S&W SEED COMPANY
2017 ANNUAL REPORT
EVOLVING
BEYOND
ALFALFA
S&W is a global leader in the alfalfa seed industry. Alfalfa
seed is primarily used for growing alfalfa hay, which is
grown throughout the world as forage for livestock,
including dairy and beef cattle, horses and sheep. It is
most often harvested as hay, but can also be made into
silage, grazed or fed as greenchop to ruminant livestock.
The alfalfa industry (and therefore the alfalfa seed
industry) is highly dependent on the dairy industry, which
is the largest consumer of alfalfa hay. As markets around
the world continue to expand to a more westernized diet
with high-protein consumption, the demands for alfalfa
production around the world continue to increase.
SORGHUM
S&W is an evolving player in the sorghum industry. Sorghum
(forage and grain) is considered one of the indispensable
crops in the world. It has traditionally been used for
livestock feed, as well as ethanol, but is gaining increasingly
in popularity in food products in the U.S. due to its gluten-
free characteristics, as well as its antioxidant, high protein,
lower fat, high fiber and non-GMO properties. Consequently,
sorghum is becoming a desired substitute for wheat, rye
and barley. Additionally, the pet food industry increasingly
utilizes sorghum for its nutritional benefits and enhanced
digestibility.
SUNFLOWER
S&W is expanding its focus on healthier consumer diets by
the breeding of hybrid sunflower seed varieties. Sunflowers
have multiple specialty uses including oil, birdseed and
human consumption. S&W’s current sunflower seed focus is
on the oil market. Sunflower oil is light in taste and appearance
and supplies more Vitamin E than any other vegetable oil. It
is a combination of monounsaturated and polyunsaturated
fats with low saturated fat levels. The versatility of this
healthy oil is recognized by cooks internationally, valued for
its frying performance and health benefits. With multiple
types of sunflower oils available, it meets the needs of
consumer and food manufacturers alike for a healthy and
high performance non-transgenic vegetable oil.
STEVIA
Stevia is a relative newcomer in the estimated over $50
billion global sweetener market. Stevia leaf and its refined
products constitute a natural, non-caloric high intensity
sweetener, estimated to be 200 to 300 times sweeter than
sugar. In the U.S., approximately 70% of all new products
formulated with stevia are beverages, with the remainder
split between diverse categories, including dairy products
and baked goods. The stevia plant is indigenous to the rain
forests of Paraguay and has been used as a sweetener in
its raw, unprocessed form for hundreds of years. In recent
years, it has been grown commercially in Brazil, Paraguay,
Uruguay, parts of Central America, Thailand, China and
the U.S. Currently, the majority of global commercial
stevia production occurs in China. S&W is looking to create
varieties capable of being produced in North America which
are better tasting and have ease of processing attributes.
DEVELOPING
BEST IN CLASS TRAITS
INTEGRATED TECHNOLOGIES
Based on independent analysis, more value per pound of seed is
garnered from technology than from the seed itself. Over the coming
years, S&W plans to evolve beyond its current focus to work with
partners to develop traits for its alfalfa, sorghum, sunflower and
other future crops. There are certain classes of genes S&W expects
to evaluate with a high degree of interest, including digestibility,
insect resistance, disease resistance and herbicide resistance. S&W
believes that it is uniquely positioned within the seed industry to
capitalize on this strategy and intends to leverage the experience of
its new management to drive enhanced value of our varieties going
forward.
FEED
DIGESTIBILITY
INSECT
RESISTANCE
DISEASE
RESISTANCE
HERBICIDE
RESISTANCE
CAPITALIZING
ON INDUSTRY TRENDS
WESTERNIZATION OF DIETS
60%
to 100%
EST. FOOD
PRODUCTION
INCREASE
It is estimated that the world will need to
increase food production by between 60%
and 100% by 2050 to meet the roughly 30%
increase in global population.*
INCREASED ANIMAL PROTEIN DEMAND
There has been an increasing pressure on the livestock sector to
meet the growing demand for high-value animal protein. The world’s
livestock sector is growing at an unprecedented rate and the driving
force behind this enormous surge is a combination of population
growth, rising incomes and urbanization. Alfalfa and sorghum are rich
sources of protein to address this increased demand.*
HEALTHIER CONSUMER DIETS
Consumer health is front and center in today’s day and age, with
consumers increasingly focused on healthy foods and ingredients. S&W
is addressing these trends through its production of gluten-free sorghum,
healthy sunflower oils, and the non-caloric alternative to sugar – stevia.
*WORLD HEALTH ORGANIZATION
One of the common operational themes across many of the companies I have run in the past was working with distributors
to have an ‘end customer centric focus strategy.’ We want to understand what drives their decisions and find ways to com-
municate directly to them
TO OUR LOYAL
SHAREHOLDERS
Over the last eight years, S&W Seed Company has evolved from a small alfalfa seed
company based in California with $3 million in sales, to the largest alfalfa seed
company in the world with distribution in more than 30 countries, seed production
in both hemispheres, and a world-class R&D program. We have seen our sales grow
significantly over this period of time in alfalfa, while recently setting the stage for the
next phase of growth with our expansion in stevia, as well as the hybrid sorghum and
sunflower seed markets.
As we evolve beyond our historical roots, the board appointed Mark Wong as S&W’s
new President and CEO. This executive management change aligns with our strategic
initiative to maintain a leadership position in our core alfalfa crop, while expanding our
portfolio into complimentary crops and technologies. In addition to making this change,
the board also worked to enhance the financial structure of the company to allow for
continued growth trends by adding growth capital and investing in key development
projects that will allow the company to flourish in the next chapter of its history.
During this time of evolution at S&W, the board believes there is no person better
equipped to lead S&W into the next stage of our growth than Mark Wong. Mark brings
experience in developing multiple successful seed biotech and agricultural companies,
and is currently chairman of one of the largest dairies in the U.S., providing him with a
unique understanding of the role alfalfa and other forages play in meeting the protein
demands of a growing global population. We look forward to leveraging Mark’s vast
experience across multiple crops and technologies to successfully lead S&W into the
future.
I was honored to have been appointed president and CEO of S&W Seed Company with
just a couple of weeks left in fiscal 2017. As we move into fiscal 2018 we have the
opportunity to leverage on the great work of our former CEO and advance S&W as one
of the leaders in our industry. We are dedicated to evolving beyond our historical focus
in alfalfa and expanding into a broader spectrum of crop types that we believe will
diversify our overall portfolio and increase our ability to generate additional revenue
streams and enhance profitability.
My 40-year career in agriculture has largely been based on two overriding themes:
leveraging core assets through the integration of technology and having a more
customer centric strategy. Specifically, creating more effective products using elite
germplasm and genes. I see a tremendous opportunity to leverage S&W’s existing
business, through the introduction of new traits as well as robust customer support
and marketing, to enhance S&W’s market share going forward.
Over the last few years, S&W has made efforts to develop certain traits within the alfalfa
platform. Agreements like the one we have with Calyxt will be important as we look to
move S&W forward. In addition, I think there is an even larger opportunity for us to build
Mark Harvey
Chairman of the
Board of Directors
Mark Wong
President & Chief
Executive Officer
an integrated seed biotech platform that can bring
significant value to the marketplace. There are certain
classes of genes that we will be evaluating with a high
degree of interest, for traits including digestibility,
insect resistance, disease resistance and herbicide
resistance. Based on independent analysis, more
value per pound of seed is garnered from technology
than from the seed itself. We will have an increased
focus on technology, and I intend to build S&W as an
integrated seed biotech platform in the coming years.
One of the common operational themes across many
of the companies I have run in the past was working
with distributors to have an end customer centric
focus strategy. We want to understand what drives
their decisions and find ways to communicate directly
to them. Our distributors are important partners for
us, and we must work together to achieve the goal
of educating our customers on the benefits of our
products. We need to work with our distributors
that are true partners in expanding the S&W brand.
Organizationally, we are developing strategies to
become more customer centric, working in conjunction
with our key distributors to highlight and communicate
the attributes of our alfalfa, as well as our sorghum,
sunflower, and stevia varieties, to our customers. We
will be hiring additional field support and agronomy
personnel to ensure our end-customers, primarily the
dairy and beef industry, understand the economic
benefits of feeding livestock our varieties compared to
those of the competition.
Looking back, the headwinds for S&W in the Saudi
Arabian market significantly impacted the Company’s
results in fiscal 2017. The changes in water regulations
in Saudi Arabia have created uncertainty, and
disruption, to the normal flow of seed inventory to
the country. We are in unprecedented times and I
do not believe we will be able to have a full grasp of
the magnitude of the disruption for a couple of years.
Through a more customer-centric approach, we will
look to better understand the dynamics taking place
within each country in which we operate, hoping to get
ahead of these changes much sooner.
As we look to the future, we intend to place greater
emphasis on our complementary crops, including
sorghum, sunflower and stevia. In sorghum and
sunflower, we will look to establish market share
through organic, and possibly acquisition growth,
while developing traits that will allow us to become
significant players in these crops going forward.
Stevia is the type of crop that has potential to be a
significant growth catalyst in the coming years and I
plan to personally be involved in commercialization
efforts going forward. Additionally, we will be active
in our pursuit of additional crop opportunities. I have
a long career working with a number of crops and
with the platform that S&W provides, I believe we
can drive value by incorporating certain crops where
technological advances are readily available.
I am excited about the opportunity S&W has before it.
We have a tremendous team of individuals. These are
industry veterans who have high levels of expertise
within their respective verticals. I am confident in
our abilities to build a great agricultural platform
going forward by leveraging our existing assets,
while also incorporating new technologies and focus
areas. This is an exciting time to be in agriculture
and S&W has a tremendous platform from which to
build. I am committed to building upon the success
of recent years. All of us at the S&W appreciate the
ongoing support from our loyal shareholders and we
look forward to driving value for our customers, our
partners, and all other stakeholders for years to come.
Mark Harvey
Chairmain of the Board of Directors
Mark Wong
President & Chief Executive Officer
COMPANY FINANCIALS
S&W Seed Company: Consolidated Statement of Operations
Years ended June 30
Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Selling, general and administrative expenses
Research and development expenses
Depreciation and amortization
Disposal of property, plant and equipment loss (gain)
Impairment charges
Total Operating Expenses
Income (Loss) From Operations
Other Expenses
Foreign currency loss (gain)
Change in derivative warrant liabilities
Change in contingent consideration obligations
Loss on equity method investment
Anticipated loss on sub-lease land
Gain on sale of marketable securities
Interest expense - amortization of debt discount
Interest expense - convertible debt and other
Loss Before Income Taxes
Provision (benefit) for income tax
Net Income (Loss)
Net Income (Loss) Per Common Share
Basic and Diluted
2016
GAAP
$
96,044,254
77,653,646
18,390,608
10,397,863
2,764,358
3,185,126
(153)
-
16,347,194
2,043,414
(226,529)
(1,903,900)
55,092
294,197
-
(123,038)
3,899,739
2,086,005
(2,038,152)
(2,403,379)
365,227
$
$
2017
GAAP
$
75,373,810
59,232,846
16,140,964
11,794,026
3,032,112
3,325,743
78,538
319,001
18,549,420
(2,408,456)
1,388
(1,517,500)
231,584
144,841
424,600
-
1,176,023
1,324,945
(4,194,337)
7,627,705
$
(11,822,042)
0.02
$
(0.67)
Weighted Average Number of Common Shares Outstanding
Basic and Diluted
14,936,311
17,718,057
Itemized Reconciliation Between Net Income (Loss)
And Non-GAAP Adjusted EBITDA (unaudited)
Years ended June 30
Net income (loss)
Non-recurring cost of revenue charges
Separation costs
Reserve for uncollectable sub-lease income
Non-recurring transaction costs
Impairment charges
Non-cash stock based compensation
Depreciation and amortization
Foreign currency loss (gain)
Change in derivative warrant liabilities
Change in contingent consideration obligations
Gain on sale of marketable securities
Loss on equity method investment
Anticipated loss on sub-lease land
Interest expense – amortization of debt discount
Interest expense – convertible debt and other
Provision (benefit) from income taxes
2016
$ 365,227
259,566
-
-
267,353
-
1,190,126
3,185,126
(226,529)
(1,903,900)
55,092
(123,038)
294,197
-
3,899,739
2,086,005
(2,403,379)
2017
$(11,822,042)
-
674,597
223,200
-
319,001
1,409,368
3,325,743
1,388
(1,517,500)
231,584
-
144,841
424,600
1,176,023
1,324,945
7,627,705
Revenues
$ in Millions
$120
$100
$96.0M
$75.4M
$80
$60
$40
$20
Adjusted
EBITDA
$ in Millions
$6.9M
$3.5M
$8.0
$6.0
$4.0
$2.0
FY2016
FY2017
FY2016
FY2017
Non-GAAP Adjusted EBITDA
$ 6,945,585
$ 3,543,453
Non-GAAP Measurements: This document includes certain financial information that constitutes “non-GAAP financial measures” as defined by the SEC. A full reconciliation of the non-GAAP mea-
sures to GAAP can be found in the tables above. EBITDA and Adjusted EBITDA are supplemental to results presented under accounting principles generally accepted in the United States of America
(“GAAP”) and may not be comparable to similarly titled measures presented by other companies. These non-GAAP measures are used by management to facilitate period-to-period comparisons
and analysis of S&W’s operating performance and liquidity. Management believes these non-GAAP measures are useful to investors in trending, analyzing and benchmarking the performance and
value of S&W’s business. These non-GAAP measures should be considered in addition to, but not as a substitute for, other similar measures reported in accordance with GAAP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
____________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
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
(State or Other Jurisdiction of
Incorporation or Organization)
802 North Douty Street, Hanford, CA
(Address of Principal Executive Offices)
27-1275784
(I.R.S. Employer
Identification No.)
93230
(Zip Code)
(559) 884-2535
(Registrant’s Telephone Number,
Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value
Nasdaq Capital Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
No
Securities Act.
Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
No
15(d) of the Act.
Yes
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 such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
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 during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company
Accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed
by reference to the price at which the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrant’s most recently completed second fiscal
quarter was $62,748,342.
The number of shares outstanding of common stock of the registrant as of September 18, 2017 was
20,692,089.
DOCUMENTS INCORPORATED BY REFERENCE
None.
S&W SEED COMPANY
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2017
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS .........................................................................................
PART I ..................................................................................................................................................
Business ......................................................................................................................
Risk Factors ................................................................................................................
Unresolved Staff Comments .......................................................................................
Properties ....................................................................................................................
Legal Proceedings .......................................................................................................
Mine Safety Disclosures .............................................................................................
PART II ................................................................................................................................................
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
1
3
3
25
44
45
46
46
47
47
48
Item 5.
Item 6.
Item 7.
Item 9A.
Item 9B.
Item 7A.
Item 8.
Item 9.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ....................................................................................
Selected Financial Data ...............................................................................................
Management’s Discussion and Analysis of Financing Condition and Results of
Operations ...................................................................................................................
Qualitative and Quantitative Disclosures About Market Risk ....................................
Financial Statements ....................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ...................................................................................................................
106
Controls and Procedures ............................................................................................. 106
Other Information ....................................................................................................... 107
PART III ............................................................................................................................................... 108
Directors, Executive Officers and Corporate Governance ......................................... 108
Executive Compensation ............................................................................................ 121
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ....................................................................................................
137
Certain Relationships and Related Transactions, and Director Independence ........... 141
Principal Accountant Fees and Services ..................................................................... 143
PART IV ............................................................................................................................................... 144
Exhibits and Financial Statement Schedules .............................................................. 144
SIGNATURES ..................................................................................................................................... 145
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
49
67
68
Item 15.
i
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), 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 or to diversify our product
offerings; 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 following:
• whether we are successful in securing sufficient acreage to support the growth of our alfalfa seed
business,
• our plans for expansion of our business (including through acquisitions) and our ability to
successfully integrate acquisitions into our operations;
•
•
•
the continued ability of our distributors and suppliers to have access to sufficient liquidity to fund
their operations;
trends and other factors affecting our financial condition or results of operations from period to
period;
the impact of crop disease, severe weather conditions, such as flooding, or natural disasters, such
as earthquakes, on crop quality and yields and on our ability to grow, procure or export our
products;
•
the impact of pricing of other crops that may be influence what crops our growers elect to plant;
• whether we are successful in aligning expense levels to revenue changes;
• whether we are successful in monetizing our stevia business;
1
•
the cost and other implications of pending or future legislation or court decisions and pending or
future accounting pronouncements; and
• other risks that are described herein including but not limited to the items discussed in “Risk
Factors” below, and that are otherwise described or updated from time to time in our filings with
the SEC.
You are urged to carefully review the disclosures made concerning risks and uncertainties that may affect
our business or operating results, which include, among others, those listed in Part I, Item 1A. “Risk
Factors” of this Annual Report on Form 10-K.
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 Annual Report on Form 10-K, some of which are beyond our control, will be important in
determining our future performance. Consequently, these statements are inherently uncertain and 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 Annual Report on Form 10-K 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. All forward-
looking statements included herein are expressly qualified in their entirety by the cautionary statements
contained or referred to in this section. Furthermore, such forward-looking statements represent our views
as of, and speak only as of, the date of this Annual Report on Form 10-K, and such statements should not
be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially
available relevant information. We undertake no obligation to publicly update any forward-looking
statements, or to update the reasons why actual results could differ materially from those anticipated in
any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law.
When used in this Annual Report on Form 10-K, the terms “we,” “us,” “our,” “the Company,” “S&W”
and “S&W Seed” refer to S&W Seed Company and its subsidiaries or, as the context may require, S&W
Seed Company only. Our fiscal year ends on June 30, and accordingly, the terms “fiscal 2017,” “fiscal
2016” and “fiscal 2015” in this Annual Report on Form 10-K refer to the respective fiscal year ended
June 30, 2017, 2016 and 2015, respectively, with corresponding meanings to any fiscal year reference
beyond such dates. Trademarks, service marks and trade names of other companies appearing in this
report are the property of their respective holders.
2
PART I
Item 1.
Business
Overview
Founded in 1980 and headquartered in the Central Valley of California, we are a global agricultural
company. Grounded in our historical expertise and, what we believe is our present leading position in the
breeding, production and sale of alfalfa seed, we continue to build towards our goal of being recognized
as the world’s preferred proprietary forage, grain and specialty crop seed company. In addition to our
primary activities in alfalfa seed, we have recently expanded our product portfolio by adding hybrid
sorghum and sunflower seed germplasm, which complement our alfalfa seed offerings by allowing us to
leverage our infrastructure, research and development expertise and our distribution channels. We believe
that such diversification will allow us to enter new markets with historically higher margins.
Our alfalfa seed is produced under contract with growers in the Western United States, Canada and
Australia, and we sell our alfalfa seed varieties in more than 30 countries across the globe. Historically,
we have been recognized as the leading producer of non-dormant alfalfa seed varieties that have been
bred for warm climates and high-yields, including varieties that can thrive in poor, saline soils. Our
December 2014 acquisition of certain alfalfa research and production facility and conventional (non-
GMO) alfalfa germplasm assets of DuPont Pioneer, a wholly-owned subsidiary of E.I. du Pont de
Nemours and Company (“Dupont Pioneer”), has provided us with the opportunity to become a leading
producer of dormant, high yield alfalfa seed varieties, which are the varieties bred to survive cold winter
conditions. As a result, our alfalfa seed business now encompasses the production, breeding and sale of
non-dormant and dormant conventional varieties and the potential for future production and sale of GMO
(genetically modified organism) varieties.
Since our initial public offering in fiscal 2010, we have expanded certain pre-existing business initiatives
and added new ones, including:
• diversifying our production geographically by expanding from solely producing alfalfa seed in
the San Joaquin Valley of California to initially adding production capability in the Imperial
Valley of California, then expanding into Australia (primarily South Australia) and, most
recently, adding production in other western states and Canada;
•
•
expanding from solely offering non-dormant varieties to now having a full range of both dormant
and non-dormant alfalfa seed varieties;
expanding the depth and breadth of our research and development capabilities in order to develop
new varieties of both dormant and non-dormant alfalfa seed with traits sought after by our
existing and future customers;
• diversifying into complementary proprietary crops by acquiring the assets of a Queensland,
Australia company specializing in breeding and licensing of hybrid sorghum and sunflower seed
germplasm;
3
•
•
•
expanding our distribution channels and customer base, initially through the acquisition of the
customer list of our then-largest international customer in the Middle East in July 2011, and
thereafter, through certain strategic acquisitions;
expanding our sales geographically both through the expansion of our product offerings to supply
products needed in regions we historically did not cover and the expansion of our sales and
marketing efforts generally; and
implementing a stevia breeding program to develop new stevia varieties that incorporate the most
desirable characteristics of this all-natural, zero calorie sweetener.
We have accomplished these expansion initiatives through a combination of organic growth and
strategic acquisitions, foremost among them:
•
•
•
•
•
•
the acquisition in July 2011 of certain intangible assets, including the customer information,
related to the field seed and small grain business from Genetics International, Inc., which had
previously operated in the Middle East and North Africa (“MENA”), and which began our
transition into selling directly to MENA distributors;
the acquisition of Imperial Valley Seeds, Inc. (“IVS”) in October 2012, which enabled us to
expand production of non-GMO seed into California's Imperial Valley, thereby ensuring a non-
GMO uncontaminated source of seed due to the prohibition on growing GMO crops in the
Imperial Valley, as well as enabling us to diversify our production areas and distribution
channels;
the acquisition of a portfolio of dormant germplasm in August 2012 to launch our entry into the
dormant market;
the acquisition of the leading local producer of non-dormant alfalfa seed in South Australia, Seed
Genetics International Pty Ltd (“SGI”) in April 2013, which greatly expanded our production
capabilities and geographic diversity;
the acquisition of the alfalfa production and research facility assets and conventional (non-GMO)
alfalfa germplasm from DuPont Pioneer in December 2014, thereby substantially expanding upon
our initial entrance into the dormant alfalfa seed market that began in 2012 and enabling us to
greatly expand our production and research and product development capabilities; and
the acquisition, in May 2016, of the assets and business of SV Genetics Pty Ltd (“SV Genetics”),
a private Australian company specializing in the breeding and licensing of proprietary hybrid
sorghum and sunflower seed germplasm, which represents our initial effort to diversify our
product portfolio beyond alfalfa seed and stevia.
We believe our 2013 combination with SGI created the world's largest non-dormant alfalfa seed company
and gave us the competitive advantages of year-round production in that market. With the acquisition of
dormant alfalfa seed assets from DuPont Pioneer in December 2014, we believe we have become the
largest alfalfa seed company worldwide (by volume), with industry-leading research and development, as
well as production and distribution capabilities in both hemispheres and the ability to supply proprietary
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dormant and non-dormant alfalfa seed. Our operations span the world's alfalfa seed production regions,
with operations in the San Joaquin and Imperial Valleys of California, five additional Western states,
Australia and three provinces in Canada. We now sell our seed products in more than 30 countries
worldwide. In addition, we believe our recent acquisition of the hybrid sorghum and sunflower seed
assets of SV Genetics sets us on the road to begin diversifying into product offerings with historically
higher margins.
We also own and operate seed-cleaning and processing facilities in Five Points, California and Nampa,
Idaho and a seed processing facility in Keith, South Australia.
World Agriculture
We believe that one of the biggest challenges of the 21st century will be to expand agricultural production
so that it can meet the food and nutritional demands of the world’s growing population. According to
World Population Prospects: The 2015 Revision, Key Findings and Advance Tables, published by the
United Nations, Department of Economic and Social Affairs, Population Division, the world population is
estimated to reach 8.5 billion in 2030 and to surpass 9.7 billion by 2050.
Improvements in farm productivity have allowed agriculture to keep pace with growing food demand.
Yield-enhancing technologies such as mechanization, hybrid seed and crop protection chemicals have
enabled farmers to meet the ever-growing demand for food. Because of decreases in the amount of arable
land and shrinking worldwide fresh water resources, further increases in agricultural production must
come from improvements in agricultural productivity. We address this need by breeding high-yielding
alfalfa varieties that are adapted to the major growing regions of the world. Additionally, some of our
alfalfa varieties expand the addressable acreage for forage production with their ability to tolerate inferior,
saline soils.
Alfalfa Seed Industry
Alfalfa seed is primarily used for growing alfalfa hay, which is grown throughout the world as “forage”
for livestock, including dairy and beef cattle, horses and sheep. It is most often harvested as hay, but can
also be made into silage, grazed or fed as greenchop to ruminant livestock. The alfalfa industry (and
therefore the alfalfa seed industry) is highly dependent on the dairy industry, which is the largest
consumer of alfalfa hay. As markets around the world continue to expand to a more westernized diet with
high-protein consumption, the demands for alfalfa production around the world continue to increase.
Alfalfa is indigenous to the Middle East where it is considered a “non-dormant” plant, meaning it grows
year round. “Dormant” varieties of alfalfa have adapted to cold climates by going dormant during periods
when frost or snow conditions would otherwise kill them. Dormancy is rated using a numerical system
under which “dormant” varieties are rated toward the lower end of a 1 through 11 scale, such as 2 through
4, while “non-dormant” varieties are rated toward the upper end of the scale, such as 8 through 11. The
number typically identifies the number of cuttings that a farmer might be able to obtain each year.
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While exact production estimates worldwide are difficult to obtain, we estimate that approximately 150
million pounds of alfalfa seed are produced worldwide each year, roughly divided evenly between non-
dormant and dormant production. Alfalfa seed for the non-dormant marketplace is primarily grown in just
a few key regions of the world, including the San Joaquin Valley of California, the Imperial Valley of
California, and Southern Australia. However, the growing regions for “non-dormant” alfalfa hay include
the Southwestern U.S., the Middle East, North Africa, Latin America and other hot, arid regions of the
world. “Dormant” alfalfa seed, by contrast, is grown in the western United States and Canada for
production of alfalfa hay in colder climates, including the northern regions of the United States, Canada,
Europe and China.
Alfalfa seed production is demanding for even the most experienced farmers. Farming practices must be
tailored to the climatic conditions of each area. Irrigation must be carefully controlled and timed to stress
the plants to cause maximum flowering and seed production. Weed control is essential in order to pass
inspections for purity needed for certification. Insect pests, especially lygus bugs, must be managed
throughout the season, using strategies that protect pollinators, such as honey bees, leafcutter bees and
alkali bees. Fields are desiccated using chemicals that remove moisture and then are harvested as quickly
thereafter as possible to limit or avoid rain damage.
Stevia and the Sweetener Industry
Stevia is a relative newcomer in the estimated over $50 billion global sweetener market. According to a
report released by analysts at Technavio on May 26, 2016, this market is forecasted to grow at a
compound annual growth rate of 4.78% during the period between 2016 and 2020. Although this market
is still dominated by sugar, sugar substitutes continue to increase in market share as consumer concern
over sugar intake continues to increase. Stevia leaf and its refined products constitute a natural, non-
caloric high intensity sweetener, estimated to be 200 to 300 times sweeter than sugar. Its taste has a
slower onset and longer duration than that of sugar. It has the advantage of not breaking down with heat,
making it more stable for cooking than other sugar alternatives. In the U.S., approximately 70% of all
new products formulated with stevia are beverages, with the remainder split between diverse categories,
including dairy products and baked goods.
The stevia plant is indigenous to the rain forests of Paraguay and has been used as a sweetener in its raw,
unprocessed form for hundreds of years. In recent years, it has been grown commercially in Brazil,
Paraguay, Uruguay, parts of Central America, Thailand, China and the U.S. Currently, the majority of
global commercial stevia production occurs in China.
The incorporation of stevia-derived extracts into foods and beverages in the U.S. has seen a rapid increase
since the beginning of 2009, when stevia was first introduced as a sweetener alternative to sugar in food
and beverages. According to a Mintel and Leatherhead Food Research report released in 2014, the use of
intense sweeteners, such as stevia, in food and beverage products has grown from being used in
approximately 3.5% of all launches globally in 2009 to approximately 5.5% in 2012. The value of stevia
as an additive for use in food and beverage manufacture in 2013 totaled approximately $110 million, and
Mintel and Leatherhead Food Research estimates that this total will grow to approximately $275 million
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by 2017. Their report further states that, while sales of artificial sweeteners, such as aspartame,
acesulfame K and sucralose still dominate the market for sugar substitutes, consumer demand for artificial
sweeteners has seen a decline since the introduction of stevia. Mintel and Leatherhead Food Research
expects this trend to continue, with plant-derived sweeteners, such as stevia, providing the main area of
growth in the sweetener market in the future.
Sorghum Industry
Sorghum comes in two types, forage and grain, and is considered one of the indispensable crops in the
world. It has traditionally been used for livestock feed, as well as ethanol, but is gaining increasingly in
popularity in food products in the U.S. due to its gluten-free characteristics, as well as its antioxidant,
high protein, lower fat, high fiber and non-GMO properties. Consequently, sorghum is becoming a
desired substitute for wheat, rye and barley. Additionally, the pet food industry increasingly utilizes
sorghum for its nutritional benefits and enhanced digestibility.
The U.S. Department of Agriculture (the “USDA”) estimates the world sorghum production for
2016/2017 will be approximately 64 million metric tons. Industry experts estimate the 2016 U.S. sorghum
crop to encompass between 7 million and 8 million acres with the majority of the world’s sorghum grown
in developing countries, primarily in Africa and Asia. Similar to alfalfa, sorghum grows well in poor soil
and drought conditions, thanks to its hardiness, market versatility and high-quality seed. Sorghum
requires less water to grow than many other crops and is generally used as a replacement for corn and
other grains in areas where water is scarce. In Africa, sorghum can be a food staple for human
consumption.
Sunflower Industry
Sunflowers have multiple specialty uses including oil, birdseed and human consumption. Our current
sunflower seed focus is on the oil market. Sunflower oil is light in taste and appearance and supplies more
Vitamin E than any other vegetable oil. It is a combination of monounsaturated and polyunsaturated fats
with low saturated fat levels. The versatility of this healthy oil is recognized by cooks internationally,
valued for its frying performance and health benefits. With multiple types of sunflower oils available, it
meets the needs of consumer and food manufacturers alike for a healthy and high performance non-
transgenic vegetable oil. Global sunflower seed production in 2016-2017 is projected at 41.2 million tons,
up 5 percent from the current season and above the recent 10-year average. The sunflower seed oil trade
is forecast to rise, supported by demand in India, the EU, North Africa, and the Middle East.
Business Strategy
Over the years, we have built our business upon four pillars that serve as our foundation and drive our
future plans and direction. These include:
•
•
a strong product portfolio;
leading edge research and development expertise;
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•
a large and diversified production base; and
• global distribution.
We strive to enhance our growth potential and improve gross margins by expanding our alfalfa seed
business, by leveraging our expertise in plant discovery and development and by continually assessing
opportunities to expand into the development, production and sale of other, higher margin crops.
We continue to pursue our strategy to be recognized as the world’s preferred provider of seed for forage,
grain and specialty crops by:
•
increasing distribution into foreign markets through sales in the Middle East, North Africa,
Mexico, other Latin American locations and Eastern Europe;
•
expanding and improving our domestic distribution channels;
• promoting worldwide the economic advantages of our high-yielding alfalfa seed varieties and our
salt-tolerant alfalfa seed varieties;
•
expanding our breeding program, both in classical breeding and transgenic breeding, in order to
develop new varieties with those characteristics most needed or desired by farmers, and most
recently, expanding our breeding program into crops with historically higher margins, in
particular, hybrid sorghum and sunflower seed germplasm; and
•
increasing our assortment of available non-dormant and dormant, conventional and GMO alfalfa
seed varieties.
These goals are being accomplished both through organic growth of our legacy business and through
strategic acquisitions. We will continue to look for additional acquisition or internal opportunities that
will expand our existing business or provide us with a gateway to entering new markets that complement
our existing business.
We also are continuing to exploit the emerging market for stevia through our stevia breeding program.
