S&W SEED COMPANY You should read the following discussion of our financial condition and results of operations in conjunction with our condensed 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 condensed 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 under the heading "Forward-Looking Statements" in 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 endedJune 30, 2022 , particularly in Part I, Item 1A., "Risk Factors." Strategic Review We recently undertook a strategic review of our operations and future growth opportunities to determine areas we believe are key centers of value, including our sorghum technology operations (led by Double Team™, our non-GMO herbicide tolerant sorghum solution), international forage operations,U.S. forage operations and our specialty crops. With respect to specialty crops, we intend to initially focus on stevia and camelina. We believe that an opportunity exists to bring to market new stevia varieties that can both meet consumer taste requirements and have yield quality that would enable farmers to profitably grow stevia inNorth and South America . We plan to leverage our proprietary stevia germplasm to form collaborations and commercial agreements with supply chain partners to create aU.S. -based stevia production industry for high-quality stevia sweetener with superior taste profiles that would supply major customers in the U.S. market, including pursuant to our previously announcedU.S. stevia pilot production supply agreement with Ingredion. We also believe we have an opportunity to enter the camelina market as a seed and technology provider, where we plan to work with large oil companies for biofuel production leveraging our capabilities in producing, processing, and packaging camelina. We have also begun working to align our cost structure to support these centers of value while assessing other potential value-generating transactions and means to strengthen our balance sheet. OnJanuary 3, 2023 , we andTrigall Genetics S.A. , or Trigall Genetics, a leader in transgenic wheat, announced our entry into a partnership for the development and marketing of wheat varieties inAustralia throughTrigall Australia Pty Ltd , a newly formed Australian corporation, or Trigall Australia.S&W Seed Company Australia Pty Ltd , our wholly owned subsidiary, or S&W Australia, contributed itsAustralia -based wheat breeding program and related assets to TrigallAustralia in exchange for$2.0 million in cash, a$1.0 million promissory note to be paid inDecember 2023 and a 20% ownership interest in Trigall Australia. Pursuant to the partnership, S&W Australia is obligated to make an aggregate of$560,000 of capital contributions to Trigall Australia throughJune 2025 and has agreed to provide certain marketing, collection and other operational services in support of the partnership. OnFebruary 6, 2023 , S&W entered into a Contribution and Membership Interest Purchase Agreement, or Shell Partnership Agreement, withEquilon Enterprises LLC (dbaShell Oil Products US , or Shell), relating to a partnership for the development and production of sustainable biofuel feedstocks. The closing of the transactions contemplated by the Shell Partnership Agreement occurred onFebruary 6, 2023 , or the Shell Partnership Closing. At theShell Partnership Closing, among other things: • S&W (i) contributed itsNampa, Idaho production and research facilities, or the Nampa Facilities, toVision Bioenergy Oilseeds LLC , an entity formed by S&W for purposes of the partnership, or Vision Bioenergy, along with certain personal property, including vehicles, fixed assets and other similar equipment; (ii) caused Vision Bioenergy to make offers of employment to certain key personnel; (iii) assigned to Vision Bioenergy certain contracts and permits; and (iv) agreed to a two-year non-solicitation covenant with respect to the personnel transferred to Vision Bioenergy; and
•
Shell (i) made a$13.0 million cash contribution to Vision Bioenergy; (ii) paid$7.0 million to S&W; and (iii) paid off S&W's outstanding approximately$7.0 million Rooster Note (as defined below), which was secured by a priority security interest in the property, plant and fixtures located at theNampa Facilities. In addition, under the terms and conditions of the Shell Partnership Agreement, on the one-year anniversary of the Shell Partnership Closing, Shell is required to pay an additional$6.0 million to S&W and make an additional$12.0 million cash contribution to Vision Bioenergy. Shell received a 66% interest in Vision Bioenergy and S&W retained a 34% interest. Pursuant to the Shell Partnership Agreement, upon the achievement of certain specified milestones, measured as of the fourth and seventh anniversaries of the Shell Partnership Closing, S&W is eligible to receive up to an additional aggregate 10% interest in Vision Bioenergy. In addition, S&W has a one-time option, exercisable at any time on or before the fourth anniversary of the Shell Partnership Closing, to purchase a 6% membership interest from Shell for a purchase price ranging between approximately$7.1 and$12.0 million , depending on the date on which such purchase is completed. 22 -------------------------------------------------------------------------------- We believe these partnerships will, among other things, enable us to reduce our operating expenses, provide immediate liquidity to fund our ongoing operations and sharpen our focus on key growth priorities. Overall, we have begun implementing our plan to reduce annual operating expenses by approximately$4.0 to 5.0 million. In addition to the above partnerships, we have:
•
streamlined our European sunflower operations by closing our facilities in
•
reduced headcount and simplified our organization structure through a reduction in force.
