S&W Seed pany(SANW) - 2023 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS Forward-Looking Statements Overview This section cautions readers that the report contains forward-looking statements, which are subject to risks and uncertainties, including loan compliance, macroeconomic events, and product demand - All statements other than statements of historical fact are considered forward-looking, identified by words like 'anticipate,' 'believe,' 'expect,' 'intend,' 'may,' 'plan,' 'will,' etc[9] - Key risks and uncertainties include the ability to comply with loan agreements, potential effects of global macroeconomic events (COVID-19, inflation, supply chain, conflicts), demand for seed products (e.g., Double Team™), successful product commercialization, and the anticipated benefits of partnerships with Trigall Genetics and Shell[9][10] - The company does not guarantee future results and undertakes no obligation to publicly update forward-looking statements, except as required by law[11] PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, equity, and cash flows Condensed Consolidated Balance Sheets Total assets and stockholders' equity significantly increased as of March 31, 2023, driven by equity method investments and prepaid expenses, while total liabilities remained stable | Metric | March 31, 2023 | June 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :------------ | :--------- | :--------- | | Cash and cash equivalents | $1,569,463 | $2,056,508 | $(487,045) | -23.68% | | Accounts receivable, net | $20,424,589 | $19,051,236 | $1,373,353 | 7.21% | | Inventories, net | $55,666,627 | $54,515,894 | $1,150,733 | 2.11% | | Prepaid expenses and other current assets | $10,748,580 | $1,605,987 | $9,142,593 | 569.29% | | TOTAL CURRENT ASSETS | $88,409,259| $77,229,625| $11,179,634| 14.48% | | Property, plant and equipment, net| $10,241,685 | $16,871,669 | $(6,629,984)| -39.30% | | Intangibles, net | $30,328,212 | $34,095,827 | $(3,767,615)| -11.05% | | Equity method investments | $24,121,771 | $367,970 | $23,753,801| 6455.49% | | TOTAL ASSETS | $158,483,654| $133,787,851| $24,695,803| 18.46% | | TOTAL LIABILITIES | $77,605,063| $77,574,363| $30,700 | 0.04% | | TOTAL STOCKHOLDERS' EQUITY | $75,724,512| $51,408,669| $24,315,843| 47.30% | Condensed Consolidated Statements of Operations The company shifted from net loss to net income for the three and nine months ended March 31, 2023, primarily due to a significant gain on business interest sale, despite a three-month revenue decrease Three Months Ended March 31, | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Revenue | $17,662,307 | $23,186,877 | $(5,524,570)| -23.8% | | Gross profit | $4,430,471 | $2,705,414 | $1,725,057 | 63.8% | | Loss from operations | $(3,912,749) | $(6,210,929) | $2,298,180 | -37.0% | | Government grant income | $(1,444,044) | — | $(1,444,044)| - | | Gain on sale of business interest | $(38,323,506)| — | $(38,323,506)| - | | Net income (loss) attributable to S&W Seed Company | $32,119,365 | $(7,304,923) | $39,424,288| -539.7% | | Basic EPS | $0.75 | $(0.19) | $0.94 | -494.7% | Nine Months Ended March 31, | Metric | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Revenue | $50,465,974 | $51,349,967 | $(883,993) | -1.7% | | Gross profit | $11,684,273 | $7,492,447 | $4,191,826 | 55.9% | | Loss from operations | $(13,562,196)| $(20,877,021)| $7,314,825 | -35.0% | | Government grant income | $(1,444,044) | — | $(1,444,044)| - | | Gain on sale of business interest | $(38,323,506)| — | $(38,323,506)| - | | Net income (loss) attributable to S&W Seed Company | $21,624,419 | $(23,500,000)| $45,124,419| -192.0% | | Basic EPS | $0.50 | $(0.62) | $1.12 | -180.6% | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income significantly improved for both three and nine months ended March 31, 2023, moving from loss to gain, reflecting substantial net income partially offset by foreign currency adjustments Comprehensive Income (Loss) Attributable to S&W Seed Company | Period | 2023 | 2022 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended March 31 | $31,946,583 | $(6,824,643) | $38,771,226| -568.1% | | Nine Months Ended March 31 | $21,276,862 | $(23,227,498)| $44,504,360| -191.6% | Condensed Consolidated Statements of Mezzanine Equity and Stockholders' Equity Stockholders' equity significantly increased from June 30, 2022, to March 31, 2023, driven by net income and additional paid-in capital, despite preferred stock dividend accruals Stockholders' Equity Changes | Metric | March 31, 2023 | June 30, 2022 | Change ($) | Change (%) | | :-------------------------------- | :------------- | :------------ | :--------- | :--------- | | Total Stockholders' Equity | $75,724,512 | $51,408,669 | $24,315,843| 47.30% | | Accumulated Deficit | $(84,598,398) | $(105,873,557)| $21,275,159| -20.10% | | Additional Paid-In Capital | $167,297,153 | $163,892,575 | $3,404,578 | 2.08% | - Net income of $32,119,365 contributed to the increase in stockholders' equity for the nine months ended March 31, 2023[22] Condensed Consolidated Statements of Cash Flows For the nine months ended March 31, 2023, operating cash use decreased, investing activities generated significant cash from partnerships and asset sales, resulting in a net cash decrease Nine Months Ended March 31, Cash Flow Summary | Activity | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Net cash used in operating activities | $(15,828,395)| $(18,006,419)| $2,178,024 | -12.09% | | Net cash provided by (used in) investing activities | $8,360,648 | $(569,181) | $8,929,829 | -1568.9% | | Net cash provided by financing activities | $6,565,494 | $17,899,513 | $(11,334,019)| -63.32% | | Net decrease in cash & cash equivalents | $(487,045) | $(386,018) | $(101,027) | 26.17% | - Investing activities were significantly boosted by $7.0 million from the Vision Bioenergy partnership and $2.0 million from the Trigall Australia partnership in 2023[24] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business information, accounting policies, leases, revenue, assets, debt, equity, and non-cash activities NOTE 1 - GENERAL This note describes S&W Seed Company as a global multi-crop agricultural company, highlighting recent strategic partnerships with Shell and Trigall Genetics, and the divestment of its Bioceres investment - S&W Seed Company is a global multi-crop agricultural company focused on breeding, growing, processing, and selling agricultural seeds[27] - Formed Vision Bioenergy Oilseeds LLC partnership with Shell on February 6, 2023, for sustainable biofuel feedstocks, selling a 66% interest to Shell[28] - Established Trigall Australia Pty Ltd partnership with Trigall Genetics S.A. on December 23, 2022, for wheat variety development and marketing in Australia, selling an 80% interest to Trigall[29] - Sold the remainder of its investment in Bioceres, S.A. for net proceeds of $400,000 during the nine months ended March 31, 2023, realizing a gain of $32,030[30] NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note details significant accounting policies, including liquidity, going concern, foreign currency, inventory, ERC, income tax, EPS, revenue/asset concentrations, derivatives, and fair value measurements for the Vision Bioenergy Purchase Option - The company has recorded negative cash flows from operations for several years and had $1.6 million cash on hand as of March 31, 2023, raising substantial doubt about its ability to continue as a going concern, despite meeting financial covenants as of that date[36][37] - Recognized $1.4 million in Government grant income for the Employee Retention Credit (ERC) for the period April 1, 2021, to September 30, 2021, accounted for by analogy to IAS 20[42] Inventory Components | Component | March 31, 2023 | June 30, 2022 | | :---------------------- | :------------- | :------------ | | Raw materials and supplies | $3,312,634 | $2,645,764 | | Work in progress | $12,890,422 | $6,677,980 | | Finished goods | $39,463,571 | $45,192,150 | | Inventories, net | $55,666,627| $54,515,894| - International sales represented 55% and 75% of total revenue for the three and nine months ended March 31, 2023, respectively, indicating significant foreign market concentration[49] - The Purchase Option related to the Vision Bioenergy partnership was valued at $0.6 million using a lattice option valuation model, incorporating unobservable inputs like risk-free rate (3.8%-4.9%), stock price volatility (60%-65%), lack of control premium (13%), and lack of marketability premium (30%)[55][56] NOTE 3 - LEASES The company leases office, laboratory, research, and equipment space; as of March 31, 2023, total lease assets were $3.98 million and liabilities were $4.24 million, with operating lease costs as the largest expense Lease Assets and Liabilities (March 31, 2023) | Category | Amount | | :-------------------------------- | :------------- | | Right of use assets - finance leases, net | $631,867 | | Right of use assets - operating leases | $3,344,109 | | Total lease assets | $3,975,976 | | Current lease liabilities - finance leases | $402,164 | | Current lease liabilities - operating leases | $1,254,357 | | Long-term portion of lease liabilities - finance leases | $246,977 | | Long-term portion of lease liabilities - operating leases | $2,337,168 | | Total lease liabilities | $4,240,666 | Total Lease Costs (Nine Months Ended March 31, 2023) | Category | Amount | | :-------------------------------- | :------------- | | Operating lease cost (Cost of revenue) | $540,260 | | Operating lease cost (SG&A) | $155,288 | | Operating lease cost (R&D) | $316,833 | | Finance lease cost (Depreciation and amortization) | $385,901 | | Finance lease cost (Interest expense, net) | $30,033 | | Total lease costs | $1,428,315 | NOTE 4 - REVENUE RECOGNITION Revenue primarily from seed product sales, recognized upon shipment with 30-180 day payment terms, saw significant growth in Double Team™ Sorghum sales, with international markets like Australia and Saudi Arabia as key sources - Revenue from seed product sales is recognized at the point of transfer of control, generally upon shipment[61] Double Team™ Sorghum Seed Sales | Period | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended March 31 | $3.8 million | $1.7 million | $2.1 million | 123.5% | | Nine Months Ended March 31 | $5.0 million | $1.7 million | $3.3 million | 194.1% | Revenue by Type of Contract | Type | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2023 | Nine Months Ended March 31, 2022 | | :--------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Seed sales | $17,382,360 | $22,791,148 | $50,054,978 | $49,946,635 | | Services | $279,947 | $395,729 | $410,996 | $1,403,332 | | Total | $17,662,307 | $23,186,877 | $50,465,974 | $51,349,967 | Revenue by Destination Country (Nine Months Ended March 31, 2023) | Country | Revenue ($) | % of Total | | :------------- | :---------- | :--------- | | United States | $12,751,506 | 25% | | Australia | $12,522,642 | 25% | | Saudi Arabia | $7,631,494 | 15% | | Mexico | $4,297,823 | 8% | | Libya | $2,995,608 | 6% | | Sudan | $2,303,702 | 5% | | Pakistan | $1,594,026 | 3% | | South Africa | $1,063,255 | 2% | | Algeria | $912,040 | 2% | | Argentina | $803,264 | 2% | | Other | $3,590,614 | 7% | | Total | $50,465,974| 100% | NOTE 5 – INTANGIBLE ASSETS Net intangible assets decreased to $30.33 million as of March 31, 2023, from $34.10 million at June 30, 2022, primarily due to amortization and intellectual property transfer to Trigall Australia Intangible Assets, Net | Category | March 31, 2023 | June 30, 2022 | | :-------------------- | :------------- | :------------ | | Trade name | $931,424 | $1,084,791 | | Customer relationships| $5,103,313 | $5,499,815 | | Intellectual property | $21,996,763 | $23,035,925 | | License agreement | $0 | $1,986,598 | | Total Intangibles, net| $30,328,212| $34,095,827| - Amortization expense for intangible assets totaled $548,438 for the three months ended March 31, 2023, and $1,719,646 for the nine months ended March 31, 2023[71] - The license agreement intangible asset was reduced to $0 due to the transfer of intellectual property rights to Trigall Australia[70][71] NOTE 6 - PROPERTY, PLANT AND EQUIPMENT Net property, plant, and equipment decreased to $10.24 million as of March 31, 2023, from $16.87 million at June 30, 2022, due to depreciation and Vision Bioenergy partnership contributions Property, Plant and Equipment, Net | Category | March 31, 2023 | June 30, 2022 | | :-------------------------- | :------------- | :------------ | | Land and improvements | $942,919 | $2,265,087 | | Buildings and improvements | $3,371,017 | $8,119,960 | | Machinery and equipment | $12,622,765 | $14,972,462 | | Vehicles | $608,002 | $1,085,342 | | Leasehold improvements | $552,810 | $552,810 | | Construction in progress | $20,000 | $110,107 | | Total PPE | $18,117,513| $27,105,768| | Less: accumulated depreciation | $(7,875,828) | $(10,234,099) | | PPE, net | $10,241,685| $16,871,669| - Depreciation expense totaled $438,505 for the three months ended March 31, 2023, and $1,591,997 for the nine months ended March 31, 2023[73][74] NOTE 7 - DEBT Net total debt decreased to $4.71 million as of March 31, 2023, from $12.31 million at June 30, 2022, primarily due to the Shell payoff, with CIBC, NAB, and MFP loan agreements amended for extended maturities and increased facilities Total Debt Outstanding, Net | Category | March 31, 2023 | June 30, 2022 | | :-------------------------------- | :------------- | :------------ | | Total working capital lines of credit, net | $42,783,136 | $34,382,183 | | Total long-term debt, net | $4,706,783 | $12,309,323 | | Total debt, net | $47,489,919| $46,691,506| - The CIBC Loan Agreement was amended on March 22, 2023, extending its maturity to August 31, 2024, and providing a senior secured credit facility of up to $25.0 million (seasonal)[77][78] - The