The goal of this program is to leverage our research, development and breeding expertise to invent stevia
varieties with flavor characteristics that best complement the food and beverages into which stevia is
increasingly being incorporated or that can be consumed on its own.
Our Current Alfalfa Seed Products
We have a history of innovation in alfalfa breeding, dating back to the early 1980s when our non-dormant
varieties (“S&W varieties”) were first introduced to the market. Starting in 2003, our Australian
subsidiary, SGI, began a breeding program targeted at creating varieties that maximize seed yields,
thereby reducing the cost of seed production. Historically, we differentiated our products by optimizing
our varieties for geographical regions that have hot climates and, in the case of S&W varieties,
challenging soil conditions such as high-salt content, while maximizing crop yield. Our December 2014
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acquisition of DuPont Pioneer’s conventional, dormant alfalfa seed varieties built upon our initial 2012
launch into dormant alfalfa seed markets by adding a wide selection of dormant alfalfa seed varieties that
are suited for higher elevation and cooler climate conditions. Our current portfolio of alfalfa seed products
includes varieties that, depending upon the particular variety, exhibit traits including high yield, muscle
(strength in the field), salt tolerance, drought tolerance, leafhopper resistance and stem nematode
resistance, among other traits sought by farmers who grow forage hay.
Fall Dormancy Ratings of Our Varieties
Fall dormancy is a key characteristic that can vary among alfalfa varieties. Fall Dormancy (FD) ratings
are assigned to varieties based on their performance in standardized tests for the onset of dormancy in the
fall. Standard check varieties span an FD rating continuum from FD 1 to FD 11, where the onset of
dormancy is measured as fall height relative to standard check varieties. FD1 represents the earliest onset
of fall dormancy, whereas FD 11 represents a completely non-dormant growth habit. Early FD ratings are
generally most suited to cold winter climates where plants must cease fall growth early allowing
individual plants to survive cold winters and frozen soils conditions for lengthy periods. FD 2 and FD 3
ratings are typically associated with early onset fall dormancy, when grown in the upper Midwest for
example. FD 9 and FD 10 ratings are typically non-dormant, are characterized as having relatively little
slowdown in fall growth and are more suited for continuing forage yield production and improved yield
potential in warm winter climates where soils do not freeze.
Our current commercial product line-up includes alfalfa seed varieties that span from FD 3 (our earliest
onset of fall-dormancy) to FD 10 (our most non-dormant, most winter active). The legacy S&W product
development efforts were focused on FD 8, FD 9 and FD 10, with some breeding effort devoted to FD 4,
FD 6 and FD7.
S&W Varieties
S&W varieties are all bred and developed to meet the guidelines for certification by the National Alfalfa
Variety Review Board and/or the Association of Official Seed Certifying Agencies.
In February 2012, we announced the certification of our first proprietary dormant alfalfa seed variety,
which was specifically bred to thrive in high altitude and cooler climates. In August 2012, we purchased
the rights to a portfolio of alfalfa varieties suited for higher elevations and colder climate conditions,
marking our commitment to expand more aggressively into the dormant variety market. The colder
climate or higher elevation varieties that we acquired are in the range of FD 3, FD 4 and FD 5. In
December 2014, we acquired from DuPont Pioneer one of the alfalfa industry’s largest portfolios of
dormant alfalfa germplasm, along with their active breeding program. The Pioneer breeding program
amassed a significant germplasm base that spans from FD 3 through FD 9. The primary focus of the
Pioneer breeding program was FD 4 and FD 5 for the North America market. These acquisitions of
dormant germplasm significantly expand the range of geographic and climatic growing regions where we
can offer adapted varieties.
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Our non-dormant varieties (FD 8, FD 9 and FD 10) still represent a large proportion of our business and
are best suited to hot, arid climates. Our salt tolerant non-dormant varieties do well in salty irrigation
waters and salty soils. Our leading non-dormant varieties include SW10, SW9720, SW9215, SW9628,
and SW8421S. Of these varieties, SW9720, SW9215 and SW8421S are bred to perform very well in
highly saline conditions that would stunt or kill ordinary alfalfa.
Our FD 3, FD 4 and FD 5 S&W varieties are adapted to the winter-hardy intermountain west and the
northern half of the United States and Canada. These include Rhino, SW4107, and SW5909. Some of
these varieties are derived from the DuPont Pioneer germplasm base for commercial introduction as S&W
brand varieties. Other dormant varieties from the DuPont Pioneer germplasm have been selected as
potential varieties for licensing to third party brands. Our breeding and genetics experts continue the
multi-year process of developing improved varieties over all of the dormancy spectrum, but concentrating
primarily on dormancy 9 with high salt- and heat-tolerant varieties, and dormancy 4 high yield winter
hardy type varieties where we have established ourselves as a leading provider. We also create blends of
seed varieties.
IVS Varieties
IVS markets both common and certified alfalfa seeds, sourced from growers located in the Imperial
Valley of Southeast California. Portions of the alfalfa seed sold by IVS in fiscal 2016 and 2017 were
common varieties (i.e., uncertified seed) while the balance consisted of certified CUF (a public variety)
and proprietary varieties. The primary proprietary varieties we acquired in the IVS acquisition are
LaJolla, Catalina and Saltana. Because GMO alfalfa is not permitted in the Imperial Valley, we are able to
rely upon the seed grown in the Imperial Valley, along with seed grown in Australia, to supply customers
in regions such as the Middle East and Europe, where GMO products are strictly prohibited.
SGI Varieties
SGI has developed well-known proprietary varieties of alfalfa, such as SuperSonic, SuperNova,
SuperStar, SuperCharge, SuperAurora, SuperSequel and SuperSiriver. Since 2003, the varieties
developed by SGI have attracted an expanding grower base, and in 2017, SGI accounted for
approximately 60% of the total Australian certified proprietary alfalfa seed production. SGI’s alfalfa seed
varieties are bred to resist disease, exhibit persistence in the field and produce higher yields of both the
alfalfa hay forage and alfalfa seed production for our seed growers. SGI’s proprietary varieties exhibit
superior seed yield capability compared to traditional non-proprietary alfalfa varieties in Australia, with
the most recent varieties showing the highest seed yields. Forage yields of the older SGI proprietary
varieties are at least equivalent to traditional non-proprietary varieties, and the forage yields of the more
recent SGI varieties are even better. All of SGI’s proprietary alfalfa varieties, excluding SuperAurora,
have FD ratings of 8-9 and therefore achieve optimum growth and forage production in Mediterranean to
desert climates.
SGI’s breeding program includes a number of initiatives addressing semi-dormant and highly non-
dormant alfalfa varieties and tropical alfalfa seed varieties.
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Additionally, SGI has a breeding and production platform of proprietary white clover varieties, including
SuperHuia, SuperLadino, SuperHaifa and SuperHaifa II. In fiscal 2017, clover sales represented
approximately 11.5% of SGI’s total seed sales and a nominal amount of our total consolidated sales.
SGI’s white clover varieties are used for forage and ornamentation.
Genetically Modified Organism Alfalfa
Currently, Europe, the Middle East and certain other parts of the world prohibit the sale of genetically
modified organism (GMO) alfalfa. Therefore, historically, we have not employed genetic engineering in
the breeding of our current commercial seed varieties for these markets, and consequently, we have
products that can be sold throughout the world. As a result of the January 2011 deregulation by the USDA
of Roundup Ready® alfalfa, a GMO product, Roundup Ready® alfalfa is currently being grown in the
United States without any federal or state regulations governing field isolation and other protections.
Collaborative stewardship programs have been developed to facilitate the coexistence of GMO and non-
GMO seed. For example, in 2010, the AOSCA launched its Alfalfa Seed Stewardship Program (the
“ASSP”). The ASSP is a voluntary, fee-based certification program for the production of alfalfa seed to
be sold into markets that prohibit the sale of GMO alfalfa. ASSP certification of seed fields includes
testing for GMO material and observance of a minimum stated isolation distance of five miles from any
GMO alfalfa seed production field. Also in 2010, the California Crop Improvement Association (the
“CCIA”) developed a web-based alfalfa seed field isolation “pinning” map for alfalfa seed production in
the Western U.S. This map is intended to pin both GMO and non-GMO seed fields. Although beneficial
to growers and customers alike, these stewardship programs do not afford legal protection to non-GMO
growers.
We continue to evaluate our options with respect to incorporating biotechnology into our alfalfa seed
traits and the resulting impact on our business strategy and operations. In April 2013, we entered into a
license agreement with Forage Genetics International, LLC, a subsidiary of Land O’ Lakes, Inc. (“FGI”)
to develop and commercialize seed varieties that incorporate proprietary traits, including the Roundup
Ready® trait. This agreement further documented and formalized our previously announced collaboration
with FGI and Monsanto to develop genetically modified versions of certain of our proprietary alfalfa
varieties. This development of biotech seed varieties consists of several phases including greenhouse
work and field trials to confirm agronomic performance and trait efficiency of each developed variety.
Upon completion of the field trials and demonstration of minimum performance standards, we may elect
to commercialize the variety and enter into a variety-specific license agreement with FGI pursuant to
which we would pay certain royalties and access fees.
In connection with the DuPont Pioneer acquisition, we only acquired conventional alfalfa varieties.
However, the parties agreed to the terms of a second asset purchase agreement relating to the purchase of
DuPont Pioneer’s GMO alfalfa assets, to be entered into under certain circumstances: If FGI provides its
required consent to this transaction prior to November 30, 2017, and subject to the satisfaction of certain
other specified conditions, either we or DuPont Pioneer have the right to enter into (and require the other
party to enter into) the second asset purchase agreement on or before December 29, 2017, pursuant to
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which we would acquire DuPont Pioneer’s GMO germplasm varieties and other related assets for a
purchase price of $7,000,000. We are in active discussions with DuPont Pioneer and FGI regarding this
second asset purchase agreement and FGI’s required consent. We recently received correspondence from
FGI indicating that FGI did not intend to provide the required consent or license, but we continue to
pursue discussions with FGI and DuPont Pioneer to obtain the required consent and licenses to enable us
to acquire DuPont Pioneer’s GMO assets. There is no assurance that we will purchase the DuPont Pioneer
GMO assets, however, we are actively working to satisfy the requisite conditions and are hopeful that the
purchase will be consummated.
In December 2014, we also entered into a Contract Alfalfa Production Services Agreement with DuPont
Pioneer, whereby we produce alfalfa seed of commercial DuPont Pioneer varieties containing the
Roundup Ready® gene. These varieties are exclusive to DuPont Pioneer and accordingly, we do not
produce them for or sell them to any other customer. This Production Services Agreement will terminate
on December 31, 2017 if we do not extend the maturity date or complete the acquisition of the DuPont
Pioneer GMO assets as described above. However, we are in active discussions with DuPont Pioneer
regarding the Production Services Agreement, and believe we may be able to renew that agreement even
if we do not complete the acquisition of the DuPont Pioneer GMO assets. If the Production Services
Agreement terminates, DuPont Pioneer would be free to pursue alternative production arrangements for
the GMO-traited varieties, and DuPont Pioneer’s minimum purchase commitments to us under our
separate distribution agreement would be materially reduced.
As a result of the increasing use of Roundup Ready® alfalfa by traditional hay farmers and the lack of
federal or state rules requiring adequate isolation of Roundup Ready® alfalfa fields from conventional
fields to prevent cross-pollination of GMO plants with non-GMO plants, we have experienced an increase
in the number of seeds in recent harvests that have tested positive for the adventitious presence of GMO.
To date, the low percentage of seeds that have tested positive has not undermined our ability to meet
international demand, and we expect to be able to sell these seeds domestically and in other jurisdictions
that permit the importation of GMO alfalfa at our customary prices for certified seed. Nevertheless, we
are taking proactive steps to protect our seed crops to ensure we have sufficient seed to meet the demand
for our varieties in international markets. These steps include seeking collaborative agreements,
regulations or other measures to ensure neighboring farms that grow GMO limit the extent to which they
allow the flowering and cross-pollination of their GMO-based crops with our conventional non-GMO
crops to occur; and expanding our contracted grower base in areas that have less GMO alfalfa present
including the Imperial Valley of California and the Canadian provinces of Alberta, Manitoba and
Saskatchewan. We also have begun to grow S&W varieties in Australia, where there is no GMO activity
in alfalfa, and intend to increase that production in future growing seasons.
Alfalfa Seed Cleaning and Processing
Alfalfa seed processing is similar in all of our growing regions and begins with the harvest. Each field is
harvested and identified separately with unique information such as variety, lot number, grower name,
field name, acres and certification number. During harvest, our growers load field run harvested seed
separately for each field out of the combine into bulk containers for transport to the processing facility.
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When the containers arrive at the facility, each container is weighed, labeled with the unique field
information and a sample is taken.
Harvested seed is then sent to seed-cleaning lines where it is cleaned and foreign matter such as weeds,
inert matter and other crop seed is removed. Clean seed samples are taken and tested for purity and
germination to meet company quality standards. The clean seed is then stored in bulk until needed to
fulfill a sales order. Upon receipt of a sales order, the clean seed is pulled from inventory and processed
through our packaging equipment to meet specific customer requirements such as treatment, package size
and unique bag and labeling.
We have processing facilities in Nampa, Idaho and Five Points (San Joaquin Valley), California and
handle processing of our Imperial Valley seed under a long-term service agreement. The facility in
Nampa, Idaho gives us exclusive access to the use of patented coating technology that, among other
things, allows for the extension of rhizobium (seed treatment) lifespan.
S&W Processing
S&W proprietary seed is packaged into an S&W branded seed bag as well as unique customer-specific
branded seed bags. Final packaging for customers includes attaching a label with variety name and
physical quality data, and attaching a State Certification tag (also known as a “blue tag”) to each
individual bag. When the seed is treated with any type of seed treatment, a treatment tag must also be
attached to each individual bag.
S&W proprietary seed production is produced under a state seed certification program. As part of the
DuPont Pioneer acquisition, we acquired a CCIA certified lab that enables us to collect, analyze and
submit to the state all of the data needed for certification of our seed varieties so that we no longer are
required to outsource that function. Certification by these programs ensures both physical and genetic
quality standards for individual lots of seed. Additional testing may be required, dependent on the market
to which the shipment is destined, such as Saudi Arabia or Mexico. Samples may be sent to the Federal
Seed Laboratory (part of the USDA) or a State Department of Agriculture laboratory for further physical
quality testing and/or market specific phytosanitary testing.
Unlike many other plant species, the physiological characteristics of alfalfa seed allow for longer term
storage without losing physical quality of the seed. When we have unsold inventory at the end of a sales
season, these seed characteristics ensure the ability to store and sell the inventory in subsequent years.
As our alfalfa seed business grows, processing facility utilization will be increased by implementing
process improvements such as autonomous maintenance and quicker material changeovers to reduce
downtime. In addition, we will increase throughput by sequencing operations to remove bottlenecks and
by adding work shifts. Finally, we may make capital improvements to our facilities when business
opportunities exist to create a strong return on investment.
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SGI Processing
SGI’s growers contract directly with independent mills in the southeast region of Southern Australia for
the cleaning and preparation of SGI’s varieties. Four milling facilities are used by SGI’s growers to clean
and process the majority of SGI alfalfa seed, and one company, Tatiara Seeds Pty Ltd (“Tatiara”), which
owns two of the four milling facilities, processes approximately 70% of seed grown for SGI. One other
milling facility cleans the majority of SGI’s white clover. Although most of SGI’s milling requirements
are processed through Tatiara-owned mills, we are aware of other mills that would serve our purposes
were we no longer able or willing to process the SGI seed through Tatiara-owned mills.
The SGI growers are required to deliver seed that meets SGI’s processing specifications, based on
international and domestic certification standards. In a typical year, approximately 90-95% of product
received from the growers meets SGI’s specifications.
In June 2016, SGI’s new packaging facility in Keith, South Australia gained final accreditation to become
fully operational. In this state-of-the-art facility, SGI bags and labels its seed varieties and stores the
inventory pending sale. We expect to pack approximately half of the SGI seed at the Keith facility and
consequently, we will be less reliant on third party processors to provide this function.
Alfalfa Seed Product Development
Classical Breeding
Our alfalfa breeding program is designed to make steady genetic improvements in our germplasm base
that is used to create better performing varieties for our customer. A typical alfalfa variety can take as
little as five years or as long as 18 years to be developed, depending on methodology and the desired
agronomic traits. Because of the many years required to develop a new alfalfa variety, we believe our
successful breeding program allows us to offer seed varieties incorporating a combination of
characteristics desired by farmers that are not available from any other source, thereby providing us with
a competitive advantage.
In connection with the breeding of our non-GMO varieties, we conduct tests to ensure that we have no
adventitious presence (AP) of GMO contamination. Both field and greenhouse breeding locations are
used in our breeding program.
Biotechnology Breeding
We are also looking to build on our research and development expertise and expand our biotechnology
initiatives. As such, we look for opportunities to collaborate with other companies that have technologies
that we believe complement our proprietary products and/or our research and development breeding
expertise to develop as yet unavailable specialized alfalfa seed products and potentially, other seed
products.
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We currently are collaborating with Calyxt, Inc. (Nasdaq CLXT) to research, develop, produce and
commercialize alfalfa seed products involving next generation gene editing technology on our elite alfalfa
seed genetics. The goal of this collaboration is to create novel traits that are currently classified as non-
GMO, which ultimately can be incorporated into our seed varieties. This relationship is starting to deliver
meaningful product developments, however, we do not expect to see a material impact on our revenue for
at least two years, if ever. However, this biotech initiative demonstrates our willingness and ability to
expand our research and development efforts beyond our classically-bred proprietary alfalfa seed
breeding program.
Sales, Marketing and Distribution
S&W Sales and Marketing
Historically, we primarily sold high quality proprietary “non-dormant” seed varieties to those parts of the
world with hot, arid climates. Our primary geographical focus for non-dormant seed is the Middle East
and North Africa, although we currently sell to customers in a broad range of areas, including the Western
U.S., Mexico, South America, Middle East and Africa, as well as other countries with Mediterranean
climates. Unlike cooler climates, the geographic areas on which we have historically concentrated are
able to sustain long growing seasons and therefore alfalfa growers can benefit from our high-yielding,
non-dormant varieties. In recent periods, we have expanded geographically into colder climates where our
more recently-acquired dormant varieties thrive. Our customers are primarily our distributors and dealers.
Our distributors and dealers, in turn, sell to farmers, consisting primarily of dairy farmers, livestock
producers and merchant hay growers.
Although we have a sales team, we primarily sell our seed through our network of distributors and
dealers, as well as through the services of seed brokers. We do not have formal distribution agreements
with most of our distributors, but instead operate on the basis of purchase orders and invoices. We believe
that selling through dealers and distributors enables our products to reach hay growers in areas where
there are geographic or other constraints on direct sales efforts. We select dealers and distributors based
on shared vision, technical expertise, local market knowledge and financial stability. Over the years, we
have built dealer/distributor loyalty through an emphasis on service, access to breeders, ongoing training
and promotional material support. We limit the number of dealers and distributors with whom we have
relationships in any particular area in order to provide adequate support and opportunity to those with
whom we choose to do business.
Through our distributors, our primary export market historically had been Saudi Arabia and to a lesser
extent, certain other Middle Eastern and North African countries. The overall international sales mix
changed beginning in fiscal 2013 with our acquisition of SGI in South Australia. In recent years, in
addition to sales to Saudi Arabia and Australia, we have been selling to customers in Sudan, Morocco,
Egypt and Libya, and to customers in other regions of the world, including Latin America, (Argentina and
Mexico) and South Asia (Pakistan), both of which we view as important regions for potential expansion.
In total, we sell our alfalfa seed varieties in approximately 30 countries throughout the world.
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Domestic seed marketing is based primarily upon the dormancy attributes of our varieties as suited to
climates in target markets. Prior to the DuPont Pioneer acquisition, we marketed our alfalfa seed, which
consisted primarily of non-dormant varieties, in California, Arizona, New Mexico, Texas and Nevada.
We slowly began broadening our domestic geographic reach beginning in fiscal 2013, with our first sales
of dormant alfalfa seed, and significantly expanded in fiscal 2015 following the acquisition of DuPont
Pioneer’s dormant alfalfa seed assets. In connection with that acquisition, we entered into a distribution
agreement with DuPont Pioneer pursuant to which we became the sole supplier, subject to certain
exceptions, of certain alfalfa seed products for sale to customers by DuPont Pioneer through September
2024. In fiscal 2017, DuPont Pioneer accounted for approximately 49% of our revenue. Given its
historical market share in the sale of dormant alfalfa seed, we expect sales to DuPont Pioneer to be a
significant portion of our annual sales throughout the term of the distribution agreement. A disruption in
this relationship could have a material adverse impact on our results of operations and financial condition.
The price, terms of sale, trade credit and payment terms are negotiated on a customer-by-customer basis.
Our arrangements with our distributors do not include a right of return. Typical terms for domestic
customers require payment in full within 60 days of the date of shipment. Our credit terms with DuPont
Pioneer are governed by the distribution agreement, as amended, and provide that we receive equal
installment payments in September, January and February of each year.
Sales to our international customers are paid in advance of shipment or typically within 120 days of
shipment and may also be accomplished through use of letters of credit, cash against documents and
installment payment arrangements. Our credit policies are determined based upon the long-term nature of
the relationship with our customers. Credit limits are established for individual customers based on
historical collection experience, current economic and market conditions and a review of the current
status of each customer’s trade accounts receivable.
In fiscal 2017, DuPont Pioneer, a domestic customer, and Sorouh Agricultural Company, an international
customer (“Sorouh”), collectively accounted for approximately 58% of our alfalfa seed revenue. In fiscal
2017, sales to domestic customers increased as a percentage of our total sales, primarily as a result of
reduced sales to customers in Saudi Arabia. Sales into international markets accounted for 45% in fiscal
2017 versus 54% in fiscal 2016.
Both farmers (dairy farmers and hay growers) and dealers use pest-control advisors who recommend the
varieties of alfalfa that will produce the best results in a particular location. Therefore, a key part of our
marketing strategy is to educate the consultants, as well as the farmers, as to benefits of our seed varieties.
We believe that our best marketing tool is the dissemination of information regarding the quality and
characteristics of our propriety seed varieties to those persons who make the hay growing decisions. We
continue to place advertisements in trade journals, participate in seed industry conferences and trade
shows and engage in various other educational and outreach programs as we deem appropriate.
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Most of our international marketing efforts are accomplished through face-to-face meetings with our
existing and potential customers and their end users. In addition, we participate in international trade
shows to boost our international presence and sales efforts.
SGI Sales and Marketing
SGI sells a majority of its proprietary alfalfa seed (approximately 70-90% of its total sales per year) into
Saudi Arabia, the United States and Argentina. SGI sells the bulk of its proprietary clover seed to China,
Europe and the U.S. Similar to S&W Seed, SGI has historically relied upon a network of distributors to
market and sell its products.
In marketing its products, SGI’s initial impetus was to gain market penetration through the sale of
improved versions of proven varieties (e.g., SuperSiriver and SuperAurora) in the market place at
competitive pricing. Subsequently, SGI launched additional varieties such as SuperSonic. SGI utilizes a
variety of distribution strategies. Through distribution arrangements, SGI’s proprietary varieties are
marketed directly as SGI brands or under customer brand labels, and strategic allocations of full and
partial exclusivity rights are made in specific countries and geographical regions to incentivize
distributors to establish markets for SGI products.
Alfalfa Seed Production
As of the end of our 2017 fiscal year, we have alfalfa seed production capabilities in California and most
of the other states in the Western United States, including higher elevations and colder climatic regions
where dormant alfalfa seed is produced, the Canadian provinces of Alberta, Manitoba and Saskatchewan
and in the Australian States of South Australia, Victoria, and New South Wales.
S&W and IVS Alfalfa Seed Production
Historically, we fulfilled all of our alfalfa seed requirements under contracts with farmers primarily
located in the San Joaquin Valley of California. For a brief period, beginning in fiscal 2013, we were
engaged in our own internal farming operations and acquired, through purchase and lease, acreage on
which to grow our seed directly. However, in fiscal 2015, we made a strategic decision to move away
from internal farming, and we began selling some of the farmland acreage we had been using for that
purpose. After completion of the fall 2015 harvest, we shut down our internal farming operations as a
source of our alfalfa seed, and instead, returned to sourcing all of our production from third party growers.
As of June 30, 2017, we had contracts with several hundred growers in the Western United States and
Canada. Generally, we enter into contracts to produce alfalfa seed, which is typical industry practice. Our
normal contracts with U.S. growers range from one to three years, include a price for the seed that is
determined annually and that generally do not vary from grower to grower or variety to variety. Under
these contracts, we pay our growers based on the weight of cleaned and processed seed. The growers’
contracts that we acquired in connection with the DuPont Pioneer acquisition were primarily for
production in the Pacific Northwest and Canada. The terms of these contracts are similar in substance to
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the contracts we have historically entered into with the S&W grower base. Because a key to our success
as a business is to have the product mix required by our customers, aligning the growers’ production plan
to the anticipated purchase needs of our customers is a challenge on which management has focused
considerable efforts in recent periods, with increasing success.
Alfalfa seed is an extremely demanding crop. Our network of growers has the expertise needed to
successfully grow high quality alfalfa seed. We have worked with many of the same growers for much of
the past 35 years, and we believe that we have strong relationships with them. We allocate our seed
production among our growers so that we can purchase the proper mix of seed varieties each year. The
growers incur the greatest cost in the first year of production, when they plant seed, eradicate weeds and
pests and manage the pollination process; they then may be able to harvest seed from the same stands for
several additional years, with the average alfalfa seed field producing for three years. With the added
resources of the DuPont Pioneer alfalfa business, we believe we have expanded our production
capabilities in the Western United States and Canada with both existing growers and by recruiting new
growers in these regions.
Alfalfa seed is harvested annually in the Northern Hemisphere beginning in July for the southwest region
of the United States and concluding in October in the Canadian provinces.
SGI Production
As of June 30, 2017, SGI had contracts with approximately 150 individual growers in Western Victoria,
South Australia and New South Wales to grow its alfalfa seed varieties on a total of approximately 20,000
irrigated and 8,000 non-irrigated acres. In the Southern Hemisphere, alfalfa seed is grown counter
seasonally to the Northern Hemisphere and is harvested annually, in March through early May.
Under its current form of SGI alfalfa seed production agreement, SGI provides foundation seed to each
grower and grants each grower a license to use its seed for the purpose of production of seed for sale to
SGI. Each grower is responsible for all costs of the crop production. Title in the produced seed passes to
SGI upon it being certified compliant; and, if the seed is not compliant, title will only pass to SGI upon
SGI’s further agreement to purchase the non-compliant seed. SGI uses a staggered payment system with
the growers of its alfalfa and white clover seed, and the payment amounts are based upon an estimated
budget price (“EBP”) for compliant seed. EBP is a forecast of the final price that SGI believes will be
achieved taking into account prevailing and predicted market conditions at the time the estimate is made.
Following the grower’s delivery of uncleaned seed to a milling facility, SGI typically pays 40% of the
EBP to the grower based on a percentage of the pre-cleaning weight. Following this initial payment and
prior to the final payment, SGI will make a series of scheduled progress payments and, if applicable, a
bonus payment for “first grade” (high quality) alfalfa seed. The final price payable to each grower (and
therefore the total price) is dependent upon and subject to adjustment based upon the clean weight of the
seed grown, on the average price at which SGI sells the pooled seed and other costs incurred by SGI.
Accordingly, the total price paid by SGI to its grower may be more or less than the EBP. SGI’s seed
production agreements for alfalfa provide for an initial term of seven years and an optional renewal term
of three years. SGI’s seed production agreements for white clover provide for an initial term of two years
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and an optional renewal term of one year. Historically, SGI has not required its growers to harvest seed in
every year under the seed production agreement. Some growers have elected to have non-harvest years,
and their alfalfa is cut for hay or used for grazing instead of being harvested for seed production.
Seasonality
We contract with growers based upon our anticipated market demand; we mill, clean and stock the seed
during the harvest season and ship from inventory throughout the year. However, our alfalfa seed
business is seasonal, with our highest concentration of sales falling in the second, third and fourth fiscal
quarters (October through June).
Internal tests have shown that seed that has been held in inventory for over one year improves in quality.
Therefore, provided that we have sufficient capital to carry additional inventory, 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. This will also reduce the potential for inventory shortages in the event
that we have higher than anticipated demand or other factors, such as growers electing to plant alternative,
higher priced crops, reducing our available seed supply in a particular year.
Clover Production and Distribution
In addition to its core business of producing and selling alfalfa seed, SGI also operates a small white
clover and annual clover production and distribution business. SGI’s white clover varieties are bred for
winter activity, while the annual clover is particularly adapted to a variety of soil types ranging from
sandy to heavy clays, which can be farmed under irrigation or under dry conditions. SGI leverages its
production, processing and distribution channels to also make available a total of five clover seed
varieties. SGI’s clover seed is sold primarily in Europe, China, Argentina and Australia.
SV Genetics Crops– Expansion into Complementary Crops
In May 2016, we acquired the assets and business operations of SV Genetics, based in Queensland,
Australia. Since 2006, SV Genetics has been in the business of breeding and licensing hybrid sorghum
and sunflower seed germplasm. We see this acquisition as an opportunity to leverage the worldwide
research, production and distribution platforms we have built over the decades in alfalfa seed with the
addition of complementary new crops that are consistent with our strategy to be the world’s preferred
provider of proprietary seed for forage, grain and specialty crops. As a result of the acquisition, we
currently license proprietary seed genetics and sell parent seed to local-market production/distribution
partners. The licensees produce hybrid seed using the SV Genetics genetics and pay a royalty on the seed
produced and sold. We acquired licensing agreements with 14 different partners under which we provide
grain sorghum, forage sorghum and sunflower genetics in approximately ten locations throughout the
world, including Australia, Argentina, Brazil, Bolivia, China, Europe, Pakistan, South Africa, Ukraine
and the United States. In addition to licensing, SV Genetics also engages in the production and selling of
commercial varieties to international customers.
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Stevia Breeding, Research and Development
Since we began our stevia business in 2010, our stevia activities have evolved from exploring on a small
scale the potential commercial production of stevia in California to focusing on developing varieties we
believe can add value at the front end of the supply chain through breeding of unique plant varieties.
Since fiscal 2013 when we ceased pursuing the commercial production of stevia, we have leveraged our
breeding research and development expertise in order to develop new varieties of stevia that embody
specifically targeted characteristics, focusing in particular on increased yields and strong plant vigor,
which are of value to farmers, and taste preferences of consumers, including sweet taste combined with
little or no bitterness and aftertaste.
In our breeding program, we have identified stevia plant lines that we believe grow to heights and plant
mass that compare favorably to the results for stevia plants grown in China and Paraguay, which have
historically been the primary regions for growing stevia. Our lines contain high overall steviol glycosides,
including Reb A, Reb B and Reb C as well as other minor glycosides. We conduct extensive high-
pressure liquid chromatography (“HPLC”) sample testing of stevia plants under development and make
further selections and crosses of these plants based upon test results. The goal is to develop a stevia plant
with an inherently pleasant taste profile, a large and hardy plant mass and high Reb A content.
We are focused on developing our proprietary stevia germplasm into commercial varieties. Towards that
end, we have filed four patent applications with the U.S. Patent and Trademark Office (“USPTO”) for
unique stevia plant varieties. As our breeding program produces new lines, we plan to file additional
patent applications in the future.
Two of the filed patent applications cover lines that have been developed with a pleasing taste profile,
thereby enabling the resulting dried leaf to be consumed directly. At the present time, farmers are
conducting trials with this variety. If these trials yield satisfactory results, we expect to be paid a royalty
calculated as a percent of the gross sales made by these farmers.