Global Economic Conditions We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic events, such as the continued impact of the COVID-19 pandemic, the ongoing military conflict betweenUkraine andRussia and related sanctions, uncertain market conditions, including higher inflation and supply chain disruptions, and other global events, which have had and may continue to have an adverse impact on our business, operations and the markets and communities in which we, our partners and customers operate. The COVID-19 pandemic may cause further disruptions in the various markets in which we operate. The COVID-19 pandemic negatively impacted our operations and financial results in 2021 and 2022, due to broad-based supply chain disruptions across theU.S. and globally. These supply chain issues negatively impacted our ability to book containers for ocean freight, which delayed customer shipments, which in certain cases extended our regular sales and collection cycle. In 2023 we experienced a lessoning of the severity of these supply chain issues, though continue to experience effects in certain jurisdictions that continue to have various restrictions, which have impacted certain of our customers. We continue to work closely with our customers, business units, third party contractors and suppliers and other external business partners to minimize the potential impact on our business. As COVID-19 continues to affect the areas in which we operate, we believe future outbreaks 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 location, duration and spread of future outbreaks, and the resulting specific impacts felt by our customers, employees and vendors, all of which are uncertain and cannot be predicted. Following the invasion ofUkraine byRussia in early 2022, theU.S. and global financial markets experienced volatility, which has led to disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity globally. In response to the invasion,the United States ,United Kingdom andEuropean Union , along with others, imposed significant new sanctions and export controls againstRussia , Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social impact of the sanctions imposed onRussia and possible future punitive measures that may be implemented, as well as the counter measures imposed byRussia , in addition to the ongoing military conflict betweenUkraine andRussia and related sanctions, which could conceivably expand into the surrounding region, remains uncertain; however, both the conflict and related sanctions have resulted and could continue to result in disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity on acceptable terms, in bothEurope and globally, and has introduced significant uncertainty into global markets. Our product revenue is predicated on our ability to timely fulfill customer orders, which depends in large part upon the consistent availability and operation of shipping and distribution networks operated by third parties. Farmers typically have a limited window during which they can plant seed, and their buying decisions can be shaped by actual or perceived disruptions in our distribution and supply channels, or concerns about our ability to timely fulfill their orders. If our customers delay or decrease their orders due to potential disruptions in our distribution and supply channels, including as a result of the COVID-19 pandemic or other adverse geopolitical and macroeconomic events, this will adversely affect our product revenue. During the year endedJune 30, 2022 and the six months endedDecember 31, 2022 , we experienced numerous logistical challenges due to limited availability of trucks for product deliveries, congestion at the ports, and overall volatility of shipping and transportation costs. We expect these logistical challenges to persist throughout fiscal 2023, which may, among other things, delay or reduce our ability to recognize revenues within a particular fiscal period and harm our results of operations. The ultimate impact that COVID-19 and other adverse geopolitical and macroeconomic events will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic and any broad-based supply chain disruptions, labor shortages, rising levels of inflation and interest rates, tightening of credit markets or other developments resulting from the pandemic or recent geopolitical and macroeconomic events, as well as the economic recovery and actions taken in response to local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of those potential and evolving impacts to our business and consolidated financial statements. 23 --------------------------------------------------------------------------------
Components of Our Statements of Operations Data
Revenue
We derive most of our revenue from the sale of our proprietary seed varieties and hybrids. We expect that over the next several years, a substantial majority of our revenue will be generated from the sale of alfalfa, sorghum, and pasture seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into higher margin crops. The mix of our product offerings will continue to change over time with the introduction of new seed varieties and hybrids resulting from our robust research and development efforts, including our potential expansion of novel, non-GMO product lines, potential entry into gene-edited product markets, potential entry into specialty crop markets, including stevia and biofuels, and additional strategic transactions. Our revenue will fluctuate depending on the timing of orders from our customers and distributors and the extent to which markets are impacted by sources of instability and volatility in global markets and industries, including, among other things, the COVID-19 pandemic, the conflict betweenRussia andUkraine , supply chain issues and global inflation. 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. Some of this fluctuation is offset by having operations in both the northern and southern hemispheres. In addition, due to the numerous logistical challenges we have experienced in our shipping and distribution networks resulting from current geopolitical and macroeconomic events, including the COVID-19 pandemic, our product revenue has fluctuated, and our ability to recognize revenues within a particular fiscal period has been impacted. We expect our product revenue will fluctuate from period to period as a result of the current geopolitical and macroeconomic conditions. Our specialty crops, including our stevia breeding program and biofuels program, have yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various opportunities to monetize the results of our research and development efforts. Such potential opportunities include possible collaborations and/or joint ventures, licensing agreements and royalty-based agreements. For example, we recently entered into our Vision Bioenergy partnership with Shell in order to develop commercially viable camelina sativa and other oilseeds varieties that produce grain from which oil and meal can be extracted for future processing into biofuels, feed and other potential bioproducts. Although we have received upfront payments from Shell pursuant to the partnership and will be entitled to receive additional payments from Shell upon the one-year anniversary of our entry into partnership, there can be no assurance that this will generate any meaningful revenue.
