September 30, 2014 DOC


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 001-34719

S&W SEED COMPANY
(Exact name of Registrant as Specified in its Charter)

 

Nevada
27-1275784
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

25552 South Butte Avenue
Five Points, CA    93624

(Address of Principal Executive Offices, including Zip Code)

(559) 884-2535
(Registrant's Telephone Number, including Area Code)

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    x YES      ¨ NO   

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  x     NO  ¨

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    ¨

Accelerated filer    ¨

Non-accelerated filer    ¨
(Do not check if a smaller reporting company)

Smaller reporting company    x

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES    ¨        NO    x

      As of November 11, 2014, 11,658,801 shares of the registrant's common stock were outstanding.



S&W SEED COMPANY
Table of Contents

PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements (Unaudited):
 
     
           Consolidated Balance Sheets at September 30, 2014 and June 30, 2014
2
     
           Consolidated Statements of Operations for the Three Months Ended September 30, 2014 and 2013
3
     
           Consolidated Statements of Comprehensive Income (Loss)for the Three Months Ended September 30, 2014 and 2013
4
     
           Consolidated Statements of Stockholders' Equity for the Fiscal Year Ended June 30, 2014 and for the Three Months Ended September 30, 2014
5
     
           Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2014 and 2013
6
     
           Notes to Consolidated Financial Statements
7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
36
     
Item 4. Controls and Procedures
36
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
37
     
Item 1A. Risk Factors
37
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
37
     
Item 3. Defaults Upon Senior Securities
37
     
Item 4. Mine Safety Disclosures
37
     
Item 5. Other Information
37
     
Item 6. Exhibits
37

1


Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

S&W SEED COMPANY
(A NEVADA CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

      September 30,          June 30,     
      2014     2014
ASSETS            
             
CURRENT ASSETS            
     Cash and cash equivalents   $ 2,314,780    $ 1,167,503 
     Accounts receivable, net     21,492,373      24,255,596 
     Inventories, net     29,050,403      28,485,584 
     Prepaid expenses and other current assets     384,131      230,907 
     Deferred tax asset     1,293,747      1,300,665 
               TOTAL CURRENT ASSETS     54,535,434      55,440,255 
             
Property, plant and equipment, net of accumulated depreciation     10,400,311      10,356,809 
Goodwill     4,678,818      4,939,462 
Other intangibles, net     13,633,946      14,590,771 
Crop production costs, net     2,671,114      1,952,100 
Deferred tax asset - long term     1,960,042      1,666,488 
Other asset - long term     359,507      354,524 
               TOTAL ASSETS   $ 88,239,172    $ 89,300,409 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
             
CURRENT LIABILITIES            
     Accounts payable   $ 13,439,282    $ 15,026,669 
     Accounts payable - related parties     2,526,426      1,053,874 
     Accrued expenses and other current liabilities     462,697      818,730 
     Working capital lines of credit     17,334,726      15,888,640 
     Foreign exchange contract liability     65,768      -  
     Current portion of long-term debt     212,606      267,764 
               TOTAL CURRENT LIABILITIES     34,041,505      33,055,677 
             
Non-compete payment obligation, less current portion     150,000      150,000 
Other non-current liabilities     21,722      21,108 
Deferred tax liability - non-current     98,892      106,758 
Long-term debt, less current portion     4,437,098      4,452,631 
             
               TOTAL LIABILITIES     38,749,217      37,786,174 
             
STOCKHOLDERS' EQUITY            
     Preferred stock, $0.001 par value; 5,000,000 shares authorized;            
          no shares issued and outstanding     -       -  
     Common stock, $0.001 par value; 50,000,000 shares authorized;            
          11,674,447 issued and 11,649,447 outstanding at September 30, 2014;            
          11,665,093 issued and 11,640,093 outstanding at June 30, 2014     11,675      11,666 
     Treasury stock, at cost, 25,000 shares at September 30, 2014 and June 30, 2014     (134,196)     (134,196)
     Additional paid-in capital     55,313,934      55,121,876 
     Retained earnings (deficit)     (2,690,659)     (1,816,344)
     Other comprehensive income     (3,010,799)     (1,668,767)
               TOTAL STOCKHOLDERS' EQUITY     49,489,955      51,514,235 
               TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 88,239,172    $ 89,300,409 

See notes to consolidated financial statements.

2


S&W SEED COMPANY
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

      Three Months Ended
      September 30,
      2014     2013
             
Revenue   $ 8,164,234    $ 12,378,586 
             
Cost of revenue     6,850,442      10,071,006 
             
Gross profit     1,313,792      2,307,580 
             
Operating expenses            
     Selling, general and administrative expenses     1,788,425      1,594,203 
     Research and development expenses     223,359      233,639 
     Depreciation and amortization     319,759      314,454 
             
          Total operating expenses     2,331,543      2,142,296 
             
Income (loss) from operations     (1,017,751)     165,284 
             
Other expense            
     Foreign currency (gain) loss     47,741      (33,985)
     Interest expense, net     246,650      136,998 
             
Income (loss) before income tax expense (benefit)     (1,312,142)     62,271 
     Income tax expense (benefit)     (437,827)     21,062 
Net income (loss)   $ (874,315)   $ 41,209 
             
Net income (loss) per common share:            
     Basic   $ (0.08)   $ 0.00 
     Diluted   $ (0.08)   $ 0.00 
             
Weighted average number of common shares outstanding:            
     Basic     11,625,115      11,563,452 
     Diluted     11,625,115      11,854,685 

See notes to consolidated financial statements.

3


S&W SEED COMPANY
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

      Three Months Ended
      September 30,
      2014     2013
             
Net income (loss)   $ (874,315)   $ 41,209 
             
Foreign exchange translation adjustment     (1,342,032)     294,168 
             
Comprehensive income (loss)   $ (2,216,347)   $ 335,377 

See notes to consolidated financial statements.

4


S&W SEED COMPANY
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)

                            Additional     Retained     Accumulated     Total
    Common Stock     Treasury Stock     Paid-In     Earnings     Other Comprehensive     Stockholders'
    Shares     Amount     Shares     Amount     Capital     (Deficit)     Loss     Equity
                                               
Balance, June 30, 2013   11,584,101    $ 11,585        $   $ 54,338,758    $ (2,189,444)   $ (2,103,836)   $ 50,057,063 
                                               
Stock-based compensation - options, restricted stock, and RSUs       -               872,711      -           872,711 
Common stock issued for exercise of underwriter warrant and A warrant   31,500      32              213,644      -           213,676 
Net issuance to settle RSUs   57,557      57              (241,709)     -           (241,652)
Cancellation of restricted shares for withholding taxes   (8,065)     (8)             (61,528)     -           (61,536)
Treasury stock purchases           (25,000)     (134,196)         -           (134,196)
Comprehensive income                       -       435,069      435,069 
Net income for the year ended June 30, 2014                       373,100          373,100 
Balance, June 30, 2014   11,665,093      11,666      (25,000)     (134,196)     55,121,876      (1,816,344)     (1,668,767)     51,514,235 
                                               
Stock-based compensation - options, restricted stock, and RSUs       -               219,012      -           219,012 
Net issuance to settle RSUs   9,354                  (26,954)     -           (26,945)
Comprehensive income                       -       (1,342,032)     (1,342,032)
Net loss for the three months ended September 30, 2014                       (874,315)         (874,315)
Balance, September 30, 2014   11,674,447    $ 11,675      (25,000)   $ (134,196)   $ 55,313,934    $ (2,690,659)   $ (3,010,799)   $ 49,489,955 

See notes to consolidated financial statements.

5


S&W SEED COMPANY
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

      Three Months Ended
      September 30,
      2014     2013
CASH FLOWS FROM OPERATING ACTIVITIES            
     Net income (loss)   $ (874,315)   $ 41,209 
     Adjustments to reconcile net income (loss) from operating activities to net             
          cash used in operating activities            
          Stock-based compensation     219,012      215,026 
          Depreciation and amortization     319,759      314,454 
          Change in foreign exchange contracts     69,786      (525,726)
          Amortization of debt discount     13,036      12,754 
          Changes in:            
               Accounts receivable     2,077,130      (42,468)
               Inventories     (1,624,020)     (2,079,229)
               Prepaid expenses and other current assets     (147,782)     41,585 
               Crop production costs     (719,014)     (819,773)
               Deferred tax asset      (293,554)     (92,110)
               Accounts payable     (809,065)     (3,469,146)
               Accounts payable - related parties     1,462,997      412,530 
               Accrued expenses and other current liabilities     (350,100)     (102,365)
               Other non-current liabilities     2,302      (98,617)
                    Net cash used in operating activities     (653,828)     (6,191,876)
             
CASH FLOWS FROM INVESTING ACTIVITIES            
     Additions to property, plant and equipment     (149,850)     (89,839)
     Investment in Bioceres     (4,983)    
                    Net cash used in investing activities     (154,833)     (89,839)
             
CASH FLOWS FROM FINANCING ACTIVITIES            
     Common stock repurchased         (21,785)
     Taxes paid related to net share settlements of stock-based compensation awards     (26,945)     (141,458)
     Borrowings and repayments on lines of credit, net     2,090,978      (115,974)
     Repayments of long-term debt     (83,727)     (82,910)
                    Net cash provided by (used in) financing activities     1,980,306      (362,127)
             
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (24,368)     (2,963)
             
NET INCREASE (DECREASE) IN CASH     1,147,277      (6,646,805)
             
CASH AND CASH EQUIVALENTS, beginning of the period     1,167,503      11,781,074 
             
CASH AND CASH EQUIVALENTS, end of period   $ 2,314,780    $ 5,134,269 
             
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION            
     Cash paid during the period for:            
          Interest   $ 251,778    $ 161,843 
          Income taxes     118,159     

See notes to consolidated financial statements.

6


S&W SEED COMPANY
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - BACKGROUND AND ORGANIZATION

Organization

The original business of the Company, that is, breeding, growing, processing and selling alfalfa seed, began as S&W Seed Company, a general partnership, in July 1980. The corporate entity, S&W Seed Company, was incorporated in Delaware in October 2009. The corporation is the successor entity to Seed Holding, LLC, which had purchased a majority interest in the general partnership between June 2008 and December 2009. Following the Company's initial public offering in May 2010, the Company purchased the remaining general partnership interests and became the sole owner of the business. Seed Holding, LLC is a consolidated subsidiary of the Company.

In December 2011, S&W Seed Company consummated a merger (the "Reincorporation") with and into its wholly owned subsidiary, S&W Seed Company, a Nevada corporation, pursuant to the terms and conditions of an Agreement and Plan of Merger. As a result of the Reincorporation, the Company is now a Nevada corporation.

On April 1, 2013, the Company, together with its wholly owned subsidiary, S&W Seed Australia Pty Ltd, an Australia corporation ("S&W Australia"), closed on the acquisition of all of the issued and outstanding shares of Seed Genetics International Pty Ltd, an Australia corporation ("SGI"), from SGI's shareholders (the "SGI Acquisition").