We also have developed lines that have been bred for processing in order to produce a stevia extract
suitable for use in foods and beverages. These lines are high in sweetener content, have large plant mass
and generally offer a superior source of stevia leaf for the extraction market.
Proprietary Rights
Ownership of and access to intellectual property rights are important to us and our competitors. We sell
only our proprietary alfalfa seed varieties that have been specially selected to manifest the traits we deem
best suited to particular regions in which our seed is planted for alfalfa hay. Our ability to compete
effectively is dependent upon the proprietary nature of the seeds, seedlings, processes, technologies and
materials owned by or used by us or our growers. If any competitors independently develop any
technologies that substantially equal or surpass our process technology, it will adversely affect our
competitive position.
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In addition to patent protection for some of our alfalfa seed varieties that we acquired from DuPont
Pioneer, we guard our proprietary varieties by exercising a high degree of control over the supply chain.
As part of this control process, we require our growers to deliver back to us all seed derived from our
proprietary varieties. Historically, we have found that this control mechanism has been an effective means
to protect our proprietary seed. However, because we do not have more formal proprietary rights
protections in place with our growers, it would be possible for persons with access to our seed or plants
grown from our seed to potentially reproduce proprietary seed varieties, which could significantly harm
our business and our reputation. In the future, we may deem it appropriate to implement more formal
proprietary rights protections.
SGI registers its varieties under the Australian Plant Breeder’s Rights Act 1994 (Cth) (the “PBR Act”).
Currently the varieties SuperSequel, SuperSiriver, SuperAurora, SuperSonic, SuperStar, SuperSiriver II,
SuperNova, SuperLadino, SuperHuia and SuperHaifa are protected under the PBR Act. Seed from
varieties with plant breeder’s rights (“PBR”) protection can only be bought from the PBR registrant,
commercial partner, licensee or an agent authorized by the registrant. Exceptions exist for use of a PBR
variety, including for private and non-commercial purposes, for experimental purposes, and for breeding
other plant varieties. PBR protections last for 20 years in Australia in respect of registered plant varieties,
and generally for 20 years in other member countries of the International Union for the Protection of New
Varieties of Plants (“UPOV”), an international convention concerning plant breeder’s rights. There are
currently more than 70 countries that are members of the UPOV.
SGI has licensed production and marketing rights of several of its varieties in exchange for royalties.
In addition to PBR and licensing arrangements, SGI controls dissemination of its proprietary lines by
including a demand right in its form of seed production agreement for the return of unused foundation
seed if a grower fails to propagate the seed within 60 days after the grower’s acquires it.
We are also continuing to develop proprietary stevia lines for which we have filed four patent applications
with the USPTO, two of which have already been granted. It is our intention to build a patent portfolio of
proprietary stevia lines developed through the efforts of our stevia breeding program.
The SV Genetics proprietary products are protected via hybrid production systems. Male and female
parent seed is provided to licensees for production of F1 Hybrid seed for sale to customers. Production of
F1 Hybrid seed is only possible using the correct parents and it is not possible to produce parent seed
from parent seed so the licensee is reliant on ongoing supply of parent seed from SV Genetics.
Competition
Competition in the alfalfa seed industry both domestically and internationally is intense. We face direct
competition by other seed companies, including small family-owned businesses, as well as subsidiaries or
other affiliates of chemical, pharmaceutical and biotechnology companies, many of which have
substantially greater resources than we do.
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Our principal competitors in our alfalfa seed business are Forage Genetics International (a subsidiary of
Land O’ Lakes, Inc.), Alforex Seeds (owned by Dow AgroSciences LLC, a wholly owned subsidiary of
The Dow Chemical Company), and Pacific International Seed Company, Inc. We believe that the key
competitive drivers in the industry are proven performance, customer support in the field and value,
which takes into account not simply the price of the seed but also yield in the field.
Breeding a new variety of alfalfa seed takes many years and considerable expertise and skill. We believe
that our reputation for breeding and producing high-quality proprietary varieties of alfalfa seed that
manifest the traits the farmers need provide us with a competitive advantage, not only in the niche market
for high salt- and heat-tolerant, non-dormant alfalfa seed, which has been our core business for several
decades, but also, with the December 2014 acquisition of the research and development assets of DuPont
Pioneer, in the full range of dormant varieties suited for colder climates as well. We believe our research
and development capabilities are unmatched in the industry and provide us with a distinct competitive
advantage.
In addition to our competitors, SGI’s principal regional competitors in the proprietary alfalfa seed market
are Heritage Seeds Pty. Ltd. Blue Ribbon Seeds Pty. Ltd., PGG Wrightson Seeds Ltd, Naracoorte Seeds
Pty. Ltd., Pasture Genetics Pty Ltd (formerly Seed Distributors Pty. Ltd.) and various other minor
companies compete with SGI through sales of Siriver, a common alfalfa variety. SGI also faces
competition from lower value alfalfa seed produced in the European Union and, to a lesser extent,
Argentina. With the exception of Blue Ribbon Seeds, SGI faces similar competitors in its proprietary
white clover business. These companies compete with SGI for acres and in sales by selling Haifa, a
common white clover variety. Competitively priced white clover is also produced and sold from the
European Union and New Zealand.
In relation to the SV Genetics business, sorghum and sunflower genetics tend to be concentrated globally
amongst a few large international companies, resulting in a significant barrier to entry for many
intermediate and regionally based seed companies and their reliance on just a few suppliers for elite
genetics.
Despite the advantages we perceive we have over many of our competitors, many of our existing and
potential competitors have substantially greater research and product development capabilities and
financial, marketing and human resources than we do. As a result, these competitors may:
•
succeed in developing products that are equal to or superior to our products or potential products
or that achieve greater market acceptance than our products or potential products;
• devote greater resources to developing, marketing or selling their products;
•
respond more quickly to new or emerging technologies or scientific advances and changes in
customer requirements, which could render our products or potential products obsolete or less
preferable;
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• obtain patents that block or otherwise inhibit our ability to develop and commercialize potential
products we might otherwise develop;
• withstand price competition more successfully than we can;
•
•
•
establish cooperative relationships among themselves or with third parties that enhance their
ability to address the needs of our customers or prospective customers;
take advantage of acquisition or other opportunities more readily than we can; and
control acreage and growers located in zones where GMO seed production is forbidden, thereby
lessening the risks of GMO traits contaminating seed produced for overseas markets.
We are not aware of any significant domestic or international persons or companies engaged in ongoing
stevia breeding activities similar to or that could be considered competitive with our stevia breeding
program.
Environmental and Regulatory Matters
Our agricultural operations are subject to a broad range of evolving environmental laws and regulations.
These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act and the Comprehensive
Environmental Response, Compensation and Liability Act.
These environmental laws and regulations are intended to address concerns related to air quality, storm
water discharge and management and disposal of agricultural chemicals relating to seed treatment both
for domestic and overseas varieties. We maintain particulate matter air emissions from our milling
activities below annual tonnage limits through cyclone air handling systems. We maintain storm water
onsite, which eliminates the risk of waterway or tributary contamination. Pesticide and agricultural
chemicals are managed by trained individuals, certified and licensed through the California Department of
Pesticide Regulation. County agricultural commissioners monitor all seed-treating activity for
compliance.
Compliance with these laws and related regulations is an ongoing process that does not, and is not
expected to, have a material effect on our capital expenditures, earnings or competitive position.
Environmental concerns are, however, inherent in most major agricultural operations, including those
conducted by us, and there can be no assurance that the cost of compliance with environmental laws and
regulations will not be material. Moreover, it is possible that future developments, such as increasingly
strict environmental laws and enforcement policies thereunder, and further restrictions on the use of
agricultural chemicals, could result in increased compliance costs.
We also are subject to the Federal Seed Act (the “FSA”), which regulates the interstate shipment of
agricultural and vegetable seed. The FSA requires that seed shipped in interstate commerce be labeled
with information that allows seed buyers to make informed choices and mandates that seed labeling
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information and advertisements pertaining to seed must be truthful. The FSA also helps to promote
uniformity among state laws and fair competition within the seed industry.
Because, under our existing business plan, we are acting as a breeder of stevia leaf and will not be
extracting Reb-A or other derivatives from the leaves or adding such derivatives to any food or beverages,
we believe that we do not need to apply to the U.S. Food and Drug Administration (“FDA”) for a
Generally Recognized as Safe (“GRAS”) no-objections determination or any other FDA approval in
connection with our stevia business. However, should our plans with respect to stevia cultivation and
processing expand in future years, we will then reexamine the advisability of seeking a GRAS
determination or other FDA approval. We do not believe that our current stevia operations are subject to
any special regulatory oversight.
Internationally, we are subject to various government laws and regulations (including the U.S. Foreign
Corrupt Practices Act and similar non-U.S. laws and regulations) and local government regulations. To
help ensure compliance with these laws and regulations, we have adopted specific risk management and
compliance practices and policies, including a specific policy addressing the U.S. Foreign Corrupt
Practices Act.
We are also subject to numerous other laws and regulations applicable to businesses operating in
California and other states, including, without limitation, health and safety regulations.
Our Australian operations are subject to a number of laws that regulate the conduct of business in
Australia, and more specifically, SGI’s agricultural activities. Laws regulating the operation of companies
in Australia, including in particular the Corporations Act 2001 (Cth) are central to SGI’s corporate actions
and corporate governance issues in Australia. Competition laws and laws relating to employment and
occupational health and safety matters are also of fundamental importance in the Australian regulatory
environment. These include the Competition and Consumer Act 2010 (Cth), the Fair Work Act 2009
(Cth), the Work Health and Safety Act 2012 (SA) and related regulations. Notably Australian
employment laws are much more favorable to the employee than U.S. employment laws.
SGI’s intellectual property rights in Australia are protected and governed by laws relating to plant
breeder’s rights, copyright, trademarks, the protection of confidential information, trade secrets and
know-how. These include the PBR Act, the Copyright Act 1968 (Cth), the Trade Marks Act 1995 (Cth)
and related regulations.
Our Australian operations are also subject to a number of environmental laws, regulations and policies,
including in particular the Environment Protection Act 1993 (SA), the Agricultural and Veterinary
Products (Control of Use) Act 2002 (SA), the Genetically Modified Crops Management Act 2004 (SA),
the Dangerous Substances Act 1979 (SA), the Controlled Substances Act 1984 (SA) and related
regulations and policies. These laws regulate matters including air quality, water quality and the use and
disposal of agricultural chemicals.
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Research and Development
R&D for the year ended June 30, 2017 totaled $3,032,112 compared to $2,764,358 in the year ended June
30, 2016.
Employees
As of September 18, 2017, S&W had 75 full-time employees, of which 14 are employed by SGI. We also
employ 3 part-time employees, of which 3 are SGI employees. We also retain consultants for specific
purposes when the need arises. None of our employees are represented by a labor union. We consider our
relations with our employees to be good.
Corporate History
From 1980 until 2009, our business was operated as a general partnership. We bought out the former
partners beginning in June 2008, incorporated in October 2009 in Delaware, and completed the buyout of
the general partners in May 2010. We reincorporated in Nevada in December 2011. SGI, our wholly
owned subsidiary, 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.
Our Contact Information
Our principal business office is located at 802 North Douty Street, Hanford, CA 93230, and our telephone
number is (559) 884-2535. Our website address is www.swseedco.com. Information contained on our
website or any other website does not constitute part of this Annual Report on Form 10-K, and the
inclusion of our website address in this report is an inactive textual reference only.
Item 1A. Risk Factors
Risks Relating to Our Business and Industry
Our earnings can be negatively impacted by declining demand brought on by varying factors, many of
which are out of our control.
A variety of factors, notably a severe downturn in the dairy industry, could have a negative effect on sales
of alfalfa hay, and as a result, the demand for our alfalfa seed in the domestic market. In addition, demand
for our products could decline because of other supply and quality issues or for any other reason,
including products of competitors that might be considered superior by end users. A decline in demand
for our products could have a material adverse effect on our business, results of operations and financial
condition.
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Our earnings may also be sensitive to fluctuations in market prices for seed.
Market prices for our alfalfa seed can be impacted by factors such as the quality of the seed and the
available supply, including whether lower quality, uncertified seed is available. Growing conditions,
particularly weather conditions such as windstorms, floods, droughts and freezes, as well as diseases and
pests and the adventitious presence of GMO, are primary factors influencing the quality and quantity of
the seed and, therefore, the market price at which we can sell our seed to our customers. A decrease in the
prices received for our products could have a material adverse effect on our business, results of operations
and financial condition.
Our earnings are vulnerable to cost increases.
Future increase in costs, such as the costs of growing seed, could cause our margins and earnings to
decline unless we are able to pass along the increased price of production to our customers. We may not
be able to increase the price of our seed sufficiently to maintain our margins and earnings in the future.
Our inventory of seed can be adversely affected by the market price being paid for other crops.
Our seed production, whether in the U.S., Australia or Canada, relies entirely on unaffiliated growers to
grow our proprietary seed and to sell it to us at negotiated prices each year. Growers have a choice of
what crops to plant. If a particular crop is paying a materially higher price than has been paid in the past,
growers may decide to not grow alfalfa seed in favor of receiving a higher return from an alternative crop
planted on the same acreage. If our growers decline to a significant degree to plant the acreage on which
we rely, and if we cannot find other growers to plant the lost acreage, our inventory of seed could be
insufficient to satisfy the needs of our customers unless we are able to procure the necessary additional
seed in the market at prices we cannot control. If these circumstances occur, our business, results of
operations and financial condition could materially decline. In addition, our customers could look to other
suppliers for their seed if we cannot satisfy their requirements, and we may not be able to regain them as
customers once our inventory levels have returned to normal.
Adverse weather conditions, natural disasters, crop disease, pests and other natural conditions can
impose significant costs and losses on our business.
Alfalfa seed, our primary product, is vulnerable to adverse weather conditions, including windstorms,
floods, drought and temperature extremes, which are common but difficult to predict. In addition, alfalfa
seed is vulnerable to crop disease and to pests, which may vary in severity and effect, depending on the
stage of production at the time of infection or infestation, the type of treatment applied and climatic
conditions. Unfavorable growing conditions can reduce both crop size and quality. Although we no longer
grow any of our seed directly, these factors can still impact us by potentially decreasing the quality and
yields of our seed and reducing our available inventory. These factors can increase costs, decrease
revenue and lead to additional charges to earnings, which may have a material adverse effect on our
business, results of operations and financial condition.
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Because our alfalfa seed business is highly seasonal, our revenue, cash flows from operations and
operating results may fluctuate on a seasonal and quarterly basis.
We expect that the majority of our revenue will continue to be generated from our alfalfa seed business
for the foreseeable future. Our alfalfa seed business is seasonal, with the highest concentration of sales
occurring during the second, third and fourth fiscal quarters. The seasonal nature of our operations results
in significant fluctuations in our working capital during the growing and selling cycles. We have
experienced, and expect to continue to experience, significant variability in net sales, operating cash flows
and net income (loss) on a quarterly basis.
We have had a material concentration of revenue from a small group of customers that fluctuates, and
the loss of any of these customers in any quarter could have a material adverse effect on our revenue.
On a historical basis, we have experienced a material concentration of revenue from a small group of
customers. This concentration fluctuates from quarter to quarter, depending on our customer's specific
requirements, which are themselves cyclical. However, in any particular quarter, we generally have a
small group of customers that accounts for a substantial portion of that quarter’s revenue. Most of these
customers are not contractually obligated to purchase seed from us. The loss of one or more of these
customers on a quarterly basis, when taken year over year, could have a material adverse impact on our
business, financial position, results of operations and operating cash flows. We could also suffer a
material adverse effect from any losses arising from a major customer's disputes regarding shipments,
product quality or related matters, or from our inability to collect accounts receivable from any major
customer. There are no assurances that we will be able to maintain our current customer relationships or
that they will continue to purchase our seed in the current projected quantities. Any failure to do so may
materially adversely impact our business.
Because we depend on a core group of significant customers, our sales, cash flows from operations
and results of operations may be negatively affected if our key customers reduce the amount of
products they purchase from us.
We rely upon a small group of customers for a large percentage of our net revenue. Overall, two
customers accounted for 58% of our fiscal 2017 revenue. We expect that a small number of customers
will continue to account for a substantial portion of our net revenue for the foreseeable future. There is no
assurance that we will be able to maintain the relationships with our major customers or that they will
continue to purchase our seed in the quantities that we expect and rely upon. If we cannot do so, our
results of operations could suffer.
Because we do not grow the alfalfa seed that we sell, we are completely dependent on our network of
contract growers, and our sales, cash flows from operations and results of operations may be
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negatively affected if we are unable to maintain an adequate network of contract growers to supply our
seed requirements.
We do not directly grow any of the alfalfa seed that we sell, and therefore, we are entirely dependent upon
our network of growers. While we have some supply contracts with our growers of two or three years in
duration, many of our grower contracts cover only one year, which makes us particularly vulnerable to
factors beyond our control. Events such as a shift in pricing caused by an increase in the value of
commodity crops other than seed crops, increase in land prices, unexpected competition or reduced water
availability could disrupt our supply chain. Any of these disruptions could limit the supply of seed that we
obtain in any given year, adversely affecting supply and thereby lowering revenue. Such disruption could
also damage our customer relationships and loyalty to us if we cannot supply the quantity of seed
expected by them. In recent years, we have had some of our California growers decide to not grow alfalfa
seed due to drought conditions. This situation could reoccur and could negatively impact our revenue if
we do not otherwise have sufficient seed inventory available for sale.
SGI relies on a pool of approximately 150 Australian growers to produce its proprietary seeds. Each
grower arrangement is typically made for a term of seven to ten harvests. Although SGI's grower pool is
diversified, it is not without risks. Adverse agronomic, climatic or other factors could lead to grower
exodus and negatively impact SGI's revenue if SGI does not otherwise have sufficient seed inventory
available for sale.
Our ability to contract for sufficient acreage presents challenges.
In order to increase revenue and earnings, we continue to need more production acreage. As we continue
to increase the number of acres under contract and/or to move production into new geographical
locations, we face challenges that can impede our ability to produce as much seed inventory as we have
budgeted. For example, when we move production into new geographical locations, we may find it
difficult to identify growers with the expertise to grow alfalfa seed, and we may not have sufficient
company personnel available in such new locations to provide production advice on a timely basis. We
also face increased competition for conventional seed acreage as the need for technology acres grows,
which is further complicated by the field isolation issue relating to GMO crops that can reduce the
amount of acreage available for conventional alfalfa seed crops. If we are unable to secure the acreage we
need to meet our planned production for the crop year and are unable to purchase seed in the market, our
results of operations could suffer, as would our reputation.
A lack of availability of water in the U.S., Australia or Canada could impact our business.
Adequate quantities and correct timing of the application of water are vital for most agriculture to thrive.
Whether particular farms are experiencing water shortages depends, in large part, on their location.
However, continuing drought conditions can threaten all farmland other than those properties with their
own water sources. Foreign or domestic regulations regarding water usage and rights may also limit the
availability of water. Although alfalfa seed is not a water-intensive crop, the availability or the cost of
water is a factor in the planting of the alfalfa hay grown from our seed. Moreover, if the dairy farmers and
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others who purchase our alfalfa seed to grow hay cannot get an adequate supply of water, or if the cost of
water makes it uneconomical for the farmers to grow alfalfa, we may not be able to sell our seed, which
could have an adverse impact on our results of operations. We cannot predict if limitations on the
availability of water will impact our business in the future, but if alfalfa hay growers are impacted by
limitations on the availability of water, our business could also materially decline.
We face intense competition, and our inability to compete effectively for any reason could adversely
affect our business.
The alfalfa seed market is highly competitive, and our products face competition from a number of small
seed companies, as well as large agricultural and biotechnology companies. We compete primarily on the
basis of consistency of product quality and traits, product availability, customer service and price. Many
of our competitors are, or are affiliated with, large diversified companies that have substantially greater
marketing and financial resources than we have. These resources give our competitors greater operating
flexibility that, in certain cases, may permit them to respond better or more quickly to changes in the
industry or to introduce new products more quickly and with greater marketing support. Increased
competition could result in lower profit margins, substantial pricing pressure, reduced market share and
lower operating cash flows. Price competition, together with other forms of competition, could have a
material adverse effect on our business, financial position, results of operations and operating cash flows.
If we are unable to estimate our customers’ future needs accurately and to match our production to the
demand of our customers, our business, financial condition and results of operations may be adversely
affected.
We sell our seed primarily to dealers and distributors who, in turn, sell primarily to hay and dairy farmers
who grow hay for dairy cattle and other livestock. Due to the nature of the alfalfa seed industry, we
normally produce seed according to our production plan before we sell and deliver seed to distributors
and dealers. Our dealers and distributors generally make purchasing decisions for our products based on
market prices, economic and weather conditions and other factors that we and our dealers and distributors
may not be able to anticipate accurately in advance. If we fail to accurately estimate the volume and types
of products sought by the end users and otherwise adequately manage production amounts, we may
produce more seed than our dealers and distributors want, resulting in excess inventory levels. On the
other hand, if we underestimate demand, which has happened in the past, we may not be able to satisfy
our dealers and distributors' demand for alfalfa seed, and thus damage our customer relations and end-
user loyalty. Our failure to estimate end users’ future needs and to match our production to the demand of
our customers may adversely affect our business, financial condition and results of operations.
Our third-party distributors may not effectively distribute our products.
We depend in part on third-party distributors and strategic relationships for the marketing and selling of
our products. We depend on these distributors’ efforts to market our products, yet we are unable to
control their efforts completely. In addition, we are unable to ensure that our distributors comply with all
applicable laws regarding the sale of our products, including the United States Foreign Corrupt Practices
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Act of 1977, as amended. If our distributors fail to effectively market and sell our products, and in full
compliance with applicable laws, our operating results and business may suffer.
We extend credit to our largest international customer and to certain of our other international
customers, which exposes us to the difficulties of collecting our receivables in foreign jurisdictions if
those customers fail to pay us.
Although payment terms for our seed sales generally are 90 to120 days, we regularly extend credit to our
largest international customer, Sorouh, and to other international customers up to 180 days. Sales of our
alfalfa seed varieties to Sorouh and to other international customers represented a material portion of our
revenue in fiscal 2017 and we expect that we will continue to extend credit in connection with future
sales. Because these customers are located in foreign countries, collection efforts, were they to become
necessary, could be much more difficult and expensive than pursuing similar claims in the United States.
Moreover, future political and/or economic factors, as well as future unanticipated trade regulations,
could negatively impact our ability to timely collect outstanding receivables from these important
customers. The extension of credit to our international customers exposes us to the risk that our seed will
be delivered but that we may not receive all or a portion of the payment therefor. If these customers are
unable or unwilling to fully pay for the seed they purchase on credit, our results of operations and
financial condition could be materially negatively impacted. Moreover, our internal forecasts on which
we make business decisions throughout the year could be severely compromised, which could, in turn,
mean that we spend capital for operations, investment or otherwise that we would not have spent had we
been aware that the customer would not honor its credit extension obligation.
The future demand for our non-dormant alfalfa seed varieties in Saudi Arabia is uncertain.
Historically, sales to customers in Saudi Arabia have represented a significant portion of our revenue, and
one Saudi Arabia based customer represented approximately 9% of our revenue in fiscal 2017. In fiscal
2017, our sales to customers in Saudi Arabia decreased approximately $16.5 million as compared to fiscal
2016. Regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage
producers caused customers in the region to defer purchases and/or reduce inventory carrying levels. The
outlook for demand for our non-dormant varieties in Saudi Arabia over the next two to four years
continues to be uncertain because of the potential for water use restrictions and further regulations from
the Saudi Arabian government on water usage. If there is a significant decrease in demand from our
customers in Saudi Arabia, we would experience a material decline in revenue and earnings in the
absence of growth in other regions and other products.
Our current reliance on the seed development and production business does not permit us to spread
our business risks among different business segments, and thus a disruption in our seed production or
the industry would harm us more immediately and directly than if we were more diversified.
We currently operate primarily in the alfalfa seed business, and we do not expect this to change materially
in the foreseeable future, despite recent diversification efforts into hybrid sorghum and sunflower seeds.
Without business line diversity, we will not be able to spread the risk of our operations. Therefore, our
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business opportunities, revenue and income could be more immediately and directly affected by
disruptions from such things as drought and disease or widespread problems affecting the alfalfa industry,
payment disruptions and customer rejection of our varieties of alfalfa seed. If there is a disruption as
described above, our revenue and earnings could be reduced, and our business operations might have to
be scaled back.
If we fail to introduce and commercialize new alfalfa seed varieties, we may not be able to maintain
market share, and our future sales may be harmed.
The performance of our new alfalfa seed varieties may not meet our customers’ expectations, or we may
not be able to introduce and commercialize specific seed varieties. Reorder rates are uncertain due to
several factors, many of which are beyond our control. These include changing customer preferences,
which could be further complicated by competitive price pressures, our failure to develop new products to
meet the evolving demands of the end users, the development of higher-demand products by our
competitors and general economic conditions. The process for new products to gain market recognition
and acceptance is long and has uncertainties. If we fail to introduce and commercialize a new seed variety
that meets the demand of the end user, if our competitors develop products that are favored by the end
users, or if we are unable to produce our existing products in sufficient quantities, our growth prospects
may be materially and adversely affected, and our revenue may decline. In addition, sales of our new
products could replace sales of some of our current similar products, offsetting the benefit of a successful
product introduction.
The presence of GMO alfalfa in Australia or California could impact our sales.
GMO crops currently are prohibited in most of the international markets in which our proprietary seed is
currently sold. There are regions in the United States, including the Pacific Northwest, where even small
quantities of GMO material inadvertently interspersed with conventional (non-GMO) seed make the seed
undesirable, which causes customers to look elsewhere for their alfalfa seed requirements. The greater the
use of GMO seed in California and other alfalfa seed growing regions, the greater the risk that the
adventitious presence of GMO material in our seed production will occur due to pollination from hay
fields or other seed fields. We regularly test for the adventitious presence of GMO in our conventional
seed, and we have seen a slight increase in the percentage of GMO presence in conventional seed over the
past several years. Our seed containing GMO material can only be sold domestically or in other
jurisdictions that permit the importation of GMO alfalfa. If we are unable to isolate our conventional seed
from inadvertently being contaminated by GMO seed, we may find it more difficult to sell that seed in
our key markets and we may have insufficient quantities of seed to sell internationally, either of which
could materially adversely impact our revenue over time.
We have limited experience in the hybrid sorghum and sunflower markets.
In May 2016, we acquired the assets and business operations of SV Genetic’s hybrid sorghum and
sunflower seed germplasm business in Queensland, Australia. Having spent over 35 years focused almost
exclusively on the alfalfa seed market, these are new markets for us. If we are unable to successfully draw
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upon the research, development and distribution expertise we have developed in the alfalfa seed industry
and apply it to the new crops into which we have recently diversified, we may not be able to attain the
revenue and margins improvements we hope to achieve within our currently budgeted time frame, if at
all.
The stevia market may not develop as we anticipate, and therefore our continued research and
development activities with respect to stevia may never become profitable to us.
There are a number of challenges to market acceptance of stevia as a natural, non-caloric sweetener.
Stevia has its own unique flavor, which can affect the taste of some foods and beverages. A common
complaint about stevia is that some of its extracts and derivatives have a bitter aftertaste, and its taste does
not uniformly correspond to all regional taste preferences or combine well with some food flavors. Other
factors that could impact market acceptance include the price structure compared to other sugar
substitutes and availability. If the high-intensity, non-caloric sweetener market declines or if stevia fails to
achieve substantially greater market acceptance than it currently enjoys, we might never be able to profit
from our continued research and development activities relating to stevia or any commercial applications
that we derive therefrom. Even if products conform to applicable safety and quality standards, sales could
be adversely affected if consumers in target markets lose confidence in the safety, efficacy and quality of
stevia. Adverse publicity about stevia or stevia-based products may discourage consumers from buying
products that contain stevia. Any of these developments could adversely impact the future amount of dry
leaf stevia, processed stevia leaves or extract we are able to sell, which could adversely impact our results
of operations.
The loss of key employees or the failure to attract qualified personnel could have a material adverse
effect on our ability to run our business.
The loss of any of our current executives, key employees or key advisors, or the failure to attract,
integrate, motivate and retain additional key employees, could have a material adverse effect on our
business. Although we have employment agreements with our Chief Executive Officer, our Chief
Financial Officer, our Chief Operating Officer, and our Chief Marketing and Technology Officer, as well
as certain other employees, any employee could leave our employ at any time if he chose to do so. We do
not carry “key person” insurance on the lives of any of our management team. As we develop additional
capabilities, we may require more skilled personnel who must be highly skilled and have a sound
understanding of our industry, business or processing requirements. Recruiting skilled personnel is highly
competitive. Although to date we have been successful in recruiting and retaining qualified personnel,
there can be no assurance that we will continue to attract and retain the personnel needed for our business.
The failure to attract or retain qualified personnel could have a material adverse effect on our business.
We may not be able to manage expansion of our operations effectively.
We expect our operations to continue to grow in the future, both as we expand our historical alfalfa seed
business both domestically and internationally through internal growth and synergistic acquisitions and
increase our growers’ production. These efforts will require the addition of employees, expansion of
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facilities and greater oversight, perhaps in diverse locations. If we are unable to manage our growth
effectively, we may not be able to take advantage of market opportunities, execute on our business
strategies or respond to competitive pressures, and we may have difficulties maintaining and updating the
internal procedures and the controls necessary to meet the planned expansion of our overall business.
Our management will also be required to maintain and expand our relationships with customers, suppliers
and other third parties as well as attract new customers and suppliers. We expect that our sales and
marketing costs will increase as we grow our product lines and as we increase our sales efforts in new and
existing markets. Our current and planned operations, personnel, systems and internal procedures and
controls may not be adequate to support our future growth.
We may be unable to successfully integrate the businesses we have recently acquired and may acquire
in the future with our current management and structure.
As part of our growth strategy, we have acquired and may continue to acquire additional businesses,
product lines or other assets. We may not be able to locate or make suitable acquisitions on acceptable
terms, and future acquisitions may not be effectively and profitably integrated into our business. Our
failure to successfully complete the integration of the businesses we acquire could have an adverse effect
on our prospects, business activities, cash flow, financial condition, results of operations and stock price.
Integration challenges may include the following:
•
•
assimilating the acquired operations, products and personnel with our existing operations,
products and personnel;
estimating the capital, personnel and equipment required for the acquired businesses based on the
historical experience of management with the businesses with which they are familiar;
• minimizing potential adverse effects on existing business relationships with other suppliers and
customers;
• developing and marketing the new products and services;
•
•
entering markets in which we have limited or no prior experience; and
coordinating our efforts throughout various distant localities and time zones.
The diversion of management's attention and costs associated with acquisitions may have a negative
impact on our business.
If management’s attention is diverted from the management of our existing businesses as a result of its
efforts in evaluating and negotiating new acquisitions and strategic transactions, the prospects, business
activities, cash flow, financial condition and results of operations of our existing businesses may suffer.
We also may incur unanticipated costs in connection with pursuing acquisitions and strategic transactions,
whether they ultimately are consummated or not.
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SGI's alfalfa seed grower pool is dependent on a limited number of milling facilities to process its seed,
with particular dependence on a dominant operator whose commercial interests may be adverse to SGI.
Only five milling facilities are regularly used by SGI’s grower pool to clean and process SGI seed. Should
one or more of these facilities become unusable, there could be a significant effect on SGI’s ability to get
its Australian seed to market in a timely manner or at all. SGI’s growers use Tatiara to process
approximately 70% of the seed grown for SGI. The owner of Tatiara has begun to sell his own common
seed and is now a competitor of SGI. This competing seed business creates a potential conflict of interest
for Tatiara in the care and handling of SGI’s product and could impact SGI’s ability to have seed
available to sell on the time schedule required by our customers.
SGI is thinly capitalized and may become dependent upon us for financing.