Cost of Revenue and Gross Margin
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
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.
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 constructed 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.
24
--------------------------------------------------------------------------------Depreciation and Amortization
We amortize intangible assets, including those acquired fromPasture Genetics Ltd. , or Pasture Genetics, in 2020,Chromatin Inc. , or Chromatin, in 2018 and fromSV Genetics Pty Ltd inMay 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, 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 (Income) Expense
Other (income) expense consists primarily of foreign currency gains and losses, gains on disposal of intangible assets and equity investments, changes in contingent consideration obligation, interest expense and interest expense resulting from the amortization of debt discount. Interest expense and Interest expense - amortization of debt discount primarily consists of interest costs related to outstanding borrowings on our working capital credit facilities and our financing withRooster Capital, LLC , or Rooster. Amortization of the MFP Letter of Credit (as defined below) asset is also recorded under the caption Interest expense - amortization of debt discount.
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. UnderU.S. generally accepted accounting principles, or 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 condensed consolidated financial statements. As a result, our effective tax rate reflected in our condensed 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. Based on financial projections, we do not believe that it is more likely than not that ourU.S. deferred tax assets will be realized, and a full valuation allowance is recorded against them. Results of Operations
Three Months Ended
The following table presents our results of operations for the periods
indicated:
Three Months Ended December 31,
2022 2021 Change
% of % of
$ Revenue(1) $ Revenue(1) $ % Change
Revenue $ 12,937,802 100.0 % $ 12,631,409 100.0 % $ 306,393 2.4 %
Cost of revenue 10,188,511 78.7 % 10,971,045 86.9 % (782,534 ) (7.1 )%
Gross profit 2,749,291 21.3 % 1,660,364 13.1 % 1,088,927 65.6 %
Operating expenses
Selling, general and
administrative expenses 6,241,461 48.2 % 7,073,320 56.0 % (831,859 ) (11.8 )%
Research and development
expenses 1,503,473 11.6 % 2,110,413 16.7 % (606,940 ) (28.8 )%
Depreciation and amortization 1,253,904 9.7 % 1,373,653 10.9 % (119,749 ) (8.7 )%
Total operating expenses 8,998,838 69.6 % 10,557,386 83.6 % (1,558,548 ) (14.8 )%
Loss from operations (6,249,547 ) (48.3 )% (8,897,022 ) (70.4 )% 2,647,475 (29.8 )%
Other (income) expense
Foreign currency loss 176,624 1.4 % 258,482 2.0 % (81,858 ) (31.7 )%
Gain on disposal of
intangible assets (1,796,252 ) (13.9 )% - - (1,796,252 ) -
Change in contingent
consideration obligation - - (466,376 ) (3.7 )% 466,376 (100.0 )%
Interest expense -
amortization of debt discount 578,112 4.5 % 221,196 1.8 % 356,916 161.4 %
Interest expense, net 1,092,327 8.4 % 589,694 4.7 % 502,633 85.2 %
Gain on sale of equity
investment (32,030 ) (0.2 )% - - (32,030 ) -
Other expense 4,561 0.0 % 23,771 0.2 % (19,210 ) (80.8 )%
Loss before income taxes (6,272,889 ) (48.5 )% (9,523,789 ) (75.4 )% 3,250,900 (34.1 )%
(Benefit from) provision for
income taxes (282,296 ) (2.2 )% 257,776 2.0 % (540,072 ) (209.5 )%
Net loss $ (5,990,593 ) (46.3 )% $ (9,781,565 ) (77.4 )% $ 3,790,972 (38.8 )%
(1) Amount in column may not foot due to rounding
The discussion and analysis presented below is concerned with material changes in our results of operations between the three months endedDecember 31, 2022 and the three months endedDecember 31, 2021 . All comparisons presented are with respect to the prior-year 25 -------------------------------------------------------------------------------- period, unless stated otherwise. This discussion and analysis should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedJune 30, 2022 , as filed with theSEC onSeptember 28, 2022 .
Revenue
The year-over-year increase in revenue for the second quarter endedDecember 31, 2022 was primarily due to an increase of$1.9 million in alfalfa sales to the Middle East North Africa, or MENA, region, a$1.0 million increase inNorth America sorghum sales, and a$0.2 million increase in pastures sales inAustralia . This was offset by a decrease in sales of sorghum to the MENA region of$1.4 million , a$0.7 million decrease in alfalfa sales toNorth America , and a$0.7 million decrease inNorth America service revenue.