Business Overview

Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding, growing, processing and selling agricultural commodities, primarily alfalfa seed. The Company owns a 40-acre seed cleaning and processing facility located in Five Points, California that it has operated since its inception. The Company's products are primarily grown under contract by farmers in the San Joaquin and Imperial Valleys of California, Southern Australia as well as by the Company itself under a small direct farming operation. The Company began its stevia initiative in fiscal 2010 and is currently focused on breeding improved varieties of stevia, improving its harvesting and milling techniques, and developing marketing and distribution programs for its stevia products.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP").

The consolidated financial statements include the accounts of Seed Holding, LLC and its other wholly-owned subsidiaries, S&W Australia which owns 100% of SGI, and Stevia California, LLC. All significant intercompany balances and transactions have been eliminated.

7


Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of September 30, 2014, consolidated statements of operations for the three months ended September 30, 2014 and 2013, consolidated statements of comprehensive income for the three months ended September 30, 2014 and 2013, consolidated statement of owners' equity for the three months ended September 30, 2014 and consolidated statements of cash flows for the three months ended September 30, 2014 and 2013 are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of the Company's management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company's statement of financial position at September 30, 2014 and its results of operations and its cash flows for the three months ended September 30, 2014 and 2013. The results for the three months ended September 30, 2014 are not necessarily indicative of the results to be expected for the fiscal year ending June 30, 2015.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in the financial statements. These include allowance for doubtful trade receivables, sales returns and allowances, inventory valuation and obsolescence, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable to farmers who grow seed for the Company), contingencies and litigation. Significant estimates and assumptions are also used to establish the fair value and useful lives of depreciable tangible and certain intangible assets as well as valuing stock-based compensation. Actual results may differ from those estimates and assumptions, and such results may affect income, financial position or cash flows.

Certain Risks and Concentrations

The Company's revenue is principally derived from the sale of alfalfa seed, the market for which is highly competitive. The Company depends on a core group of significant customers. Three customers accounted for 37% of its net revenue for the three months ended September 30, 2014, and one customer accounted 22% of its net revenue for the three months ended September 30, 2013. 

Two customers accounted for 32% of the Company's accounts receivable at September 30, 2014. One customer accounted for 32% of the Company's accounts receivable at June 30, 2014.

Sales direct to international customers represented 77% and 86% of revenue during the three months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, approximately 3% of the net book value of fixed assets were located outside of the United States.

The following table shows revenues from external customers by country:

      Three Months Ended September 30,
      2014       2013  
Saudi Arabia   $ 2,440,716  30%   $ 4,239,391  34%
United States     1,026,951  13%     1,691,095  14%
Mexico     1,999,808  24%     1,089,627  9%
Australia     630,017  8%     1,256,135  10%
Libya     (485) 0%     1,128,540  9%
France     414,480  5%     7,978  0%
Other     1,652,747  20%     2,965,820  24%
Total   $ 8,164,234  100%   $ 12,378,586  100%

8


International Operations

The Company translates its foreign operations' asset and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in the cumulative translation account, a component of accumulated other comprehensive income. Gains or losses from foreign currency transactions are included in the consolidated statement of operations.

Revenue Recognition

The Company derives its revenue primarily from sale of seed and other crops and milling services. Revenue from seed and other crop sales is recognized when risk and title to the product is transferred to the customer, which usually occurs at the time of shipment.

When the right of return exists in the Company's seed business, sales revenue is reduced at the time of sale to reflect expected returns. In order to estimate the expected returns, management analyzes historical returns, economic trends, market conditions and changes in customer demand. At September 30, 2014, no customers had the right of return.

The Company recognizes revenue from milling services according to the terms of the sales agreements and when delivery has occurred, performance is complete, no right of return exists and pricing is fixed or determinable at the time of sale.

Additional conditions for recognition of revenue for all sales include the requirements that the collection of sales proceeds must be reasonably assured based on historical experience and current market conditions, the sales price is fixed and determinable and that there must be no further performance obligations under the sale.

Shipping and Handling Costs

The Company records purchasing and receiving costs, inspection costs and warehousing costs in cost of goods sold. In some instances, the Company is not obligated to pay for shipping or any costs associated with delivering its products to its customers. In these instances, costs associated with the shipment of products are not included in the Company's consolidated financial statements. When the Company is required to pay for outward freight and/or the costs incurred to deliver products to its customers, the costs are included in cost of goods sold.

Cash and Cash Equivalents

For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents consist of the following:

      September 30,          June 30,     
      2014     2014
             
Cash   $ 2,193,463    $ 1,046,201 
Money market funds     121,317      121,302 
    $ 2,314,780    $ 1,167,503 

The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation ("FDIC"). Accounts are guaranteed by the FDIC up to $250,000 under current regulations. Cash equivalents held in money market funds are not FDIC insured. Cash deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company had approximately $1,943,463 and $796,201 in excess of FDIC insured limits at September 30, 2014 and June 30, 2014, respectively.

9


Accounts Receivable

The Company provides an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer's trade accounts receivable. The allowance for doubtful trade receivables was $72,556 at September 30, 2014 and June 30, 2014, respectively.

Inventories

Inventory

Inventories consist of alfalfa seed purchased from the Company's growers under production contracts, alfalfa seed produced from its own farming operations, and packaging materials.

Inventories are stated at the lower of cost or market, and an inventory reserve would permanently reduce the cost basis of inventory. Inventories are valued as follows: Actual cost is used to value raw materials such as packaging materials, as well as goods in process. Costs for substantially all finished goods, which include the cost of carryover crops from the previous year, are valued at actual cost. Actual cost for finished goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing overhead costs based on normal capacity. The Company records abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) as current period charges and allocates fixed production overhead to the costs of finished goods based on the normal capacity of the production facilities.

The Company's subsidiary SGI does not fix the final price for seed payable to its growers until the completion of a given year's sales cycle pursuant to its standard contract production agreement. SGI records an estimated unit price; accordingly, inventory, cost of goods sold and gross profits are based upon management's best estimate of the final purchase price to growers.

Inventory is periodically reviewed to determine if it is marketable, obsolete or impaired. Inventory that is determined to not be marketable is written down to market value. Inventory that is determined to be obsolete or impaired is written off to expense at the time the impairment is identified. Because the germination rate, and therefore the quality, of alfalfa seed improves over the first year of proper storage, inventory obsolescence for alfalfa seed is not a material concern. The Company sells its inventory to distributors, dealers and directly to growers.

Growing Crops

Expenditures on growing crops are valued at the lower of cost or market and are deferred and charged to cost of products sold when the related crop is harvested and sold. The deferred growing costs included in inventories in the consolidated balance sheets consist primarily of labor, lease payments on land, interest expense on farmland, cultivation, on-going irrigation, harvest and fertilization costs. Costs included in growing crops relate to the current crop year. Costs that are to be realized over the life of the crop are reflected in crop production costs.

Components of inventory are:

      September 30,          June 30,     
      2014     2014
Raw materials and supplies   $ 187,831    $ 173,922 
Work in progress and growing crops     1,103,547      3,990,678 
Finished goods     27,759,025      24,320,984 
    $ 29,050,403    $ 28,485,584 

10


Crop Production Costs

Expenditures on crop production costs are valued at the lower of cost or market and are deferred and charged to cost of products sold when the related crop is harvested and sold. The deferred crop production costs included in the consolidated balance sheets consist primarily of the cost of plants and the transplanting, stand establishment costs, intermediate life irrigation equipment and land amendments and preparation. Crop production costs are estimated to have useful lives of three to five years depending on the crop and nature of the expenditure and are amortized to growing crop inventory each year over the estimated life of the crop.

Components of crop production costs are:

      September 30,          June 30,     
      2014     2014
Alfalfa seed production   $ 2,466,443    $ 1,747,429 
Alfalfa hay     16,885      16,885 
Wheat and triticale     187,786      187,786 
Total crop production costs, net   $ 2,671,114    $ 1,952,100 

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. The cost of plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset - periods of approximately 18-28 years for buildings, 3-7 years for machinery and equipment and 3-5 years for vehicles. Long-lived assets are reviewed for impairment whenever in management's judgment conditions indicate a possible loss. Such impairment tests compare estimated undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its fair value or, if fair value is not readily determinable, to an estimated fair value based on discounted cash flows. Fully depreciated assets are retained in property, plant and equipment and accumulated depreciation accounts until they are removed from service. In case of disposals of assets, the assets and related accumulated depreciation are removed from the accounts, and the net amounts after proceeds from disposal are credited or charged to income.

Intangible Assets

Intangible assets acquired in business acquisitions are reported at their initial fair value less accumulated amortization. Intangible assets acquired in the acquisition of the customer list in July 2011 and the acquisition of proprietary alfalfa germ-plasm in August 2012 are reported at their initial cost less accumulated amortization. The intangible assets are amortized based on useful lives ranging from 3-20 years.

Goodwill and Other Intangible Assets Not Subject to Amortization

The Company periodically reviews the carrying value of intangible assets not subject to amortization, including goodwill, to determine whether impairment may exist. Goodwill and certain intangible assets are assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The Company has the option to review goodwill on a qualitative basis first. If it is more likely than not that impairment is present the Company, then must evaluate goodwill for impairment using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The Company uses Level 3 inputs and a discounted cash flow methodology to estimate the fair value of a reporting unit. A discounted cash flow analysis requires one to make various judgmental assumptions including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company's budget and long-term plans. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value,

11


the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The Company conducted a qualitative assessment of goodwill and other intangibles and determined that it was more likely than not there was no impairment.

Purchase Accounting

The Company accounts for acquisitions pursuant to Accounting Standards Codification ("ASC") No. 805, Business Combinations. The Company records all acquired tangible and intangible assets and all assumed liabilities based upon their estimated fair values.

Research and Development Costs

The Company is engaged in ongoing research and development ("R&D") of proprietary seed and stevia varieties. The Company accounts for R&D under standards issued by the Financial Accounting Standards Board ("FASB"). Under these standards, all R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred. Third-party R&D 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 R&D activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset. The amortization and depreciation for such capitalized assets are charged to R&D expenses.

Stock-Based Compensation

The Company has in effect a stock incentive plan under which incentive stock options have been granted to employees and non-qualified stock options, restricted stock, and restricted stock units ("RSUs") have been granted to employees and non-employees, including members of the Board of Directors. The Company accounts for its stock-based compensation plan by expensing the estimated fair value of stock-based awards over the requisite service period, which is the vesting period. The measurement of stock-based compensation expense for option grants is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate, attrition rate and exercise price. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. The Company estimates the fair value of stock options using the lattice valuation model and the assumptions shown in Note 10. Restricted stock and RSUs are valued based on the Company's stock price on the day the awards are granted. The excess tax benefits recognized in equity related to equity award exercises are reflected as financing cash inflows. See Note 10 for a detailed discussion of stock-based compensation.

Net Income (Loss) Per Common Share Data

Basic net income (loss) per common share, or earnings per share ("EPS"), is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting outstanding shares, assuming any dilutive effects of options, restricted stock awards and common stock warrants calculated using the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common stock results in a greater dilutive effect from outstanding options, restricted stock awards and common stock warrants.