Because SGI has relatively little net working capital, it is substantially dependent upon its credit
arrangement with National Australia Bank Ltd (“NAB”) to purchase its seed inventory. If SGI breaches
its credit arrangement in the future or other reasons cause this credit arrangement to become unavailable
to SGI, SGI may become reliant on us to finance its operations or for financial guarantees. We currently
are a guarantor on SGI's NAB credit facility. SGI's financial dependency upon us could have a negative
adverse effect upon our financial condition.
SGI is dependent on a pool of seed growers and a favorable pricing model.
SGI relies on a pool of approximately 150 Australian contract growers to produce its proprietary seeds. In
this system, growers contract with SGI to grow SGI’s seed for terms of seven to ten years in the case of
alfalfa and two to three years for white clover. SGI uses a staggered payment system with the growers of
its alfalfa and white clover; the payment amounts are based upon an estimated budget price, or EBP, for
compliant seed. EBP is a forecast of the final price that SGI believes will be achieved taking into account
prevailing and predicted market conditions at the time the estimate is made. Following the grower’s
delivery of uncleaned seed to a milling facility, SGI typically pays 40% of the EBP to the grower based
on pre-cleaning weight. Following this initial payment and prior to the final payment, SGI makes a series
of scheduled progress payments and, if applicable, a bonus payment for “first grade” alfalfa seed. The
final price payable to each grower (and therefore the total price) is dependent upon and subject to
adjustment based upon the clean weight of the seed grown, on the average price at which SGI sells the
pooled seed and other costs incurred by SGI. Accordingly, the total price paid by SGI to its growers may
be more or less than the EBP. This arrangement exposes SGI’s business to unique risks, including, the
potential for current growers to make collective demands that are unfavorable to SGI and the potential for
our competitors to offer more favorable terms for seed production, including fixed (instead of variable)
payment terms.
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SGI’s reliance upon an estimated purchase price to growers could result in changes in estimates in our
consolidated financial statements.
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 the standard contract production agreement. We record an estimated
unit price, and 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.
We may need to raise additional capital in the future.
We may find it necessary or advisable to raise additional capital in the future, whether to enhance our
working capital, to repay indebtedness, to fund acquisitions (including the acquisition under the second
asset purchase agreement with DuPont Pioneer) or for other reasons. If we are required or desire to raise
additional capital in the future, such additional financing may not be available on favorable terms, or
available at all, may be dilutive to our existing stockholders, if in the form of equity financing, or may
contain restrictions on the operation of our business, if in the form of debt financing. If we fail to obtain
additional capital as and when required, such failure could have a material impact on our business, results
of operations and financial condition.
Changes in government policies and laws could adversely affect international sales and therefore our
financial results.
Historically, sales to our distributors who sell our proprietary alfalfa seed varieties outside the United
States have constituted a meaningful portion of our annual revenue. We anticipate that sales into
international markets will continue to represent a meaningful portion of our total sales and that continued
growth and profitability will require further international expansion, particularly in the Middle East and
North Africa. Our financial results could be affected by changes in trade, monetary and fiscal policies,
laws and regulations, or other activities of U.S. and non-U.S. governments, agencies and similar
organizations. These conditions include but are not limited to changes in a country’s or region’s economic
or political conditions, trade regulations affecting production, pricing and marketing of products, local
labor conditions and regulations, reduced protection of intellectual property rights in some countries,
changes in the regulatory or legal environment, burdensome taxes and tariffs and other trade barriers.
International risks and uncertainties, including changing social and economic conditions as well as
terrorism, political hostilities and war, could lead to reduced distribution of our products into international
markets and reduced profitability associated with such sales.
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We are subject to risks associated with doing business globally.
Our operations, both inside and outside the United States, are subject to risks inherent in conducting
business globally and under the laws, regulations and customs of various jurisdictions and geographies.
Although we sell seed to various regions of the world, a large percentage of our sales outside the United
States in fiscal year 2017, including those of SGI, were principally to customers in the Middle East, North
Africa and Mexico. Accordingly, developments in those parts of the world generally have a more
significant effect on our operations than developments in other places. Our operations outside the United
States are subject to special risks and restrictions, including, without limitation: fluctuations in currency
values and foreign-currency exchange rates; exchange control regulations; changes in local political or
economic conditions; governmental pricing directives; import and trade restrictions; import or export
licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other
potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies
doing business abroad, including the U.S. Foreign Corrupt Practices Act and the trade sanctions laws and
regulations administered by the U.S. Department of the Treasury's Office of Foreign Assets Control. Acts
of terror or war may impair our ability to operate in particular countries or regions, and may impede the
flow of goods and services between countries. Customers in weakened economies may be unable to
purchase our products, or it could become more expensive for them to purchase imported products in their
local currency, or sell their commodity at prevailing international prices, and we may be unable to collect
receivables from such customers. Further, changes in exchange rates may affect our net earnings, the
book value of our assets outside the United States and our stockholders’ equity. Failure to comply with
the laws and regulations that affect our global operations could have an adverse effect on our business,
financial condition or results of operations.
Failure to comply with the United States Foreign Corrupt Practices Act or similar laws could subject
us to penalties and other adverse consequences.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United
States companies, including their suppliers, distributors and other commercial partners, from engaging in
bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining
business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-
time in the countries in which we distribute products. We have adopted formal policies and procedures
designed to facilitate compliance with these laws. If our employees or other agents, including our
distributors or suppliers, are found to have engaged in such practices, we could suffer severe penalties and
other consequences that may have a material adverse effect on our business, financial condition and
results of operations.
Environmental regulation affecting our alfalfa seed, sorghum, sunflower or stevia products could
negatively impact our business.
As an agricultural company, we are subject to evolving environmental laws and regulations by federal and
state governments. Federal laws and regulations include the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Federal Insecticide, Fungicide and Rodenticide Act, the
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Comprehensive Environmental Response, Compensation and Liability Act, the Federal Seed Act, and
potentially regulations of the FDA and/or other State regulatory agencies.
Our Australian operations are also subject to a number of environmental laws, regulations and policies,
including in particular the Environment Protection Act 1993 (SA), the Agricultural and Veterinary
Products (Control of Use) Act 2002 (SA), the Genetically Modified Crops Management Act 2004 (SA),
the Dangerous Substances Act 1979 (SA), the Controlled Substances Act 1984 (SA) and related
regulations and policies. These laws regulate matters including air quality, water quality and the use and
disposal of agricultural chemicals.
Our failure to comply with these laws and related regulations could have an adverse effect on our
business, financial condition or results of operations. Moreover, it is possible that future developments,
such as increasingly strict environmental laws and enforcement policies thereunder, and further
restrictions on the use of agricultural chemicals, could result in increased compliance costs which, in turn,
could have a material adverse effect on our business, financial condition or results of operations.
Insurance covering defective seed claims may become unavailable or be inadequate.
Defective seed could result in insurance claims and negative publicity. Although we carry general liability
insurance to cover defective seed claims, such coverage may become unavailable or be inadequate. Even
if coverage is offered, it may be at a price and on terms not acceptable to us. If claims exceed coverage
limits, or if insurance is not available to us, the occurrence of significant claims could have a material
adverse effect on our business, results of operations and financial condition.
We may be exposed to product quality claims, which may cause us to incur substantial legal expenses
and, if determined adversely against us, may cause us to pay significant damage awards.
We may be subject to legal proceedings and claims from time to time relating to our seed or stevia
quality. The defense of these proceedings and claims can be both costly and time consuming and may
significantly divert efforts and resources of our management personnel. An adverse determination in any
such proceeding could subject us to significant liability and damage our market reputation and prevent us
from achieving increased sales and market share. Protracted litigation could also result in our customers
or potential customers deferring or limiting their purchase of our products.
Capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing
and disrupt the operations of our growers and customers.
The capital and credit markets have experienced increased volatility and disruption over the past several
years, making it more difficult for companies to access those markets. Although we believe that our
operating cash flows, recent access to the capital market and our lines of credit will permit us to meet our
financing needs for the foreseeable future, continued or increased volatility and disruption in the capital
and credit markets may impair our liquidity or increase our costs of borrowing, if we need to access the
37
credit market. Our business could also be negatively impacted if our growers or customers experience
disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.
If we are unable to protect our intellectual property rights, our business and prospects may be harmed.
Our ability to compete effectively is dependent upon the proprietary nature of the seeds, seedlings,
processes, technologies and materials owned by or used by us or our growers. If any competitors
independently develop new traits, seeds, seedlings, processes or technologies that customers or end users
determine are better than our existing products, such developments could adversely affect our competitive
position. In addition to patent protection for some of our alfalfa seed varieties that we acquired from
DuPont Pioneer, the USPTO has granted us patents covering stevia plant varieties SW107 and SW227,
and we have submitted patent applications for SW227 for the fresh and dry leaf market and SW129 for
the commercial processing market. We also rely on trade secret protection and confidentiality agreements
to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce
and any other elements of our discovery and development processes that involve proprietary know-how,
information or technology that is not covered by patents. Although we require our employees,
consultants, advisors and any third parties who have access to our proprietary know-how, information, or
technology to enter into confidentiality agreements, we cannot be certain that our trade secrets and other
confidential proprietary information will not be disclosed or that competitors will not otherwise gain
access to our trade secrets or independently develop substantially equivalent information and techniques.
Furthermore, we guard our proprietary property by exercising a high degree of control over the alfalfa
seed supply chain from our S&W varieties, as well as over our stevia material, while our newly-acquired
hybrid sorghum and sunflower seed varieties are made available pursuant to licensing arrangements that
reasonably safeguard our ownership and control of our intellectual property. In Australia, SGI has secured
protection under the PBR Act for its most popular varieties.
However, even with these measures in place, it would be possible for persons with access to our seed or
plants grown from our seed to reproduce and market products substantially similar to our proprietary seed
varieties, which could significantly harm our business and our reputation. We may be unable to obtain
further protection for our intellectual property in the United States and other key jurisdictions, and third
parties may challenge the validity, enforceability or scope of our existing patents, which may result in
such patents being cancelled, narrowed, invalidated or held unenforceable. Furthermore, the laws of some
foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of
the United States. As a result, we may encounter significant problems in protecting and defending our
intellectual property both in the United States and abroad. Litigation may be necessary to protect our
proprietary property and determine the validity and scope of the proprietary rights of competitors.
Intellectual property litigation could result in substantial costs and diversion of our management and other
resources. If we are unable to successfully protect our intellectual property rights, our competitors could
market products that compete with our proprietary products without obtaining a license from us.
38
We currently depend on DuPont Pioneer for the majority of our sales of dormant alfalfa seed and have
agreed to limitations on other sales of the seed varieties we sell to DuPont Pioneer. Any decline in
DuPont Pioneer’s demand will have a material adverse effect on our results of operations.
DuPont Pioneer was our largest customer in fiscal 2017. Our distribution agreement with DuPont Pioneer
limits our ability to otherwise sell the specific varieties of dormant alfalfa seed we supply to DuPont
Pioneer in the sales territory covered by DuPont Pioneer. The DuPont Pioneer sales territory includes the
United States, Europe and many other of the principal dormant alfalfa seed markets. In these markets, our
ability to sell the specified varieties through distribution channels other than DuPont Pioneer is limited to
certain blended, private label and variety not stated forms and cannot exceed a specified percentage of
DuPont Pioneer’s demand. As result of these limitations, sales to DuPont Pioneer represent and, for the
foreseeable future will continue to represent, the majority of our sales of dormant alfalfa seed. Any
decline in DuPont Pioneer’s demand for our dormant alfalfa seed products will have a material adverse
effect on our results of operations.
DuPont Pioneer may purchase alfalfa seed from other sources and reduce its purchase commitments
to us.
Under our distribution agreement with DuPont Pioneer, DuPont Pioneer has made minimum purchase
commitments for our dormant alfalfa seed products that extend through September 30, 2024. However,
there are circumstances under which DuPont Pioneer is permitted to purchase seed from other sources and
reduce its purchase commitments to us, including:
• Production Shortfalls. If in any year we fail to produce an adequate supply of alfalfa seed to meet
DuPont Pioneer’s demand, and we are unable to source alternative supply, DuPont Pioneer may
purchase seed from third parties to meet the shortfall in our production.
• New Products. If a third party offers for license a new product (a new transgenic and/or novel
trait for alfalfa seed) that offers a superior value pricing opportunity compared to varieties we
offer, and DuPont Pioneer wishes to sell the new product, we would have a one-year period to
obtain rights to produce and sell the new product to DuPont Pioneer. If we fail to obtain rights to
the new product within the one-year period or otherwise do not offer the new product on
substantially the same terms as offered by a third party, then DuPont Pioneer would be free to
purchase the new product from the third party, and DuPont Pioneer’s minimum purchase
commitment to us would be reduced by the amount of the new product purchased.
• GMO-Traited Varieties. Unless and until we complete the transactions contemplated under our
second asset purchase agreement with DuPont Pioneer, DuPont Pioneer may purchase certain
GMO-traited varieties of alfalfa seed from third parties. In addition, if we do not complete the
transactions contemplated under our second asset purchase agreement, our production agreement
with DuPont Pioneer (relating to GMO-traited varieties) would terminate on December 31, 2017,
DuPont Pioneer would be free to pursue alternative production arrangements for the GMO-traited
varieties, and DuPont Pioneer’s minimum purchase commitments to us under the distribution
agreement would be materially reduced. We are in active discussions with DuPont Pioneer and
39
FGI regarding this second asset purchase agreement and FGI’s required consent. We recently
received correspondence from FGI indicating that FGI did not intend to provide the required
consent or license, but we continue to pursue discussions with FGI and DuPont Pioneer to obtain
the required consent and licenses to enable us to acquire DuPont Pioneer’s GMO assets. There is
no assurance that we will purchase the DuPont Pioneer GMO assets. We are also in active
discussions with DuPont Pioneer regarding the production agreement, and believe we may be
able to renew that agreement even if we do not complete the acquisition of the DuPont Pioneer
GMO assets, although we cannot guarantee that we will be able to renew the production
agreement with DuPont Pioneer.
Any reduction in DuPont Pioneer’s purchase commitment to us would have a material adverse effect on
our results of operations.
We are committed to sell dormant alfalfa seed to DuPont Pioneer at initial fixed prices with fixed
subsequent maximum price increases per year. Increases in our costs of production at rates higher
than our contractual ability to increase prices would erode our profit margins and could have a
material adverse effect on our results of operations.
Under our distribution agreement with DuPont Pioneer, we were committed to sell dormant alfalfa seed at
initial fixed prices for the 2015 and 2016 sales years. In subsequent sales years (beginning in fiscal 2017),
we can increase our prices up to a fixed percentage per year by variety. Although DuPont Pioneer has
agreed to discuss in good faith an increase in the fixed maximum percentage price increase cap for any
sales year in which an increase in grower compensation costs due to changes in market conditions cause
our total production costs to increase at a percentage exceeding the amount of the cap, we cannot be
certain that any such discussions will result in additional pricing flexibility for us. If our grower
compensation costs or other productions costs increase at a rate greater than the fixed maximum
percentage increase per year, our profit margins would erode, and we could potentially be required to sell
product at a loss. Any such change in our cost structure would have a material adverse effect on our
results of operations.
If we do not complete the acquisition under the second asset purchase agreement, DuPont Pioneer may
pursue alternative production arrangements for its GMO-traited varieties and reduce purchases from
us.
We are currently producing certain GMO-traited varieties for DuPont Pioneer under our production
agreement with DuPont Pioneer. The production agreement expires on December 31, 2017 or upon the
earlier closing of our acquisition of certain GMO germplasm and related assets from DuPont Pioneer
pursuant to a second asset purchase agreement that was agreed to at the time of the 2014 acquisition.
However, we may never enter into the second asset purchase agreement or close the acquisition of
DuPont Pioneer's GMO germplasm and related assets. If DuPont Pioneer and we do not obtain the
requisite consent from FGI to the transactions contemplated by the second acquisition agreement on or
before November 30, 2017 (or certain other conditions above are not satisfied), then the obligations of the
parties to enter into the second asset purchase agreement will terminate, and we will have no right or
40
obligation to acquire the GMO germplasm and related assets. In that case, our production agreement with
DuPont Pioneer (relating to GMO-traited varieties) would terminate on December 31, 2017, DuPont
Pioneer would be free to pursue alternative production arrangements for the GMO-traited varieties, and
DuPont Pioneer’s minimum purchase commitments to us under the distribution agreement would be
materially reduced. Any reduction in DuPont Pioneer’s purchase commitment to us would have a material
adverse effect on our results of operations.
We are in active discussions with DuPont Pioneer and FGI regarding the second asset purchase agreement
and FGI’s required consent. We recently received correspondence from FGI indicating that FGI did not
intend to provide the required consent or license, but we continue to pursue discussions with FGI and
DuPont Pioneer to obtain the required consent and licenses to enable us to acquire DuPont Pioneer’s
GMO assets. There is no assurance that we will purchase the DuPont Pioneer GMO assets. We are also in
active discussions with DuPont Pioneer regarding the production agreement, and believe we may be able
to renew that agreement even if we do not complete the acquisition of the DuPont Pioneer GMO assets,
although we cannot guarantee that we will be able to renew the production agreement with DuPont
Pioneer. The termination of our production agreement with DuPont Pioneer would have a material
adverse effect on our results of operations.
If we fail to perform our obligations under our distribution agreement and production agreement with
DuPont Pioneer, DuPont Pioneer could terminate the agreements and reduce or eliminate purchases
of alfalfa seed from us, and we could be exposed to claims for damages.
The DuPont Pioneer distribution agreement and the production agreement impose numerous obligations
on us relating to, among other things, product and service quality and compliance with laws and third
party obligations. Both the distribution agreement and the production agreement permit DuPont Pioneer
to terminate the agreement if we materially breach the agreement and fail to cure the breach within a 60-
day notice period, or in the case of certain bankruptcy or insolvency events. DuPont Pioneer can also
immediately terminate the production agreement if we breach certain agreements or policies with FGI
related to the production of GMO-traited varieties. If DuPont Pioneer terminates either the distribution
agreement or the production agreement, DuPont Pioneer could reduce or eliminate altogether its purchase
of alfalfa seed from us, and we could be left with inventory of seed that it would be difficult or impossible
for us to dispose of on commercially reasonable terms. In addition, we could be exposed to significant
claims for damages to DuPont Pioneer if the termination of an agreement results from our material breach
of the agreement.
If we do not meet seed planting and production commitments to DuPont Pioneer, we could incur
significant financial penalties.
Under our distribution agreement with DuPont Pioneer, if we fail to plant sufficient acreage (based on
historical yields), together with any carryover inventory, to meet 110% of DuPont Pioneer’s demand, and
we actually fail to meet DuPont Pioneer’s demand, then we are obligated to pay DuPont Pioneer a cash
penalty based on the amount of the shortfall. A similar penalty provision applies only with respect to
2017 under our production agreement with DuPont Pioneer, if we fail to plant or cause to be planted a
41
specified number of planting acres. We contract all of our production of dormant alfalfa seed with third-
party growers. If, in any year, we are unable to obtain sufficient grower commitments to meet DuPont
Pioneer’s demand, we could be obligated to pay significant financial penalties to DuPont Pioneer.
Risks Related to Investment in Our Securities
The value of our common stock can be volatile.
Our common stock is listed on the Nasdaq Capital Market. The overall market and the price of our
common stock can fluctuate greatly. The trading price of our common stock may be significantly affected
by various factors, including but not limited to:
•
economic status and trends in the dairy industry, which underlies demand for our alfalfa seed;
• market conditions for alfalfa seed in the Middle East and North Africa, where a substantial
amount of our seed historically has been purchased by end users;
• quarterly fluctuations in our operating results;
• our ability to meet the earnings estimates and other performance expectations of investors or
financial analysts;
•
fluctuations in the stock prices of our peer companies or in stock markets in general; and
• general economic or political conditions.
Our quarter-to-quarter performance may vary substantially, and this variance, as well as general
market conditions, may cause the price of our securities to fluctuate greatly and potentially expose us
to litigation.
Our alfalfa seed business, which is our primary source of revenue, is highly seasonal because it is tied to
the growing and harvesting seasons. If sales in particular quarters are lower than expected, our operating
results for these quarters could cause our share price to decline.
Our future expense estimates are based, in large part, on estimates of future revenue, which is difficult to
predict. We expect to continue to make significant expenditures in order to expand production, sales,
marketing and processes. We may be unable to, or may elect not to, adjust spending quickly enough to
offset any unexpected revenue shortfall. If our increased expenses are not accompanied by increased
revenue in the same quarter, our quarterly operating results would be harmed.
In one or more future quarters, our results of operations may fall below the expectations of investors or
analysts, and the trading price of our securities may decline as a consequence. We believe that quarter-to-
quarter comparisons of our operating results will not be a good indication of our future performance and
should not be relied upon to predict the future performance of our stock price.
42
In the past, companies that have experienced volatility in the market price of their stock have often been
subject to securities class action litigation. We may be the target of this type of litigation in the future.
Securities litigation against us could result in substantial costs and divert our management's attention from
other business concerns, which could seriously harm our business.
If we issue shares of preferred stock, the holdings of those owning our common stock could be diluted
or subordinated to the rights of the holders of preferred stock.
Our board of directors is authorized by our articles of incorporation to establish classes or series of
preferred stock and fix the designation, powers, preferences and rights of the shares of each such class or
series without any further vote or action by our stockholders. Any shares of preferred stock so issued
could have priority over our common stock with respect to dividend or liquidation rights. Although we
have no plans to issue any shares of preferred stock or to adopt any new series, preferences or other
classification of preferred stock, any such action by our board of directors or issuance of preferred stock
by us could dilute your investment in our securities or subordinate your holdings to the higher priority
rights of the holders of shares of preferred stock issued in the future.
Our actual operating results may differ significantly from our guidance.
We routinely release annual guidance in our quarterly earnings releases, our quarterly earnings conference
calls and in other forums we consider appropriate. Such guidance regarding our future performance
represents our management's estimates as of the date of release or other communication. This guidance,
which includes forward-looking statements, is based on projections prepared by our management. These
projections are not prepared with a view toward compliance with published guidelines of the American
Institute of Certified Public Accountants, and neither our independent registered public accountants nor
any other independent expert or outside party compiles or examines the projections, and accordingly, no
such person expresses any opinion or any other form of assurance with respect thereto.
Projections are based upon a number of assumptions and estimates that, while presented with numerical
specificity, are inherently subject to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond our control and are based upon specific assumptions with
respect to future business decisions, some of which will change. If we issue guidance, we will generally
state possible outcomes as high and low ranges or approximations that are intended to provide a
sensitivity analysis as variables are changed but are not intended to represent that actual results could not
fall outside of the suggested ranges or approximations. The principal reason that we would release
guidance would be to provide a basis for our management to discuss our business outlook with analysts
and investors. We do not accept any responsibility for any projections or reports published by any such
persons.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions
of the guidance furnished by us will not materialize or will vary significantly from actual results.
Accordingly, our guidance, when given, is only an estimate of what management believes is realizable as
of the date of release or other communication. Actual results will vary from our guidance, and the
43
variations may be material. In light of the foregoing, investors are urged not to rely upon, or otherwise
consider, our guidance in making an investment decision about our securities.
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash
dividends in the near future. Our current policy is to retain all funds and any earnings for use in the
operation and expansion of our business. If we do not pay cash dividends, our stock may be less valuable
to investors because a return on their investment will only occur if our stock price appreciates.
Anti-takeover provisions and our right to issue preferred stock could make a third-party acquisition of
us difficult.
Our articles of incorporation and bylaws contain provisions that would make it more difficult for a third
party to acquire control of us, including a provision that our board of directors may issue preferred stock
without stockholder approval. In addition, certain anti-takeover provisions of Nevada law, if and when
applicable, could make it more difficult for a third party to acquire control of us, even if such change in
control would be beneficial to our stockholders.
Item 1B.
Unresolved Staff Comments
None.
44
Item 2. Properties
The following is a description of our material properties:
Location
Size
Primary Use
Leased or Owned
Arlington (Columbia County),
Wisconsin
25 acres
Alfalfa research and
Owned by S&W
development
Drayton, Queensland
3,068 sq. ft.
Sunflower and sorghum
Leased by SGI
research and development
facilities
Five Points (Fresno County),
CA
5 acres
Milling facilities
Owned by S&W
Hanford (Kings County), CA
1,462 sq. ft.
Corporate headquarters for
Leased by S&W
S&W
Kern County, CA
800 acres
Farmland suitable for farming
alfalfa seed and alfalfa hay
Leased by S&W
Keith, South Australia
8.2 acres
Processing facility
Owned by SGI
Keith, South Australia
38 acres
Research farm
Leased by SGI
Nampa (Canyon County),
Idaho
80 acres
(approx.)
Alfalfa research and
development facilities
Owned by S&W
Nampa (Canyon County),
Idaho
Sacramento (Sacramento
County), CA
12 acres
Milling facilities
Owned by S&W
2,587 sq. ft.
Office Space
Leased by S&W
Unley, South Australia
1,937 sq. ft.
Corporate headquarters for
Leased by SGI
SGI
We believe that our current facilities are adequate for our needs for the immediate future and that, should
it be needed, suitable additional space will be available to accommodate expansion of our operations on
commercially reasonable terms.
45
Item 3.
Legal Proceedings
From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending
opposition proceedings involving patents that arise in the ordinary course of business. There are no
matters pending that we expect to have a material adverse impact on our business, results of operations,
financial condition or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
46
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information Regarding Our Common Stock
Our common stock is traded on the NASDAQ Capital Market under the symbol “SANW.” The following
table sets forth the range of high and low sales prices per share of common stock as reported on
NASDAQ for the periods indicated. The closing price of our common stock on September 18, 2017 was
$3.10.
Year Ended June 30, 2016
First Quarter ............................................................................
Second Quarter .......................................................................
Third Quarter ..........................................................................
Fourth Quarter ........................................................................
Year Ended June 30, 2017
First Quarter ............................................................................
Second Quarter .......................................................................
Third Quarter ..........................................................................
Fourth Quarter ........................................................................
High
Low
$5.42
4.80
4.78
4.80
$5.14
5.35
5.00
5.20
$4.05
4.05
3.90
4.10
$4.24
4.25
4.15
3.80
Holders
As of September 18, 2017, we had 20,692,089 shares of common stock outstanding held by 34
stockholders of record. Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total number of beneficial
stockholders represented by these record holders.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we
intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our common stock. Any future determination to pay dividends
will be at the discretion of the Board of Directors and will be dependent upon then existing conditions,
including our financial condition and results of operations, capital requirements, contractual restrictions,
business prospects and other factors that the Board of Directors considers relevant. In addition, our credit
facility with KeyBank contains restrictions on our ability to pay dividends.
47
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
There were no unregistered sales of equity securities in 2017 fiscal year that have not been previously
reported on a Current Report on Form 8-K.
Purchases of Equity Securities by the Issuer and Affiliate Purchasers
None.
Item 6.
Selected Financial Data
As a smaller reporting company, we are not required to provide information typically disclosed under this
item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion of our financial condition and results of operations in
conjunction with our consolidated financial statements and the related notes included in Part II, Item 8,
“Financial Statements” of this Annual Report on Form 10-K. In addition to our historical consolidated
financial information, the following discussion contains forward-looking statements that reflect our plans,
estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-
looking statements as referred to on page 2 of this Annual Report on Form 10-K. Factors that could cause
or contribute to these differences include those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in Part I, Item 1A, “Risk Factors.”
Executive Overview
Founded in 1980 and headquartered in the Central Valley of California, we are a global agricultural
company. Grounded in our historical expertise and what we believe is our present leading position in the
breeding, production and sale of alfalfa seed, we continue to build towards our goal of being recognized
as the world’s preferred proprietary forage, grain and specialty crop seed company. In addition to our
primary activities in alfalfa seed, we have recently expanded our product portfolio by adding hybrid
sorghum and sunflower seed, which complement our alfalfa seed offerings by allowing us to leverage our
infrastructure, research and development expertise and our distribution channels, as we begin to diversify
into what we believe are higher margin opportunities. We also continue to conduct our stevia breeding
program, having filed two additional patent applications in fiscal 2016.
Following our initial public offering in fiscal year 2010, we expanded certain pre-existing business
initiatives and added new ones, including:
• diversifying our production geographically by expanding from solely producing seed in the
San Joaquin Valley of California to initially adding production capability in the Imperial
48
Valley of California, then expanding into Australia (primarily South Australia) and, most
recently, adding production in other western states and Canada;
expanding from solely offering non-dormant varieties to now having a full range of both
dormant and non-dormant varieties;
expanding the depth and breadth of our research and development capabilities in order to
develop new varieties of both dormant and non-dormant alfalfa seed with traits sought after
by our existing and future customers;
•
•
• diversifying into complementary proprietary crops by acquiring the assets of a Queensland,
Australia company specializing in breeding and licensing of hybrid sorghum and sunflower
seed;
•
•
•
expanding our distribution channels and customer base, initially through the acquisition of the
customer list of a key international customer in the Middle East in July 2011, and thereafter,
through certain strategic acquisitions;
expanding our sales geographically both through the expansion of our product offerings to
make available product needed in regions we historically did not cover and through an
expansion of our sales and marketing efforts generally; and
implementing a stevia breeding program to develop new stevia varieties that incorporate the
most desirable characteristics of this all-natural, zero calorie sweetener.
We have accomplished these expansion initiatives through a combination of organic growth and strategic
acquisitions, foremost among them:
•
•
•
•
•
the acquisition in July 2011 of certain intangible assets, including the customer information,
related to the field seed and small grain business of Genetics International, Inc., which had
previously operated in the Middle East and North Africa (“MENA”) and which began our
transition into selling directly to MENA distributors;
the acquisition of Imperial Valley Seeds, Inc. (“IVS”) in October 2012, which enabled us to
expand production of non-GMO seed into California’s Imperial Valley, thereby ensuring a
non-GMO source of seed due to the prohibition on GMO crops in the Imperial Valley, as well
as enabling us to diversify our production areas and distribution channels;
the acquisition of a portfolio of dormant alfalfa seed germplasm in August 2012 to launch our
entry into the dormant market;
the acquisition of the leading local producer of non-dormant alfalfa seed in South Australia,
Seed Genetics International Pty Ltd (“SGI”) in April 2013, which greatly expanded our
production capabilities and geographic diversity;
the acquisition of the alfalfa production and research facility assets and conventional (non-
GMO) alfalfa germplasm from DuPont Pioneer, a wholly-owned subsidiary of E.I. du Pont de
Nemours and Company (“DuPont Pioneer”) in December 2014, thereby substantially
49
expanding upon our initial entrance into the dormant alfalfa seed market that began in 2012
and enabling us to greatly expand our production and research and product development
capabilities; and
•
the acquisition, in May 2016, of the assets and business of SV Genetics Pty Ltd (“SV
Genetics”), a private Australian company specializing in the breeding and licensing of
proprietary hybrid sorghum and sunflower seed germplasm, which represents our initial effort
to diversify our product portfolio beyond alfalfa seed breeding and production and stevia
R&D.
We believe our 2013 combination with SGI created the world’s largest non-dormant alfalfa seed company
and gave us the competitive advantages of year-round production in that market. With the completion of
the acquisition of dormant alfalfa seed assets from DuPont Pioneer in December 2014, we believe we
have become the largest alfalfa seed company worldwide (by volume), with industry-leading research and
development, as well as production and distribution capabilities in both hemispheres and the ability to
supply proprietary dormant and non-dormant alfalfa seed. Our operations span the world’s alfalfa seed
production regions, with operations in the San Joaquin and Imperial Valleys of California, five additional
Western states, Australia and three provinces in Canada.
Our May 2016 acquisition of the hybrid sorghum and sunflower germplasm business and assets of SV
Genetics signals management’s commitment to our strategy of identifying opportunities to diversify our
product lines and improve our gross margins.