Cost of Revenue and Gross Margin
Despite an increase in sales, the cost of revenue for the second quarter endedDecember 31, 2022 decreased compared to the prior year period, primarily driven by increased sales of higher margin alfalfa in the MENA region and grain sorghum inNorth America , along with decreased sales of lower margin sorghum products in the MENA region and dormant alfalfa inNorth America . Write-downs of inventory lots that had deteriorated in quality and germination rates were reduced from$0.4 million in the second quarter of fiscal 2022 to$0.1 million in the second quarter of fiscal 2023.
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the three months endedDecember 2022 compared to the three months endedDecember 31, 2021 is attributable to a$0.7 million decrease in stock-based compensation expense as a result of the accelerated vesting of equity awards of a former executive officer during the three months endedDecember 2021 ,$0.3 million in reduced payroll and related expenses as a result of management's cost reduction efforts, offset by a$0.1 million increase in consulting and professional fees.
Research and Development Expenses
The year-over-year decrease in research and development expenses for the second quarter endedDecember 31, 2022 is attributable to a$0.3 million reduction in field trial related expenses, a$0.2 million reduction in payroll and related expenses as a result of management's cost reduction efforts, and a$0.1 million reduction in consulting and professional fees.
Depreciation and Amortization
The decrease in depreciation and amortization expenses for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 was attributable to decreased depreciation expense on assets held by S&W Australia, our wholly owned Australian subsidiary.
Foreign Currency Loss
The decrease in foreign currency loss for the three months endedDecember 31, 2022 compared to the three months endedDecember 31, 2021 was attributable to fluctuations in foreign currency exchange rates between the Australian dollar andU.S. dollar.
Gain on Disposal of Intangible Assets
The$1.8 million gain on disposal of intangible assets in the second quarter of fiscal 2023 was recognized by S&W Australia as a result of the contribution of itsAustralia -based wheat breeding program and related assets to TrigallAustralia in furtherance of the partnership with Trigall Australia, as discussed under the caption "Strategic Review," above.
Change in Contingent Consideration Obligation
The decrease in benefit to non-cash change in contingent consideration compared to the prior year period is due to theFebruary 2022 final valuation of the contingent consideration obligation from the 2020 acquisition ofPasture Genetics Pty Ltd. The valuation resulted in no contingent consideration due, and a reversal of the remaining$0.5 million accrual.
Interest Expense - Amortization of Debt Discount
The increased debt amortization expense in the second quarter of fiscal 2023 compared to the prior year period was due to the amortization of the financial commitment asset established in conjunction with the MFP Loan Agreement beginning inSeptember 2022 (see "Capital Resources and Requirements-MFP Loan Agreement," below). 26 --------------------------------------------------------------------------------
Interest Expense, Net
Interest expense for the three months endedDecember 31, 2022 , and 2021 primarily consisted of interest incurred on the working capital credit facilities, the Rooster Note (as defined below), and equipment capital leases. The$0.5 million increase in interest expense for the three months endedDecember 31, 2022 , was primarily driven by increases in average borrowings on the working capital credit facilities and increased interest rates on both ourUnited States and Australian wholly owned subsidiaries.
Gain on Sale of
The gain on sale of equity investment was a result of the sale of the remainder
of our investment in
(Benefit from) Provision for Income Tax Benefit
Income tax (benefit) totaled($0.3) million for the three months endedDecember 31, 2022 compared to income tax expense of$0.3 million for the three months endedDecember 31, 2021 . Our effective tax rate was 4.5% for the three months endedDecember 31, 2022 compared to an effective tax rate of (2.7)% for the three months endedDecember 31, 2021 . Our effective tax rate for the three months endedDecember 31, 2022 was 4.5% due primarily to the valuation allowance recorded against substantially all of our deferred tax assets, and the tax effects of the partnership with Trigall Genetics entered into during the quarter. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operation results, with the exception of our operations inAustralia . Our effective tax rate for the current quarter is primarily due to income tax expense related to our foreign operations and minor state taxes. 27 --------------------------------------------------------------------------------
Six Months ended
The following table presents our results of operations for the periods
indicated:
Six Months Ended December 31,
2022 2021 Change
% of % of
$ Revenue(1) $ Revenue(1) $ % Change
Revenue $ 32,803,667 100.0 % $ 28,163,090 100.0 % $ 4,640,577 16.5 %
Cost of revenue 25,549,865 77.9 % 23,376,057 83.0 % 2,173,808 9.3 %