Rooster Note, with approximately $6.6 million outstanding, was paid off in full by Shell on February 6, 2023, as part of the Vision Bioenergy partnership[83] - The NAB Finance Agreement was amended in October 2022 and February 2023, increasing the seasonal credit facility to AUD $40.0 million (USD $26.8 million) and extending maturities, with an undertaking to maintain a net related entity position of not more than USD $18.5 million[85][87] - The MFP Loan Agreement was amended to increase the maximum term loan advances to $13.0 million and extend the MFP Letter of Credit maturity to September 30, 2024, with the MFP Loan Agreement maturing on November 30, 2025[89][90] NOTE 8 - FOREIGN CURRENCY FORWARD CONTRACTS AND OPTIONS The company uses foreign currency forward contracts and call options to manage exchange rate exposure, holding $10.6 million notional value in forward contracts and recording $812,362 liability, with $167,688 in gains for the nine months ended March 31, 2023 - Held foreign currency forward contracts with a notional value of $10,621,155 as of March 31, 2023, maturing from April to June 2023[93] Foreign Currency Contract Liabilities and Gains | Metric | March 31, 2023 | June 30, 2022 | | :-------------------------------- | :------------- | :------------ | | Foreign currency contract liability | $812,362 | $996,106 | | Gains on foreign currency forward contracts (9 months ended Mar 31) | $167,688 | $(50,971) | - Acquired foreign currency options with a total notional amount of $9.0 million in March 2023, with premiums of $31,055 recorded as current assets[95] NOTE 9 – EQUITY The company generated $0.2 million from ATM common stock sales for the nine months ended March 31, 2023, with $6.2 million remaining, and issued MFP Warrants for 2,633,400 common shares to MFP Partners, L.P ATM Common Stock Sales Proceeds | Period | Gross Proceeds | | :-------------------------------- | :------------- | | Three Months Ended March 31, 2023 | $0.2 million | | Nine Months Ended March 31, 2023 | $0.2 million | | Three Months Ended March 31, 2022 | $6.2 million | | Nine Months Ended March 31, 2022 | $6.2 million | - As of March 31, 2023, $6.2 million remained available for sale under the ATM Agreement[97] - Issued warrants to purchase a total of 2,633,400 shares of common stock to MFP Partners, L.P. during the nine months ended March 31, 2023, with exercise prices ranging from $1.60 to $2.15 per share[98][99][100][101] - An aggregate value of $1,894,901 related to the MFP Warrants was capitalized and $626,141 was amortized as interest expense during the nine months ended March 31, 2023[101] NOTE 10 - EQUITY-BASED COMPENSATION The company granted 1,289,675 stock options and 495,196 restricted stock units, incurring $1.38 million in stock-based compensation expense for the nine months ended March 31, 2023, with $1.13 million and $0.46 million unrecognized for options and RSUs, respectively Stock Option Activity (Nine Months Ended March 31, 2023) | Metric | Number of Options | Weighted-Average Exercise Price Per Share | | :-------------------------- | :---------------- | :---------------------------------------- | | Outstanding at June 30, 2022| 4,637,100 | $2.64 | | Granted | 1,289,675 | $1.26 | | Exercised | (1,050) | $0.95 | | Canceled/forfeited/expired | (844,545) | $2.79 | | Outstanding at March 31, 2023| 5,081,180 | $2.27 | Restricted Stock Unit Activity (Nine Months Ended March 31, 2023) | Metric | Number of Nonvested Restricted Stock Units | Weighted-Average Grant Date Fair Value | | :-------------------------------- | :--------------------------------------- | :------------------------------------- | | Nonvested restricted units outstanding at June 30, 2022 | 267,919 | $2.66 | | Granted | 495,196 | $1.14 | | Vested | (224,164) | $2.55 | | Forfeited | (8,750) | $2.50 | | Nonvested restricted units outstanding at March 31, 2023| 530,201 | $1.29 | Stock-Based Compensation Expense | Period | 2023 | 2022 | | :-------------------------------- | :----------- | :----------- | | Three Months Ended March 31 | $620,887 | $413,293 | | Nine Months Ended March 31 | $1,382,895 | $1,821,808 | - As of March 31, 2023, $1,131,866 of unrecognized stock compensation expense related to options and $461,652 for restricted stock units remained[104][106] NOTE 11 - INVESTMENTS Equity method investments significantly increased to $24.12 million as of March 31, 2023, driven by partnerships with Shell (Vision Bioenergy) and Trigall Genetics (Trigall Australia), resulting in $38.3 million and $1.8 million gains respectively, with the Bioceres investment fully divested - The Shell Partnership (Vision