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      Three Months Ended
      September 30,
      2014     2013
Net income (loss)   $ (874,315)   $ 41,209 
             
Net income (loss) per common share:            
     Basic   $ (0.08)   $ 0.00 
     Diluted   $ (0.08)   $ 0.00 
             
Weighted average number of common shares outstanding:            
     Basic     11,625,115      11,563,452 
     Diluted     11,625,115      11,854,685 

Potentially dilutive securities not included in the calculation of diluted net income (loss) per share because to do so would be anti-dilutive are as follows:

      September 30,
      2014     2013
             
Class B warrants     1,421,000      1,410,500 
Underwriter warrants - units (common share equivalent)     238,000      -  
Class A warrants underlying underwriter warrants - units     119,000      -  
Class B warrants underlying underwriter warrants - units     119,000      129,500 
Underwriter warrants       50,000      -  
Stock options     1,089,197      25,000 
Nonvested restricted stock     24,332      48,666 
Nonvested RSUs     177,670      232,334 
Total     3,238,199      1,846,000 

Income Taxes

The Company accounts for income taxes in accordance with standards of disclosure propounded by the FASB and any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.

Impairment of Long-Lived Assets

The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC 360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. The Company evaluated its long-live assets for impairment and none existed as of June 30, 2014.

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Foreign Exchange Contracts

The Company's subsidiary SGI is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company at times manages through the use of foreign currency forward contracts.

The Company has entered into certain derivative financial instruments (specifically foreign currency forward contracts), and accounts for these instruments in accordance with ASC Topic 815, "Derivatives and Hedging", which establishes accounting and reporting standards requiring that derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met. If hedge accounting criteria are met for cash flow hedges, the changes in the derivative's fair value are recorded in shareholders' equity as a component of other comprehensive income ("OCI"), net of tax. The Company's foreign currency contracts are not designated as hedging instruments under ASC 815, accordingly, changes in the fair value are recorded in current period earnings.

Fair Value of Financial Instruments

In the first quarter of fiscal year 2009, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10"). ASC 820-10 defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the Company's consolidated financial position or operations, but does require that the Company disclose assets and liabilities that are recognized and measured at fair value on a non-recurring basis, presented in a three-tier fair value hierarchy, as follows:

  • Level 1. Observable inputs such as quoted prices in active markets;
  • Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
  • Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

No assets or liabilities were valued at fair value on a non-recurring basis as of September 30, 2014 or June 30, 2014.

Effective October 1, 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures ("ASC 820-10") and Accounting Standards Codification subtopic 825-10, Financial Instruments ("ASC 825-10"), which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company's financial position, results of operations or cash flows. The carrying value of cash and cash equivalents, accounts payable short-term and long-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments or interest rates commensurate with market rates.

The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis as of September 30, 2014 and June 30, 2014.

      Fair Value Measurements as of September 30, 2014 Using:
      Level 1     Level 2     Level 3
Foreign exchange contract liability   $ -     $ 65,768    $ -  
     Total   $ -     $ 65,768    $ -  

 

      Fair Value Measurements as of June 30, 2014 Using:
      Level 1     Level 2     Level 3
Foreign exchange contract asset   $ -     $ 627    $ -  
     Total   $ -     $ 627    $ -  

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Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires companies to report, in one place, information about significant reclassifications out of accumulated other comprehensive income, or AOCI, and disclose more information about changes in AOCI balances. The Company adopted this ASU in the first quarter of fiscal 2014. The adoption of this standard did not have a material impact on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company will adopt the standard effective July 1, 2014. The adoption of this ASU is not expected to have a material impact on its consolidated financial statements.

NOTE 3 - OTHER INTANGIBLE ASSETS

Other intangible assets consist of the following:

          Balance at                 Foreign Currency     Balance at
          July 1, 2013     Additions     Amortization     Translation     June 30, 2014
Intellectual property       $ 6,379,934    $ -     $ (324,631)   $ 191,269    $ 6,246,572 
Trade name         1,597,150      -       (85,342)     10,056      1,521,864 
Technology/IP         1,162,027      -       (118,960)     -       1,043,067 
Non-compete         602,164      -       (137,595)     7,199      471,768 
GI customer list         107,459      -       (7,164)     -       100,295 
Grower relationships         2,802,756      -       (142,613)     84,021      2,744,164 
Supply agreement         1,455,943      -       (75,632)     -       1,380,311 
Customer relationships         1,133,402      -       (59,955)     9,283      1,082,730 
        $ 15,240,835    $ -     $ (951,892)   $ 301,828    $ 14,590,771 

 

          Balance at                 Foreign Currency     Balance at
          July 1, 2014     Additions     Amortization     Translation     September 30, 2014
Intellectual property       $ 6,246,572    $ -     $ (81,863)   $ (455,540)   $ 5,709,169 
Trade name         1,521,864      -       (21,373)     (23,953)     1,476,538 
Technology/IP         1,043,067      -       (29,740)     -       1,013,327 
Non-compete         471,768      -       (34,528)     (15,914)     421,326 
GI customer list         100,295      -       (1,791)     -       98,504 
Grower relationships         2,744,164      -       (35,965)     (200,121)     2,508,078 
Supply agreement         1,380,311      -       (18,908)     -       1,361,403 
Customer relationships         1,082,730      -       (15,023)     (22,106)     1,045,601 
        $ 14,590,771    $ -     $ (239,191)   $ (717,634)   $ 13,633,946 

Amortization expense totaled $239,191 and $237,561 for the three months ended September 30, 2014 and 2013, respectively. Estimated aggregate remaining amortization expense for each of the five succeeding fiscal years is as follows:

          2015     2016     2017     2018     2019
Amortization expense       $ 709,955    $ 949,146    $ 940,502    $ 940,502    $ 940,502 

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NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Components of property, plant and equipment were as follows:

      September 30,          June 30,     
      2014     2014
             
Land and improvements   $ 7,679,908    $ 7,698,811 
Buildings and improvements     2,113,029      2,095,362 
Machinery and equipment     1,443,487      1,397,288 
Vehicles     332,714      332,714 
Construction in progress     121,573      44,080 
Total property, plant and equipment     11,690,711      11,568,255 
             
Less: accumulated depreciation     (1,290,400)     (1,211,446)
             
Property, plant and equipment, net   $ 10,400,311    $ 10,356,809 

Depreciation expense totaled $80,568 and $76,893 for the three months ended September 30, 2014 and 2013, respectively.

NOTE 5 - DEBT

Total debts outstanding are presented on the balance sheet as follows:

          September 30, 2014         June 30, 2014    
Current portion of long-term debt                
     Term loan - Wells Fargo       $ 103,808    $ 159,030 
     Term loan - Ally         8,798      8,734 
     Unsecured subordinate promissory note - related party         100,000      100,000 
          Total current portion         212,606      267,764 
                 
Long-term debt, less current portion                
     Term loan - Wells Fargo         2,194,458      2,220,803 
     Term loan - Ally         22,361      24,584 
     Unsecured subordinate promissory note - related party         300,000      300,000 
     Promissory note - SGI selling shareholders         2,000,000      2,000,000 
     Debt discount - SGI         (79,721)     (92,756)
          Total long-term portion         4,437,098      4,452,631 
          Total debt       $ 4,649,704    $ 4,720,395 

Since 2011, the Company has had an ongoing revolving credit facility agreement with Wells Fargo Bank, National Association ("Wells Fargo").

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In July 2012, the Company and Wells Fargo agreed to add a new term loan in the amount of $2,625,000 (the "Term Loan"). The Term Loan bears interest at a rate per annum equal to 2.35% above LIBOR as specified in the Term Loan. Under the Term Loan, the Company is also required to pay both monthly and annual principal reduction as follows: The first installment of monthly principal repayments commenced in August 2012 and continued at a fixed amount per month until the first annual increase in July 2013. Thereafter the amount of monthly principal reduction increases in August of each year through August 2018. The last monthly payment will be made in July 2019. The monthly principal repayments range from $8,107 per month through the July 2013 payment up to a high of $9,703 per month in the final year (August 2018 through July 2019). There are annual principal payments in August 2013 and 2014 in the amount of $56,000, with a final installment, consisting of all remaining unpaid principal due and payable in full on July 5, 2019. The Company may prepay the principal at any time, provided that a minimum of the lesser of $100,000 or the entire outstanding principal balance is prepaid at any one time. 

On February 21, 2014, the Company entered into new credit agreements with Wells Fargo and thereby became obligated under new working capital facilities (collectively, the "New Facilities"). The New Facilities include (i) a domestic revolving facility of up to $4 million to refinance the Company's outstanding credit accommodations from Wells Fargo and for working capital purposes, and (ii) an export-import revolving facility of up to $10 million for financing export-related accounts receivable and inventory (the "Ex-Im Revolver"). The availability of credit under the Ex-Im Revolver will be limited to an aggregate of 90% of the eligible accounts receivable (as defined under the credit agreement for the Ex-Im Revolver) plus 75% of the value of eligible inventory (also as defined under the credit agreement for the Ex-Im Revolver), with the term "value" defined as the lower of cost or fair market value on a first-in first-out basis determined in accordance with generally accepted accounting principles. All amounts due and owing under the New Facilities must be paid in full on or before April 1, 2015. The New Facilities are secured by a first priority lien on accounts receivable and other rights to payment, general intangibles, inventory, and equipment. The New Facilities are further secured by a lien on, and a pledge of, 65% of the stock of the Company's wholly owned subsidiary, Seed Genetics International Pty Ltd. The Facilities bear interest either (i) at a fluctuating rate per annum determined by Wells Fargo to be 2.25% above the daily one-month LIBOR Rate in effect from time to time, or (ii) at a fixed rate per annum determined to be 2.25% above LIBOR in effect on the first day of the applicable fixed rate term. Interest is payable each month in arrears.

Upon the occurrence of an event of default, as defined under the credit agreement for each of the New Facilities (collectively, the "Credit Agreements"), the principal balance due under the Facilities will thereafter bear interest at a rate per annum that is 4% above the interest rate that is otherwise in effect under the Facilities. The Credit Agreements contain customary representations and warranties, affirmative and negative covenants and customary events of default that permit Wells Fargo to accelerate the Company's outstanding obligations under the New Facilities, all as set forth in the Credit Agreements and related documents. The Credit Agreements restrict stock repurchases by the Company in any one year to $200,000; however, in October 2014, Wells Fargo agreed to increase the annual limit of stock repurchases to $2.0 million. The financial covenants imposed by Wells Fargo under the Credit Agreements include the following: a consolidated tangible net worth of not less than $30 million, measured quarterly; a consolidated debt service coverage ratio of not less than 1.25 to 1.0, measured at each fiscal year end; a maximum consolidated leverage ratio of 1.50 to 1.00, measured quarterly; a consolidated net income after taxes of not less than $1.00 on a rolling four-quarter basis, measured quarterly; and a consolidated asset coverage ratio of not less than 1.75 to 1.0, measured monthly. As of September 30, 2014, the Company did not meet the covenant requiring consolidated net income after taxes of not less than $1.00 on a rolling four-quarter basis, measured quarterly. The Company received a letter from Wells Fargo waiving this covenant for the September 30, 2014 reporting period. The Company is in compliance with all other debt covenants at September 30, 2014.