Gross profit 7,253,802 22.1 % 4,787,033 17.0 % 2,466,769 51.5 %
Operating expenses
Selling, general and
administrative expenses 11,294,058 34.4 % 12,642,887 44.9 % (1,348,829 ) (10.7 )%
Research and development
expenses 3,018,853 9.2 % 4,105,541 14.6 % (1,086,688 ) (26.5 )%
Depreciation and
amortization 2,590,338 7.9 % 2,704,698 9.6 % (114,360 ) (4.2 )%
Total operating expenses 16,903,249 51.5 % 19,453,126 69.1 % (2,549,877 ) (13.1 )%
Loss from operations (9,649,447 ) (29.4 )% (14,666,093 ) (52.1 )% 5,016,646 (34.2 )%
Other (income) expense
Foreign currency loss 367,539 1.1 % 421,028 1.5 % (53,489 ) (12.7 )%
Gain on disposal of
intangible assets (1,796,252 ) (5.5 )% - - (1,796,252 ) --
Change in contingent
consideration obligation - - (528,630 ) (1.9 )% 528,630 (100.0 )%
Interest expense -
amortization of debt
discount 861,755 2.6 % 413,391 1.5 % 448,364 108.5 %
Interest expense, net 1,879,006 5.7 % 1,142,539 4.1 % 736,467 64.5 %
Gain on sale of equity
investment (32,030 ) (0.1 )% - - (32,030 ) --
Other income (39,709 ) (0.1 )% (10,589 ) (0.0 )% (29,120 ) 275.0 %
Loss before income taxes (10,889,756 ) (33.2 )% (16,103,832 ) (57.2 )% 5,214,076 (32.4 )%
(Benefit from) provision for
income taxes (383,960 ) (1.2 )% 91,974 0.3 % (475,934 ) (517.5 )%
Net loss (10,505,796 ) (32.0 )% (16,195,806 ) (57.5 )% 5,690,010 (35.1 )%
(1) Amount in column may not foot due to rounding
The discussion and analysis presented below is concerned with material changes in our results of operations between the six months endedDecember 31, 2022 and the six months endedDecember 31, 2021 . All comparisons presented are with respect to the prior-year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedJune 30, 2022 , as filed with theSEC onSeptember 28, 2022 . Revenue The year-over-year increase in revenue for the six months endedDecember 31, 2022 was primarily due to the increase in product revenue from alfalfa sales to the MENA region of$6.6 million and increased alfalfa and sorghum sales toNorth America of$2.0 million . These revenue increases were partially offset by a decrease in sorghum sales to the MENA region of$1.7 million , a decrease in service revenue inthe United States of$1.3 million , a decrease in pasture product sales toAustralia of$0.5 million , a decrease in sorghum sales toAsia of$0.3 million , and a decrease in alfalfa sales toSouth America of$0.3 million .
Cost of Revenue and Gross Margin
Cost of revenue increased year-over-year due to increased sales in the six months endedDecember 31, 2022 , but gross margin improved compared to the prior year period, primarily driven by increased sales of higher margin alfalfa seed in the MENA region and grain sorghum seed inNorth America , as well as decreased sales of lower margin sorghum products in the MENA region. Cost of revenue for the six months endedDecember 31, 2022 and 2021 included inventory write-downs of$0.7 million and$0.7 million , respectively, related to certain inventory lots that had deteriorated in quality and germination rates.
Selling, General and Administrative Expenses
The decrease in selling, general and administrative expenses for the six months endedDecember 2022 compared to the prior year period is attributable to a$0.7 million decrease in stock-based compensation expense as a result of the accelerated vesting of equity awards of a former executive officer during the six months endedDecember 31, 2021 ,$0.6 million in reduced payroll and related expenses as a result of management's cost reduction efforts, and$0.2 million decrease in advertising and marketing, offset by a$0.1 million increase in consulting and professional fees. 28 --------------------------------------------------------------------------------
Research and Development Expenses
The year-over-year decrease in research and development expenses for the six months endedDecember 31, 2022 is attributable to a$0.4 million reduction inUnited States field trial related expenses,$0.4 million in reduced salaries, wages and related employment expenses as a result of management's cost reduction efforts,$0.2 million reduction of investment in our sunflower programs inHungary and$0.1 million reduction in consulting and professional fees.
Depreciation and Amortization
The decrease in depreciation and amortization expenses for the six months ended
Foreign Currency Loss
The decrease in foreign currency loss for the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 was attributable to fluctuations in foreign currency exchange rates between the Australian dollar andU.S. dollar.
Gain on Disposal of Intangible Assets
The$1.8 million gain on disposal of intangible assets in the second quarter of fiscal 2023 was recognized by S&W Australia as a result of its contribution of itsAustralia -based wheat breeding program and related assets to TrigallAustralia in furtherance of the partnership with Trigall Australia, as discussed under the caption "Strategic Review," above.
Change in Contingent Consideration Obligation
The decrease in benefit to non-cash change in contingent consideration compared to the prior year period is due to theFebruary 2022 final valuation of the contingent consideration obligation from the 2020 acquisition ofPasture Genetics Pty Ltd. The valuation resulted in no contingent consideration due, and a reversal of the remaining$0.5 million accrual.