Bioenergy) involved S&W contributing facilities and assets, Shell contributing $13.2 million cash to Vision Bioenergy, paying $7.0 million to S&W, and retiring $6.8 million of S&W's debt. S&W retained a 34% interest, and Shell received 66%[110][113] - A gain of $38.3 million was recognized on the sale of the 66% interest in Vision Bioenergy to Shell, based on total consideration of $43.8 million less the $5.5 million carrying value of contributed assets[114][115] - The Trigall Australia Partnership involved S&W Australia transferring intellectual property and equipment for $2.0 million cash, a $1.0 million promissory note, and a 20% ownership interest. A $1.8 million gain was recognized on this asset sale[124][125] Equity Method Investments | Investment | March 31, 2023 (Carrying Amount) | June 30, 2022 (Carrying Amount) | | :---------------- | :------------------------------- | :------------------------------ | | Vision Bioenergy | $23,340,657 | — | | Trigall Australia | $781,114 | — | | Bioceres | — | $367,970 | | Total | $24,121,771 | $367,970 | NOTE 12 – SERIES B CONVERTIBLE PREFERRED STOCK Series B Convertible Preferred Stock increased to $5.15 million as of March 31, 2023, from $4.80 million at June 30, 2022, primarily due to accrued dividends and warrant discount accretion Series B Convertible Preferred Stock Changes | Metric | Amount | | :-------------------------------- | :------------- | | Balance at June 30, 2022 | $4,804,819 | | Dividends accrued | $271,746 | | Accretion of discount for warrants | $77,514 | | Balance at March 31, 2023 | $5,154,079 | NOTE 13 - NON-CASH ACTIVITIES FOR STATEMENTS OF CASH FLOWS This note outlines significant non-cash activities for the nine months ended March 31, 2023, including ROU assets, Shell consideration for Vision Bioenergy equity, and intangible asset contribution to Trigall Non-Cash Activities (Nine Months Ended March 31, 2023) | Activity | Amount | | :-------------------------------- | :------------- | | ROU assets financed by lease liabilities | $498,143 | | Settlement of long-term debt principal, interest and other related costs (Shell) | $6,840,879 | | Note receivable (Shell) | $5,747,127 | | Membership purchase option (Shell)| $604,000 | | Contribution of property, plant and equipment and inventory to Vision Bioenergy for equity interest | $(5,532,694) | | Contribution of intangible assets to Trigall in exchange for equity investment and promissory note | $(1,750,000) | | Warrants issued for financial commitment asset | $1,894,901 | | Dividends accrued for participating securities | $271,746 | | Accretion of discount for Series B preferred stock warrants | $77,514 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and operational results, detailing strategic initiatives, global economic impacts, income statement analysis, and liquidity and capital resources Strategic Review The company's strategic review focuses on sorghum technology, international forage, and specialty crops, with partnerships with Trigall Genetics and Shell expected to reduce operating expenses, provide liquidity, and sharpen growth priorities - Strategic review focuses on sorghum technology (Double Team™), international/U.S. forage operations, and specialty crops (stevia, camelina)[136][137] - Partnerships with Trigall Genetics (wheat in Australia) and Shell (sustainable biofuel feedstocks via Vision Bioenergy) are expected to reduce operating expenses, provide liquidity, and sharpen focus on key growth priorities[139][140][143] - The company plans to reduce annual operating expenses by approximately $4.0 to $5.0 million, including streamlining European sunflower operations and reducing headcount[143][149] Global Economic Conditions Adverse geopolitical and macroeconomic events, including conflicts, inflation, and supply chain disruptions, continue to impact the business, with the Sudan conflict and Saudi Arabian market conditions expected to shift $10.0 million in alfalfa orders to fiscal 2024 - Adverse geopolitical and macroeconomic events (COVID-19, Russia-Ukraine conflict, Sudan conflict, inflation, supply chain disruptions, bank failures) continue to pose risks to operations[143][145][149][150] - The armed conflict in Sudan has disrupted shipments, leading to cancellation of orders and efforts to find alternative customers[146] - Unregistered, lower-priced European seed in Saudi Arabia has created a short-term market imbalance, causing the company to strategically avoid discounting its high-value seed[146] - Approximately $10.0 million in alfalfa orders are expected to shift to the first half of fiscal 2024 due to the Sudan conflict and Saudi