Components of Our Statements of Operations Data
Revenue and Cost of Revenue
Revenue
We derive most of our revenue from the sale of our proprietary alfalfa seed varieties. We expect that over
the next several years, a substantial majority of our revenue will continue to be generated from the sale of
alfalfa seed, although we are continually assessing other possible product offerings or means to increase
revenue, including expanding into other, higher margin crops. In late fiscal year 2016, we began that
expansion with the acquisition of the hybrid sorghum and sunflower business and assets of SV Genetics.
Revenue from the newly-acquired SV Genetics germplasm will be primarily derived from the sale of
sorghum and sunflower seed as well as royalty-based payments set forth in various licensing agreements.
Fiscal year 2016 was the first full fiscal year in which we had a full range of non-dormant and dormant
alfalfa seed varieties. This is expected to enable us to significantly expand the geographic reach of our
sales efforts. The mix of our product offerings will continue to change over time with the introduction of
new alfalfa seed varieties resulting from our robust research and development efforts, including our
potential expansion into genetically-modified varieties in future periods. Currently, we have a long-term
50
distribution agreement with DuPont Pioneer, which we expect will be the source of a significant portion
of our annual revenue through December 2024.
Our revenue will fluctuate depending on the timing of orders from our customers and distributors.
Because some of our large customers and distributors order in bulk only one or two times per year, our
product revenue may fluctuate significantly from period to period. However, some of this fluctuation is
offset by having operations in both the northern and southern hemispheres.
Our stevia breeding program has yet to generate any meaningful revenue. However, management
continues to evaluate this portion of our business and assess various means to monetize the results of our
effort to breed new, better tasting stevia varieties. Such potential opportunities include possible licensing
agreements and royalty-based agreements.
Cost of Revenue
Cost of revenue relates to sale of our seed varieties and consists of the cost of procuring seed, plant
conditioning and packaging costs, direct labor and raw materials and overhead costs.
Operating Expenses
Research and Development Expenses
Seed and stevia research and development expenses consist of costs incurred in the discovery,
development, breeding and testing of new products incorporating the traits we have specifically selected.
These expenses consist primarily of employee salaries and benefits, consultant services, land leased for
field trials, chemicals and supplies and other external expenses. With the acquisition of SV Genetics in
late fiscal 2016, similar costs are now being incurred as we continue the research and development efforts
begun by SV Genetics in the development of new varieties of hybrid sorghum and sunflower seed
germplasm. Because we have been in the alfalfa seed breeding business since our inception in 1980, we
have expended far more resources in development of our proprietary alfalfa seed varieties throughout our
history than on our stevia breeding program, which we commenced in fiscal year 2010.
In fiscal year 2013, we made the decision to shift the focus of our stevia program away from commercial
production and towards the breeding of improved varieties of stevia. We have continued that effort, which
has resulted in the granting by the USPTO of two patents covering stevia plant varieties SW 107 and SW
201. Additionally, we have applied for patent protection with the USPTO for SW 227 for the fresh and
dry leaf market, and SW 129 for the commercial processing market.
Our research and development expenses increased significantly with the acquisition of the alfalfa research
and development assets of DuPont Pioneer in December 2014. We also have expanded our genetics
research both internally and in collaboration with third parties. In addition, we acquired additional
research and development operations in connection with our May 2016 acquisition of SV Genetics that
we expect will factor into an overall increase in R&D expense. Overall, we have been focused on
51
reducing research and development expense, while balancing that objective against the recognition that
continued advancement in product development is an important part of our strategic planning. We expect
our research and development expenses will fluctuate from period to period as a result of the timing of
various research and development projects.
Our internal research and development costs are expensed as incurred, while third party research and
developments costs are expensed when the contracted work has been performed or as milestone results
have been achieved. The costs associated with equipment or facilities acquired or construed for research
and development activities that have alternative future uses are capitalized and depreciated on a straight-
line basis over the estimated useful life of the asset.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses consist primarily of employee costs, including salaries,
employee benefits and share-based compensation, as well as professional service fees, insurance,
marketing, travel and entertainment expense, public company expense and other overhead costs. We
proactively take steps on an ongoing basis to control selling, general and administrative expense as much
as is reasonably possible.
Depreciation and Amortization
Most of the depreciation and amortization expense on our statement of operations consists of amortization
expense. We amortize intangible assets, including those acquired from DuPont Pioneer in December 2014
and from SV Genetics in May 2016, using the straight-line method over the estimated useful life of the
asset, consisting of periods of 10-30 years for technology/IP/germplasm, 20 years for customer
relationships and trade names and 2-20 years for other intangible assets. Property, plant and equipment is
depreciated using the straight-line method over the estimated useful life of the asset, consisting of periods
of 5-28 years for buildings, 3-20 years for machinery and equipment and 3-5 years for vehicles.
Other Expense
Other expense consists primarily of foreign currency gains and losses, changes in the fair value of
derivative liabilities related to our warrants, changes in the fair value of our contingent consideration
obligations and interest expense in connection with amortization of debt discount. In addition, interest
expense consists of interest costs related to outstanding borrowings on our credit facilities, including our
current KeyBank revolving line of credit and on SGI’s credit facilities in South Australia, our 8% senior
secured convertible debentures that were issued in December 2014 which were fully paid off on March 1,
2017, our three-year secured promissory note issued in December 2014 in connection with the DuPont
Pioneer acquisition, and our five-year subordinated promissory note that matures in October 2017 that
was issued in connection with the IVS acquisition.
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Provision (Benefit) for Income Taxes
Our effective tax rate is based on income, statutory tax rates, differences in the deductibility of certain
expenses and inclusion of certain income items between financial statement and tax return purposes, and
tax planning opportunities available to us in the various jurisdictions in which we operate. Under U.S.
GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based
solely on the technical merits of the position, we recognize the benefit. Tax regulations require certain
items to be included in the tax return at different times than when those items are required to be recorded
in the consolidated financial statements. As a result, our effective tax rate reflected in our consolidated
financial statements is different from that reported in our tax returns. Some of these differences are
permanent, such as meals and entertainment expenses that are not fully deductible on our tax return, and
some are temporary differences, such as depreciation expense. Temporary differences create deferred tax
assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or
credit in our tax return in future years for which we have already recorded the tax benefit in our
consolidated statements of operations. In the fourth quarter of the current year, we recorded a valuation
allowance against all of our deferred tax assets. The full valuation allowance was recorded during the year
as a result of changes to our current year operating results and future projections, resulting from a recent
decline in export sales to Saudi Arabia. In addition, our available tax planning strategies are currently not
expected to overcome the uncertainty of the Saudi Arabian market. As a result of these factors, we don’t
believe that it is more likely than not that our deferred tax assets will be realized.
Results of Operations
Fiscal Year Ended June 30, 2017 Compared to the Fiscal Year Ended June 30, 2016
Revenue and Cost of Revenue
Revenue for fiscal year ended June 30, 2017 was $75,373,810 compared to $96,044,254 for the year
ended June 30, 2016. The $20,670,444 decrease in revenue for the year ended June 30, 2017 was
primarily due to a decrease of sales directed to the Saudi Arabia markets of approximately $16.5 million.
Regulatory uncertainty in Saudi Arabia surrounding water use restrictions for large forage producers
caused customers in the region to defer purchases and/or reduce inventory carrying levels. The outlook
for demand for our non-dormant varieties in Saudi Arabia over the next two to four years continues to be
uncertain because of the potential for water use restrictions and further regulations from the Saudi
Arabian government on water usage. If there is a significant decrease in demand from our customers in
Saudi Arabia, we would experience a material decline in revenue and earnings in the absence of growth in
other regions and other products.
Sales into international markets represented 45% and 54% of revenue during the years ended June 30,
2017 and 2016, respectively. Domestic revenue accounted for 55% and 46% of our total revenue for the
years ended June 30, 2017 and 2016, respectively. The increase in domestic revenue as a percentage of
total revenue is directly attributed to reduced sales to customers in Saudi Arabia.
53
We recorded sales of approximately $36.9 million from our distribution and production agreements with
DuPont Pioneer during the year ended June 30, 2017, which was a decrease of $2.5 million over the prior
year amount of $39.4 million. We expect DuPont Pioneer to represent a significant portion of our
domestic sales, as well as overall sales, for the foreseeable future.
The following table shows revenue from external sources by destination country:
United States
Saudi Arabia
Mexico
Argentina
Sudan
Australia
Peru
Other
Total
Years Ended June 30,
2017
41,505,305
12,055,276
4,749,315
2,881,050
2,747,923
1,882,899
1,230,999
8,321,043
75,373,810
55%
16%
6%
4%
4%
2%
2%
11%
100%
$
$
2016
43,926,441
25,954,835
4,529,131
2,586,360
4,267,752
3,171,323
2,056,261
9,552,151
96,044,254
46%
27%
5%
3%
4%
3%
2%
10%
100%
Cost of revenue of $59,232,846 for the year ended June 30, 2017 was 78.6% of revenue, while the cost of
revenue of $77,653,646 for the year ended June 30, 2016 was 80.9% of revenue. Cost of revenue
decreased on a dollar basis as a direct result of the decrease in revenue.
Total gross profit margin for the year ended June 30, 2017 was 21.4% compared to 19.1% in the prior
year. The increase in gross profit margins was primarily due to product sales mix during the current year
where we had a higher concentration of sales, as a percentage of total revenue, to DuPont Pioneer which
are higher margin sales. Additionally, the product costs of proprietary seed are lower in the current year
due to more favorable production contracts and arrangements.
While there will continue to be quarterly fluctuations in gross profit margin based on product sales mix,
we anticipate improved gross margins in fiscal 2018 as a result of a number of initiatives we are
deploying.
Selling, General and Administrative Expenses
Selling, General and Administrative (“SG&A”) expense for the year ended June 30, 2017 totaled
$11,794,024 compared to $10,397,863 for the year ended June 30, 2016. The $1,396,163 increase in
SG&A expense versus the prior year was primarily due to $674,597 of severance and separation costs
associated with the separation of our prior CEO, an increase in bad debt expense of $432,890, as well as
an increase in professional fees of $215,181. As a percentage of revenue, SG&A expenses were 15.6% in
the current year compared to 10.8% in the year ended June 30, 2016.
Research and Development Expenses
Research and development expenses for the year ended June 30, 2017 totaled $3,032,112 compared to
$2,764,358 in the year ended June 30, 2016. The increase of $267,754 from the prior year was primarily
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driven by additional research and development activities in connection with the recent SVG Acquisition
partially offset by reductions in the stevia and alfalfa programs.
Depreciation and Amortization
Depreciation and amortization expense for the year ended June 30, 2017 was $3,325,743 compared to
$3,185,126 for the year ended June 30, 2016. Included in the amount was amortization expense for
intangible assets, which totaled $2,223,909 in the year ended June 30, 2017 and $2,239,099 in the year
ended June 30, 2016. The $140,617 increase in depreciation and amortization expense over the prior year
is primarily driven by amortization of intangible assets acquired from SVG Acquisition in May 2016 as
the prior year included only two months of expense versus a full twelve months in the current fiscal year.
Impairment Charges
During the year ended June 30, 2017, we recorded an impairment charge of $319,001. The impairment
charge related to the carrying value of certain stand establishment assets which were deemed impaired
and uncollectible from a certain sub-leasee. During the year ended June 30, 2016, we did not record an
impairment charge.
Foreign Currency Loss(Gain)
We incurred a foreign currency loss of $1,388 for the year ended June 30, 2017 compared to a gain of
$226,529 for the year ended June 30, 2016. The foreign currency gains and losses are associated with
SGI, our wholly-owned subsidiary in Australia.
Change in Derivative Warrant Liability
The derivative warrant liability is considered a level 3 fair value financial instrument and is measured at
each reporting period. We recorded a non-cash change in derivative warrant liability gain of $1,517,500
in the year ended June 30, 2017 compared to a gain of $1,903,900 in the year ended June 30, 2016. The
gain represents the decrease in fair value of the outstanding warrants issued in December 2014.
Change in Contingent Consideration Obligations
The contingent consideration obligations are considered level 3 fair value financial instruments and will
be measured at each reporting period. The $231,584 and $55,092 charges to non-cash change in
contingent consideration obligations expense for the years ended June 30, 2017 and 2016, respectively;
represents the increase in the estimated fair value of the contingent consideration obligations during that
respective period due to the decrease in the present value discount factor used to estimate the fair value of
the contingent consideration obligations.
55
Loss on Equity Method Investment
Loss on equity method investment totaled $144,841 and $294,197 for the years ended June 30, 2017 and
2016, respectively. This represents our 50% share of losses incurred by our joint corporation (S&W
Semillas S.A.) in Argentina. The Company’s carrying value in the equity method investee company has
been reduced to zero, accordingly, no further losses will be recorded in the Company’s consolidated
financial statements related to this equity method investment.
Interest Expense - Amortization of Debt Discount
Non-cash amortization of debt discount expense for the year ended June 30, 2017 was $1,176,023
compared to $3,899,739 for the year ended June 30, 2016. The expense represents the amortization of the
debt discount, beneficial conversion feature and debt issuance costs associated with the convertible
debentures issued December 31, 2014 and the debt issuance costs associated with our KeyBank working
capital facility. The discount is amortized using the effective interest method and the quarterly expense
decreased as the net carrying value of the convertible debentures decreased. As of March 1, 2017, the
convertible debentures have been fully retired and accordingly, the amortization of debt discount
associated with the convertible debentures is complete.
Interest Expense - Convertible Debt and Other
Interest expense during the year ended June 30, 2017 totaled $1,324,945 compared to $2,086,005 for the
year ended June 30, 2016. Interest expense for the year ended June 30, 2017 primarily consisted of
interest incurred on the convertible debentures issued on December 31, 2014, on the note payable issued
to DuPont Pioneer as part of the purchase consideration for the DuPont Pioneer acquisition and the
working capital credit facilities with KeyBank and NAB. The $761,060 decrease in interest expense for
the year ended June 30, 2017 is primarily driven by a $1,027,195 decrease of interest on the convertible
debentures as the principal amount of the convertible debentures continued to be redeemed by us and
converted by the holders, partially offset with an increase in interest expense attributed to higher levels of
working capital resulting in more borrowings on the working capital facilities.
Provision (Benefit) for Income Taxes
Income tax expense totaled $7,627,705 for the year ended June 30, 2017 compared to an income tax
benefit of $2,403,379 for the fiscal year ended June 30, 2016. Our effective tax rate expense was 181.9%
for the year ended June 30, 2017, primarily driven by a valuation allowance of $9.6 million established
against our deferred tax assets during the fourth quarter of Fiscal 2017. Also influencing the effective tax
rate for fiscal 2017 was the income tax benefit associated with the income on the valuation of our
warrants, which is not taxable for federal income tax purposes. Our effective tax rate benefit was 117.9%
for the year ended June 30, 2016. The high effective tax rate benefit for the year ended June 30, 2016 was
primarily attributable to a tax benefit recorded during the second quarter of fiscal year 2016 related to a
foreign currency exchange loss on an inter-company loan to our subsidiary in Australia. We had
previously treated the inter-company loan as an investment that was long-term in nature, but during the
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second quarter of fiscal year 2016 we determined that the inter-company note would be settled in the
foreseeable future. This change in determination resulted in a tax benefit being recorded in the second
quarter of fiscal year 2016 as the inter-company loan was denominated in Australian dollars and had
devalued since the issuance of the loan resulting in a foreign exchange loss. The tax benefit related to this
foreign exchange loss is recorded in the period that we changed our determination of whether the loan
was of long-term investment nature. The higher effective tax rate benefit for the year ended June 30, 2016
was also attributed to the tax benefit associated with the change in the valuation of our warrants. The
income associated with the warrant fair value adjustments is not taxable for federal income tax purposes.
Liquidity and Capital Resources
Our working capital and working capital requirements fluctuate from quarter to quarter depending on the
phase of the growing and sales cycle that falls during a particular quarter. Our need for cash has
historically been highest in the second and third fiscal quarters (October through March) because we
historically have paid our North American contracted growers progressively, starting in the second fiscal
quarter. In fiscal year 2017, we paid our North American growers approximately 50% in October 2016
and the balance was paid in February 2017. SGI, our Australian-based subsidiary, has a production cycle
that is counter-cyclical to North America; however, this also puts a greater demand on our working
capital and working capital requirements during the second, third and fourth fiscal quarters based on
timing of payments to growers in the second through fourth quarters. As a result of the DuPont Pioneer
acquisition, which substantially increased our production and therefore our working capital demands, we
anticipate our working capital demands to be highest in second and third fiscal quarters due to the
payment schedule of our North American grower base.
Historically, due to the concentration of sales to certain distributors, which typically represented a
significant percentage of 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,
which varied significantly from year to year. The timing of collection of receivables from DuPont
Pioneer, which is our largest customer, is defined in the distribution and production agreements with
DuPont Pioneer and consists of three installment payments, the first on September 15th, the second on
January 15th, and the third payment on February 15th. Our future revenue and cash collections pertaining
to the production and distribution agreements with DuPont Pioneer are expected to provide us with
greater predictability, as sales to DuPont Pioneer are expected to be primarily concentrated in our second,
third and fourth fiscal quarters, and payments will be received in three installments over the September to
mid-February time period.
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.
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In addition to funding our business with cash from operations, we have historically relied upon occasional
sales of our debt and equity securities and credit facilities from financial institutions, both in the United
States and South Australia.
In the prior two fiscal years, we have consummated the following equity and debt financings:
On December 31, 2014, we raised an aggregate of $31,658,400 in gross proceeds in two separate private
placements.
In the first of these two financings, we sold 1,294,000 shares of our common stock at $3.60 per share for
gross proceeds of $4,658,400.
On the same day, we also sold $27,000,000 aggregate principal amount of 8% Senior Secured Convertible
Debentures due November 30, 2017, together with warrants to purchase an aggregate of 2,699,999 shares
of our common stock that expire on June 30, 2020. The offering expenses of the debenture and warrant
offering totaled approximately $2,355,218, yielding net proceeds of approximately $24,644,782. The net
proceeds from these two December 2014 financing transactions were used primarily to fund the cash
portion of the purchase price of the DuPont Pioneer Acquisition, with the balance available for working
capital and general corporate purposes.
The monthly interest on the debentures was payable in cash, in shares of our common stock, provided all
of the applicable “equity conditions” defined in the debentures were satisfied, or in any combination of
cash and shares, at our option. We have made all monthly redemption payments in cash, and made
accelerated redemption payments of $7,830,049. The principal amount of the debentures were further
reduced by optional conversions of the debentures by certain of the holders. A total of 684,321 shares of
our common stock, respectively, have been issued upon conversion of the debentures in lieu of payments
of principal and accrued interest, totaling an aggregate of $3,168,342. As of March 1, 2017, the
Debentures were fully retired and had no outstanding balance.
On December 31, 2014, in connection with the DuPont Pioneer Acquisition, we issued a secured
promissory note (the “Pioneer Note”) payable by us to DuPont Pioneer in the initial principal amount of
$10,000,000 (issued at closing), and a potential earn-out payment (payable as an increase in the principal
amount of the Pioneer Note) of up to $5,000,000 based on our sales under the distribution and production
agreements entered into in connection with the DuPont Pioneer Acquisition, as well as other sales of
products we consummate containing the acquired germplasm in the three-year period following the
closing. The Pioneer Note accrues interest at a rate of 3% per annum, and interest is payable in three
annual installments, in arrears, commencing on December 31, 2015. Our obligations under the Pioneer
Note are secured by certain of the assets purchased in the DuPont Pioneer Acquisition and are subject to
the Intercreditor Agreement. The Pioneer Note matures on December 31, 2017.
On November 23, 2015, we completed a private placement transaction with our largest shareholder, MFP
Partners, L.P. (“MFP”). In this financing, we sold 1,180,722 shares of our common stock at $4.15 per
share for gross proceeds of $4,899,996. The proceeds were used, in part, to partially redeem our
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outstanding 8% Senior Secured Convertible Debentures issued in December 2014, as well as for working
capital and general corporate purposes.
On February 29, 2016, we completed a rights offering that was made to the holders of common stock,
convertible debentures and warrants, with an accompanying contractual participation rights offering made
to the holders of the convertible debentures. We issued an aggregate of 1,930,654 shares of common
stock at $4.15 per share in the rights offering and an additional 195,028 shares of common stock, also at
$4.15 per share, in the accompanying participation rights offering to the debenture holders, for aggregate
gross proceeds of $8,821,580. The proceeds were used, in part, to accelerate payments on the convertible
debentures and for working capital and general corporate purposes.
On September 22, 2015, we entered into an up to $20,000,000 aggregate principal amount credit and
security agreement (the “KeyBank Credit Facility”) with KeyBank. On October 4, 2016, we entered into
an amendment to the KeyBank Credit Facility effective as of September 30, 2016, temporarily increasing
the borrowing limit and certain other credit facility terms as follows: (i) temporarily increasing the
borrowing capacity from $20.0 million to (a) up to $25.0 million between October 1, 2016 and November
30, 2016 and (b) up to $30.0 million from February 1, 2017 through March 31, 2017; (ii) temporarily
allowing for a $4.0 million over-advance beyond the amounts otherwise available based on the borrowing
base calculations, which will be available through February 28, 2017; and (iii) temporarily expanding the
borrowing base by reducing the reserves that KeyBank may establish with respect to grower payables to
75% between August 31, 2016 and February 28, 2017. On March 13, 2017, we entered into a Third
Amendment Agreement (the “Third Amendment”) with respect to the KeyBank Credit Facility. The
purpose of the Third Amendment was to provide certain temporary changes to the terms of the KeyBank
Credit Facility, including: (i) further extending the temporary period during which we may borrow, repay
and reborrow up to $30.0 million in the aggregate under the credit facility until April 21, 2017; and (ii)
retroactively and temporarily allowing for over-advances, beyond amounts otherwise available based on
the borrowing base calculations under the Credit Facility: (a) of up to $3.5 million during the period from
March 8, 2017 through March 10, 2017, (b) of up to $5.0 million during the period from March 11, 2017
through March 17, 2017, (c) of up to $6.0 million during the period from March 18, 2017 through March
24, 2017, (d) of up to $7.0 million during the period from March 25, 2017 through March 31, 2017 and
(e) of up to $8.5 million during the period from April 1, 2017 through as late as April 20, 2017. On
September 13, 2017, we entered into a Fourth Amendment Agreement (the “Fourth Amendment”) with
respect to the KeyBank Credit Facility. Pursuant to the Fourth Amendment, we extended the maturity
date of the Credit Facility to September 12, 2019 and increased the aggregate principal amount that we
may borrow, repay and reborrow, up to $35.0 million in the aggregate, subject to a requirement that we
maintain a reduced loan balance of (i) not more than $20.0 million for at least 30 consecutive days over
the prior twelve months (measured each quarter on a trailing 12 month basis) and (ii) not more than $25.0
million for at least 60 consecutive days over the prior twelve months (measured each quarter on a trailing
12 month basis).
Key provisions of the KeyBank Credit Facility, as amended, include:
59
All amounts due and owing, including, but not limited to, accrued and unpaid principal and interest due
under the KeyBank Credit Facility, will be payable in full on September 12, 2019.
The KeyBank Credit Facility generally establishes a borrowing base of up to 85% of eligible domestic
accounts receivable and 90% of eligible foreign accounts receivable plus up to the lesser of 65% of the
cost eligible inventory or 90% of the net orderly liquidation value, subject to lender reserves.
Loans may be based on a Base Rate or Eurodollar Rate (which is increased by an applicable margin of
2.2% per annum) (both as defined in the September 22, 2015 credit and security agreement (the “Credit
Agreement”)), generally at the Company’s option. In the event of a default, at the option of KeyBank, the
interest rate on all obligations owing will increase by 3% per annum over the rate otherwise applicable.
Subject to certain exceptions, the KeyBank Credit Facility is secured by a first priority perfected security
interest in all our now owned and after acquired tangible and intangible assets and our domestic
subsidiaries, which have guaranteed our obligations under the KeyBank Credit Facility. The KeyBank
Credit Facility is further secured by a lien on, and a pledge of, 65% of the stock of our wholly-owned
subsidiary, S&W Australia Pty Ltd. With respect to its security interest and/or lien, KeyBank has entered
into an Intercreditor Agreement with Hudson Bay Fund LP (as agent for the holders of the senior secured
debentures issued by us on December 31, 2014) and DuPont Pioneer.
At June 30, 2017, we were in compliance with all KeyBank debt covenants.
SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility
with National Australia Bank Ltd (“NAB”). The current facility, referred to as the 2016 NAB Facilities,
was amended as of March 30, 2017 and expires on March 30, 2019. As of June 30, 2017, AUD
$11,325,816 (USD $8,703,888) was outstanding under the 2016 NAB Facilities.
The 2016 NAB Facilities, as currently in effect, comprises two distinct facility lines: (i) an overdraft
facility (the “Overdraft Facility”), having a credit limit of AUD $980,000 (USD $753,130 at June 30,
2017) and a borrowing base facility (the “Borrowing Base Facility”), having a credit limit of AUD
$12,000,000 (USD $9,222,000 at June 30, 2017).
The Borrowing Base Facility permits SGI to borrow funds for periods of up to 180 days, at SGI’s
discretion, provided that the term is consistent with its trading terms. Interest for each drawdown is set at
the time of the drawdown as follows: (i) for Australian dollar drawings, based on the Australian Trade
Refinance Rate plus 1.5% per annum and (ii) for foreign currency drawings, based on the British
Bankers’ Association Interest Settlement Rate for the relevant foreign currency for the relevant period, or
if such rate is not available, the rate reasonably determined by NAB to be the appropriate equivalent rate,
plus 1.5% per annum. As of June 30, 2017, the Borrowing Base Facility accrued interest on Australian
dollar drawings at approximately 4.93% calculated daily. The Borrowing Base Facility is secured by a
lien on all the present and future rights, property and undertakings of SGI, the mortgage on SGI’s Keith,
South Australia property and the Company’s corporate guarantee (up to a maximum of AUD
$15,000,000).
60
The Overdraft Facility permits SGI to borrow funds on a revolving line of credit up to the credit limit.
Interest accrues daily and is calculated by applying the daily interest rate to the balance owing at the end
of the day and is payable monthly in arrears. As of June 30, 2017, the Overdraft Facility accrued interest
at approximately 6.77% calculated daily.
For both the Overdraft Facility and the Borrowing Base Facility, 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 (i.e., the interest rate
increases by 4.5% per annum under the Borrowing Base Facility and the Overdraft Facility rate increases
to 13.92% per annum upon the occurrence of an event of default).
Both facilities constituting the 2016 NAB Facilities are secured by a fixed and floating lien over all the
present and future rights, property and undertakings of SGI and are guaranteed by the Company as noted
above. The 2016 NAB Facilities contain 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 agreements. SGI was in compliance with all NAB debt
covenants at June 30, 2017.
In January 2015, NAB and SGI entered into a new business markets – flexible rate loan (the “Keith
Building Loan”) in the amount of AUD $650,000 (USD $499,525 at June 30, 2017). Since entering into
the Keith Building Loan, the limit has been changed on two occasions, with the current limit being AUD
$750,000 (USD $576,375 at June 30, 2017), and a separate machinery and equipment facility (the “Keith
Machinery and Equipment Facility”) has been added with the limit being changed on two occasions, the
current limit being AUD $702,779 (USD $540,085) at June 30, 2017. At June 30, 2017, the principal
balance on the Keith Building Loan was AUD $650,000 (USD $499,525) with unused availability of
AUD $100,000 (USD $76,850). At June 30, 2017, the principal balance on the Keith Machinery and
Equipment Facility was AUD $702,779 (USD $540,085) with no unused availability. In February 2016,
NAB and SGI also entered into a master asset finance facility (the “Master Assets Facility”). At June 30,
2017, the principal balance on the Master Assets Facility was AUD $346,399 (USD $266,208) with
unused availability of AUD $403,601 (USD $310,167). The Master Asset Facility has various maturity
dates through 2021 and have interest rates ranging from 4.86% to 5.31%.
The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a
building on SGI’s Keith, South Australia property, purchase of adjoining land and for the machinery and
equipment for use in the operations of the building. The Keith Building Loan matures on November 30,
2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such
period approximately 30 days), based on the weighted average of a specified basket of interest rates
(6.07% as of June 30, 2017). Interest is payable each month in arrears. The Keith Machinery and
Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate
quoted by NAB at the time of the drawdown, plus 2.9%. The Keith Credit Facilities contain 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 facility agreement. They
61
are secured by a lien on all the present and future rights, property and undertakings of SGI, the
Company’s corporate guarantee and a mortgage on SGI’s Keith, South Australia property.
We are currently in final discussions with a financial institution regarding the refinance of the Pioneer
Note and expect to enter into a long-term secured promissory note to fund the pay-off of the Pioneer Note
and the contingent consideration obligation prior to those obligations becoming due. However, we cannot
provide assurances that additional financing will be available at such times or in amounts needed by us. In
addition, our credit facility with KeyBank includes a covenant that the Pioneer Note, or any refinancing of
the Pioneer Note, have no less than 30 days to maturity at any time during the term of the credit facility. If
we are unable to refinance or repay the Pioneer Note on a timely basis, or at all, DuPont Pioneer could
proceed against the collateral granted to it to secure the indebtedness or declare all obligations under the
loan to be due and payable. In addition, KeyBank could declare all obligations under our credit facility to
be due and payable. If any indebtedness under the Pioneer Note or our credit facility were to be
accelerated, there can be no assurance that our assets would be sufficient to repay in full that
indebtedness.
On July 19, 2017, we entered into a Securities Purchase Agreement with certain purchasers, pursuant to
which we sold and issued an aggregate of 2,685,000 shares of our Common Stock at a purchase price of
$4.00 per share, for aggregate gross proceeds of $10.74 million. We also announced our intention to
complete a rights offering in the coming months.
Summary of Cash Flows
The following table shows a summary of our cash flows for the years ended June 30, 2017 and 2016:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Operating Activities
Years Ended
June 30,
2017
(10,300,160)
(2,239,188)
6,202,881
176,968
(6,159,499)
6,904,500
745,001
$
$
2016
6,714,982
(3,875,644)
567,374
(37,670)
3,369,042
3,535,458
6,904,500
$
$
For the year ended June 30, 2017, operating activities used $10,300,160 in cash. Net loss plus and minus
the adjustments for non-cash items as detailed on the statement of cash flows provided $1,602,136 in
cash, and changes in operating assets and liabilities as detailed on the statement of cash flows used
$11,902,609 in cash. The decrease in cash from changes in operating assets and liabilities was primarily
driven by an increase in inventories of $9,343,989 and a decrease in accounts payable (including related
parties) of $7,464,977 partially offset by a decrease in accounts receivable of $4,110,609.
62
For the year ended June 30, 2016, operating activities provided $6,714,982 in cash. Net income plus and
minus the adjustments for non-cash items as detailed on the statement of cash flows provided $3,868,629
in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows generated
$2,846,353. The increase in cash from changes in operating assets and liabilities was primarily driven by
decreases in inventory balances of $3,561,808, partially offset by an increase in accounts receivable
balances of $1,007,637.
Investing Activities
Investing activities during the year ended June 30, 2017 used $2,239,188 in cash. These activities
consisted primarily of additions to a build out of a new research and development facility in Nampa,
Idaho and investment in internal use software. The sale of farmland generated net proceeds of
approximately $0.9 million.
Investing activities during the year ended June 30, 2016 used $3,875,644 in cash. The acquisition of SV
Genetics (the “SV Genetics Acquisition”) accounted for $1,000,000 of the cash used in investing
activities and $2,253,618 was used in additions to property, plant and equipment, primarily for the build
out of the new packaging and distribution facility in Keith, Australia and a build out of a new research
and development facility in Nampa, Idaho.