Interest Expense - Amortization of Debt Discount
The increased debt amortization expense in the six months ended
Interest Expense, Net
Interest expense for the six months endedDecember 31, 2022 , and 2021 primarily consisted of interest incurred on the working capital credit facilities, the Rooster Note (as defined below), and equipment capital leases. The$0.7 million increase in interest expense for the six months endedDecember 31, 2022 was primarily driven by increases in average borrowings on the working capital credit facilities and increased interest rates on both ourUnited States and Australian wholly owned subsidiaries.
Gain on Sale of
The gain on sale of equity investment was a result of the sale of the remainder
of our investment in
(Benefit from) Provision for Income Tax Benefit
The income tax (benefit) totaled$(0.4) million for the six months endedDecember 31, 2022 compared to a$0.1 million income tax provision for the six months endedDecember 31, 2021 . Our effective tax rate was 3.5% during the six months endedDecember 31, 2022 compared to -0.6% for the six months endedDecember 31, 2021 . Our effective tax rate for the six months endedDecember 31, 2022 was 3.5% due primarily to the valuation allowance recorded against substantially all of our deferred tax assets, and the tax effects of the partnership with Trigall Genetics entered into during the second quarter. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operation results, with the exception of our operations inAustralia . Our effective tax rate for the current quarter is primarily due to income tax expense related to our foreign operations and minor state taxes.
Liquidity and Capital Resources
Our working capital and working capital requirements fluctuate from quarter to quarter depending on the phase of the growing and sales cycle that falls during a particular quarter. Our need for cash has historically been highest in the second and third fiscal quarters (October through March) because we historically have paid our North American contracted growers progressively, starting in the second fiscal quarter. In fiscal year 2022, we paid our North American growers approximately 50% of amounts due in the fall of 2021 and the balance was paid in the spring of 2022. This payment cycle to our growers was similar in fiscal year 2021, and we expect it to be similar for fiscal year 2023. S&W Australia and Pasture Genetics, ourAustralia -based wholly owned subsidiaries, have production cycles that are 29 -------------------------------------------------------------------------------- counter-cyclical toNorth America ; however, the timing of payments to Australian growers, which occurs in the second through fourth quarters, also puts a greater demand on our working capital and working capital requirements during these periods. 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 expenses and other current assets, accounts payable and our working capital lines of credit. In addition to funding our business with cash from operations, we have historically relied upon occasional sales of our debt and equity securities and credit facilities from financial institutions, both inthe United States andAustralia .
Capital Resources and Material Cash Requirements
We are not profitable and have had negative cash flow from operations for the last several years. To help fund our operations, we have relied on equity and debt financings, and we will need to obtain additional funding to finance our operations in the future. Accordingly, we are actively evaluating financing and strategic alternatives, including debt and equity financings and potential sales of assets or certain lines of business. We believe that cash flow from operations, cash payments from Shell pursuant to the Shell Partnership Agreement and undrawn availability under our existing debt facilities will be sufficient to meet our cash requirements over the next 12 months. We expect to meet our longer-term expected future cash requirements and obligations beyond the next 12 months through a combination of existing cash and cash equivalents, cash flow from operations, the undrawn availability under our debt facilities and issuances of equity securities or debt offerings, among other sources of capital. Our ability to fund longer-term operating needs will depend on our ability to generate sufficient cash flows through sales of our products, our ability to maintain compliance with, and secure additional from, our existing debt facilities, and our ability to access the capital markets, the impacts of adverse geopolitical and macroeconomic events, and other factors, including those discussed under the section titled "Risk Factors" in our Annual Report on Form 10-K for the year endedJune 30, 2022 , as filed with theSEC onSeptember 28, 2022 .