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As consideration for the Ex-Im Revolver, the Company is required to pay a one-time, non-refundable commitment fee of $100,000 to Wells Fargo. Pursuant to the terms of a Borrower Agreement between the Company and the Export-Import Bank of the United States (the "Ex-Im Bank"), the Ex-Im Bank agrees to guarantee 90% of amounts outstanding and owing under the Ex-Im Revolver. The Borrower Agreement includes prohibitions against the use of Ex-Im Revolver loan proceeds for certain purposes, including, and not limited to, the following: (i) servicing any of the Registrant's pre-existing or future indebtedness unless approved by the Ex-Im Bank in writing; (ii) acquiring fixed assets or capital assets for use in the Company's business; (iii) acquiring, equipping or renting commercial space outside of the United States; and (iv) paying the salaries of non-U.S. citizens or non-U.S. permanent residents who are located outside of the United States, or in connection with a retainage or warranty unless approved by the Ex-Im Bank in writing. The Borrower Agreement also requires the Company to comply with certain minimum security requirements and related borrowing base limitations, including that the export-related borrowing base equal or exceeds the aggregate outstanding amount of loan disbursements.

The outstanding balance on the Wells Fargo working capital facilities was $8.9 million at September 30, 2014.

On October 1, 2012, the Company issued a five-year subordinated promissory note to Imperial Valley Seeds, Inc. in the principal amount of $500,000 (the "IVS Note"), with a maturity date of October 1, 2017 (the "Maturity Date"). The IVS Note will accrue interest at a rate per annum equal to one-month LIBOR at closing plus 2% (2.2%). Interest will be payable in five annual installments, in arrears, commencing on October 1, 2013, and on each succeeding anniversary thereof through and including the Maturity Date (each, a "Payment Date"), and on the Maturity Date. Amortizing payments of the principal of $100,000 will also be made on each Payment Date, with any remaining outstanding principal and accrued interest payable on the Maturity Date.

In March 2013, the Company entered into a term loan for a vehicle purchase. The loan is payable in 59 monthly installments and matures in February 2018. The loan bears interest at a rate of 2.94% per annum.

On April 1, 2013, the Company issued a three-year subordinated promissory note to the selling shareholders of SGI in the principal amount of US $2,482,317 (the "SGI Note"), with a maturity date of April 1, 2016 (the "SGI Maturity Date"). The SGI note is non-interest bearing. A principal payment of $482,317 was made in October 2013, and the remaining $2,000,000 will be paid at the SGI Maturity Date. Since the note is non-interest bearing, the Company recorded a debt discount of $156,880 at the time of issuance for the estimated net present value of the obligation and accretes the net present value of the SGI Note obligation up to the face value of the SGI Note obligation using the effective interest method as a component of interest expense. Accretion of the debt discount totaled $13,035 and $12,754 for the three months ended September 30, 2014 and 2013, respectively. Accretion of the debt discount was charged to interest expense.

SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank Limited ("NAB"). The current facility expires on January 31, 2015 (the "NAB Facility Agreement"), and as of September 30, 2014, $8.4 million was outstanding under this facility.

The NAB Facility Agreement comprises several facility lines, including an overdraft facility (AUD $980,000 limit which translated to USD $855,050 at September 30, 2014) and an interchangeable market rate facility and an overseas bills purchased facility (AUD $9,000,000 combined limit which translated to USD $7,852,500 at September 30, 2014).  The market rate facility is to be reduced in stages according to the following schedule: AUD $7,000,000 by October 31, 2014; AUD $6,000,000 by November 30, 2014; and AUD $5,500,000 by December 31, 2014.

18


SGI may access the facilities in combination; however, each facility bears interest at a unique interest rate calculated per pricing period--an interval (ranging from 7 to 180 days) between interest rate adjustments. Each facility's interest rate is calculated as the sum of an applicable indicator rate plus customer margin. The indicator rate for the market rate facility is equal to the "bid rate" quoted on the Bank Bill Swap Bid (BBSY) page of the Reuters Monitor System at or about 10:15 am Sydney Time on the banking date immediately preceding the commencement of the applicable pricing period. Under the market rate facility the customer margin is equal to 2.35% per annum. Currently, SGI's facilities accrue interest at approximately the following effective rates: market rate facility, 6.6% calculated daily; overseas bills purchased facility, 3.6% to 3.9% calculated daily; and overdraft facility, 7.6% calculated daily. 

For all NAB facilities, interest is payable each month in arrears. In the event of a default, as defined in the NAB Facility Agreement, the principal balance due under the facilities will thereafter bear interest at an increased rate per annum above the interest rate that would otherwise have been in effect from time to time under the terms of each facility (e.g., the interest rate increases by 4.5% per annum under the market rate and overdraft facilities upon the occurrence of an event of default).

The NAB facility is secured by a fixed and floating lien over all the present and future rights, property and undertakings of SGI. The NAB facility contains customary representations and warranties, affirmative and negative covenants and customary events of default that permit NAB to accelerate SGI's outstanding obligations, all as set forth in the NAB Facility Agreement. SGI was in compliance with all NAB debt covenants at September 30, 2014.

Effective April 21, 2014, the Company agreed to become the guarantor for the NAB Facility and thereby release the SGI's founders from their personal guarantees to NAB. Pursuant to the terms of the guarantee, in the event of a payment default by SGI and the NAB's exhaustion of all available remedies under the NAB Facility, the Company agrees to pay all unpaid amounts due and owing from SGI to NAB under the NAB Facility up to AUD $10.0 million.

The annual maturities of short-term and long-term debt are as follows:

Fiscal Year     Amount
       
2015   $ 197,073 
2016     2,162,591 
2017     178,475 
2018     219,052 
2019     116,150 
Thereafter     1,776,363 
Total   $ 4,649,704 

NOTE 6 - STOCKHOLDERS' EQUITY

On May 7, 2010, the Company closed its initial public offering ("IPO") of 1,400,000 units, which priced at $11.00 per unit, raising gross proceeds of $15,400,000. Each unit consisted of two shares of common stock, one Class A warrant and one Class B warrant. In connection with the IPO, the Company issued Representative's Warrants to Paulson Investment Company, Inc. and Feltl and Company to purchase up to an aggregate of 140,000 units at $13.20, expiring May 3, 2015.

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Prior to the completion of the Company's redemption of the Class A warrants, each Class A warrant entitled its holder to purchase one share of the Company's common stock at an exercise price of $7.15. The Class A warrants were redeemable at the Company's option for $0.25 upon 30 days' prior written notice beginning November 3, 2010, provided certain conditions were met. The Class A warrants were redeemable provided that the Company's common stock closed at a price at least equal to $8.80 for at least five consecutive trading days. On March 12, 2013, the Company announced that it had exercised its option to call for redemption the Class A warrants. As of June 30, 2013, 1,372,641 shares of common stock were issued as a result of 1,372,641 Class A warrants being exercised at a price of $7.15. The Company received proceeds, net of fees and expenses, of $9,366,212 during the year ended June 30, 2013. The 27,359 remaining Class A Warrants that were not exercised by the deadline were redeemed by the Company for a price of $0.25 each, for an aggregate redemption cost to the Company of $6,765. There are no remaining Class A Warrants outstanding.

Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price of $11.00. The Class B warrants are exercisable at any time until their expiration on May 3, 2015. The Class B warrants are redeemable at the Company's option for $0.25 upon 30 days' prior written notice beginning November 3, 2010, provided certain conditions are met. The Class B warrants are redeemable on the same terms as the Class A warrants, provided the Company's common stock has closed at a price at least equal to $13.75 for five consecutive trading days.

On May 7, 2012, the Company issued 73,000 shares of restricted common stock to certain members of the executive management team. The restricted common shares vest annually in equal installments over a three-year period, commencing one year from the date of the grant.

On May 23, 2012, the Company closed its underwritten public offering of 1,000,000 common shares, which priced at $5.50 per share. The Company received total proceeds, net of underwriting discounts and equity offering costs, of $5,006,311. In connection with the offering, the Company issued Representative's Warrants to Rodman & Renshaw LLC to purchase up to an aggregate of 50,000 shares of the Company's common stock at an exercise price of $6.875 per share, which expire on February 8, 2017.

On September 24, 2012, the Company sold 600,000 unregistered shares of its common stock for $5.85 per share, to one accredited investor. The Company received total proceeds, net of equity offering costs, of $3,462,586.

On October 1, 2012, the Company issued 400,000 shares of the Company's unregistered common stock pursuant to the acquisition agreement with IVS. The common stock issued was valued at $2,432,000.

On January 16, 2013, the Company closed its underwritten public offering of 1,400,000 common shares, which priced at $7.50 per share. The Company received total proceeds, net of underwriting discounts and equity offering costs, of $9,413,638.

On March 16, 2013, the Company issued 280,000 restricted stock units to certain members of the executive management team. See Note 12 for discussion on equity-based compensation.

During March 2013, the Company issued 30,597 shares of common stock pursuant to a cashless exercise of a total of 50,000 other warrants which were issued in May 2010 at an exercise price of $4.00. The 50,000 warrants have been cancelled and they are no longer outstanding. The common stock issuance was recorded at par value with no change to net equity balances.

During March 2013, Paulson Investment Company, Inc. exercised 10,500 of its underwriter warrants at an exercise price of $13.20 which resulted in the Company issuing 21,000 shares of common stock, 10,500 A warrants and 10,500 B warrants. The Company received $138,600 in proceeds from this exercise. During March 2013, Paulson Investment Company, Inc. also exercised 10,500 of the A warrants generating proceeds of $75,075.

In April 2013, the Company issued 12,000 restricted common shares to terminate a consulting contract. The common stock issued was valued at $109,920 and was based on the fair value of the stock on the date of issuance.

In July 2013, the Company issued 30,028 shares for the settlement of RSU's which vested in July 2013. The shares issued to settle the vested RSU's were net of the required minimum employee payroll tax withholdings of $141,488 paid by the Company.

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In October 2013, the Company issued 9,369 shares for the settlement of RSU's which vested in October 2013. The shares issued to settle the vested RSU's were net of the required minimum employee payroll tax withholdings of $33,354 paid by the Company.

In January 2014, the Company issued 9,190 shares for the settlement of RSU's which vested in January 2014. The shares issued to settle the vested RSU's were net of the required minimum employee payroll tax withholdings of $31,768 paid by the Company.

In April 2014, the Company issued 8,970 shares for the settlement of RSU's which vested on April 1, 2014. The shares issued to settle the vested RSU's were net of the required minimum employee payroll tax withholdings of $35,081 paid by the Company.

In July 2014, the Company issued 9,354 shares for the settlement of RSU's which vested on July 1, 2014. The shares issued to settle the vested RSU's were net of the required minimum employee payroll tax withholdings of $26,945 paid by the Company.