Financing Activities
Financing activities during the year ended June 30, 2017 provided $6,202,881 in cash. We had net
borrowings of $10.5 million on our lines of credit and made $4.7 million of redemptions on our
convertible debentures. We also generated $0.6 million in net proceeds from the exercise of stock options
during the year ended June 30, 2017.
Financing activities during the year ended June 30, 2016 provided $567,374 in cash. In February 2016,
we completed a rights offering of common stock offered to holders of common stock, convertible
debentures and warrants and an accompanying contractual participation rights offering made to the
holders of the convertible debentures. We also completed a private placement of common stock in
November 2015. These equity financings collectively raised net proceeds of $13.3 million in cash. We
also had net borrowings of $3.0 million on our lines of credit and made $14.1 million of redemptions on
our convertible debentures as well as $2.1 million of other debt payments.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of
operations, including our revenue and income from continuing operations. However, if our costs were to
become subject to significant inflationary pressures, we may not be able to fully offset such higher costs
through price increases. Our inability or failure to do so could harm our business, financial condition and
results of operations.
63
Off Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during the year ended June 30, 2017.
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;
• our ability to refinance the Pioneer Note on acceptable terms;
• our ability to renew or replace our KeyBank Credit Facility on acceptable terms;
•
competition; and
• market developments.
Critical Accounting Policies
The accounting policies and the use of accounting estimates are set forth in the footnotes to our
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 – Summary of Significant Accounting Policies of the
footnotes to the consolidated 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.
64
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 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 utilize the Black-Scholes-Merton option pricing model to estimate the fair value of options granted
under share-based compensation plans. The Black-Scholes-Merton 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. 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 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.
65
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 our 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 earnings 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.
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 revenue 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 earnings.
Allowance for Doubtful Accounts
We regularly assess the collectability of receivables and provide 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. Our estimates are judgmental in nature and are made at a point in time.
Management believes the allowance for doubtful accounts is appropriate to cover anticipated losses in our
66
accounts receivable under current conditions; however, unexpected, significant deterioration in any of the
factors mentioned above or in general economic conditions could materially change these expectations.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide information typically disclosed under this
item.
67
Item 8.
Financial Statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm .......................................................
Consolidated Balance Sheets at June 30, 2017 and 2016 ...........................................................
Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2017 and
Page
69
70
2016 ......................................................................................................................................
71
Consolidated Statements of Comprehensive Loss for the Fiscal Years Ended June 30, 2017
and 2016 ……………………………………………………………………………………
72
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended
June 30, 2017 and 2016 ........................................................................................................
73
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2017 and
2016 ......................................................................................................................................
Notes to Consolidated Financial Statements ...............................................................................
74
75
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
S&W Seed Company
Hanford, California
We have audited the accompanying consolidated balance sheets of S&W Seed Company (the
"Company") as of June 30, 2017 and 2016, and the related consolidated statements of operations,
comprehensive loss, stockholders' equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our audit included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company's internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of June 30, 2017 and 2016, and the results of its
operations and its cash flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
San Francisco, California
September 20, 2017
Crowe Horwath LLP
69
S&W SEED COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Property, plant and equipment, net
Intangibles, net
Goodwill
Deferred tax assets
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Accounts payable - related parties
Deferred revenue
Accrued expenses and other current liabilities
Lines of credit
Current portion of contingent consideration obligation
Current portion of long-term debt
Current portion of convertible debt, net
TOTAL CURRENT LIABILITIES
Contingent consideration obligation
Long-term debt, less current portion
Derivative warrant liabilities
Other non-current liabilities
TOTAL LIABILITIES
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;
18,004,681 issued and 17,979,681 outstanding at June 30, 2017;
17,086,111 issued and 17,061,111 outstanding at June 30, 2016;
Treasury stock, at cost, 25,000 shares
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
TOTAL STOCKHOLDERS’ EQUITY
June 30,
2017
June 30,
2016
$
$
$
$
$
$
745,001
23,239,325
31,489,945
1,249,921
56,724,192
13,581,576
34,939,079
10,292,265
-
1,563,176
117,100,288
7,157,745
331,694
880,326
2,733,718
27,399,784
2,500,000
10,309,664
-
51,312,931
-
1,096,155
2,836,600
632,947
6,904,500
27,619,599
21,846,130
1,218,280
57,588,509
12,600,106
37,006,802
10,292,265
7,279,923
2,237,380
127,004,985
14,303,877
396,027
509,857
2,385,160
16,687,473
-
275,094
6,840,608
41,398,096
2,268,416
11,114,333
4,354,100
108,596
55,878,633
59,243,541
-
-
18,004
(134,196)
83,312,518
(16,436,286)
(5,538,385)
61,221,655
17,086
(134,196)
78,282,461
(4,614,244)
(5,789,663)
67,761,444
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
117,100,288
$
127,004,985
See notes to consolidated financial statements.
70
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue
Cost of revenue
Gross profit
Operating expenses
Selling, general and administrative expenses
Research and development expenses
Depreciation and amortization
Disposal of property, plant and equipment loss (gain)
Impairment charges
Total operating expenses
Income (loss) from operations
Other expense
Foreign currency loss (gain)
Change in derivative warrant liabilities
Change in contingent consideration obligations
Loss on equity method investment
Anticipated loss on sub-lease land
Gain on sale of marketable securities
Interest expense - amortization of debt discount
Interest expense - convertible debt and other
Loss before income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Years Ended
June 30,
2017
2016
$
75,373,810
$
96,044,254
59,232,846
77,653,646
16,140,964
18,390,608
11,794,026
3,032,112
3,325,743
78,538
319,001
10,397,863
2,764,358
3,185,126
(153)
-
18,549,420
16,347,194
(2,408,456)
2,043,414
1,388
(1,517,500)
231,584
144,841
424,600
-
1,176,023
1,324,945
(4,194,337)
7,627,705
(11,822,042)
(0.67)
(0.67)
$
$
$
(226,529)
(1,903,900)
55,092
294,197
-
(123,038)
3,899,739
2,086,005
(2,038,152)
(2,403,379)
365,227
0.02
0.02
17,718,057
17,718,057
14,936,311
14,936,311
$
$
$
See notes to consolidated financial statements.
71
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended
June 30,
2017
2016
Net income (loss)
Foreign currency translation adjustment, net of income taxes
Comprehensive loss
$
$
(11,822,042)
$
365,227
251,278
(693,077)
(11,570,764)
$
(327,850)
See notes to consolidated financial statements.
72
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Accumulated Other Comprehensive Stockholders’
Total
Deficit
Loss
Equity
Balance, June 30, 2015
13,479,101
$
13,479
(25,000)
$
(134,196)
$
62,072,379
$
(4,979,471)
$
(5,096,586)
$
51,875,605
Stock-based compensation - options, restricted stock, and RSUs
Beneficial conversion feature
Net issuance to settle RSUs
Proceeds from sale of common stock, net of fees and expenses
Exercise of stock options, net of withholding taxes
Common stock issued in acquisition
Other comprehensive loss
Net income
Balance, June 30, 2016
-
-
60,933
3,306,404
14,585
225,088
-
-
17,086,111
$
-
-
61
3,306
15
225
-
-
17,086
-
-
-
-
-
-
-
-
(25,000)
$
-
-
-
-
-
-
-
-
(134,196)
1,190,126
871,862
(109,258)
13,249,982
57,595
949,775
-
-
$
78,282,461
$
-
-
-
-
-
-
-
365,227
(4,614,244)
-
-
-
-
-
-
(693,077)
-
$
(5,789,663)
$
1,190,126
871,862
(109,197)
13,253,288
57,610
950,000
(693,077)
365,227
67,761,444
Balance, June 30, 2016
17,086,111
$
17,086
(25,000)
$
(134,196)
$
78,282,461
$
(4,614,244)
$
(5,789,663)
$
67,761,444
Stock-based compensation - options, restricted stock, and RSUs
Net issuance to settle RSUs
Issuance of common stock upon conversion of principal and interest of
convertible debentures
Exercise of stock options, net of withholding taxes
Other comprehensive income
Net loss
Balance, June 30, 2017
-
72,468
684,321
161,781
-
-
18,004,681
$
-
72
684
162
-
-
18,004
-
-
-
-
-
-
-
-
-
(25,000)
$
-
-
-
(134,196)
$
1,409,368
(143,599)
3,160,588
603,700
-
-
83,312,518
-
-
-
-
-
-
-
-
(11,822,042)
(16,436,286)
$
$
-
251,278
-
(5,538,385)
$
1,409,368
(143,527)
3,161,272
603,862
251,278
(11,822,042)
61,221,655
See notes to consolidated financial statements.
73
S&W SEED COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities
$
Years Ended
June 30,
2017
2016
(11,822,042)
$
365,227
Stock-based compensation
Change in allowance for doubtful accounts
Depreciation and amortization
Loss (gain) on disposal of property, plant and equipment
Impairment charges
Change in deferred tax asset
Change in foreign exchange contracts
Change in derivative warrant liabilities
Change in contingent consideration obligations
Amortization of debt discount
Gain on sale of marketable securities
Intercompany foreign exchange gain
Loss on equity method investment
Anticipated loss on sub-lease land
Changes in operating assets and liabilities, net:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accounts payable - related parties
Deferred revenue
Accrued expenses and other current liabilities
Other non-current liabilities
Net cash (used in) provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of business
Purchase of marketable securities
Sale of marketable securities
Equity method investment
Additions to internal use software
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock
Net proceeds from exercise of common stock options
Taxes paid related to net share settlements of stock-based compensation awards
Borrowings and repayments on lines of credit, net
Borrowings of long-term debt
Repayments of long-term debt
Repayments of convertible debt
Net cash provided by financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of the period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
Income taxes
1,409,368
449,590
3,325,743
78,538
319,001
7,269,420
112,970
(1,517,500)
231,584
1,176,023
-
-
144,841
424,600
4,110,609
(9,343,989)
(41,928)
(9,487)
(7,400,553)
(64,424)
369,688
314,402
163,386
(10,300,160)
(2,960,620)
877,617
-
-
-
-
(156,185)
(2,239,188)
-
603,862
(143,527)
10,488,213
280,654
(304,770)
(4,721,551)
6,202,881
176,968
(6,159,499)
6,904,500
1,190,126
16,700
3,185,126
(153)
-
(2,721,746)
(56,264)
(1,903,900)
55,092
3,899,739
(123,038)
(332,477)
294,197
-
(1,007,637)
3,561,808
(201,236)
(101,368)
767,328
(718,432)
(15,933)
588,169
(26,346)
6,714,982
(2,253,618)
53,150
(1,000,000)
(316,000)
439,038
(439,038)
(359,176)
(3,875,644)
13,253,288
57,610
(109,197)
3,021,538
573,447
(2,124,584)
(14,104,728)
567,374
(37,670)
3,369,042
3,535,458
$
$
745,001
$
6,904,500
1,366,854
210,682
$
2,085,544
452,933
See notes to consolidated financial statements.
74
S&W SEED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND ORGANIZATION
Organization
S&W Seed Company, a Nevada corporation (the “Company”), began as S&W Seed Company, a general
partnership, in 1980 and was originally in the business of breeding, growing, processing and selling
alfalfa seed. We then incorporated a corporation with the same name in Delaware in October 2009, which
is the successor entity to Seed Holding, LLC, having 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 general partnership’s original business. Seed Holding, LLC remains a consolidated
subsidiary of the Company.
In December 2011, the Company reincorporated in Nevada as a result of a statutory short-form merger of
the Delaware corporation into its wholly-owned subsidiary, S&W Seed Company, 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”), consummated an acquisition of all of the issued and
outstanding shares of Seed Genetics International Pty Ltd, an Australia corporation (“SGI”), from SGI’s
shareholders.
Business Overview
Since its establishment, the Company, including its predecessor entities, has been principally engaged in
breeding, growing, processing and selling agricultural seeds, primarily alfalfa seed. The Company owns
seed cleaning and processing facilities, which are located in Five Points, California and Nampa, Idaho and
a seed processing facility in Keith, South Australia. The Company’s seed products are primarily grown
under contract by farmers. The Company began its stevia initiative in fiscal year 2010 and is currently
focused on breeding improved varieties of stevia and developing marketing and distribution programs for
its stevia products.
The Company has also been actively engaged in expansion initiatives through a combination of organic
growth and strategic acquisitions, including in December 31, 2014, when the Company purchased certain
alfalfa research and production facilities and conventional (non-GMO) alfalfa germplasm assets and
assumed certain related liabilities (“the Pioneer Acquisition”) of Pioneer Hi-Bred International, Inc.
(“DuPont Pioneer”).
More recently, in May 2016, the Company acquired the assets and business of SV Genetics, a private
Australian company specializing in the breeding and licensing of proprietary hybrid sorghum and
75
sunflower seed germplasm, which represented the Company’s initial effort to diversify its product
portfolio beyond alfalfa seed and stevia.
The Company’s operations span the world’s alfalfa seed production regions with operations in the San
Joaquin and Imperial Valleys of California, five other U.S. states, Australia, and three provinces in
Canada, and the Company sells its seed products in more than 30 countries around the globe.
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 accounting
principles generally accepted in the United States of America (“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.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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, inventory valuation, asset impairments, provisions for income taxes, grower accruals (an
estimate of amounts payable to farmers who grow seed for the Company), contingent consideration
obligations, derivative liabilities, 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,
goodwill 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. Two customers accounted
for 58% and 53% of its revenue for the years ended June 30, 2017 and 2016, respectively.
Two customers accounted for 52% of the Company’s accounts receivable at June 30, 2017. One customer
accounted for 35% of the Company’s accounts receivable at June 30, 2016.
In addition, the Company sells a substantial portion of its products to international customers. Sales to
international markets represented 45% and 54% of revenue during the years ended June 30, 2017 and
2016, respectively. The net book value of fixed assets located outside the United States was 19% and 17%
of total assets at June 30, 2017 and June 30, 2016, respectively. Cash balances located outside of the
76
United States may not be insured and totaled $192,879 and $1,923,290 at June 30, 2017 and June 30,
2016, respectively.
The following table shows revenue from external sources by destination country:
United States
Saudi Arabia
Mexico
Argentina
Sudan
Australia
Peru
Other
Total
Years Ended June 30,
2017
41,505,305
12,055,276
4,749,315
2,881,050
2,747,923
1,882,899
1,230,999
8,321,043
75,373,810
55%
16%
6%
4%
4%
2%
2%
11%
100%
$
$
2016
43,926,441
25,954,835
4,529,131
2,586,360
4,267,752
3,171,323
2,056,261
9,552,151
96,044,254
46%
27%
5%
3%
4%
3%
2%
10%
100%
International Operations
The Company translates its foreign operations’ assets 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. No customer has a 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 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.
Cost of Revenue
The Company records purchasing and receiving costs, inspection costs and warehousing costs in cost of
revenue. 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 revenue.
77
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. At times, cash and cash equivalents balances exceed amounts insured by the Federal
Deposit Insurance Corporation.
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 $526,495 and $177,295 at June 30, 2017 and June 30, 2016,
respectively.
Inventories
Inventories consist of seed and packaging materials.
Inventories are stated at the lower of cost or market, and an inventory reserve permanently reduces 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 revenue 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 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.
78
Components of inventory are:
Raw materials and supplies
Work in progress and growing crops
Finished goods
Property, Plant and Equipment
June 30,
2017
266,551
5,603,825
25,619,569
31,489,945
$
$
June 30,
2016
241,268
3,120,485
18,484,377
21,846,130
$
$
Property, plant and equipment is depreciated using the straight-line method over the estimated useful life
of the asset - periods of 5-28 years for buildings, 3-20 years for machinery and equipment, and 3-5 years
for vehicles.
Intangible Assets
Intangible assets acquired in business acquisitions are reported at their initial fair value less accumulated
amortization. Intangible assets are amortized using the straight-line method over the estimated useful life
of the asset. Periods of 10-30 years for technology/IP/germplasm, 10-20 years for customer relationships
and trade names and 3-20 for other intangible assets. The weighted average estimated useful lives are 24
years for technology/IP/germplasm, 18 years for customer relationships and trade names and 18 years for
other intangible assets.
Goodwill
Goodwill originated from acquisitions of Imperial Valley Seeds, Inc. (“IVS”) and SGI during the fiscal
year 2013, the acquisition of the alfalfa business from DuPont Pioneer in fiscal year 2015 and the
acquisition of assets of SV Genetics in May 2016. Goodwill is assessed at least 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
first assesses qualitative factors to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, including goodwill. If management concludes that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, management
conducts a two-step quantitative goodwill impairment test. 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 market capitalization to estimate the fair value of its one
reporting unit. 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, 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
79
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 performed a quantitative assessment of goodwill at June 30, 2017 and 2016
and determined that goodwill was not impaired.
Equity Method Investments
Investee companies that are not consolidated, but over which the Company exercises significant
influence, are accounted for under the equity method of accounting. Whether or not the Company
exercises significant influence with respect to an investee depends on an evaluation of several factors
including, among others, representation on the investee company’s board of directors and ownership
level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under
the equity method of accounting, an investee company’s accounts are not reflected within the Company’s
consolidated balance sheets and statements of operations; however, the Company’s share of the earnings
or losses of the investee company is reflected in the caption ‘‘Loss on equity method investment’’ in the
consolidated statements of operations. The Company’s carrying value in an equity method investee
company is included in the Company’s consolidated balance sheets. When the Company’s carrying value
in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s
consolidated financial statements unless the Company guaranteed obligations of the investee company or
has committed additional funding. When the investee company subsequently reports income, the
Company will not record its share of such income until it equals the amount of its share of losses not
previously recognized.
Cost Method Investments
Investee companies not accounted for under the consolidation or the equity method of accounting are
accounted for under the cost method of accounting. Under this method, the Company’s share of the
earnings or losses of such investee companies is not included in the consolidated balance sheet or
statement of operations. However, impairment charges are recognized in the consolidated statement of
operations. If circumstances suggest that the value of the investee company has subsequently recovered,
such recovery is not recorded.
Research and Development Costs
The Company is engaged in ongoing research and development (“R&D”) of proprietary seed and stevia
varieties. 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.
80
Income Taxes
Deferred tax assets and liabilities are determined based on differences between the financial statement and
tax basis 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.
Net Income (Loss) Per Common Share Data
Basic net income (loss) per common share ("EPS"), is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding during the period.
Diluted EPS is calculated by adjusting both the numerator (net income (loss)) and the denominator
(weighted-average number of shares outstanding) for the dilutive effects of potentially dilutive securities,
including options, restricted stock awards, convertible debt and common stock warrants.
• The if-converted method is used for convertible debt. Under the if-converted method, interest
expense recognized in the period on the convertible debt is added to net income, and the number
of shares that would be obtained upon conversion is added to the denominator.
• The treasury stock method is used for common stock warrants, stock options, and restricted stock
awards. Under this method, consideration that would be received upon exercise (as well as
remaining compensation cost to be recognized for awards not yet vested) is assumed to be used
repurchase shares of stock in the market, with net number of shares assumed to be issued added to
the denominator.
The calculation of Basic and Diluted EPS is shown in the table below. Classes of securities identified in
the table with no adjustments in the calculation of Diluted EPS were determined to be antidilutive for the
applicable periods.
81
Years Ended
June 30,
2017
2016
Numerator:
Net income (loss)
$
(11,822,042)
$
365,227
Numerator for basis EPS
(11,822,042)
365,227
Effect of dilutive securities:
Convertible debt
Warrants
-
-
-
-
-
-
Numerator for diluted EPS
$
(11,822,042)
$
365,227
Denominator:
Denominator for basic EPS -
weighted-average shares
Effect of dilutive securities:
Employee stock stock options
Employee restricted stock units
Convertible debt
Warrants
Dilutive potential common shares
Denominator for diluted EPS -
adjusted weighted average shares
and assumed conversions
17,718,057
14,936,311
-
-
-
-
-
-
-
-
-
-
17,718,057
14,936,311
Basic EPS
Diluted EPS
$
$
(0.67)
(0.67)
$
$
0.02
0.02
Impairment of Long-Lived Assets
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. A triggering event during the quarter ended March 31, 2017 prompted a review of
certain stand establishment assets. The carrying value of these assets was deemed in excess of fair value,
and the Company recorded an impairment charge of $319,001 in the consolidated statement of operations
during the quarter ended March 31, 2017.
82
Derivative Financial Instruments
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. 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.
Derivative Liabilities
The Company reviews the terms of the common stock, warrants and convertible debt it issues to
determine whether there are embedded derivative instruments, including embedded conversion options
and redemption options, which are required to be bifurcated and accounted for separately as derivative
financial instruments.
Fair Value of Financial Instruments
The Company discloses assets and liabilities that are recognized and measured at fair value, 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.
The assets acquired and liabilities assumed in the DuPont Pioneer Acquisition were valued at fair value
on a non-recurring basis as of December 31, 2014. The assets acquired and liabilities assumed in the SV
Genetics Acquisition were valued at fair value on a non-recurring basis as of May 26, 2016. No assets or
liabilities were valued at fair value on a non-recurring basis as of June 30, 2017 or June 30, 2016.
The carrying value of cash and cash equivalents, accounts payable, short-term and all long-term
borrowings other than the convertible debentures, as reflected in the consolidated balance sheets,
approximate fair value because of the short-term maturity of these instruments or interest rates
commensurate with market rates. There have been no changes in operations and/or credit characteristics
since the date of issuance that could impact the relationship between interest rate and market rates. At
June 30, 2017, the fair value and carrying value of the convertible debentures was zero. At June 30, 2016,
83
the fair value and carrying value of the convertible debentures was $7,829,671 and $6,840,608
respectively. The fair value was calculated using a discounted cash flow model and utilized a 10%
discount rate that is commensurate with market rates given the remaining term, principal repayment
schedule and outstanding balance. The convertible debentures are categorized as Level 3 in the fair value
hierarchy. The Company used a discounted cash flows approach to measure the fair value using Level 3
inputs.
Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as
follows:
Foreign exchange contract asset
Contingent consideration obligations
Derivative warrant liabilities
Total
Foreign exchange contract asset
Contingent consideration obligations
Derivative warrant liabilities
Total
Fair Value Measurements as of June 30, 2017 Using:
Level 1
Level 2
Level 3
-
-
-
-
$
$
166,629
-
-
166,629
$
$
-
2,500,000
2,836,600
5,336,600
Fair Value Measurements as of June 30, 2016 Using:
Level 1
Level 2
Level 3
-
-
-
-
$
$
49,808
-
-
49,808
$
$
-
2,268,416
4,354,100
6,622,516
$
$
$
$
There were no transfers in or out of Level 3 during the years ended June 30, 2017 and 2016.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to classifications adopted in
the current period. The reclassifications had no effect on net income (loss), cash flows or stockholders’
equity.
Recently Adopted and Issued Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for
Goodwill Impairment (“ASU 2017-04”). This standard eliminates Step 2 from the goodwill impairment
test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount
by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of
goodwill allocated to the reporting unit. ASU 2017-04 is effective for the Company beginning July 1,
2020. The adoption is not expected to have a material impact on the consolidated financial statements.
In October of 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic
740): Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). This standard requires
recognition of current and deferred tax resulting from an intra-entity transfer of assets (other than
84
inventory) when the transfer occurs for public business entities for annual periods beginning after
December 15, 2017, including interim reporting periods within those annual reporting periods. ASU
2016-16 also provides for early adoption for all entities as of the beginning of an annual reporting period
for which financial statements (interim or annual) have not been issued or made available for issuance.
The Company elected to early adopt ASU 2016-16 in the first quarter of the year ended June 30, 2017.
The adoption did not have a material impact on the consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain
Cash Receipts and Cash Payments (“ASU 2016-15”). This standard addresses eight specific cash flow
issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for the
Company beginning July 1, 2018 and the Company is currently evaluating the impact that ASU 2016-15
will have on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Improvements to Employee
Share-Based Payment Accounting (“ASU 2016-09”). This standard was issued as part of the FASB’s
Simplification Initiative that involve several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities
and classification on the statement of cash flows. Some of the areas for simplification apply only to
nonpublic entities. For public business entities, ASU 2016-09 is effective for annual periods beginning
after December 15, 2016 and interim periods within those annual periods. The method of adoption is
dependent on the specific aspect of accounting addressed in this new guidance. Early adoption is
permitted in any interim or annual period. The Company is evaluating the impact of the adoption of ASU
2016-09 on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02: Leases (“ASU 2016-
02”). This standard amends various aspects of existing accounting guidance for leases, including the
recognition of a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the
pattern of expense recognition in the statement of operations. This standard also introduces new
disclosure requirements for leasing arrangements. For public business entities, ASU 2016-02 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted. The new standard must be adopted using a modified retrospective approach,
and provides for certain practical expedients. The Company is evaluating the impact of the adoption of
ASU 2016-02 on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with
Customers (‘‘ASU 2014-09’’). This standard outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most existing revenue
recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should
recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services.
ASU 2014-09 also requires enhanced disclosures about the nature, amount, timing, and uncertainty of
revenues and cash flows arising from contracts with customers. The FASB recently issued several
85
amendments to the standard, including clarifications on disclosure of prior-period performance
obligations and remaining performance obligations. Entities have the option of using either a full
retrospective or a modified retrospective approach for the adoption of the new standard. However, in
August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the
Effective Date that defers the effective date of ASU 2014-09 for all public business entities by one year.
As a result, ASU 2014-09 is effective for fiscal years beginning after December 15, 2017 including
interim periods within that reporting period. Earlier application is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. The Company is evaluating the impact of the adoption of ASU 2014-09 on its consolidated
financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going
Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern. ASU 2014-15 describes how an entity’s management should assess, considering both
quantitative and qualitative factors, whether there are conditions and events that raise substantial doubt
about an entity’s ability to continue as a going concern within one year after the date that the financial
statements are issued, which represents a change from the existing literature that requires consideration
about an entity’s ability to continue as a going concern within one year after the balance sheet date. The
Company adopted this standard during the fiscal year ended June 30, 2017. The implementation of this
standard did not have a material impact on its consolidated financial statements and related disclosures.
NOTE 3 - BUSINESS COMBINATIONS
SV Genetics Acquisition
On May 26, 2016, the Company purchased the assets and business of SV Genetics Pty Ltd (“SV
Genetics”), a private Australian company specializing in the breeding and licensing of proprietary hybrid
sorghum and sunflower seed germplasm (the “SV Genetics Acquisition”). The acquisition expanded and
diversified the Company’s product offerings and provided access to new distribution channels.
As consideration for the SV Genetics Acquisition, the Company paid the following amounts at closing:
$1.0 million in cash and 225,088 shares of the Company’s common stock. The fair value of the shares of
the Company’s common stock was determined based on the closing market price of the Company’s
common stock on the acquisition date and a 5% discount because of the lack of marketability that market
participants would consider when estimating the fair value of the common stock issued. The terms of the
SV Genetics Acquisition further provide for a potential earn-out payment of up to $3.3 million, payable in
cash or the Company’s common stock, in the sole discretion of the Company, based on the acquired
business achieving 150% of a net income target of $4.2 million for the combined 2018 and 2019 fiscal
years. Any earn-out payment, if paid in stock, will be based upon the trailing volume weighted average
price on the day immediately preceding the payment of the earn-out. The earn-out payment, if any, will be
made in September 2019.
86
The SV Genetics Acquisition has been accounted for as a business combination, and the Company valued
and recorded all assets acquired and liabilities assumed at their estimated fair values on the date of the SV
Genetics Acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at
the acquisition date of May 26, 2016:
Accounts receivable
Inventory
Liabilities assumed
Property, plant and equipment
Technology/IP - germplasm
Technology/IP - seed varieties
Customer relationships
Trade name
Non-compete agreements
Goodwill
Total acquisition cost allocated
May 26, 2016
37,888
$
150,000
(16,901)
45,273
479,000
57,000
462,000
45,000
30,000
796,064
2,085,324
$
The acquisition-date fair value of the consideration transferred consisted of the following:
Cash
Restricted stock consideration
Contingent earn-out
May 26, 2016
$
1,000,000
950,000
135,324
2,085,324
$
The excess of the purchase price over the fair value of the net assets acquired, amounting to $796,064,
was recorded as goodwill on the consolidated balance sheet. The primary item that generated goodwill
was the premium paid by the Company for the ability to control the acquired business and the technology
/ germplasm. Goodwill is not amortized for financial reporting purposes, but is amortized for tax
purposes.
Management assigned fair values to the identifiable intangible assets through a combination of the relief
from royalty method, the multi-period excess earnings method, and the with-and-without method. The
contingent consideration requires the Company to pay up to an additional $3.3 million, if the acquired
business achieves 150% of a net income target of $4.2 million for the combined 2018 and 2019 fiscal
years. The fair value of the contingent consideration arrangement at the acquisition date was $135,324.
The fair value of the contingent consideration was estimated using a Monte Carlo simulation model. The
fair value measurement is based on significant inputs not observable in the market and thus represents a
Level 3 measurement. The key assumptions in applying the Monte Carlo simulation were as follows:
40.0% present value discount factor and an underlying net income volatility of 87.9%. As of June 30,
2017, the estimated fair value of the contingent consideration was zero. The values and useful lives of the
acquired SV Genetics intangibles are as follows:
87
Estimated
Useful Life
(Years)
Estimated Fair
Value
Technology/IP - germplasm
Technology/IP - seed varieties
Customer relationships
Trade name
Non-compete agreements
Total identifiable intangible assets
25
15
10
10
5
$
$
479,000
57,000
462,000
45,000
30,000
1,073,000
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the activity of goodwill for the years ended June 30, 2017 and
2016, respectively.
Goodwill
Goodwill
$
$
Balance at
July 1, 2016
Foreign Currency
Balance at
Additions
Translation
June 30, 2017
10,292,265
$
-
$
-
$
10,292,265
Balance at
July 1, 2015
Foreign Currency
Balance at
Additions
Translation
June 30, 2016
9,630,279
$
796,064
$
(134,078)
$
10,292,265
88
Intangible assets consist of the following:
Trade name
Customer relationships
Non-compete
GI customer list
Supply agreement
Distribution agreement
Production agreement
Grower relationships
Intellectual property
Internal use software
Trade name
Customer relationships
Non-compete
GI customer list
Supply agreement
Distribution agreement
Production agreement
Grower relationships
Intellectual property
Internal use software
$
$
Balance at
July 1, 2016
1,328,786
1,359,371
198,999
85,967
1,229,047
7,113,253
335,002
1,964,024
22,870,760
521,593
$
37,006,802
$
Balance at
July 1, 2015
$
1,377,840
$
968,619
301,354
93,131
1,304,679
7,497,750
558,334
2,183,485
23,719,724
162,417
Additions
Amortization
Translation
June 30, 2017
Foreign Currency
Balance at
$
$
$
-
-
-
-
-
-
-
-
-
156,186
156,186
$
(84,480)
$
(101,208)
(96,964)
(7,164)
(75,632)
(384,500)
(223,332)
(105,408)
(1,145,221)
-
$
(2,223,909)
$
-
-
-
-
-
-
-
-
-
-
-
Additions
Amortization
Translation
Foreign Currency
45,000
462,000
30,000
-
-
-
-
-
536,000
359,176
$
(82,208)
$
(60,314)
(125,815)
(7,164)
(75,632)
(384,497)
(223,332)
(120,481)
(1,159,656)
-
(11,846)
(10,934)
(6,540)
-
-
-
-
(98,980)
(225,308)
-
1,244,306
1,258,163
102,035
78,803
1,153,415
6,728,753
111,670
1,858,616
21,725,539
677,779
34,939,079
Balance at
June 30, 2016
1,328,786
1,359,371
198,999
85,967
1,229,047
7,113,253
335,002
1,964,024
22,870,760
521,593
37,006,802
$
38,167,333
$
1,432,176
$
(2,239,099)
$
(353,608)
$
Amortization expense totaled $2,223,909 and $2,239,099 for the years ended June 30, 2017 and 2016,
respectively. Estimated aggregate remaining amortization is as follows:
Amortization expense
$
2,054,597
$
1,909,612
$
1,909,612
$
1,909,612
$
1,909,612
$
25,246,034
2018
2019
2020
2021
2022
Thereafter
89
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Components of property, plant and equipment were as follows:
Land and improvements
Buildings and improvements
Machinery and equipment
Vehicles
Construction in progress
Total property, plant and equipment
June 30,
2017
June 30,
2016
$
$
2,223,674
6,401,277
5,435,542
1,005,455
2,196,513
17,262,461
2,908,501
6,192,522
4,781,586
1,080,354
256,935
15,219,898
Less: accumulated depreciation
(3,680,885)
(2,619,792)
Property, plant and equipment, net
$
13,581,576
$
12,600,106
Depreciation expense totaled $1,101,834 and $946,027 for the years ended June 30, 2017 and 2016,
respectively.