Below is a summary of material changes to our sources of capital during the six
months ended
In connection with our partnership with Trigall Genetics (as discussed under "-Strategic Review"), we received$2.0 million in cash and a promissory note for$1.0 million due inDecember 2023 . Under the partnership agreement we are obligated to make an aggregate of$560,000 of capital contributions to TrigallAustralia throughJune 2025 . CIBC Loan Agreement Our Loan and Security Agreement withCIBC Bank USA , or CIBC, as amended to date, or the CIBC Loan Agreement, provides for a$21.0 million credit facility. The following amendments to the CIBC Loan Agreement occurred during the six months endedDecember 31, 2022 :
•
onSeptember 22, 2022 , the CIBC Loan Agreement was amended to, among other things: (i) specify that the borrowing base eligible inventory sublimit cannot be reduced below the proceeds available to be drawn under the MFP Letter of Credit (as defined below), (ii) waive our non-compliance with certain financial covenants under the CIBC Loan Agreement and (iii) establish a minimum liquidity of no less than$1.0 million , tested weekly as of the last day of each week for the remainder of the term of the CIBC Loan Agreement;
•
onOctober 28, 2022 , the CIBC Loan Agreement was amended to, among other things, increase (i) the total revolving loan commitment to$21.0 million from$18.0 million and (ii) the borrowing base eligible inventory sublimit to$12.0 million from$9.0 million ; and
•
onDecember 23, 2022 , the CIBC Loan Agreement was further amended to extend the maturity date of all revolving loans, advances and other obligations outstanding under the CIBC Loan Agreement fromDecember 23, 2022 toMarch 23, 2023 . As ofDecember 31, 2022 , we were in compliance with all covenants contained in the CIBC Loan Agreement, and approximately$4.8 million remained available for use under this credit facility. 30 --------------------------------------------------------------------------------
NAB Finance Agreement
S&W Australia's debt facilities with National Australia Bank or NAB, as amended to date, or the NAB Finance Agreement, were amended and restated onOctober 24, 2022 , and further amended onOctober 25, 2022 . Pursuant to the amendments contained in the NAB Finance Agreement, among other things:
•
the borrowing base line credit limit under S&W Australia's seasonal credit facility was increased from AUD$32.0 million (USD$21.8 million as ofDecember 31, 2022 ) to AUD$40.0 million (USD$27.2 million as ofDecember 31, 2022 ), with a one-year maturity date extension toSeptember 30, 2024 ;
•
the overdraft credit limit under S&W Australia's seasonal credit facility was increased from AUD$1.0 million (USD$0.7 million as ofDecember 31, 2022 ) to AUD$2.0 million (USD$1.4 million as ofDecember 31, 2022 ), with a one-year maturity date extension toSeptember 29, 2023 ; and
•
the maturity date of S&W Australia's master asset finance facility was extended
by one year to
After the amendments, the consolidated debt facilities under the NAB Finance Agreement provide for up to an aggregate of AUD$49.0 (USD$33.3 million as ofDecember 31, 2022 ) of credit. The NAB finance agreement is guaranteed byS&W Seed Company up to a maximum of AUD$15.0 million (USD$10.2 million as ofDecember 31, 2022 ). Following theOctober 2022 amendments, the NAB Finance Agreement contained an undertaking requiring us to maintain a net related entity position of not more than AUD$25.0 million , and our ability to comply with this undertaking was subject to fluctuations in foreign currency conversion rates outside of our control. Due to recent fluctuations in foreign currency conversion rates, we were not in compliance with this undertaking as ofDecember 31, 2022 , and we subsequently obtained a waiver from NAB with respect to such non-compliance as ofDecember 31, 2022 . OnFebruary 8, 2023 , we further amended the NAB Finance Agreement to change the required net related entity position from AUD$25.0 million to USD$18.5 million (see "Amendment of NAB Finance Agreement," below). As ofDecember 31, 2022 , approximately AUD$4.3 million (USD$2.9 million ) remained available for use under the NAB Finance Agreement.
Our promissory note, datedNovember 30, 2017 , originally issued toConterra Agricultural Capital, LLC , and subsequently endorsed to Rooster, as amended to date, or the Rooster Note, originally bore interest of 7.75% per annum, and onJuly 1, 2022 , we made the final semi-annual principal and interest payment of$454,185 . OnSeptember 22, 2022 , we entered into an amendment to extend the Rooster Note's maturity date toDecember 23, 2022 . OnDecember 23, 2022 , we entered into an amendment to increase the interest rate on the Rooster Note from 7.75% to 9.25% per annum and extend the Rooster Note's maturity date toMarch 1, 2023 . OnFebruary 6, 2023 , the Rooster Note was paid off in full by Shell in connection with the Vision Bioenergy partnership (see "-Payoff ofRooster Note ").
