 million for the nine months ended March 31,
2020
. Included in these amounts was amortization expense for intangible assets,
which totaled $1.7




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million for the nine months ended March 31, 2021 and $1.5 million for the nine
months ended March 31, 2020. The $0.5 million increase in depreciation and
amortization expense over the comparable period of the prior year was primarily
driven by $0.5 million of expense associated with our February 2020 acquisition
of Pasture Genetics and $0.1 million of additional expense following our August
2019
acquisition of a wheat breeding program in Australia from Dow AgroScience,
or the Dow Wheat Acquisition, partially offset by the decrease of $0.2 million
in depreciation due to sale of Five Points in January.



Foreign Currency Gain



We recorded a foreign currency gain of $16,704 for the nine months ended March
31, 2021
compared to a loss of $67,399 for the nine months ended March 31, 2020.
The foreign currency gains and losses are primarily associated with S&W
Australia and S&W Hungary, our wholly-owned subsidiaries.



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 $0.2
million
non-cash change in contingent consideration obligation for the nine
months ended March 31, 2021 represents the decrease in the estimated fair value
of the contingent consideration obligation associated with the February 2020
Pasture Genetics Acquisition.



Interest Expense - Amortization of Debt Discount



Non-cash amortization of debt discount expense for the nine months ended March
31, 2021
was $0.5 million compared to $0.4 million for the nine months ended
March 31, 2020. The expense in both periods represents the amortization of the
debt issuance costs associated with our working capital facilities, our secured
property note, and our equipment finance leases.



Interest Expense



Interest expense for the nine months ended March 31, 2021 totaled $1.7 million
compared to $1.4 million for the nine months ended March 31, 2020. Interest
expense for the nine months ended March 31, 2021 primarily consisted of interest
incurred on the working capital credit facilities, the secured property loan
entered into in November 2017, and equipment finance leases. Interest expense
for the nine months ended March 31, 2020 primarily consisted of interest
incurred on the working capital credit facilities, the secured property loan
entered into in November 2017, and equipment finance leases. The $0.3 million
increase in interest expense for the nine months ended March 31, 2021 was
primarily driven by higher interest resulting from increased levels of
borrowings on the working capital credit facilities.



Provision for Income Taxes



Income tax benefit totaled $0.2 million for the nine months ended March 31, 2021
compared to income tax expense of $17,224 for the nine months ended March 31,
2020
. Our effective tax rate was 1.2% for the nine months ended March 31, 2021
compared to (-0.1%) for the nine months ended March 31, 2020. Our effective tax
rate for the nine months ended March 31, 2021 was 1.2% due to the full valuation
allowance established against our deferred tax assets which was recorded during
the fourth quarter of fiscal year 2017. Due to the valuation allowance, we do
not record the income tax expense or benefit related to substantially all of our
current year operating results, as such results are generally incorporated in
our net operating loss deferred tax asset position, which has a full valuation
allowance against it. Our effective tax rate is driven by minimal state taxes,
as well as the expense from the projected income from our South African
operations over worldwide projected pre-tax book losses for the year.
Additionally, the rate for the period is driven by the Australian return to
provision booked during the quarter. The change in estimated taxable income
impacted the provision, as the deferred impact is eliminated due to the
valuation allowance in Australia.



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




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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 North America; however, this also puts a
greater demand on our working capital and working capital requirements during
the second, third and fourth fiscal quarters based on timing of payments to
growers in the second through fourth quarters.



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 February 24, 2020, S&W Australia acquired all of the issued and outstanding
shares of Pasture Genetics, the PG Acquisition, for an initial consideration
that consisted of an upfront cash payment at closing of USD $7.5 million (AUD
$11.4 million). A potential earn-out payment of up to USD $5.3 million (AUD $8.0
million
), or the Earn-Out, is payable on September 30, 2022, or the Earn-Out
Date. The amount of any Earn-Out will be equal to the excess, if any, of (a)
7.5, multiplied by the average of an agreed-upon calculation of Pasture
Genetics' earnings over fiscal years 2021 and 2022, above (b) USD $7.5 million
(AUD $11.4 million). At S&W Australia's election, up to 50% of the Earn-Out may
be paid in shares of our common stock at a per share purchase price equal to the
volume-weighted average purchase price of our common stock during the 10-day
period ending immediately prior to the Earn-Out Date.