Arabia market conditions[146] - Logistical challenges, including truck availability and port congestion, are expected to persist throughout fiscal 2023, potentially delaying revenue recognition[148] Components of Our Statements of Operations Data Revenue primarily from proprietary seed varieties (alfalfa, sorghum, pasture) fluctuates due to market instability; cost of revenue includes procurement and packaging, while operating expenses, including R&D, focus on high-value traits for alfalfa and sorghum - Revenue is primarily from proprietary seed varieties and hybrids, with alfalfa, sorghum, and pasture seed expected to be substantial contributors[151] - Revenue fluctuates due to customer order timing and global market instability (COVID-19, Russia-Ukraine, Sudan conflicts, supply chain, inflation)[153] - Specialty crops (stevia, biofuels) have not yet generated meaningful revenue, but the Vision Bioenergy partnership with Shell aims to develop camelina sativa for biofuels[154] - Gross margin is expected to improve with increased market acceptance of Double Team™ sorghum[155] - Research and development efforts are focused on high-value activities, including differentiating forage quality traits for alfalfa and higher value grain products and herbicide tolerance for sorghum[158] Results of Operations Results for the three and nine months ended March 31, 2023, show a significant shift from net loss to net income, primarily due to a substantial gain on the Vision Bioenergy business interest sale, with gross profit improving from higher-margin sales Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022 Revenue decreased by 23.8% due to lower sales, but gross profit increased by 63.8% from higher-margin Double Team™ sorghum and reduced inventory write-downs, leading to a net income improvement from a $7.3 million loss to a $32.1 million gain, driven by a $38.3 million business interest sale gain and $1.4 million government grant income Key Financial Changes (Three Months Ended March 31, 2023 vs 2022) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Revenue | $17,662,307 | $23,186,877 | $(5,524,570)| -23.8% | | Gross profit | $4,430,471 | $2,705,414 | $1,725,057 | 63.8% | | Selling, general and administrative expenses | $5,990,651 | $5,582,060 | $408,591 | 7.3% | | Research and development expenses | $1,208,038 | $1,904,631 | $(696,593) | -36.6% | | Loss from operations | $(3,912,749) | $(6,210,929) | $2,298,180 | -37.0% | | Government grant income | $(1,444,044) | — | $(1,444,044)| - | | Gain on sale of business interest | $(38,323,506)| — | $(38,323,506)| - | | Net income (loss) | $32,113,573 | $(7,262,255) | $39,375,828| -542.2% | - Revenue decrease was primarily due to a $3.9 million decrease in alfalfa sales (MENA, US, Europe, Asia, South Africa), a $2.0 million decrease in pastures and forages sales in Australia, and a $1.1 million decrease in conventional sorghum sales to the US[167] - Gross margin improvement was driven by increased sales of higher-margin Double Team™ sorghum in the US, reduced lower-margin dormant alfalfa sales, and lower inventory write-downs ($0.4 million in 2023 vs $1.1 million in 2022)[168] - Other (income) expenses included $1.5 million in lender fees written off due to uncompleted financing efforts[178] Nine Months Ended March 31, 2023 Compared to the Nine Months Ended March 31, 2022 Revenue slightly decreased by 1.7%, but gross profit increased by 55.9% due to improved margin and reduced inventory write-downs, leading to a net income improvement from a $23.5 million loss to a $21.6 million gain, driven by a $38.3 million business interest sale gain and a $1.8 million intangible asset disposal gain Key Financial Changes (Nine Months Ended March 31, 2023 vs 2022) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Revenue | $50,465,974 | $51,349,967 | $(883,993) | -1.7% | | Gross profit | $11,684,273 | $7,492,447 | $4,191,826 | 55.9% | | Selling, general and administrative expenses | $17,289,120 | $18,260,785 | $(971,665) | -5.3% | | Research and development expenses | $4,226,891 | $6,010,172 | $(1,783,281)| -29.7% | | Loss from operations | $(13,562,196)| $(20,877,021)| $7,314,825 | -35.0% | | Government grant income | $(1,444,044) | — | $(1,444,044)| - | | Gain on sale of business interest | $(38,323,506)| — | $(38,323,506)| - | | Gain on disposal of intangible assets | $(1,796,252)| — | $(1,796,252)| - | | Net income (loss) | $21,607,777 | $(23,458,061)| $45,065,838| -192.1% | - Revenue decrease was primarily due to a $4.6 million decrease in alfalfa sales (US, Europe, Asia, South Africa) and a $4.0 million decrease in conventional sorghum