NOTE 6 - DEBT
Total debt outstanding, excluding convertible debt addressed in Note 7, are presented on the consolidated
balance sheet as follows:
Working capital lines of credit
KeyBank
National Australia Bank Limited
Total working capital lines of credit
Current portion of long-term debt
Keith facility (building loan) - National Australia Bank Limited
Keith facility (machinery & equipment loans) - National Australia Bank Limited
Unsecured subordinate promissory note - related party
Promissory note – DuPont Pioneer
Total current portion
Long-term debt, less current portion
Keith facility (building loan) - National Australia Bank Limited
Keith facility (machinery & equipment loans) - National Australia Bank Limited
Unsecured subordinate promissory note - related party
Promissory note – DuPont Pioneer
Total long-term portion
Total debt
June 30, 2017
June 30, 2016
18,695,896
8,703,888
27,399,784
-
209,664
100,000
10,000,000
10,309,664
499,524
596,631
-
-
1,096,155
11,405,819
$
$
12,308,828
4,378,645
16,687,473
37,205
137,889
100,000
-
275,094
446,454
567,879
100,000
10,000,000
11,114,333
11,389,427
$
$
On September 22, 2015, the Company and KeyBank National Association (“KeyBank”) entered into a
credit and securities agreement and related agreements with respect to a $20,000,000 aggregate principal
90
amount revolving credit facility (the “KeyBank Credit Facility”), which principal amount was increased
to $35,000,000 pursuant to a Fourth Amendment Agreement (the “Fourth Amendment”)on September 13,
2017, as more fully described below. Under the Fourth Amendment, all amounts of unpaid principal and
interest due under the KeyBank Credit Facility must be paid in full on or before September 12, 2019.
On October 4, 2016, the Company and KeyBank entered into a Second Amendment Agreement effective
September 30, 2016 (the “Second Amendment”). The purpose of the Second Amendment was to provide
certain temporary changes to the terms of the KeyBank Credit Facility, including: (i) temporarily
increasing the borrowing capacity from $20.0 million to (a) up to $25.0 million between October 1, 2016
and November 30, 2016 and (b) up to $30.0 million from February 1, 2017 through March 31, 2017; (ii)
temporarily allowing for a $4.0 million over-advance beyond the amounts otherwise available based on
the borrowing base calculations, which will be available through February 28, 2017; and (iii) temporarily
expanding the borrowing base by reducing the reserves that KeyBank may establish with respect to
grower payables to 75% between August 31, 2016 and February 28, 2017.
On March 13, 2017, the Company entered into a Third Amendment Agreement (the " Third
Amendment"). The purpose of the Third Amendment was to provide certain temporary changes to the
terms of the KeyBank Credit Facility, including: (i) further extending the temporary period during which
the Company may borrow, repay and reborrow up to $30.0 million in the aggregate under the credit
facility until April 21, 2017; and (ii) retroactively and temporarily allowing for over-advances, beyond
amounts otherwise available based on the borrowing base calculations under the Credit Facility (a) of up
to $3.5 million during the period from March 8, 2017 through March 10, 2017, (b) of up to $5.0 million
during the period from March 11, 2017 through March 17, 2017, (c) of up to $6.0 million during the
period from March 18, 2017 through March 24, 2017, (d) of up to $7.0 million during the period from
March 25, 2017 through March 31, 2017 and (e) of up to $8.5 million during the period from April 1,
2017 through as late as April 20, 2017.
On September 13, 2017, the Company and Key Bank entered into the Fourth Amendment, pursuant to
which the maturity date was extended to September 12, 2019 and the principal amount that the Company
may borrow, repay and reborrow was increased to $35.0 million, subject to a requirement that the
Company maintain a reduced loan balance of (i) not more than $20 million for at least 30 consecutive
days over the prior 12 months (measured each quarter on a trailing 12 month basis) and (ii) not more than
$25 million for at least 60 consecutive days over the prior 12 months (measured each quarter on a trailing
12 month basis). The Fourth Amendment generally establishes a borrowing base of up to 85% of eligible
domestic accounts receivable and 90% of eligible foreign accounts receivable, plus up to 65% of eligible
inventory, subject to lender reserves. Loans may be based on a Base Rate or Eurodollar Rate (which is
increased by an applicable margin of 2.2% per annum), generally at the Company’s option.
In the event of a default, at the option of KeyBank, the interest rate on all obligations owing will increase
by 3% per annum over the rate otherwise applicable. The Company is required to maintain one or more
lockbox or cash collateral accounts at KeyBank, in KeyBank’s name, which provide for the collection and
remittance of all proceeds from sales of Company product (which is collateral for the KeyBank Credit
Facility) on a daily basis. Subject to certain exceptions, the KeyBank Credit Facility is secured by a first
91
priority perfected security interest in all the Company’s now owned and after acquired tangible and
intangible assets as well as the assets of the Company’s domestic subsidiaries, which have guaranteed the
Company’s obligations under the KeyBank Credit Facility. The KeyBank Credit Facility is further
secured by a lien on, and a pledge of, 65% of the stock of S&W Australia Pty Ltd., the Company’s
wholly-owned subsidiary. With respect to its security interest and/or lien, KeyBank has entered into an
intercreditor and subordination agreement with Hudson Bay Fund LP (as agent for the holders of the
senior secured debentures issued by the Company in December 2014) and DuPont Pioneer. The KeyBank
Credit Agreement contains customary representations and warranties, affirmative and negative covenants
and customary events of default. The Company was in compliance with all covenants at June 30, 2017.
The outstanding balance on the KeyBank Credit Facility was $18,695,896 at June 30, 2017.
On October 1, 2012, the Company issued a five-year subordinated promissory note to IVS in the principal
amount of $500,000 (the “IVS Note”), with a maturity date of October 1, 2017. The IVS Note accrues
interest at a rate equal to one-month LIBOR at closing plus 2%, which equals 2.2%. Interest is payable in
five annual installments, in arrears, on October 1 of each year. Amortizing payments of the principal of
$100,000 will also be made on each October 1, with any remaining outstanding principal and accrued
interest payable on the maturity date of the IVS Note. The outstanding balance on the IVS Note was
$100,000 at June 30, 2017.
On December 31, 2014, the Company issued a three-year secured promissory note to DuPont Pioneer in
the initial principal amount of $10,000,000 (the “Pioneer Note”), with a maturity date of December 31,
2017. The Pioneer Note accrues interest at 3% per annum. Interest is payable in three annual installments,
in arrears, commencing on December 31, 2015. On December 31, 2014, the Company also issued
contingent consideration to DuPont Pioneer which requires the Company to increase the principal amount
of the Pioneer Note by up to an additional $5,000,000 if the Company meets certain performance metrics
during the three-year period following December 31, 2014. The fair value of the contingent consideration
arrangement was $2,500,000 at June 30, 2017. The Company expects to refinance the Pioneer Note in the
normal course of business. The source of funds for refinance has not yet been fully arranged. In addition,
the Fourth Amendment to the KeyBank Credit Facility includes a covenant that the Pioneer Note, or any
refinancing of the Pioneer Note, have no less than 30 days to maturity at any time during the term of the
KeyBank Credit Facility.
SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility
with National Australia Bank Ltd (“NAB”). The current facility, referred to as the 2016 NAB Facilities,
was amended as of March 30, 2017 and expires on March 30, 2019. As of June 30, 2017, AUD
$11,325,816 (USD $8,703,888) was outstanding under the 2016 NAB Facilities.
The 2016 NAB Facilities, as currently in effect, comprises two distinct facility lines: (i) an overdraft
facility (the “Overdraft Facility”), having a credit limit of AUD $980,000 (USD $753,130 at June 30,
2017) and a borrowing base facility (the “Borrowing Base Facility”), having a credit limit of AUD
$12,000,000 (USD $9,222,000 at June 30, 2017).
92
The Borrowing Base Facility permits SGI to borrow funds for periods of up to 180 days, at SGI’s
discretion, provided that the term is consistent with its trading terms. Interest for each drawdown is set at
the time of the drawdown as follows: (i) for Australian dollar drawings, based on the Australian Trade
Refinance Rate plus 1.5% per annum and (ii) for foreign currency drawings, based on the British
Bankers’ Association Interest Settlement Rate for the relevant foreign currency for the relevant period, or
if such rate is not available, the rate reasonably determined by NAB to be the appropriate equivalent rate,
plus 1.5% per annum. As of June 30, 2017, the Borrowing Base Facility accrued interest on Australian
dollar drawings at approximately 4.93% calculated daily. The Borrowing Base Facility is secured by a
lien on all the present and future rights, property and undertakings of SGI, the mortgage on SGI’s Keith,
South Australia property and the Company’s corporate guarantee (up to a maximum of AUD
$15,000,000).
The Overdraft Facility permits SGI to borrow funds on a revolving line of credit up to the credit limit.
Interest accrues daily and is calculated by applying the daily interest rate to the balance owing at the end
of the day and is payable monthly in arrears. As of June 30, 2017, the Overdraft Facility accrued interest
at approximately 6.77% calculated daily.
For both the Overdraft Facility and the Borrowing Base Facility, 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 (i.e., the interest rate
increases by 4.5% per annum under the Borrowing Base Facility and the Overdraft Facility rate increases
to 13.92% per annum upon the occurrence of an event of default).
Both facilities constituting the 2016 NAB Facilities are secured by a fixed and floating lien over all the
present and future rights, property and undertakings of SGI and are guaranteed by the Company as noted
above. The 2016 NAB Facilities contain 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 agreements. SGI was in compliance with all NAB debt
covenants at June 30, 2017.
In January 2015, NAB and SGI entered into a new business markets – flexible rate loan (the “Keith
Building Loan”) in the amount of AUD $650,000 (USD $499,525 at June 30, 2017). Since entering into
the Keith Building Loan, the limit has been changed on two occasions, with the current limit being AUD
$750,000 (USD $576,375 at June 30, 2017), and a separate machinery and equipment facility (the “Keith
Machinery and Equipment Facility”) has been added with the limit being changed on two occasions, the
current limit being AUD $702,779 (USD $540,085) at June 30, 2017. At June 30, 2017, the principal
balance on the Keith Building Loan was AUD $650,000 (USD $499,525) with unused availability of
AUD $100,000 (USD $76,850). At June 30, 2017, the principal balance on the Keith Machinery and
Equipment Facility was AUD $702,779 (USD $540,085) with no unused availability. In February 2016,
NAB and SGI also entered into a master asset finance facility (the “Master Assets Facility”). At June 30,
2017, the principal balance on the Master Assets Facility was AUD $346,399 (USD $266,208) with
93
unused availability of AUD $403,601 (USD $310,167). The Master Asset Facility has various maturity
dates through 2021 and have interest rates ranging from 4.86% to 5.31%.
The Keith Building Loan and Keith Machinery and Equipment Facility are used for the construction of a
building on SGI’s Keith, South Australia property, purchase of adjoining land and for the machinery and
equipment for use in the operations of the building. The Keith Building Loan matures on November 30,
2024. The interest rate on the Keith Building Loan varies from pricing period to pricing period (each such
period approximately 30 days), based on the weighted average of a specified basket of interest rates
(6.07% as of June 30, 2017). Interest is payable each month in arrears. The Keith Machinery and
Equipment Facility bears interest, payable in arrears, based on the Australian Trade Refinance Rate
quoted by NAB at the time of the drawdown, plus 2.9%. The Keith Credit Facilities contain 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 facility agreement. They
are secured by a lien on all the present and future rights, property and undertakings of SGI, the
Company’s corporate guarantee and a mortgage on SGI’s Keith, South Australia property.
The annual maturities of short-term and long-term debt, excluding convertible debt addressed in Note 7,
are as follows:
Fiscal Year
Amount
2018
2019
2020
2021
2022
Thereafter
Total
$
10,309,664
298,766
325,129
204,465
91,040
176,755
11,405,819
NOTE 7 - SENIOR CONVERTIBLE NOTES AND WARRANTS
On December 31, 2014, the Company consummated the sale of senior secured convertible debentures (the
“Debentures”) and common stock purchase warrants (the “Warrants”) to various institutional investors
(“Investors”) pursuant to the terms of a securities purchase agreement among the Company and the
Investors. At closing, the Company received $27,000,000 in gross proceeds. Offering expenses of
$1,931,105 attributed to the Debentures were recorded as deferred financing fees and recorded as a debt
discount and offering expenses of $424,113 attributed to the Warrants were expensed during the year
ended June 30, 2015. The net proceeds were paid directly to DuPont Pioneer in partial consideration for
the purchase of certain DuPont Pioneer assets, the closing for which also took place on December 31,
2014.
Debentures
At the date of issuance, the Debentures were due and payable on November 30, 2017, unless earlier
converted or redeemed. The Debentures bear interest on the aggregate unconverted and then outstanding
94
principal amount at 8% per annum, payable in arrears monthly beginning February 2, 2015. Commencing
on the occurrence of any Event of Default (as defined in the Debentures) that results in the eventual
acceleration of the Debentures, the interest rate will increase to 18% per annum. The monthly interest is
payable in cash, or in any combination of cash or shares of the Company’s common stock at the
Company’s option, provided certain “equity conditions” defined in the Debentures are satisfied.
Beginning on July 1, 2015, the Company was required to make monthly payments of principal as well,
payable in cash or any combination of cash or shares of its common stock at the Company’s option,
provided all of the applicable equity conditions are satisfied. The Debentures contain certain rights of
acceleration and deferral at the holder’s option in the event a principal payment is to be made in stock and
contains certain limited acceleration rights of the Company, provided certain conditions are satisfied.
During Fiscal Year 2016, the Company accelerated three redemption payments totaling $2,830,049.
Total convertible debt outstanding, excluding debt addressed in Note 6, is presented on the consolidated
balance sheet as follows:
Current portion of convertible debt, net
Senior secured convertible notes payable
$ -
$ 7,849,754
Debt discount
Total current portion
-
(1,009,146)
$ -
$ 6,840,608
June 30, 2017
June 30, 2016
As of June 30, 2017, the Debentures were fully retired and had no outstanding balance.
The Debentures were initially convertible, at the holder’s option, into the Company’s common stock at a
conversion price of $5.00. Pursuant to the terms of the Debentures, the conversion price was reset to
$4.63 on September 30, 2015.
During the year ended June 30, 2017, certain holders of the Debentures converted an aggregate of
$3,168,342 of principal and interest into 684,321 shares of the Company’s common stock in accordance
with the terms of the Debentures. Upon conversion, the Company recognized interest expense of
$194,939 related to unamortized debt discount on the Debentures and incurred $7,070 of stock issuance
costs.
Warrants
The Warrants entitle the holders to purchase, in the aggregate, 2,699,999 shares of the Company’s
common stock. The Warrants are exercisable through their expiration on June 30, 2020, unless earlier
redeemed. The Warrants were initially exercisable at an exercise price equal to $5.00. On September 30,
2015, pursuant to the terms of the Warrants, the exercise price was reset to $4.63. In addition, if the
Company issues or is deemed to have issued securities at a price lower than the then applicable exercise
price during the three-year period ending December 31, 2017, the exercise price of the Warrants will
95
adjust based on a weighted average anti-dilution formula (“down-round protection”). On November 24,
2015, the Company closed on a private placement transaction in which 1,180,722 common shares were
sold at $4.15 per share. Pursuant to the down-round protection terms of the Warrants, the exercise price
was adjusted to $4.59 on November 24, 2015. On February 29, 2016, the Company completed a rights
offering and accompanying noteholders’ participation rights offering in which an aggregate of 2,125,682
shares of common stock were sold at $4.15 per share, triggering an adjustment of the exercise price of the
Warrants to $4.53. The Warrants may be exercised for cash, provided that, if there is no effective
registration statement available registering the exercise of the Warrants, the Warrants may be exercised
on a cashless basis. At any time that (i) all equity conditions set forth in the Warrants have been satisfied,
and (ii) the closing sales price of the common stock equals or exceeds $12.00 for 15 consecutive trading
days (subject to adjustment for stock splits, reverse stock splits and other similar recapitalization events),
the Company may redeem all or any part of the Warrants then outstanding for cash in an amount equal to
$0.25 per Warrant.
Accounting for the Conversion Option and Warrants
Due to the down-round price protection included in the terms of the Warrants, the Warrants are treated as
a derivative liability in the consolidated balance sheet, measured at fair value and marked to market each
reporting period until the earlier of the Warrants being fully exercised or December 31, 2017, when the
down-round protection expires. The initial fair value of the Warrants on December 31, 2014 was
$4,862,000. At June 30, 2017 and June 30, 2016, the fair value of the Warrants was estimated at
$2,836,600 and $4,354,100, respectively. The Warrants were valued at June 30, 2017 using the Monte
Carlo simulation model, under the following assumptions: (i) remaining expected life of 3 years, (ii)
volatility of 45.6%, (iii) risk-free interest rate of 1.54% and (iv) dividend rate of zero. The aggregate fair
value of the Warrants derived via the Monte Carlo analysis were also weighted by a prior third party
market transaction and third party indications of fair value. The prior third party market transaction was
provided a weighting of 10.0% while the third party indications of fair value were provided a 50%
weighting in the fair value analysis. The Warrants were valued at June 30, 2016 using the Monte Carlo
simulation model, under the following assumptions: (i) remaining expected life of 4.0 years, (ii) volatility
of 49.9%, (iii) risk-free interest rate of 0. 86% and (iv) dividend rate of zero. The aggregate fair value of
the Warrants derived via the Monte Carlo analysis were also weighted by a prior third party market
transaction. The prior third party market transaction was provided a weighting of 10.0% in the fair value
analysis.
Of the $27,000,000 in principal amount of Debentures sold in December 2014, $22,138,000 of the initial
proceeds was allocated to the Debentures. The required redemption contingent upon the real estate sale
was determined to be an embedded derivative not clearly and closely related to the borrowing. As such, it
was bifurcated and treated as a derivative liability, recorded initially at its fair value of $150,000, leaving
an allocation to the host debt of $21,988,000. The difference between the initial amount allocated to the
borrowing and the face value of the Debentures was amortized over the term of the Debentures using the
effective interest method. Debt issuance costs totaling $1,931,105 were also amortized over the term of
the Debentures using the effective interest method. In addition, the reduction in the conversion price of
96
the Debentures as of September 30, 2015 resulted in a beneficial conversion feature of $871,862, which
was recognized as additional debt discount and an increase to additional paid-in capital.
NOTE 8 - INCOME TAXES
Loss before income taxes consists of the following:
United States
Foreign
Loss before income taxes
Years Ended June 30,
2017
2016
$
$
(3,545,631)
(648,706)
(4,194,337)
(2,847,980)
809,828
(2,038,152)
$
$
Significant components of the provision (benefit) for income taxes from continuing operations are as
follows:
Current:
Federal
State
Foreign
Total current provision
Deferred:
Federal
State
Foreign
Total deferred provision (benefit)
Provision (benefit) for income taxes
Years Ended June 30,
2017
2016
$
-
1,680
-
1,680
$
108,075
(1,953)
208,491
314,613
6,945,260
691,135
(10,370)
7,626,025
7,627,705
$
(2,753,271)
(33,942)
69,221
(2,717,992)
(2,403,379)
$
The difference between income tax benefits and income taxes computed using the U.S. federal income tax
rate are as follows:
Tax expense (benefit) at statutory tax rate
State taxes (benefit), net of federal tax (benefit)
Stock compensation
Mark to market on financial instruments
Other permanent differences
Federal and state research credits - current year
Foreign currency loss on intercompany note
Foreign rate differential
Shortfall on restricted stock vest
Valuation allowance
Other
Year Ended June 30,
2017
2016
(1,426,075)
(112,798)
-
(515,950)
33,251
(103,006)
-
25,407
129,627
9,615,586
(18,337)
7,627,705
$
(692,971)
(22,697)
26,067
(647,326)
53,880
(97,881)
(1,095,906)
(37,617)
120,204
-
(9,132)
(2,403,379)
$
The Company recognizes federal and state current tax liabilities or assets based on its estimate of taxes
payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal
97
and state deferred tax liabilities or assets based on the Company's estimate of future tax effects
attributable to temporary differences and carry forwards. The Company records a valuation allowance to
reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and
judgment, are not expected to be realized.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during periods in which
those temporary differences become deductible. The Company considers projected future taxable income
and planning strategies in making this assessment. Based on the projections for the taxable income, the
Company has determined that it is more likely than not that the deferred tax assets will not be realized.
Accordingly, a valuation allowance has been recorded as of June 30, 2017. The Company recorded a
valuation allowance of approximately $9.6 million in the fourth quarter of the year ended in 2017 as a
result of changes to the Company’s current year operating results and future projections resulting from a
recent decline in export sales to Saudi Arabia. The recent regulatory uncertainty regarding water use
restrictions for large forage producers had an adverse impact on the Company’s fourth quarter sales as
customers in the Saudi Arabian region decided to defer purchases and reduce inventory carrying levels.
The Company’s available tax planning strategies are currently not expected to overcome the uncertainty
of the Saudi Arabian market. The U.S. Internal Revenue Code of 1986, as amended, generally imposes an
annual limitation on a corporation's ability to utilize net operating loss carryovers ("NOLs") if it
experiences an ownership change as defined in Section 382. In general terms, an ownership change may
result from transactions increasing the ownership of certain stockholders in the stock of a corporation by
more than 50% over a three-year period. In the event that an ownership change has occurred, or were to
occur, utilization of the Company’s NOLs would be subject to an annual limitation under Section 382 as
determined by multiplying the value of the Company’s stock at the time of the ownership change by the
applicable long-term tax-exempt rate as defined in the Internal Revenue Code. Any unused annual
limitation may be carried over to later years. The Company could experience an ownership change under
Section 382 as a result of events in the past in combination with events in the future. If so, the use of the
Company’s NOLs, or a portion thereof, against future taxable income may be subject to an annual
limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization.
To the extent our use of net operating loss carryforwards is significantly limited under the rules of Section
382, our income could be subject to U.S. corporate income tax earlier than it would if we were able to use
net operating loss carryforwards, which could result in lower profits. Any carryforwards that expire prior
to utilization as a result of such limitations will be removed, if applicable, from deferred tax assets with a
corresponding reduction of the valuation allowance. As of June 30, 2017, the Company is not aware of
any applicable Section 382 limitations that may exist on its net operating losses.
Significant components of the Company's deferred tax assets are shown below.
98
Deferred tax assets:
Net operating loss carry forwards
Compensation accruals
Allowance for bad debts
Stock compensation
Tax credit carry forwards
Deferred Rent
Other, net
Total deferred tax assets
Valuation allowance for deferred tax assets
Deferred tax assets, net of valuation allowance
Deferred tax liabilities
Intangible assets
Fixed assets
Total deferred tax liabilities
Years Ended June 30,
2017
2016
$
8,511,398
327,462
182,723
451,303
341,411
153,656
220,208
10,188,161
(9,617,331)
570,830
$
6,744,515
-
-
373,738
238,405
-
446,892
7,803,550
-
7,803,550
(235,218)
(562,763)
(797,981)
(49,499)
(484,493)
(533,992)
Net deferred tax asset / (liability)
$
(227,151)
$
7,269,558
As of June 30, 2017, the Company had federal and state net operating loss carry forwards of
approximately $22,808,276 and $9,482,301, respectively, which will begin to expire June 30, 2030,
unless previously utilized. The Company has federal research credits of $324,852 which will expire June
30, 2031, unless previously utilized. The Company also has foreign tax credits of $157,859 which will
begin to expire June 30, 2023, unless previously utilized. The Company has state research credits of
$25,089 that do not expire.
As of June 30, 2017, the Company has not provided for U.S. federal and state income taxes and foreign
withholding taxes on approximately $3,278,000 of undistributed earnings of its foreign subsidiary as
these earnings are considered indefinitely reinvested outside of the United States. Determination of the
amount of any potential unrecognized deferred income tax liability is not practicable due to the
complexities of the hypothetical calculation. If management decides to repatriate such foreign earnings in
future periods, the Company may incur incremental U.S. federal and state income taxes as well as foreign
withholding taxes. However, the Company's intent is to keep these funds indefinitely reinvested outside
the U.S. and its current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step
is to evaluate the tax position for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon settlement. While the Company believes that it has
appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential
outcome of examinations by tax authorities in determining the adequacy of its provision for income taxes.
The Company believes that it has appropriate support for the income tax positions taken on its tax returns
and that its accruals for tax liabilities are adequate for all open years based on an assessment of many
99
factors, including past experience and interpretations of tax law applied to the facts of each matter. The
Company is open for audit for all years since the entity became a corporation.
The Company's policy is to recognize interest expense and penalties related to income tax matters as a
component of income tax expense. The Company has not accrued interest and penalties associated with
uncertain tax positions as of June 30, 2017 and 2016. The Company does not expect its unrecognized tax
benefits to change significantly over the next 12 months.
NOTE 9 - WARRANTS
The following table summarizes the total warrants outstanding at June 30, 2017:
Underwriter warrants
Warrants
Issue Date
May 2012
Dec 2014
Exercise Price
Per Share
Expiration
Date
Outstanding as of
June 30, 2016
New Issuances
Expired
Outstanding as of
June 30, 2017
$
$
6.88
4.53
Feb 2017
Jun 2020
50,000
2,699,999
2,749,999
-
-
-
(50,000)
-
(50,000)
-
2,699,999
2,699,999
The following table summarizes the total warrants outstanding at June 30, 2016:
Underwriter warrants
Warrants
Issue Date
May 2012
Dec 2014
Exercise Price
Per Share
Expiration
Date
Outstanding as
of June 30, 2015
New Issuances
Expired
Outstanding as
of June 30, 2016
$
$
6.88
4.53
Feb 2017
Jun 2020
50,000
2,699,999
2,749,999
-
-
-
-
-
-
50,000
2,699,999
2,749,999
The warrants issued in December 2014 are subject to down-round price protection. See Note 7 for further
discussion.
NOTE 10 - 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; accordingly,
changes in the fair value are recorded in current period earnings. These foreign currency contracts had a
notional value of $9,892,013 at June 30, 2017 and their maturities range from July to December 2017.
The Company records an asset or liability on the consolidated balance sheet for the fair value of the
foreign currency forward contracts. The foreign currency contract assets totaled $166,629 at June 30,
2017 and $49,808 at June 30, 2016. The Company recorded a gain on foreign exchange contracts of
$205,531 and a loss on foreign exchange contracts of $271,754, which is reflected in cost of revenue for
the years ended June 30, 2017 and 2016, respectively.
100
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Commitments
In the DuPont Pioneer Acquisition, DuPont Pioneer retained ownership of its GMO (genetically
modified) alfalfa germplasm and related intellectual property assets, as well as the right to develop new
GMO-traited alfalfa germplasm. The retained GMO germplasm assets incorporate certain GMO traits that
are licensed to DuPont Pioneer from third parties (the “Third Party GMO Traits”).
Pursuant to the terms of the Asset Purchase and Sale Agreement for the DuPont Pioneer Acquisition, if
required third party consents are received prior to November 30, 2017 and subject to the satisfaction of
certain other conditions specified in the Asset Purchase and Sale Agreement, either the Company or
DuPont Pioneer has the right to enter into (and require the other party to enter into) on December 29,
2017 (or such earlier date as the parties agree) a proposed form of asset purchase and sale agreement, as
the same may be updated in accordance with the terms of the Asset Purchase and Sale Agreement,
pursuant to which Company would acquire additional GMO germplasm varieties and other related assets
from DuPont Pioneer for a purchase price of $7,000,000.
Leases
The Company has entered into various non-cancelable operating lease agreements. Rent expense under
operating leases was $555,583 and $567,553 for the years ended June 30, 2017 and 2016, respectively.
The following table sets forth the Company's estimates of future lease payment obligations as of June 30,
2017:
2018
2019
2020
2021
2022
2023 and
beyond
Total (a)
Operating lease obligations
$
307,942
$
230,698
$
252,883
$
227,460
$
210,000
$
420,000
$
1,648,983
(a) Minimum payments have not been reduced by minimum sublease rentals of $1,410,000 due in the future under noncancelable sublease.
The following table sets forth the composition of total rental expense for all operating leases except those
with terms of a month or less that were not renewed.
Minimum rentals
Less: Sublease rentals
Contingencies
Years Ended June 30,
2017
2016
$
$
555,583
(223,200)
332,383
$
$
567,553
(228,290)
339,263
101
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 12 - RELATED PARTY TRANSACTIONS
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 IVM’s majority shareholder and a member of its Board of Directors.
Glen D. Bornt is also a majority shareholder of Kongal Seeds Pty. Ltd. (“Kongal”). IVM had a 15-year
supply agreement with IVS, 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 must be offered and sold
to the Company, and the Company has the exclusive option to purchase all or any portion of IVM’s seed
production. The Company paid $8,482,663 to IVM during the year ended June 30, 2017. Amounts due to
IVM totaled $326,941 and $396,027 at June 30, 2017 and June 30, 2016, respectively. The Company paid
$94,744 to Kongal during the year ended June 30, 2017. Amounts due to Kongal totaled $4,753 at June
30, 2017.
NOTE 13 - 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 (as amended and/or restated from time to time, 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. In
September 2015 and December 2015, 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 2,450,000 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.
102
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. 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. The Company amortizes stock-based compensation expense on a straight-line
basis over the requisite service period.
The Company utilizes a Black-Scholes-Merton option pricing model, which includes assumptions
regarding the risk-free interest rate, dividend yield, life of the award, and the volatility of the Company's
common stock to estimate the fair value of employee options grants.
Weighted average assumptions used in the Black-Scholes-Merton model are set forth below:
June 30,
2017
June 30,
2016
Risk free rate
Dividend yield
Volatility
Average forfeiture assumptions
1.2% - 2.0%
0%
1.5% - 1.6%
0%
46.9% - 50.8% 50.4% - 50.8%
6.1%
2.4%
During year ended June 30, 2017, the Company granted 230,610 options to its directors and officers at
exercise prices ranging from $3.85 - $4.86. These options vest in periods ranging from one year annually
to monthly over three years and expire ten years from the date of grant.
A summary of stock option activity for the years ended June 30, 2017 and 2016 is presented below:
Outstanding at June 30, 2015
Granted
Exercised
Canceled/forfeited/expired
Outstanding at June 30, 2016
Granted
Exercised
Canceled/forfeited/expired
Outstanding at June 30, 2017
Options vested and exercisable at June 30, 2017
Options vested and expected to vest as of June 30, 2017
Number
Outstanding
Weighted -
Average
Exercise Price
Per Share
Weighted -
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
901,697
203,500
(14,582)
(69,197)
1,021,418
230,610
(232,000)
(29,500)
990,528
738,595
990,345
$
5.33
4.56
3.95
6.08
5.14
4.19
4.20
5.95
5.12
5.44
5.12
4.1
9.7
-
-
4.2
-
-
-
4.3
3.0
4.3
$
392,850
-
-
-
142,381
-
-
-
100,344
51,087
100,336
The weighted average grant date fair value of options granted and outstanding at June 30, 2017 was
$1.47. At June 30, 2017, the Company had $370,972 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 2.24 years. The Company settles employee stock option
exercises with newly issued shares of common stock.