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 the United States and
South Australia.



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;


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• 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 December 26, 2019, we entered into a Loan and Security Agreement with CIBC,
or the Loan Agreement, which we amended on September 22, 2020, December 30, 2020
and May 12, 2021. As amended, the Loan Agreement provides for a $25.0 million
credit facility, or the CIBC Credit Facility. The key terms of the amended Loan
Agreement include the following:






• Advances under the CIBC Credit Facility are to be used: (i) to finance our
ongoing working capital requirements; and (ii) for general corporate
purposes. We may also use a portion of the CIBC Credit Facility to finance
permitted acquisitions and related costs.


• All amounts due and owing, including, but not limited to, accrued and unpaid
principal and interest due under the CIBC Credit Facility, will be payable
in full on December 23, 2022.


• The 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 May 2021 amendment to the Loan Agreement, CIBC modified our
fixed charge coverage ratio financial covenants to require that we maintain a
fixed charge coverage ratio equal to or greater than (i) 1.10 to 1.00 for the
fiscal quarters ended March 31, 2021 and June 30, 2021 and (ii) 1.15 to 1.00 for
each fiscal quarter thereafter. In addition, pursuant to the May 2021 amendment,
in the event that our forecasted liquidity is less than $4,000,000 in any
12-month forecast delivered to CIBC, we will be required to raise equity in an
amount equal to such deficiency at least 90 days prior to such forecasted
liquidity shortfall. After giving effect to the May 2021 amendment, we were in
compliance with the Loan Agreement for the fiscal period ended March 31, 2021.



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,




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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 March 31, 2021, S&W Australia has debt facilities with NAB, all of which are
guaranteed by S&W Seed Company up to a maximum of AUD $15,000,000 (USD
$11,421,000) and cross-guaranteed by S&W Australia.



In June 2020, S&W Australia executed documentation to consolidate the Pasture
Genetics debt facility with NAB into its debt facilities with NAB. The
documentation became effective in July 2020. The consolidated debt facilities
with NAB provide for up to an aggregate of AUD $34,500,000 (USD $26,268,300) of
credit as of March 31, 2021, and include the following:




• 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 $19,100%,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 $19,100%,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 March 31, 2021.



Paycheck Protection Program



On April 14, 2020, we received loan proceeds of $1,958,600, or the Loan,
pursuant to the Paycheck Protection Program under the recently enacted
Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act,
administered by the U.S. Small Business Administration, or the SBA. If the loan
proceeds are fully utilized to pay qualified expenses, the full principal amount
of the Paycheck Protection Program, or PPP, loan, along with any accrued
interest, may qualify for loan forgiveness, subject to potential reduction based
on the level of full-time employees maintained by the organization.



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 March 2021, the PPP loan was forgiven in full.




Equity Issuances



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On September 23, 2020, we entered into an At Market Issuance Sales Agreement, or
the ATM Agreement, with B. Riley Securities, Inc., or B Riley, under which we
may offer and sell from time to time, at our sole discretion, shares of our
common stock having an aggregate offering price of up to $14.0 million through
B. Riley as our sales agent. For the nine months ended March 31, 2021, we
received gross proceeds of approximately $5.5 million from the sale
of 1,580,220 shares of its common stock pursuant to the ATM Agreement.



From April 1, 2021 through May 12, 2021, we received gross proceeds of
approximately $5.4 million from the sale of 1,427,795 shares of our common stock
pursuant to the ATM Agreement.



As of May 12, 2021, we have $3.1 million remaining available for sale under the
ATM Agreement.

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