MFP Loan Agreement
OnSeptember 22, 2022 , our largest stockholder,MFP Partners, L.P. , or MFP, provided a letter of credit issued byJPMorgan Chase Bank, N.A . for the account of MFP, with an initial face amount of$9.0 million , or the MFP Letter of Credit, for the benefit of CIBC, as additional collateral to support our obligations under the CIBC Loan Agreement. The MFP Letter of Credit initially matured onJanuary 23, 2023 , one month after the maturity date of the existing CIBC Loan Agreement. Concurrently, onSeptember 22, 2022 , we entered into a Subordinate Loan and Security Agreement, or the MFP Loan Agreement, with MFP, pursuant to which any draw CIBC may make on the MFP Letter of Credit will be deemed to be a term loan advance made by MFP to us. The MFP Loan Agreement initially provided for up to$9.0 million of term loan advances. Concurrent with theOctober 28, 2022 amendment to the CIBC Loan Agreement (as described above), MFP amended the MFP Letter of Credit to increase the face amount from$9.0 million to$12.0 million , and the MFP Loan Agreement was amended to increase the maximum amount of term loan advances available to us from$9.0 million to$12.0 million . In connection with theDecember 23, 2022 amendment to the CIBC Loan Agreement, MFP amended the MFP Letter of Credit, extending the maturity date fromJanuary 23, 2023 toApril 30, 2023 The MFP Loan Agreement will mature onNovember 30, 2025 . Pursuant to the MFP Loan Agreement, we will pay to MFP a cash fee through the maturity date of the MFP Letter of Credit equal to 3.50% per annum on all amounts remaining undrawn under the MFP Letter of Credit. In the event any term advances are deemed made under the MFP Loan Agreement, such advances will bear interest at a rate per annum equal to term SOFR (with a floor of 1.25%) plus 9.25%, half of which will be payable in cash on the last day of each fiscal quarter and half of which will accrue as payment in kind interest payable on the maturity date, unless, with respect to any quarterly payment date, we elect to pay such interest in cash. 31 -------------------------------------------------------------------------------- The MFP Loan Agreement includes customary affirmative and negative covenants and events of default. The MFP Loan Agreement is secured by substantially all of our assets and is subordinated to the CIBC Loan Agreement. Upon the occurrence and during the continuance of an event of default, MFP may declare all outstanding obligations under the MFP Loan Agreement immediately due and payable and take such other actions as set forth in the MFP Loan Agreement.
Below is a summary of material changes to our sources of capital during
subsequent to the six months ended
Shell Partnership OnFebruary 6, 2023 , S&W and Shell entered into a joint venture for the development and production of sustainable biofuel feedstocks through Vision Bioenergy (see "-Strategic Review" above), and we received$7.0 million at the Shell JV Closing and will be eligible to receive an additional$6.0 million inFebruary 2024 . Payoff ofRooster Note
On
Amendment of NAB Finance Agreement
OnFebruary 8, 2023 , we further amended the NAB Finance Agreement to change the maximum permissble net related entity position from AUD$25.0 million to USD$18.5 million . We believe that this amendment to the NAB Finance Agreement will provide us with greater control over our compliance with this undertaking.
Summary
The CIBC Loan Agreement and our debt facilities with NAB contain various operating and financial covenants. Adverse geopolitical and macroeconomic events and uncertain market conditions have increased the risk of our inability to comply with these covenants, which could result in acceleration of our repayment obligations and foreclosure on our pledged assets. In addition, these loan agreements contain cross-default provisions, such that certain defaults or breaches under any of our loan agreements may entitle CIBC to invoke default remedies. We were not in compliance with certain covenants in the CIBC Loan Agreement as ofJune 30, 2021 ,December 31, 2021 ,March 31, 2022 ,June 15, 2022 andJune 30, 2022 , and were required to obtain waivers and/or amendments from CIBC. In particular, the CIBC Loan Agreement as presently in effect requires us to maintain minimum liquidity of no less than$1.0 million and the NAB Finance Agreement, as amended, includes an undertaking that requires us to maintain a net related entity position of not more than USD$18.5 million . We are actively pursuing refinancing of the CIBC Loan Agreement.
Our future liquidity and capital requirements will be influenced by numerous factors, including:
•
the maturity and repayment of our debt;
•
the extent and sustainability of future operating income;
•
the level and timing of future sales and expenditures;
•
timing for when we are able to recognize revenue;
•
working capital required to support our growth;
•
our ability to timely pay our growers;
•
investment capital for plant and equipment;
•
investment in our sales and marketing programs;
•
investment capital for potential acquisitions;
•
our ability to renew and/or refinance our debt on acceptable terms;
•
our ability to raise equity financing, in order to secure refinancing as well as support our operations, among other things;
• competition; • market developments; and •
developments related to adverse geopolitical and macroeconomic events, including the COVID-19 pandemic, inflation and supply chain disruptions.
32--------------------------------------------------------------------------------
We cannot assure you that we will be successful in renewing or refinancing our existing debt, raising additional capital, securing future waivers and/or amendments from CIBC, NAB or our other lenders, or securing new financing. If we are unsuccessful in doing so, we may need to reduce the scope of our operations, repay amounts owing to our lenders, finance our cash needs through a combination of equity and debt financings, enter into collaborations, strategic alliances and licensing arrangements, sell certain assets or divest certain operations. If we are required or desire to raise additional capital in the future, whether as a condition to loan refinancing or separately, such additional financing may not be available on favorable terms, or available at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest would be diluted and the terms of these securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends and may be secured by all or a portion of our assets, and may be on terms less favorable than our existing loans. If we fail to obtain additional capital as and when required, such failure could have a material impact on our business, results of operations and financial condition. As a result of the COVID-19 pandemic and actions taken to slow its spread, the ongoing military conflict betweenRussia andUkraine , and other geopolitical and macroeconomic factors beyond our control, 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, our ability to comply with the terms of our loan agreements has been compromised 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.
© Edgar Online, source