sales (US, Asia, South Africa, MENA), partially offset by increases in sorghum sales to MENA and LATAM[184] - Gross margin improvement was driven by increased sales of higher-margin Double Team™ sorghum and non-dormant alfalfa, reduced lower-margin sorghum Sudan sales, and lower inventory write-downs ($0.9 million in 2023 vs $1.9 million in 2022)[185][186] - SG&A expenses decreased by $1.0 million due to reduced stock-based compensation, payroll, bad debt, advertising, and consulting expenses, partially offset by increased one-time transaction costs[187] - R&D expenses decreased by $1.8 million due to reductions in salaries, field trial expenses, consulting fees, and investment in sunflower programs[188] Liquidity and Capital Resources Liquidity is influenced by seasonal working capital and historical reliance on debt/equity financing; the company, not profitable from operations, requires additional funding, expecting to meet short-term needs via cash, partnership payments, and debt facilities, but faces long-term financing and covenant compliance risks Overview Working capital requirements fluctuate seasonally, peaking in the second and third fiscal quarters due to grower payments, with sales and cash receipts highly dependent on distributor delivery and payment timing - Working capital needs are highest in the second and third fiscal quarters (October-March) due to progressive payments to North American contracted growers[200] - Sales and cash receipts are highly dependent on the timing of deliveries and payments from large distributors, leading to significant period-to-period fluctuations[201] - Historically, funding has relied on occasional sales of debt and equity securities and credit facilities from financial institutions[203] Capital Resources and Material Cash Requirements Excluding the Vision Bioenergy gain, the company is unprofitable with negative operating cash flow, requiring additional funding; it expects to cover 12-month needs via cash, Shell payments, and debt facilities, but faces critical challenges in securing long-term funding and maintaining debt covenant compliance - Excluding the Vision Bioenergy partnership gain, the company is not profitable and has had negative cash flow from operations for several years, requiring additional funding[204] - Expected to meet cash requirements for the next 12 months through cash flow from operations, cash payments from Shell ($7.0 million received, $6.0 million expected in Feb 2024), and undrawn availability under existing debt facilities[205][207] - The CIBC Loan Agreement was amended on March 22, 2023, extending maturity to August 31, 2024, with a credit facility up to $25.0 million (seasonal). As of March 31, 2023, the company was in compliance with all CIBC covenants[209][210] - The NAB Finance Agreement was amended to increase credit limits and extend maturities, with an undertaking to maintain a net related entity position of not more than USD $18.5 million. As of March 31, 2023, the company was in compliance with all NAB covenants[213][214] - The MFP Loan Agreement was amended to increase term loan advances to $13.0 million and extend the MFP Letter of Credit maturity to September 30, 2024, with the MFP Loan Agreement maturing on November 30, 2025[217][220] - Failure to renew/refinance debt or secure additional capital could lead to reduced operations, repayment acceleration, or asset sales[223][224] Summary of Cash Flows For the nine months ended March 31, 2023, operating activities used $15.8 million cash (down from $18.0 million in 2022), investing activities provided $8.4 million (up from $0.6 million used in 2022), and financing activities provided $6.6 million (down from $17.9 million in 2022) Cash Flow Summary (Nine Months Ended March 31) | Activity | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :----------- | :----------- | :--------- | :--------- | | Cash flows from operating activities | $(15,828,395)| $(18,006,419)| $2,178,024 | -12.09% | | Cash flows from investing activities | $8,360,648 | $(569,181) | $8,929,829 | -1568.9% | | Cash flows from financing activities | $6,565,494 | $17,899,513 | $(11,334,019)| -63.32% | | Net decrease in cash and cash equivalents | $(487,045) | $(386,018) | $(101,027) | 26.17% | - Investing activities were positively impacted by $7.0 million from the Vision Bioenergy partnership and $2.0 million from the Trigall Australia partnership[229] - Financing activities in 2023 included $7.8 million in net borrowings on working capital lines of credit and $0.3 million in long-term debt borrowings, offset by $1.4 million in long-term debt repayments[231] Inflation Risk