During April 2014, Paulson Investment Company, Inc. exercised 10,500 of its underwriter warrants at an exercise price of $13.20 which resulted in the Company issuing 21,000 shares of common stock, 10,500 A warrants and 10,500 B warrants. The Company received $138,600 in proceeds from this exercise. During April 2014, Paulson Investment Company, Inc. also exercised 10,500 of the A warrants generating proceeds of $75,075.

The Company re-purchased 25,000 shares of common stock for $134,196 during the year ended June 30, 2014 pursuant to its previously announced share repurchase program.

The following table summarizes the warrants outstanding at September 30, 2014:

      Grant   Warrants     Exercise Price   Expiration
      Date   Outstanding     Per Share / Unit   Date
                     
Class B warrants     May 2010   1,421,000    $ 11.00    May 2015
Underwriter warrants - units     May 2010   119,000    $ 13.20    May 2015
Underwriter warrants     May 2012   50,000    $ 6.88    Feb 2017
          1,590,000           

The Company is authorized to issue up to 50,000,000 shares of its $0.001 par value common stock. At September 30, 2014, there were 11,674,447 shares issued and 11,649,447 shares outstanding. At June 30, 2014, there were 11,665,093 shares issued and 11,640,093 shares outstanding.

See Note 10 for discussion on equity-based compensation.

NOTE 7 - FOREIGN CURRENCY CONTRACTS

The Company's subsidiary SGI is exposed to foreign currency exchange rate fluctuations in the normal course of its business, which the Company manages through the use of foreign currency forward contracts. These foreign currency contracts are not designated as hedging instruments under ASC 815; accordingly, changes in the fair value are recorded in current period earnings. These foreign currency contracts have a notional value of $5.6 million at September 30, 2014 and maturities range from November 2014 to January 2015.

The Company records an asset or liability on the balance sheet for the fair value of the foreign currency forward contracts. The foreign currency contract liabilities totaled $65,768 at September 30, 2014 compared to a foreign currency contract asset of $627 at June 30, 2014. The Company recorded a loss on foreign exchange contracts of $39,709 which is reflected in cost of revenue for the three months ended September 30, 2014. The Company recorded a gain on foreign exchange contracts of $91,519 during the three months ended September 30, 2013, which is reflected in cost of revenue.

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NOTE 8 - COMMITMENTS AND CONTINGENCIES

Contingencies

The Company is not currently a party to any pending or threatened legal proceedings. Based on information currently available, management is not aware of any matters that would have a material adverse effect on the Company's financial condition, results of operations or cash flows.

NOTE 9 - RELATED PARTY TRANSACTIONS

Grover T. Wickersham, the Company's Chairman of the Board, has a non-controlling ownership interest in Triangle T Partners, LLC ("TTP") and served as a member of its Board of Managers until his resignation in December 2012.

The Company used the services of TTP employees and TTP equipment in connection with harvesting certain alfalfa seed fields farmed by S&W during the first quarter of fiscal 2015 and 2014. In addition, the Company purchased alfalfa seed from TTP during such periods. The Company incurred $78,634 and $98,765 of charges from TTP for its services and costs in connection with farming operations and seed purchases during the three months ended September 30, 2014 and 2013, respectively.

Amounts due to TTP totaled $78,634 at September 30, 2014 and $100,500 at June 30, 2014, respectively.

Glen D. Bornt, a member of the Company's Board of Directors, is the founder and President of Imperial Valley Milling Co. ("IVM"). He is its majority shareholder and a member of its Board of Directors. Fred Fabre, the Company's Vice President of Sales and Marketing, is a minority shareholder of IVM.  IVM had a 15-year supply agreement with Imperial Valley Seeds, Inc., and this agreement was assigned by IVS to the Company when it purchased the assets of IVS in October 2012. IVM contracts with alfalfa seed growers in California's Imperial Valley and sells its growers' seed to the Company pursuant to a supply agreement. Under the terms of the supply agreement, IVM's entire certified and uncertified alfalfa seed production will be offered and sold to the Company, and the Company will have the exclusive option to purchase all or any portion of IVM's seed production.  The Company paid $1,432,259 to IVM during the three months ended September 30, 2014.   Total amounts due to IVM totaled $2,233,008 at September 30, 2014 and $651,611 at June 30, 2014, respectively.

Simon Pengelly, SGI's Chief Financial Officer, has a non-controlling ownership interest in the partnership Bungalally Farms ("BF"). During the period April 1, 2013 to June 30, 2014, BF was one of SGI's contract alfalfa seed growers. SGI currently has entered into seed production contracts with BF on the same commercial terms and conditions as with the other growers with whom SGI contracts for alfalfa seed production. For the fourth quarter of fiscal 2013 and the year ended June 30, 2014, the Company purchased a total of $884,097 of alfalfa seed which BF grew and sold to SGI under contract seed production agreements. SGI currently has seed production agreements with BF for 123 hectares of various seed varieties as part of its contract production for which SGI paid BF the same price it agreed to pay its other growers. Mr. Pengelly did not personally receive any portion of these funds. Amounts due to BF totaled $214,785 at September 30, 2014 and $373,341 at June 30, 2014.

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NOTE 10 - EQUITY-BASED COMPENSATION

2009 Equity Incentive Plan

In October 2009 and January 2010, the Company's Board of Directors and stockholders, respectively, approved the 2009 Equity Incentive Plan (the "2009 Plan"). The plan authorized the grant and issuance of options, restricted shares and other equity compensation to the Company's directors, employees, officers and consultants, and those of the Company's subsidiaries and parent, if any. In October 2012 and December 2012, the Company's Board of Directors and stockholders, respectively, approved the amendment and restatement of the 2009 Plan, including an increase in the number of shares available for issuance as grants and awards under the Plan to 1,250,000 shares. In September 2013 and December 2013, the Company's Board of Directors and stockholders, respectively, approved the amendment and restatement of the 2009 Plan, including an increase in the number of shares available for issuance as grants and awards under the Plan to 1,700,000 shares.

The term of incentive stock options granted under the 2009 Plan may not exceed ten years, or five years for incentive stock options granted to an optionee owning more than 10% of the Company's voting stock. The exercise price of options granted under the 2009 Plan must be equal to or greater than the fair market value of the shares of the common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than 10% of voting stock must have an exercise price equal to or greater than 110% of the fair market value of the common stock on the date the option is granted.

The Company has adopted ASC 718, Stock Compensation, ("ASC 718"). ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award.

The Company accounts for equity instruments, including stock options, issued to non-employees in accordance with authoritative guidance for equity-based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest.

For stock-based awards granted, the Company amortizes stock-based compensation expense on a straight-line basis over the requisite service period.

The fair value of employee option grants are estimated on the date of grant and the fair value of options granted to non-employees are re-measured as they vest. Fair value is calculated using a lattice model. The weighted average assumptions used in the models are outlined in the following table:

      Employee Options   Non-Employee Options
      September 30,   September 30,
      2014   2013   2014   2013
                   
Risk-free rate of interest     1.66%   1.68%   -     -  
Dividend yield     0%   0%   -     -  
Volatility of common stock     53%   44%   -     -  
Exit / attrition rates     25%   25%   -     -  
Target exercise factor     1.50    1.75    -     -  

On December 8, 2012, the Company granted 175,000 stock options to its directors, officers, and employees at an exercise price of $7.20, which was the closing price for the Company's common stock on the date of grant. These options vest in equal quarterly installments over one- and three-year periods, commencing on January 1, 2013, and expire five years from the date of grant. During the year ended June 30, 2014, the Company granted 270,000 stock options to its officers and employees at exercise prices ranging from $5.94 to $8.29, which was the closing price for the Company's common stock on the date of grants. These options vest in equal quarterly installments over periods ranging from six months to three-years and expire five years from the date of grant.

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A summary of stock option activity for the year ended June 30, 2014 and three months ended September 30, 2014 is presented below:

                    Weighted -
                Weighted -   Average
                Average   Remaining
          Number     Exercise Price   Contractual
          Outstanding     Per Share   Life (Years)
Outstanding at June 30, 2013         827,000    $ 4.74    2.8 
     Granted         270,000      6.44    4.5 
     Exercised         -       -     -  
     Canceled/forfeited/expired         (10,000)     4.10    1.6 
Outstanding at June 30, 2014         1,087,000      5.17    2.5 
     Granted         2,197      6.25    4.8 
     Exercised         -       -     -  
     Canceled/forfeited/expired         -       -     -  
Outstanding at September 30, 2014         1,089,197      5.17    2.2 
Options vested and exercisable at September 30, 2014         864,542    $ 4.82    1.7 

The weighted average grant date fair value of options granted and outstanding at September 30, 2014 was $0.83. At September 30, 2014, the Company had $191,260 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the 2009 Plan, which will be recognized over the weighted average remaining service period of 0.5 years. The Company settles employee stock option exercises with newly issued shares of common stock.

On May 7, 2012, the Company issued 73,000 shares of restricted common stock to certain members of the executive management team. The restricted common shares vest annually in equal installments over a three-year period, commencing one year from the date of the grant. The Company recorded $36,500 of stock-based compensation expense associated with this grant during the three months ended September 30, 2014 and 2013, respectively. The value of the award was based on the closing stock price on the date of grant.

A summary of activity related to non-vested restricted shares is presented below:

Three Months Ended September 30, 2014
                      Weighted -
                  Weighted -   Average
            Number of     Average   Remaining
            Nonvested     Grant Date   Contractual
            Restricted Shares     Fair Value   Life (Years)
Beginning nonvested restricted shares outstanding           24,332    $ 6.00    -  
Granted           -       -     -  
Vested           -       -     -  
Forfeited           -       -     -  
Ending nonvested restricted shares outstanding           24,332    $ 6.00    0.6 

At September 30, 2014, the Company had $87,841 of unrecognized stock compensation expense related to the restricted stock grants, which will be recognized over the weighted average remaining service period of 0.6 years.

On March 16, 2013, the Company issued 280,000 restricted stock units to certain members of the executive management team. The restricted stock units have varying vesting periods whereby 34,000 restricted stock units vest on July 1, 2013 and the remaining 246,000 restricted stock units vest quarterly in equal installments over a four and one-half year period, commencing on July 1, 2013. The Company recorded $145,511 of stock-based compensation expense associated with this grant during the three months ended September 30, 2014 and 2013, respectively. The fair value of the award was $2,984,800 and was based on the closing stock price on the date of grant.

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A summary of activity related to non-vested restricted share units is presented below:

Three Months Ended September 30, 2014
                      Weighted -
            Number of     Weighted -   Average
            Nonvested     Average   Remaining
            Restricted     Grant Date   Contractual
            Share Units     Fair Value   Life (Years)
Beginning nonvested restricted units outstanding           191,336    $ 10.66    -  
Granted           -       -     -  
Vested           (13,666)     -     -  
Forfeited           -       -     -  
Ending nonvested restricted units outstanding           177,670    $ 10.66    3.0 

At September 30, 2014, the Company had $1,735,060 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the weighted average remaining service period of 3.0 years.

At September 30, 2014 there were 222,803 shares available under the 2009 Plan for future grants and awards. Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the three months ended September 30, 2014 and 2013 totaled $219,012 and $215,026, respectively.

NOTE 11 - NON-CASH INVESTING AND FINANCING ACTIVITIES FOR STATEMENTS OF CASH FLOWS

The below table represents supplemental information to the Company's Statements of Cash Flows for non-cash investing and financing activities during the three months ended September 30, 2014 and 2013, respectively.

      Three Months Ended
      September 30,
      2014     2013
(Increase) decrease in non-cash net assets of subsidiary due to foreign currency translation gain (loss)      (1,342,032)     294,168 

NOTE 12 - SUBSEQUENT EVENTS

In October 2014, the Company issued 9,354 shares for the settlement of RSU's which vested on October 1, 2014.

 

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This Quarterly Report on Form 10-Q, including, but not limited to, this "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any statements concerning expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases; any statements regarding future economic conditions or performance; any statements of expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward- looking statements. Risks, uncertainties and assumptions include the possibility that certain foreign markets into which our seed is sold could be adversely impacted by discounted pricing of non-proprietary seed by competitors, our alfalfa seed growers could choose to grow more profitable crops instead of our alfalfa seed; decline in the dairy industry; macro-economic and geopolitical trends and events; the execution and performance of contracts by our company and our customers, suppliers and partners; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; the outcome of pending or future legislation or court decisions and pending or future accounting pronouncements; and other risks that are described herein, and the items discussed in the Risk Factors set forth in Item 1A of Part I of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the "SEC") on September 29, 2014 and that are otherwise described or updated from time to time in our SEC reports.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Many factors discussed in this Report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. Furthermore, such forward-looking statements speak only as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Executive Overview

Founded in 1980 and headquartered in the Central Valley of California, we are the leading producer of warm climate, high- yield alfalfa seed varieties, including varieties that can thrive in poor, saline soils. We also offer seed cleaning and processing for other seed manufacturers. Until we incorporated in 2009, our business was operated for almost 30 years as a general partnership and was owned by five general partners. We incorporated in October 2009 in Delaware, having bought out the former partners between June 2008 and May 2010, and reincorporated as a Nevada corporation in December 2011. Following our initial public offering in fiscal 2010, we expanded certain pre-existing business initiatives and added new ones, including:

increasing our farming acreage dedicated to alfalfa seed production by both acquisition of leased and purchased farmland and by increasing the number of acres under contract with growers in the Central and Imperial Valleys of California;

teaming with Forage Genetics International, LLC ("Forage Genetics") and Monsanto Corporation ("Monsanto") to develop genetically modified organism (GMO) alfalfa seeds, using our germplasm and Monsanto's genetically modified traits;

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developing stevia varieties in response to growing demand for the all-natural, zero calorie sweetener;

acquiring the customer list of our primary international distributor of alfalfa seed;

entering into the dormant market via the acquisition of a portfolio of dormant germplasm in August 2012;

entering into production of non-GMO seed in the Imperial Valley, California by purchasing farmland and acquiring Imperial Valley Seeds, Inc. ("IVS") in October 2012; and

entering into production of non-GMO seed in Southern Australia by acquiring the dominant local producer, Seed Genetics International Pty Ltd ("SGI") in April 2013.

Our combination with SGI creates the world's largest non-dormant alfalfa seed company, and our combined company now has the competitive advantages of year-round production, which extends to all areas of the alfalfa seed business, including sales, inventory management and cash collection cycles. SGI was incorporated as a limited proprietary corporation in South Australia in 1993, as Harkness Group, changed its name to Seed Genetics Australia Pty Ltd in 2002, and in 2011 changed its name to Seed Genetics International Pty Ltd. SGI's principal office space is located in Unley, South Australia.

We also own a seed-cleaning and processing facility in Five Points, California that was modernized and rebuilt in the late 1980's. The property encompasses a total of 40 acres, including 35 acres that are in reserve for future development and five acres with permanent structures and three seed-processing lines. In recent years, the facility has operated at less than 25% of capacity, providing ample opportunity for growth, both in terms of cleaning the alfalfa seed we grow or purchase from our growers and providing cleaning services for San Joaquin Valley growers of small grains such as wheat, barley and triticale.

We fulfill our seed requirements by contracting with farmers in the San Joaquin and Imperial Valleys of California and Southern Australia, and by internally farming acreage we have leased or purchased in California. Once our seed is processed and bagged at our facility in California or at the facilities of third party processors in Southern Australia, the majority of it is marketed and sold as certified seed to agribusiness firms and farmers throughout the world for the growing of alfalfa hay. Our principal business is subject to uncertainty caused by various factors, which include but are not limited to the following: (i) our seed growers may decide to grow different crops when prices for alternative commodities are on the rise, which can impact our ability to produce seed; (ii) farmers who typically purchase our seed to grow alfalfa hay may plant alternative crops due to a decline in the dairy industry (and corresponding decline in demand for alfalfa hay) or to plant crops with greater profit margins and in either case, smaller quantities of our seed will be purchased; (iii) farmers may choose to convert their alfalfa hay crops to non-certified common seed resulting in an overabundance of non-certified seed entering the market and driving down the overall market price for alfalfa seed, including the market for certified alfalfa seed; (iv) the risks of internally farmed operations such as adverse agronomic decisions, weather conditions, natural disasters, crop disease, pests, lack of water and other natural conditions as well as other factors outside our control; and (v) the risks of doing business internationally following our acquisition of SGI. As a result of these factors and others, our revenue and margins can be difficult to project.

Our alfalfa seed business is largely dependent upon the dairy and livestock industries, each of which is subject to significant and localized cycles of over-supply and under-supply. Consequently, although we are subject to the volatility of local markets, the breadth of our market and the quality niche of our certified seed have resulted in relatively stable demand in most years. However, the supply of seed in the marketplace is subject to substantial swings.

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From inception until 2003, almost all our seed sales were to distributors who exported our products to international markets. Modest sales efforts in the Western U.S. were initiated around 2003, and in the fiscal year ended June 30, 2010, our seed shipments were allocated approximately 51% to the domestic market and 49% to distributors who sold into international markets. In fiscal 2011, both markets were negatively impacted by events beyond our control. The domestic market continued to be impacted by the dairy industry downturn that began in fiscal 2009 when dairy prices declined due to over-supply. In normal years, we are typically able to offset this situation with sales to our distributors in our international markets. However, in fiscal 2011, our Middle East distributor experienced the most challenging year in its history due to an over-supply of uncertified common seed being sold at significantly reduced prices. As a result of this over- supply in fiscal 2011, we and our distributor elected to hold back much of our certified proprietary seed rather than sell into the depressed market. Because of our decisions in fiscal 2011, we had strong levels of certified seed inventory available for sale in fiscal 2012 when most of the common seed that glutted those markets in fiscal 2011 had been sold out. This allowed us to meet expected demand and, to some extent, control pricing during our first year selling directly into international markets. We plan to continue to expand our served markets and therefore minimize the risks associated with any specific geographic market. More recently, in fiscal 2014, a surplus of less expensive Australian seed had a negative impact on the market. Australian growers are typically able to produce seed at a lower cost, which in the case of strong overall supply, can result in downward pricing across the market. This downward pressure on pricing resulted in some of our competitors moving away from South American markets and selling into the Middle East and North Africa at discounted prices in order to gain market share in those regions.

Our alfalfa seed business is seasonal, and historical sales prior to the acquisition of SGI were concentrated in the first six months of our fiscal year (July through December). The acquisition of SGI in April 2013 provides us with a geographically diversified and year-round production cycle allowing us to carry sufficient levels of inventory throughout the year to respond to customer demands in a more consistent manner. This will likely mitigate (at least in part) the seasonality of our business as the fourth quarter is now expected to be a significant sales quarter for our newly combined global operation. We contract with growers based upon our anticipated market demand. Also, we mill, clean and stock the seed during the respective harvest seasons and ship from inventory throughout the year. Tests show that seed that has been held in inventory for over one year improves in quality. Therefore, we may increase our seed purchases and planned season end inventory if, in our judgment, we can generate increased margins and revenue with the aged seed and we have sufficient capital to carry additional inventory. This will also reduce the potential for inventory shortages in the event that we have higher than anticipated demand or other factors, such as a reduction in our available seed supply in a particular year as a result of our growers electing to plant alternative, higher priced crops or adverse weather events.

Although we believe an opportunity exists to materially expand our alfalfa seed business without substantially overhauling our operations, we could nevertheless encounter unforeseen problems. For example, in fiscal 2011 and 2012, some of our seed growers elected to grow alternative crops, such as cotton, that yielded greater profit than alfalfa seed. This shift to other crops could reoccur from time to time as commodity prices fluctuate. However, by first leasing farmland in fiscal 2011, and then gaining long-term access to additional farmland in the San Joaquin Valley of California through additional leases entered into in fiscal 2012, and farmland purchases and leases in fiscal 2013, we now have the ability to grow a portion of our alfalfa seed production ourselves, which could partially mitigate this risk in future years. Although we have an experienced farming management and operations staff, our recently implemented direct farming operations pose new challenges. As we obtain additional farmland, by lease or purchase, both our farming costs and risks could continue to climb. And, the farming decisions we make could have a significant negative impact on our results of operations. Traditionally, we have contracted with growers to pay a set price for each pound of clean seed that is delivered to us. Therefore, we do not carry the farming risk on seed yield of that particular type of production and that risk is borne by the contracted seed grower. In our internally farmed operations, we incur a number of costs, and therefore the amount seed yield directly impacts the cost per pound of seed produced which could be higher or lower than our contracted rate based on our ability to achieve lower or higher yields. Nevertheless, we believe that by vertically integrating our alfalfa seed business to include our own production, we can leverage our management infrastructure, our experienced agronomics team and our milling capacity while reducing our costs and more directly controlling our inventory. Expanding our contracted grower base in the Imperial Valley of California and Southern Australia will provide a greater level of diversification of production and we expect it to allow us to grow and gain additional market share.

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Up to this point, we have only sold non-genetically modified organism ("GMO") alfalfa seed varieties. In fiscal 2011, we encountered a new challenge created by the availability of Roundup Ready® alfalfa in the U.S. We are still uncertain as to the extent to which Roundup Ready® alfalfa might negatively impact our business, if at all. Moreover, the lack of regulations regarding field isolation could raise concerns about the adventitious presence of GMO material in our non-GMO seed. In fiscal 2012, the first year in which Roundup Ready® alfalfa was planted in the San Joaquin Valley, the presence of GMO traits in our fields was discovered. In fiscal 2013, the number of lots of our seed that tested positive for the adventitious presence of GMO was greater than in fiscal 2012. The preliminary testing results for our most recent harvest suggest that less than 1% of our estimated annual global production and sourced seed for fiscal 2014 will contain GMO material. Maintaining the integrity of our seed is critical to us as a large majority of our customers are located within regions, including Saudi Arabia that substantially restrict or prohibit the importation of GMO seed varieties. We actively test for the presence of GMO in our seed stock in the San Joaquin Valley. The presence of GMO alfalfa in significant amounts of our contracted seed production could severely limit the amount of seed that we have available to sell into Saudi Arabia and other locations that prohibit GMO seed varieties. Furthermore, due to widespread negative perception of GMO material, even if we were able to successfully remediate the accidental occurrence of GMO in our seed production, there are no assurances that we would be able to achieve export sales to Saudi Arabia and other non-GMO locations at the same levels as we achieved before the accidental occurrence of GMO.