Inflationary pressures on labor and commodity prices impacted operations during the nine months ended March 31, 2023, and are expected to continue, with management attempting to mitigate costs through price increases and product mix changes - Inflationary pressures on labor and commodity prices directly impacted results and are expected to continue through fiscal year 2023[233] - Strategies to manage inflationary costs include selective price increases and changes in product mix[233] - Rapidly changing inflationary pressures and competitive markets may limit the ability to fully recover cost increases[233] Critical Accounting Estimates Critical accounting estimates include revenue recognition, internal-use software, and business combinations, with the Vision Bioenergy partnership introducing new estimates for Purchase Option valuation and gain on sale, requiring future financial performance and interest rate projections - Critical accounting estimates include revenue recognition, internal-use software, and business combinations[235] - The Purchase Option from the Vision Bioenergy partnership is valued at $0.6 million using a lattice option valuation model with significant unobservable inputs[236] - The gain on sale of business interest from the Vision Bioenergy transaction was based on fair value adjustments of contributed assets and current/future payments, requiring estimates of future financial performance and interest rates[237] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, S&W Seed Company is not required to provide detailed quantitative and qualitative market risk disclosures in this quarterly report - The company is a smaller reporting company and is not required to provide detailed market risk disclosures[239] Item 4. Controls and Procedures This section addresses the effectiveness of disclosure controls and procedures and reports on any changes in internal control over financial reporting Disclosure Controls and Procedures Management evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2023, concluding they were effective at a reasonable assurance level - Disclosure controls and procedures were evaluated as of March 31, 2023, and deemed effective at the reasonable assurance level[240] Changes in Internal Control over Financial Reporting No significant changes in internal control over financial reporting occurred during the period that materially affected or are reasonably likely to affect these controls - No significant changes in internal control over financial reporting occurred during the period[241] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in routine legal proceedings, but no matters are expected to have a material adverse impact on its business, results of operations, financial condition, or cash flows - No matters pending are expected to have a material adverse impact on the company's business, results of operations, financial condition, or cash flows[243] Item 1A. Risk Factors As a smaller reporting company, S&W Seed Company is not required to provide risk factor information in this Form 10-Q, referring to its Annual Report on Form 10-K - The company is a smaller reporting company and is not required to provide risk factor information in this Form 10-Q[244] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds for the period - No unregistered sales of equity securities or use of proceeds occurred[245] Item 3. Defaults Upon Senior Securities The company reports no defaults upon senior securities for the period - No defaults upon senior securities occurred[246] Item 4. Mine Safety Disclosures This item is not applicable to S&W Seed Company - Mine Safety Disclosures are not applicable to the company[247] Item 5. Other Information The company reports no other information for the period - No other information is reported[248] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, common stock certificates, warrants, partnership agreements, loan agreements, and certifications - Exhibits include organizational documents (Articles of Incorporation, Bylaws), common stock certificates, various Common Stock Purchase Warrants (including those issued to MFP Partners, L.P.), the Contribution and Membership Interest Purchase Agreement with Shell, the Amended and Restated Loan and Security Agreement with CIBC Bank USA, the Third Amendment to Loan and Security Agreement with MFP Partners, L.P., and certifications by the CEO and CFO[250] SIGNATURES The report was duly signed on behalf of S&W Seed Company by Elizabeth Horton, Chief Financial Officer, on May 11, 2023 - The report was signed by Elizabeth Horton, Chief Financial Officer, on May 11, 2023[257]