We have entered into a series of agreements with Monsanto and Forage Genetics to produce and sell GMO alfalfa seed to certain regions of the world where GMO alfalfa seed is approved; however, we are still conducting field trials on performance. Commercial production acreage will be planted in the Fall of 2014 for our first commercial harvest in the Fall of 2015. Once testing results have been approved by Monsanto, sales could commence as early as the Fall of 2015 but may not start until the Fall of 2016. Due to issues surrounding field isolation from GMO-based crops and the widespread ban of GMO-based crops in many international markets, including markets that are critical to our business, we must take particular care in the planting of any GMO-based alfalfa seed we grow.

We currently are using less than 25% of our mill capacity, providing ample opportunity for revenue growth without having to incur significant capital costs. In particular, we clean, process and bag seed and small grains for growers in the Five Points, California area during the periods in which we are not using the mill for our alfalfa seed business.

In fiscal 2010, we laid the groundwork for the commercial production of stevia in California's Central Valley by conducting trials on various samples of stevia material. Because stevia is a new line of business for us, and the incorporation of stevia extracts into food and beverages sold in the U.S. is still a relatively new industry, our plans may not succeed to the extent we expect or on the time schedule we have planned, or at all. We planted our first small-scale commercial crop of stevia in May and June 2011 and completed the first harvest and its first small-scale shipment of dried stevia leaf under a previously signed supply agreement during the second quarter of fiscal 2012. In May 2013, as the result of a stevia crop loss, we determined to shift the focus of our stevia program away from commercial production and towards further research and development of the stevia plant lines and breeding of improved varieties of stevia. We recorded a crop loss on stevia totaling $2,333,123 for the year ended June 30, 2013.

In our breeding program, we have identified stevia plant lines containing high overall steviol glycosides, including rebaudioside A ("Reb A"), stevioside, Reb B and Reb C. These plants have also been selected for their improved taste, production and hardiness. We have conducted extensive HPLC sample testing of stevia plants under development and have made further selections and crosses of these plants this season based upon test results. Selections so made are currently in multiple field trials. The results of these trials (after further HPLC testing) should result in us filing patents in the Fall of this year.

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Results of Operations

Three months ended September 30, 2014 Compared to the Three Months Ended September 30, 2013

Revenue and Cost of Revenue

Revenue for the three months ended September 30, 2014 was $8,164,234 compared to $12,378,586 for the three months ended September 30, 2013. The $4,214,352, or 34%, decrease in revenue during the quarter was impacted by a reduction of sales orders from the Middle East as the region works through increased volumes of lower priced seed from the 2013 Australian harvest as well as the impact from the economic crisis in the Argentine market which has largely remained on the sidelines during the past 15 months, diverting seed typically destined for this market into the Middle East.

Sales direct to international customers represented 77% and 86% of revenue during the three months ended September 30, 2014 and 2013, respectively. Domestic revenue accounted for 13% and 14% of our total revenue for the three months ended September 30, 2014 and 2013, respectively.

Cost of revenue of $6,850,442 in the three months ended September 30, 2014 was 84% of revenue, while the cost of revenue of $10,071,006 in the three months ended September 30, 2013 was 81% of revenue. The dollar decrease in cost of revenue for the current quarter was primarily attributable to the decrease in revenue described above.

Total gross profit margins for the current quarter totaled 16.1% versus 18.6% in the comparable period of the prior year. The decrease in gross profit margins can be attributed to a change in sales mix for the quarter which resulted in an increased percentage of lower quality and slower moving seed sold and a corresponding lower concentration of our highest margin products sold.  There will continue to be quarterly fluctuations in gross profit margins based on revenue mix, but we anticipate that we will improve gross margins in our core business in fiscal year 2015 compared to fiscal year 2014 if we successfully execute on our optimization strategy which entails creating unique blends of lower cost products marketed at higher sales prices.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2014 totaled $1,788,425 compared to $1,594,203 for the three months ended September 30, 2013. The $194,222, or 12%, increase in SG&A expense versus the prior year was primarily due to the increase in legal expenses and other miscellaneous expenses.  As a percentage of revenue, SG&A expenses were 22% in the current period compared to 13% in the three months ended September 30, 2013.

Research and Development Expenses

Research and development expenses ("R&D") for the three months ended September 30, 2014 totaled $223,359 compared to $233,639 in the comparable period in the prior year. R&D expenses decreased $10,280 or 4% from the comparable period of the prior year.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2014 was $319,759 compared to $314,454 for the three months ended September 30, 2013. Included in the amount was amortization expense for intangible assets, which totaled $239,191 in the current quarter and $237,561 in the comparable period of the prior year.

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Foreign Currency (Gain) Loss

The Company incurred a foreign currency loss of $47,741 for the first three months of the current fiscal year compared to a gain of $33,985 for the comparable period of the prior fiscal year. The foreign currency gains and losses are associated with SGI, its wholly owned subsidiary in Australia.

Interest Expense, Net

Interest expense, net during the three months ended September 30, 2014 totaled $246,650 compared to $136,998 for the three months ended September 30, 2013. Interest expense primarily consisted of interest incurred on the SGI's credit facility with NAB and on the credit facility with Wells Fargo. The increase in interest expense is due to the higher levels of working capital in accounts receivable resulting in additional borrowings on the working capital facilities.

Income Tax Expense (Benefit)

Income tax benefit totaled $437,827 for the three months ended September 30, 2014 compared to income tax expense of $21,062 for the three months ended September 30, 2013. The Company's effective tax rate was 33.4% in the current quarter versus 33.8% in the three months ended September 30, 2013.

Net Income (Loss)

We had a net loss of $874,315 for the three months ended September 30, 2014 compared to net income of $41,209 for the three months ended September 30, 2013. The decrease in profitability was attributable primarily to the reduction in revenue and gross profits recorded during the current fiscal quarter coupled with a 9% increase in operating expenses, as discussed above. The net loss per basic and diluted common share for the current quarter was $(0.08), compared to net income per basic and diluted common share of $0.00 for the three months ended September 30, 2013.

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 typically pay our California contracted growers progressively, starting in the second quarter. In fiscal 2014, we paid our California growers approximately 50% in October 2013, and the remaining 50% was paid in February 2014. The acquisition of SGI, an Australian-based alfalfa seed company, in April 2013 provides the Company with a geographically diversified and year-round production cycle which will likely result in less quarter-to-quarter fluctuation in revenues; however, it will put a greater demand on our working capital and working capital requirements during the second, third and fourth quarters as the Company expects to pay its Australian growers during these periods as well as our California growers in the second and third quarters.

Historically, due to the concentration of sales to certain distributors and key customers, which typically represented a significant percentage of alfalfa seed sales, our month-to-month and quarter-to-quarter sales and associated cash receipts were highly dependent upon the timing of deliveries to and payments from these distributors and customers, which varied 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 January 16, 2013, we closed on an underwritten public offering of 1,400,000 common shares, which priced at $7.50 per share. We received total proceeds, net of underwriting discounts and equity offering costs, of approximately $9.4 million.

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On March 12, 2013, we announced that we were exercising our option to call for redemption the Class A warrants. As a result, 1,372,641 shares of common stock were issued as a result of 1,372,641 Class A warrants being exercised. We received proceeds, net of fees and expenses, of $9,366,212 during the year ended June 30, 2013. The 27,359 remaining Class A Warrants that were not exercised by the deadline were redeemed by the Company for a price of $0.25 each, for an aggregate redemption cost to S&W of $6,765. There are no remaining Class A Warrants outstanding.

Since 2011, we have had an ongoing revolving credit facility agreement with Wells Fargo Bank, National Association ("Wells Fargo").

On February 21, 2014, we entered into new credit agreements with Wells Fargo and thereby became obligated under new working capital facilities (collectively, the "New Facilities"). The New Facilities include (i) a domestic revolving facility of up to $4 million to refinance our outstanding credit accommodations from Wells Fargo and for working capital purposes, and (ii) an export-import revolving facility of up to $10 million for financing export-related accounts receivable and inventory (the "Ex-Im Revolver"). The availability of credit under the Ex-Im Revolver will be limited to an aggregate of 90% of the eligible accounts receivable (as defined under the credit agreement for the Ex-Im Revolver) plus 75% of the value of eligible inventory (also as defined under the credit agreement for the Ex-Im Revolver), with the term "value" defined as the lower of cost or fair market value on a first-in first-out basis determined in accordance with generally accepted accounting principles. All amounts due and owing under the New Facilities must be paid in full on or before April 1, 2015. The New Facilities are secured by a first priority lien on accounts receivable and other rights to payment, general intangibles, inventory, and equipment. The New Facilities are further secured by a lien on, and a pledge of, 65% of the stock of the Company's wholly owned subsidiary, Seed Genetics International Pty Ltd. The Facilities bear interest either (i) at a fluctuating rate per annum determined by Wells Fargo to be 2.25% above the daily one-month LIBOR Rate in effect from time to time, or (ii) at a fixed rate per annum determined to be 2.25% above LIBOR in effect on the first day of the applicable fixed rate term. Interest is payable each month in arrears.

The financial covenants imposed by Wells Fargo under the Credit Agreements include the following: a consolidated tangible net worth of not less than $30 million, measured quarterly; a consolidated debt service coverage ratio of not less than 1.25 to 1.0, measured at each fiscal year end; a maximum consolidated leverage ratio of 1.50 to 1.00, measured quarterly; a consolidated net income after taxes of not less than $1.00 on a rolling four-quarter basis, measured quarterly; and a consolidated asset coverage ratio of not less than 1.75 to 1.0, measured monthly. As of September 30, 2014, the Company did not meet the covenant requiring consolidated net income after taxes of not less than $1.00 on a rolling four-quarter basis, measured quarterly. The Company received a letter from Wells Fargo waiving this covenant for the September 30, 2014 reporting period. The Company is in compliance with all other debt covenants at September 30, 2014.

The outstanding balance on the Wells Fargo working capital facilities was $8.9 million at September 30, 2014.

In July 2012, we obtained a term loan from Wells Fargo in a principal amount of up to $2,625,000 (the "Term Loan"), which we used to fund a portion of the purchase of the 640 acres of Imperial Valley farmland. The Term Loan bears interest at a rate per annum equal to 2.35% above LIBOR as specified in the term note. Under the term loan, we are also required to pay both monthly and annual principal reduction as follows: The first installment of monthly principal repayments commenced in August 2012 and continued at a fixed amount per month until the first annual increase in July 2013. Thereafter, the amount of monthly principal reduction will increase in August of each year through August 2018. The last monthly payment will be made in July 2019. The monthly principal repayments range from $8,107 per month through the July 2013 payment up to a high of $9,703 per month in the final year (August 2018 through July 2019). There are annual principal payments in August 2013 and 2014 in the amount of $56,000, with a final installment, consisting of all remaining unpaid principal due and payable in full on July 5, 2019. We may prepay the principal at any time, provided that a minimum of the lesser of $100,000 or the entire outstanding principal balance is prepaid at any one time.

SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank Limited ("NAB"). The current facility expires on January 31, 2015 (the "NAB Facility Agreement") and, as of September 30, 2014, $8.4 million was outstanding under this facility.

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The NAB Facility Agreement comprises several facility lines, including an overdraft facility (AUD $980,000 limit which translates to USD $855,050 at September 30, 2014) and an interchangeable market rate facility and an overseas bills purchased facility (AUD $9,000,000 combined limit which translated to USD $7,852,500 at September 30, 2014).  The market rate facility is to be reduced in stages according to the following schedule: AUD $7,000,000 by October 31, 2014; AUD $6,000,000 by November 30, 2014; and AUD $5,500,000 by December 31, 2014.

SGI may access the facilities in combination; however, each facility bears interest at a unique interest rate calculated per pricing period--an interval (ranging from 7 to 180 days) between interest rate adjustments. Each facility's interest rate is calculated as the sum of an applicable indicator rate plus customer margin. The indicator rate for the market rate facility is equal to the "bid rate" quoted on the Bank Bill Swap Bid (BBSY) page of the Reuters Monitor System at or about 10:15 am Sydney Time on the banking date immediately preceding the commencement of the applicable pricing period. Under the market rate facility the customer margin is equal to 2.35% per annum. Currently, SGI's facilities accrue interest at approximately the following effective rates: market rate facility, 6.6% calculated daily; overseas bills purchased facility, 3.6% to 3.9% calculated daily; and overdraft facility, 7.6% calculated daily. 

For all NAB facilities, interest is payable each month in arrears. In the event of a default, as defined in the NAB Facility Agreement, the principal balance due under the facilities will thereafter bear interest at an increased rate per annum above the interest rate that would otherwise have been in effect from time to time under the terms of each facility (e.g., the interest rate increases by 4.5% per annum under the market rate and overdraft facilities upon the occurrence of an event of default).

Effective April 21, 2014, the Company agreed to become the guarantor for the NAB Facility and thereby release the SGI's founders from their personal guarantees to NAB. Pursuant to the terms of the guarantee, in the event of a payment default by SGI and the NAB's exhaustion of all available remedies under the NAB Facility, the Company agrees to pay all unpaid amounts due and owing from SGI to NAB under the NAB Facility up to AUD $10.0 million.

Summary of Cash Flows

The following table shows a summary of our cash flows for the three months ended September 30, 2014 and 2013:

      Three Months Ended
      September 30,
      2014     2013
Cash flows from operating activities   $ (653,828)   $ (6,191,876)
Cash flows from investing activities     (154,833)     (89,839)
Cash flows from financing activities     1,980,306      (362,127)
Effect of exchange rate changes on cash     (24,368)     (2,963)
Net increase (decrease) in cash     1,147,277      (6,646,805)
Cash and cash equivalents, beginning of period     1,167,503      11,781,074 
Cash and cash equivalents, end of period   $ 2,314,780    $ 5,134,269 

Operating Activities

For the three months ended September 30, 2014, operating activities used $653,828 in cash, as a result of a net loss of $874,315, an increase in inventories of $1,624,020 and an increase in crop production costs of $719,014, partially offset by a decrease in accounts receivable of $2,077,130 and an increase in accounts payable (including related parties) of $653,932. For the three months ended September 30, 2013, operating activities used $6,191,876 in cash, as a result of an increase in inventories of $2,079,229 and a decrease in accounts payable of $3,469,146 primarily due to grower payments.

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Our largest customer, which is located in Saudi Arabia, owed us approximately $4.2 million at September 30, 2014. Subsequent to the end of the first quarter of the current fiscal year, we have collected approximately $1.9 million of this balance and the remaining outstanding balance is still current as these outstanding invoices have 150-day payment terms. Our relationship with this customer is strong, and we intend to continue to do a significant amount of business together. Including our largest customer mentioned above, two customers comprised 32% of our accounts receivable at September 30, 2014.

Investing Activities

Our investing activities during the three months ended September 30, 2014 totaled $154,833. These activities consisted primarily of additions to property, plant, and equipment. Our investing activities during the three months ended September 30, 2013 totaled $89,839 and consisted of the purchase of equipment.

Financing Activities

Our financing activities during the three months ended September 30, 2014 consisted primarily of $2.1 million of net borrowings from our lines of credit with Wells Fargo and NAB. We also made principal payments totaling $83,727 on the long-term loans.

Our financing activities during the three months ended September 30, 2013 consisted primarily of $115,974 of net pay-downs on SGI's line of credit. We also made principal payments totaling $82,910 on the long-term loans.

Off Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the three months ended September 30, 2014.

Capital Resources and Requirements

Our future liquidity and capital requirements will be influenced by numerous factors, including:

  • the extent and duration of future operating income;
  • the level and timing of future sales and expenditures;
  • working capital required to support our growth;
  • investment capital for plant and equipment;
  • our sales and marketing programs;
  • investment capital for potential acquisitions;
  • competition; and
  • market developments.

Critical Accounting Policies

The accounting policies and the use of accounting estimates are set forth in the footnotes to the consolidated financial statements.

In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2 - Significant Accounting Policies set forth in the notes to the financial statements. In order to apply our accounting policies, we often need to make estimates based on judgments about future events. In making such estimates, we rely on historical experience, market and other conditions, and on assumptions that we believe to be reasonable. However, the estimation process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our results of operations, financial condition and changes in financial condition may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or to take other corrective actions, either of which may also have a material effect on our results of operations, financial condition or changes in financial condition. Members of our senior management have discussed the development and selection of our critical accounting estimates, and our disclosure regarding them, with the audit committee of our board of directors, and do so on a regular basis.

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We believe that the following estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our results of operations, financial condition or changes in financial condition for the current period could have been materially different from those presented.

Intangible Assets: All amortizable intangible assets are assessed for impairment whenever events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the intangible. If the review indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying amount of the intangible is reduced by the estimated cash-flow shortfall on a discounted basis, and a corresponding loss is charged to the consolidated statement of operations. Significant changes in key assumptions about the business, market conditions and prospects for which the intangible asset is currently utilized or expected to be utilized could result in an impairment charge.

Stock-Based Compensation: We account for stock-based compensation in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 718 Stock Compensation, which establishes accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line method, over the employee's requisite service period (generally the vesting period of the equity grant).

We account for equity instruments, including stock options, issued to non-employees in accordance with authoritative guidance for equity based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest.

We use the lattice valuation model to estimate the fair value of options granted under share-based compensation plans. The lattice valuation model requires us to estimate a variety of factors including, but not limited to, the expected term of the award, stock price volatility, dividend rate, risk-free interest rate, attrition rate, and exercise rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. The expected term used represents the weighted-average period that the stock options are expected to be outstanding. We have used the historical volatility for our stock for the expected volatility assumption required in the lattice model as it is more representative of future stock price trends. We use a risk-free interest rate that is based on the implied yield available on U.S. Treasury issued with an equivalent remaining term at the time of grant. We have not paid dividends in the past and currently do not plan to pay any dividends in the foreseeable future, and as such, dividend yield is assumed to be zero for the purposes of valuing the stock options granted. We evaluate the assumptions used to value stock awards on a quarterly basis. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. When there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. To the extent that we grant additional equity securities to employees, our share-based compensation expense will be increased by the additional unearned compensation resulting from those additional grants.

Income Taxes: We regularly assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. When a valuation allowance is established or increased, an income tax charge is included in the consolidated financial statements and net deferred tax assets are adjusted accordingly. Changes in tax laws, statutory tax rates and estimates of the Company's future taxable income levels could result in actual realization of the deferred tax assets being materially different from the amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision, resulting in a reduction of net income and stockholders' equity.

Inventories: All inventories are accounted for on a lower of cost or market basis. Inventories consist of raw materials and finished goods as well as in the ground crop inventories. Depending on market conditions, the actual amount received on sale could differ from our estimated value of inventory. In order to determine the value of inventory at the balance sheet date, we evaluate a number of factors to determine the adequacy of provisions for inventory. The factors include the age of inventory, the amount of inventory held by type, future demand for products and the expected future selling price we expect to realize by selling the inventory. Our estimates are judgmental in nature and are made at a point in time, using available information, expected business plans and expected market conditions. We perform a review of our inventory by product line on a quarterly basis.

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Our subsidiary SGI does not fix the final price for seed payable to its growers until the completion of a given year's sales cycle pursuant to its standard contract production agreement. We record an estimated unit price, accordingly, inventory, cost of goods sold and gross profits are based upon management's best estimate of the final purchase price to our SGI growers. To the extent the estimated purchase price varies from the final purchase price for seed, the adjustment to actual could materially impact the results in the period when the difference between estimates and actuals are identified. If the actual purchase price is in excess of our estimated purchase price, this would negatively impact our financial results including a reduction in gross profits and net income.

Recently Adopted and Recently Enacted Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2013-02, Comprehensive Income: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires companies to report, in one place, information about significant reclassifications out of accumulated other comprehensive income, or AOCI, and disclose more information about changes in AOCI balances. We adopted this ASU in the first quarter of fiscal 2014. The adoption of this standard did not have a material impact on our consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which provides guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We will adopt the standard effective July 1, 2014. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company and therefore, we are not required to provide information required by this item of Form 10-Q.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Potential investors should be aware that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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Part II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are not a party to any material legal proceedings.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed under the caption "Risk Factors" in Item 1A of Part 1 of our Annual Report on Form 10-K filed with the SEC on September 29, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.

 

Description

10.1

 

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on July 24, 2014)

10.2

 

General Pledge Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.3

 

EX-IM Working Capital Guarantee General Pledge Agreement (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.4

 

First Amendment to Credit Agreement (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.5

 

First Amendment to EX-IM Working Capital Guarantee Credit Agreement (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.6

 

Amendment No. 1 to Employment Agreement with Matthew K. Szot (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 8, 2014)

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31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

38


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 12th day of November 2014.

S&W SEED COMPANY 

   

By:      /s/ Matthew K. Szot          

          Matthew K. Szot

          Executive Vice President Finance and Chief Financial Officer
          (Principal Accounting and Financial Officer and Duly Authorized Signatory)

 

 

 

 

 

39


EXHIBIT INDEX

Exhibit No.

 

Description

10.1

 

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on July 24, 2014)

10.2

 

General Pledge Agreement (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.3

 

EX-IM Working Capital Guarantee General Pledge Agreement (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.4

 

First Amendment to Credit Agreement (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.5

 

First Amendment to EX-IM Working Capital Guarantee Credit Agreement (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed with the Commission on August 1, 2014)

10.6

 

Amendment No. 1 to Employment Agreement with Matthew K. Szot (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Commission on August 8, 2014)

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

 

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

 

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

40