On July 15, 2015, the Company issued 88,333 restricted stock units to certain members of the executive
management team. The restricted stock units have varying vesting periods whereby 13,250 restricted
103
stock units vest on October 1, 2015 and the remaining 75,083 restricted stock units vest quarterly in equal
installments over a three-year period, commencing on July 1, 2015. The fair value of the award was
$420,465 and was based on the closing stock price on the date of grant.
On December 11, 2015, the Company issued 28,059 restricted stock units to certain members of the
executive management team and other employees. The restricted stock units have varying vesting periods
whereby 500 restricted stock units vest on December 11, 2015, 4,259 restricted stock units vest in
quarterly installments over a one-year period, and the remaining 23,300 restricted stock units vest
annually in equal installments over a three-year period. The fair value of the award was $119,251 and was
based on the closing stock price on the date of grant.
On March 18, 2016, the Company issued 3,000 restricted stock units. The restricted stock units have
varying vesting periods whereby 1,000 restricted stock units vested on March 18, 2016; and the remaining
2,000 restricted stock units vest annually in equal installments over a three-year period. The fair value of
the award was $12,180 and was based on the closing stock price on the date of grant.
During the year ended June 30, 2017, the Company issued 77,275 restricted stock units to its directors,
certain members of the executive management team, and other employees. The restricted stock units
have varying vesting periods ranging from immediate vesting to annual installments over a three-year
period. The fair value of the awards totaled $374,530 and was based on the closing stock price on the date
of grants.
The Company recorded $1,032,170 and $772,543 of stock-based compensation expense associated with
grants of restricted stock units during the years ended June 30, 2017 and 2016, respectively. A summary
of activity related to non-vested restricted stock units is presented below:
Beginning nonvested restricted units outstanding
Granted
Vested
Forfeited
Ending nonvested restricted units outstanding
Year ended June 30, 2017
Number of
Nonvested
Restricted
Stock Units
170,879
77,275
(127,183)
-
120,971
$
$
Weighted -
Average
Grant Date
Fair Value
7.51
4.85
7.71
-
5.59
Weighted -
Average
Remaining
Contractual
Life (Years)
1.5
1.7
-
-
1.0
At June 30, 2017, the Company had $417,648 of unrecognized stock compensation expense related to the
restricted stock units, which will be recognized over the weighted average remaining service period of 1
years.
At June 30, 2017, there were 561,278 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 years ended June 30, 2017 and 2016, totaled $1,409,368 and $1,190,126, respectively.
104
NOTE 14 - NON-CASH ACTIVITIES FOR STATEMENTS OF CASH FLOWS
The below table represents supplemental information to the Company's consolidated statements of cash
flows for non-cash activities during the years ended June 30, 2017 and 2016, respectively.
Issuance of common stock upon conversion of principal and interest of convertible debentures
NOTE 15 - SUBSEQUENT EVENTS
Years Ended
June 30,
2017
3,168,342
$
2016
-
$
On July 19, 2017, the Company entered into a Securities Purchase Agreement with certain purchasers,
pursuant to which the Company sold and issued an aggregate of 2,685,000 shares of its Common Stock at
a purchase price of $4.00 per share, for aggregate gross proceeds of $10.74 million. Pursuant to the down-
round protection terms of the Warrants, the exercise price was adjusted to $4.46 on July 19, 2017.
On July 20, 2017, the Company entered into a separation and consulting agreement with Mark S. Grewal
(the "Separation Agreement") in connection with his previously announced resignation, which supersedes
all prior arrangements between Mr. Grewal and the Company, including, but not limited to, his
employment agreement with the Company dated as of March 18, 2016. Pursuant to the Separation
Agreement, Mr. Grewal is entitled to receive the following compensation and other benefits: (i) continued
payment of his base salary for 12 months following June 19, 2017 (the effective date of Mr. Grewal's
resignation) (the "Separation Date"), through June 19, 2018; (ii) payment in lieu of a cash bonus for fiscal
year 2017 in the amount of $175,000; (iii) payment of COBRA premiums on Mr. Grewal's behalf,
through the earlier of the following: (a) the duration of the Consulting Period (as defined below); (b) the
date upon which he becomes eligible for health insurance pursuant to another employer-sponsored group
health insurance plan; or (c) the date upon which he becomes ineligible for continued coverage under
COBRA; (iv) acceleration of vesting of all options or other equity awards previously granted to Mr.
Grewal; and (v) transfer of the Company automobile previously purchased for his use.
Mr. Grewal also agreed to provide certain transition and consulting services to the Company for a period
of up to two years following the Separation Date (the "Consulting Period"), for which Mr. Grewal will be
paid an annualized rate of $87,500. In addition, Mr. Grewal's services will constitute continuous service
with the Company, and as a result, the outstanding equity awards previously granted to him will continue
to be exercisable during the Consulting Period.
On September 13, 2017, the Company and KeyBank entered into the Fourth Amendment as described in
Note 6 above.
105
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and our Principal Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017 (the
“Evaluation Date”). 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 June 30, 2017, our Principal Executive Officer and Principal Financial Officer concluded
that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance
level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance with GAAP. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management has conducted, with the participation of our Principal Executive Officer and our Principal
Accounting Officer, an assessment, including testing of the effectiveness, of our internal control over
financial reporting as of the Evaluation Date. Management’s assessment of internal control over financial
reporting was conducted using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control—Integrated Framework (2013 Framework). A
material weakness is a deficiency, or a combination of deficiencies, in internal control over financial
106
reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis. In connection with our
management’s assessment of our internal control over financial reporting as required under Section 404 of
the Sarbanes-Oxley Act of 2002, we have not identified any material weaknesses in our internal control
over financial reporting as of the Evaluation Date. We have thus concluded that our internal control over
financial reporting was effective as of the Evaluation Date.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by
our registered public accounting firm pursuant to an exemption for smaller reporting companies under
Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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 that have significantly affected, or are reasonably likely to significantly affect, our
internal control over financial reporting.
Item 9B. Other Information
Not applicable.
107
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Following is a brief description of the principal occupation and recent business experience of each of our
executive officers and directors and their ages as of September 10, 2017:
Name
Age
Position
Directors:
Mark J. Harvey ...................................................
Mark W. Wong ..................................................
Glen D. Bornt .....................................................
David A. Fischhoff, Ph.D. .................................
Alexander C. Matina ..........................................
Charles (Chip) B. Seidler ...................................
Grover T. Wickersham .......................................
Non-Director Executive Officers:
Danielson B. Gardner .........................................
Dennis C. Jury ....................................................
Matthew K. Szot ................................................
62
68
59
64
41
40
68
51
57
43
Chairman of the Board
President, Chief Executive Officer
and Director
Director
Director
Director
Director
Director
Chief Marketing and Technology
Officer
Executive Vice President Operations
and Chief Operating Officer
Executive Vice President Finance
and Administration and Chief
Financial Officer
The following contains a biography of each of our executive officers and directors as of September 10,
2017, including, with respect to our directors, information regarding the specific experience,
qualifications, attributes or skills that led to the conclusion of our board of directors to that each member
of our board of directors should serve as a director:
Directors
Mr. Harvey was appointed Chairman of Board of Directors of our company in December 2014, after
having served as Vice Chairman since April 2013. In addition to his duties as Chairman, he actively
supports our sales and marketing efforts. Mr. Harvey has more than 35 years of experience in production
processing and marketing of seed to many parts of the world, particularly branded alfalfa and clover. Mr.
Harvey managed a 10,000-acre family farm producing seed, wheat and pulse crops, along with wool and
beef, from 1976 until 1996 when the company he founded, Paramount Seeds, was sold to Elders Ltd.
While with Elders, he was manager of their national and international seed business from 1996 until 2001.
In 2002, he was a founding partner of Seed Genetics International, where he focused primarily on
108
marketing and distribution. Mr. Harvey was educated at Cunderdin Agricultural College in West
Australia. We believe Mr. Harvey should serve as a director because of his extensive experience in the
seed industry, which contributes valuable business expertise.
Mr. Wong was elected to our Board in December 2014. In June 2017, he was appointed to serve as our
President and Chief Executive Officer. He has more than 35 years of experience in agribusiness, with
particular expertise in technology integration and commercialization. Mr. Wong was a founder and, since
2009, has been a partner of Colorado Financial Holdings (CFH), a private venture investment and
investment bank that specializes in the agricultural, energy and biotechnology sectors. Since January
2012, Mr. Wong has served as Chairman of American Dairyco, Ponte Vedra, Florida, the owner and
operator of dairies in Florida and Georgia, which is a venture jointly owned by CFH. Between 2008 and
December 2015, he served either as Chairman of the Board or chief executive officer of Agrivida, a
private company that is developing and commercializing high-performance products that incorporate
novel, regulated proteins precisely engineered for specific applications in a variety of markets, including
animal nutrition, bio-based fuels and chemicals and industrial enzymes. From January 2016 to February
2016, Mr. Wong served as Acting President and Chief Executive Officer of Arcadia Biosciences, Inc., a
publicly-traded agricultural biotechnology trait company for which he also served on the board from May
2006 until February 2016. Mr. Wong was the Chief Executive Officer of Renewable Agricultural Energy
Corporation, a private ethanol production company, from 2006 to 2007. Prior to that time, was the
founder and, from 1999 to 2005, chief executive officer of Emergent Genetics, an international seed
biotech company that was sold to Monsanto Company in 2005. Mr. Wong founded and managed a series
of other agricultural and biotechnology companies, including Big Stone Partners, Agracetus Corporation,
a plant biotechnology company that was sold to Monsanto and Agrigenetics Corporation, a seed and
biotechnology company that was sold to Dow Chemical. Mr. Wong also worked as an engineer for FMC
Corporation and Chemical Construction Corporation. Mr. Wong served as a director of BioFuel Energy
Corp., a publicly traded corn ethanol company, from January 2008 until October 2014, and Chair from
March 2010 to October 2014, when it was renamed Green Brick Partners following an acquisition and
recapitalization transaction. Mr. Wong received his Bachelor of Science degree in Chemical Engineering
from Lehigh University and his M.B.A. from the Wharton School of Business at the University of
Pennsylvania. Mr. Wong provides the Board with a wealth of experience in the agricultural and energy
industries, and is able to draw upon his many years of executive leadership experience.
Mr. Bornt was elected to our Board in December 2012. Since 1987, he has been the President of Imperial
Valley Milling Co., where he serves as chief executive officer and on-site manager. Concurrently, since
September 2007, he also has served as Vice President of Imperial Valley Seeds, Inc. Mr. Bornt earned a
BS degree in Agriculture Management from California Polytechnic State University, San Luis Obispo.
Mr. Bornt’s over 25 years of experience in the agriculture seed industry, specializing in alfalfa seed,
brings invaluable expertise to our boardroom as we continue to expand our seed business geographically
and with new varieties.
David A. Fischhoff, Ph.D. was elected to our Board in December 2016. He has 33 years of experience in
agricultural research and development (“R&D”) across a broad range of technologies, product
development and business development in areas including biotechnology, plant breeding, genomics,
109
precision agriculture and data science. In addition to R&D leadership, he has expertise in new technology
identification, assessment and acquisition; technology licensing; establishment and management of
research collaborations; and intellectual property management and defense. Dr. Fischhoff recently retired
after a 33-year career with Monsanto Company and currently serves as an independent consultant and
advisor. With Monsanto, he most recently served from 2014 to 2016 as Chief Scientist of The Climate
Corporation, a subsidiary of Monsanto that develops and provides digital agriculture products and
services for farmers. At The Climate Corporation, he led R&D teams in data science, field research and
new measurement technologies. Prior to this, from 2002 to 2014, he was Vice President for Technology
Strategy and Development at Monsanto with responsibilities for scientific strategy, identification of new
growth opportunities, assessment and acquisition of new technologies, and oversight of Monsanto’s
research portfolio. Dr. Fischhoff is internationally recognized as a founder of agricultural biotechnology.
He was responsible for the development of insect resistant transgenic crops (i.e., Bt crops), which today
are a primary tool for insect control in corn, cotton and soybean in multiple countries. He is the co-
inventor of the synthetic gene technology for expression of Bt genes in plants, which is the enabling
technology for all insect resistant crops today. Dr. Fischhoff served as the scientific expert in the
acquisition by Monsanto of multiple biotech and seed companies, including Agracetus, Calgene, Ecogen,
Dekalb and Asgrow. He initiated and led Monsanto’s plant genomics research program, and from 1998 to
2002 he was Co-President of Cereon Genomics LLC, a collaborative research venture between Monsanto
and Millennium Pharmaceuticals; and he played leadership roles in the establishment and management of
genomics research collaborations with Mendel Biotechnology, Paradigm Genetics and Ceres.
Dr. Fischhoff received his S.B. in Biology from the Massachusetts Institute of Technology and a Ph.D. in
Genetics and Molecular Biology from The Rockefeller University. He was the recipient of the first
Innovation Prize for Agricultural Technology from the American Society of Plant Biologists in 2015 for
his work on insect resistant crops, and the James B. Eads Award for outstanding achievement in
technology from the Academy of Science of St. Louis in 2010. Dr. Fischhoff is also the recipient of
Monsanto’s two highest awards for science and technology. He is the inventor on key patents related to
insect resistant plants, an author of more than 25 scientific publications, and an invited speaker at
numerous national and international symposia. We believe Dr. Fischhoff’s wealth of experience in
agriculture, genetics and technology will help guide the Board in the years to come.
Mr. Matina has served on the Board of Directors since May 2015. Since November 2007, he has held the
office of Vice President, Investments for MFP Investors, LLC, the family office of Michael F. Price,
which has a value-investing focus across public and private markets. From October 2005 to August 2007,
Mr. Matina served in various roles at Balance Asset Management, a multi-strategy hedge fund, and from
June 2004 to September 2005, as a senior associate at Altus Capital Partners, a middle market private
equity fund. Prior thereto, he was a principal at 747 Capital, a private equity fund-of-funds, and a
financial analyst at Salomon Smith Barney in the financial sponsors group of the investment banking
division. Since April 2013, he has served on the board of directors of Trinity Place Holdings, Inc., a
publicly traded real estate company and as its Chairman of the Board since November 2013. Since August
2007, Mr. Matina has also served as an adjunct professor of finance at Fordham University. Mr. Matina
brings a strong finance background to our company’s Board, including experience with private equity, as
well as his experience in other public companies.
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Mr. Seidler was elected to our Board in June 2010. Commencing in June 2010, Mr. Seidler began serving
as an executive director and senior member of a proprietary trading group of Nomura Securities in New
York, New York. From January 2007 through June 2010, Mr. Seidler held various senior positions at
Deutsche Bank AG in Tokyo, Japan, including Head of JPY/UST International Sales (from March 2009
until his departure in June 2010), JPY Flow Trader (from September 2008 to March 2009) and Rates
Proprietary Trader from January 2007 to September 2008. Between March 2003 and January 2007, Mr.
Seidler was Co-Portfolio Manager of Caxton Associates, L.L.C., the macro hedge fund, New York, New
York, where he focused on macro and relative value trading with a particular focus on the Japanese
markets. He currently and during the last five years has served on numerous corporate boards of directors,
however, none of them are companies with a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended. Mr. Seidler has a Masters of Arts Degree from Colgate
University. Because of Mr. Seidler’s extensive experience in the corporate boardroom and his financial
expertise, he brings to our Board a level of professionalism and perspective that we believe is invaluable.
Mr. Wickersham has served as our Chairman of the Board from incorporation in October 2009 until
December 2014, when he stepped down to become our Vice Chairman. Since July 2016 and November
2016, respectively, Mr. Wickersham has been serving as Chairman of the Board and Chief Executive
Officer of Eastside Distilling, Inc., a public company producer and marketer of craft spirits located in
Portland, Oregon. Since 1996, Mr. Wickersham has also been a director and portfolio advisor of
Glenbrook Capital Management, the general partner of a limited partnership that invests primarily in
public and private securities. Mr. Wickersham also serves since December 2015 as the Vice Chairman of
the Board of SenesTech, Inc., a public company that has developed proprietary technology for managing
animal pest populations through fertility control. From 1996 until its voluntary liquidation and dissolution
in 2016, Mr. Wickersham served as the chairman of the board of trustees of The Purisima Funds, a trust
that operated two series of mutual funds advised by Fisher Investments of Woodside, California. In
addition to the chairmanships noted above, Mr. Wickersham also serves on the board of directors of
Verseon Corporation, a London AIM-listed pharmaceutical development company Mr. Wickersham is
admitted to practice by the California State Bar and has specialized in securities law. From 1976 to 1981,
Mr. Wickersham served as a staff attorney, and then as a branch chief, of the U.S. Securities and
Exchange Commission. He holds an A.B. from the University of California at Berkeley, an M.B.A. from
Harvard Business School and a J.D. from University of California (Hastings College of Law). We believe
that Mr. Wickersham is qualified to serve as a member of our board of directors because of his experience
and knowledge of corporate finance and legal matters, his experience and knowledge of operational
matters gained as a past and present director of other public and private companies and his knowledge of
our company, its markets and operations developed over his tenure as Chairman and Vice Chairman.
Non-Director Executive Officers
Mr. Gardner joined our Company in October 2012 as Vice President of Breeding and Genetics. In August
2016, he was promoted to the newly-created executive office position of Chief Marketing and
Technology Officer. For 18 years prior to joining S&W, he served in various positions in breeding and
international sales at Dairyland Seed Co., a Dow AgroSciences subsidiary. His most recent position at
Dairyland, which he held from June 2008 until his departure in October 2012, was International
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Distribution Manager. He also served as Alfalfa Breeder for Dairyland from March 1994 until October
2012. Mr. Gardner has a B.S. degree in Genetics from the University of California at Davis and later
graduated from the UC Davis Plant Breeding Academy. He currently sits on the board of the California
Seed Association.
Mr. Jury has served as our Executive Vice President and Chief Operating Officer since April 2013. He
also serves as Chief Executive and Managing Director of our subsidiary, Seed Genetics International Pty
Ltd (“SGI”). Mr. Jury served as SGI’s Managing Director from July 2009 until April 2013. He is a
veteran of the agricultural industry, having worked for ICI Crop Care, Schering Ag, and South Australian
Seedgrowers Cooperative in various roles including territory sales, territory manager, and product and
market development manager, before joining SGI in August 2003 as Business Manager. Mr. Jury studied
Agricultural Science at the Waite Agricultural Research Institute in Urbrae, South Australia with a
Bachelor of Agricultural Science degree, and received his MBA from the University of Adelaide
Graduate School of Management.
Mr. Szot has served as our Chief Financial Officer and Treasurer since March 2010. In August 2014, he
was designated our Executive Vice President of Finance and Administration, after having held the title of
Senior Vice President prior thereto. Mr. Szot also serves as a member of the Board of Directors of our
wholly owned subsidiaries, S&W Seed Australia Pty Ltd and Seed Genetics International Pty Ltd. Mr.
Szot is also currently a Director and serves as Chairman of the Audit Committee and Compensation
Committees of SenesTech, a publicly traded life science company focused on animal health. From
February 2007 until October 2011, Mr. Szot served as the Chief Financial Officer for Cardiff Partners,
LLC, a strategic consulting company that provided executive financial services to various publicly traded
and privately held companies. From 2003 to December 2006, Mr. Szot served as Chief Financial Officer
and Secretary of Rip Curl, Inc., a market leader in wetsuit and action sports apparel products. From 1996
to 2003, Mr. Szot was a Certified Public Accountant with KPMG and served as an Audit Manager for
various publicly traded companies. Mr. Szot has a Bachelor of Science degree in Agricultural
Economics/Accountancy from the University of Illinois, Champaign-Urbana and is a Certified Public
Accountant in the State of California.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who
beneficially own more than ten percent of a registered class of our equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of our common stock and other equity
securities. Executive officers, directors and greater than ten percent stockholders are required by SEC
regulation to provide to us copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written
representations that no other reports were required during the fiscal year ended June 30, 2017, our
executive officers, directors and greater than ten percent beneficial owners complied with all applicable
Section 16(a) filing requirements, other than (i) Danielson B. Gardner, who was late in filing a Form 3
after becoming an executive officer for the second time, a Form 4 to report a grant of options and
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restricted stock units and a Form 4 to report the initial vesting of restricted stock units, and (ii) Mark W.
Wong, who was late in filing a Form 4 to report the grant of stock options upon his appointment as our
Chief Executive Officer. All such reports have since been filed by such individuals.
Code of Business Conduct and Ethics
Our board of directors values effective corporate governance and adherence to high ethical standards. As
such, our board has adopted a Code of Business Conduct and Ethics, which is applicable to all of our
employees, officers and directors, including our senior executive and financial officers. Our Code of
Business Conduct and Ethics is available on our corporate website located at
www.swseedco.com/investors.
We will provide our code of ethics in print without charge to any stockholder who makes a written
request to: S&W Seed Company, 802 North Douty Street, Hanford, CA 93230, Attention: Secretary, or
by e-mail to secretary@swseedco.com. Any waivers of the application of, and any amendments to, our
code of ethics must be made by our Board of Directors and will be disclosed promptly on our Internet
website, www.swseedco.com.
Corporate Governance
Our board of directors believes that sound governance practices and policies provide an important
framework to assist them in fulfilling their duty to stockholders. Our board of directors has implemented
many “best practices” in the area of corporate governance, including the establishment of separate
committees of our board, careful annual review of the independence of our Audit and Compensation
Committee members, maintenance of a majority of independent directors, and written expectations of
management, among other things.
Committees of the Board of Directors
Our board of directors has five standing committees: an Audit Committee, a Compensation Committee, a
Nominating and Governance Committee, a Finance Committee and an Acquisition and Strategy
Committee, each of which meet as needed or advisable. The table below provides membership and
meeting information for fiscal 2017 for each of the standing committees of our board of directors. In
addition to formal in-person and telephonic meetings, committee members took various actions by written
consent during the fiscal year and spent many hours in informal consultation with one another and with
management.
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Audit
Compensation
Nominating and
Governance
Finance(8)
Acquisition and
Strategy(8)
David A. Fischhoff
Michael M. Fleming(2)
Mark S. Grewal(3)
Mark J. Harvey
Alexander B. Matina(4)
Charles B. Seidler(5)
Grover T. Wickersham(6)
Mark W. Wong(7)
X
X
X
Chair
Total Meetings Held
4
X
X
Chair
X
X
6
X
Chair
X
X
4
X
X
Chair
X
2
Chair
X
X
3
___________
(1) Dr. Fischhoff was appointed to the Audit Committee and the Compensation Committee upon his
election to our Board of Directors in December 2016, and was appointed to the Nominating and
Governance Committee in June 2017.
(2) Mr. Fleming served as Chair of the Audit Committee and as a member of the Compensation
Committee until December 2016.
(3) Mr. Grewal served on the Acquisition and Strategy Committee until his resignation in June 2017.
(4) Mr. Matina was appointed as Chair of the Compensation Committee in June 2017.
(5) Mr. Seidler was appointed to the Compensation Committee in June 2017.
(6) Mr. Wickersham was appointed to the Audit Committee and was designated as its Chairman in
December 2016.
(7) Mr. Wong resigned from the Compensation Committee and Nominating and Governance Committee
in connection with his appointment as our President and Chief Executive Officer in June 2017.
(8) The Acquisition and Strategy Committee and Finance Committee were formalized as standing
committees of the board in December 2016. Accordingly, the number of reported meetings of these
respective committees is limited to the time period after December 2016.
Audit Committee
As of September 10, 2017, the members of the Audit Committee are Messrs. Wickersham and Seidler and
Dr. Fischhoff. Mr. Wickersham serves as current chairman of the committee.
The Audit Committee of the Board of Directors was established in accordance with Section 3(a)(58)(A)
of the Exchange Act to oversee our corporate accounting and financial reporting processes and audits of
its financial statements. We are required to have an Audit Committee in order to maintain our listing on
the Nasdaq Capital Market. Our Board of Directors has determined that each of the members of our Audit
Committee satisfies the requirements for Audit Committee independence and financial literacy under the
current rules and regulations of the SEC and the Nasdaq Stock Market. The Board of Directors has also
determined that Mr. Wickersham is an “Audit Committee financial expert” as defined in SEC rules and
satisfies the financial sophistication requirements of Nasdaq as a result of his many years serving as a
chief executive and audit committee chair. This designation does not impose on Mr. Wickersham any
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duties, obligations or liabilities that are greater than is generally imposed on him as a member of our
Audit Committee and our Board of Directors.
The Audit Committee is responsible for, among other things:
•
•
•
selecting, hiring and terminating our independent auditors;
evaluating the qualifications, independence and performance of our independent auditors;
approving the audit and non-audit services to be performed by the independent auditors;
• overseeing and monitoring the integrity of our financial statements and our compliance with
legal and regulatory requirements as they relate to financial statements or accounting matters;
• with management and our independent auditors, reviewing any earnings announcements and
other public announcements regarding our results of operations;
•
reviewing and discussing with management and our independent registered public accounting
firm, our annual and quarterly financial statements and annual and quarterly reports on Forms
10-K and 10-Q; and
• providing to the Board of Directors information and materials to make the Board of Directors
aware of significant financial and audit-related matters that require the attention of the Board
of Directors.
The Audit Committee acts under a written charter adopted and approved by our Board of Directors. A
current copy of the charter of our Audit Committee is available on the Investors page on our website
located at www.swseedco.com.
Report of the Audit Committee
The following is the report of the Audit Committee with respect to the Company's audited financial
statements for the year ended June 30, 2017. The information contained in this report shall not be deemed
"soliciting material" or otherwise considered "filed" with the SEC, and such information shall not be
incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the
extent that the Company specifically incorporates such information by reference in such filing.
The Audit Committee has reviewed and discussed the audited financial statements for fiscal 2017 with
our management. The Audit Committee has discussed with our independent registered public accounting
firm the matters required to be discussed by Auditing Standard No. 16, as amended, Communications
with Audit Committees, as adopted by the Public Company Accounting Oversight Board (“PCAOB”).
The Audit Committee has also received the written disclosures and the letter from the independent
registered public accounting firm required by applicable requirements of the PCAOB regarding the
independent accountants’ communications with the Audit Committee concerning independence, and has
discussed with the independent registered public accounting firm the accounting firm’s independence.
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Based on the foregoing, the Audit Committee has recommended to our Board that the audited financial
statements be included in this Annual Report on Form 10-K.
Grover T. Wickersham (Chair)
David A. Fischhoff, Ph.D.
Charles B. Seidler
Compensation Committee
As of September 10, 2017, the members of the Compensation Committee are Messrs. Matina and Seidler
and Dr. Fischhoff. Mr. Matina serves as chairman of the committee. Our Board of Directors has
determined that each member of our Compensation Committee meets the requirements for independence
under the current Nasdaq rules, the non-employee director definition of Rule 16b-3 promulgated under
the Exchange Act and the outside director definition of Section 162(m) of the Internal Revenue Code of
1986, as amended, or the Internal Revenue Code. The Compensation Committee is responsible for,
among other things:
• overseeing our compensation policies, plans and benefit programs and making
recommendations to the Board of Directors with respect to improvements or changes to the
compensation plans and adoption of other plans;
•
reviewing and approving with respect to our executive officers: annual base salaries, annual
incentive bonuses, equity compensation, employment agreements, severance arrangements
and change of control agreements/provisions, signing bonuses or payments of relocation costs
and any other benefits, compensation or arrangements;
•
evaluating and approving the corporate and individual goals and objectives relevant to the
compensation of our executive officers; and
•
administering our equity compensation plans.
The Compensation Committee acts under a written charter adopted and approved by our Board of
Directors. A current copy of the charter of our Compensation Committee is available on the Investors
page on our website located at www.swseedco.com.
Typically, the Compensation Committee meets approximately four times per year and with greater
frequency if necessary. The agenda for each meeting is usually developed by the Chair of the
Compensation Committee, in consultation with the Chairman of the Board. The Compensation
Committee meets regularly in executive session. However, from time to time, other directors and outside
advisors or consultants may be invited to participate in Compensation Committee meetings. The Chief
Executive Officer may not participate in, or be present during, any deliberations or determinations of the
Compensation Committee regarding his compensation or individual performance objectives.
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The charter of the Compensation Committee grants the Compensation Committee full access to all books,
records, facilities and personnel of the Company. The Compensation Committee has the authority to
obtain, at our expense, such advice or assistance from consultants, legal counsel, accounting or other
advisors as it deems appropriate to perform its duties. Without limiting the generality of the foregoing, the
Compensation Committee may retain or obtain the advice of compensation consulting firms to assist in
the performance of its duties and to determine and approve the terms, fees and costs of such engagements.
Under its charter, prior to selecting, or receiving advice from, any consultant or advisor, the
Compensation Committee is required to consider the independence of such advisor based on any
applicable criteria specified by the SEC or Nasdaq, including the independence factors listed in Nasdaq
Rule 5605(d)(3). However, the Compensation Committee is not prohibited from obtaining advice from
advisors that it determines are not independent. During fiscal 2017, the Compensation Committee did not
retain the services of any outside consultants.
The specific determinations of the Compensation Committee with respect to executive compensation for
fiscal 2017 are described in greater detail in the Executive Compensation section of this Annual Report on
Form 10-K.
Nominating and Governance Committee
As of September 10, 2017, the members of the Nominating and Governance Committee are Messrs.
Seidler and Wickersham and Dr. Fischhoff. Mr. Seidler serves as chairman of the committee. Our Board
of Directors has determined that each member of our Nominating and Governance Committee meets the
requirements for independence under the current rules of the SEC and Nasdaq.
The goal of the Nominating and Governance Committee is to ensure that the members of our Board of
Directors have a variety of perspectives and skills derived from high-quality business and professional
experience. The Nominating and Governance Committee seeks to achieve a balance of knowledge,
experience and capability on our Board of Directors. To this end, the committee seeks nominees with high
professional and personal integrity, an understanding of our business lines and industry, diversity of
business experience and expertise, broad-based business acumen and the ability to think strategically.
Although neither we nor our Nominating and Governance Committee has a formal policy about diversity
in the nominee selection process, our Nominating and Governance Committee charter states that the
committee’s goal is to develop a diverse and experienced board. In the context of the existing
composition and needs of the board and its committees, the Nominating and Governance Committee
considers various factors, including, but not limited to, independence, age, diversity (which, in this
context, means race, ethnicity and gender), integrity, skills, financial and other expertise, breadth of
experience and knowledge about our business or industry. Although the Nominating and Governance
Committee uses these and other criteria to evaluate potential nominees, we have not established any
particular minimum criteria for nominees. After its evaluation of potential nominees, the committee
submits nominees to the Board of Directors for approval. When appropriate, the Nominating and
Governance Committee may in the future retain executive recruitment firms to assist in identifying
suitable candidates.
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The Nominating and Governance Committee is responsible for, among other things:
•
•
•
assisting our Board of Directors in identifying prospective director nominees and
recommending to our Board of Directors the director nominees for each annual meeting of
stockholders;
evaluating the performance of current members of our Board of Directors;
ensuring that our Board of Directors is properly constituted to meet its fiduciary obligations
to us and our stockholders and that we follow appropriate governance standards;
• developing principles of corporate governance and recommending them to our Board of
Directors;
• overseeing compliance by our Board of Directors and its committees with applicable laws
and regulations, including those promulgated by the rules of the SEC and Nasdaq; and
• overseeing the evaluation of our Board of Directors and recommending compensation of
Board members.
The Nominating and Governance Committee acts under a written charter adopted and approved by our
Board of Directors. A current copy of the charter of our Nominating and Governance Committee is
available on the Investors page on our website located at www.swseedco.com.
Finance Committee
The Finance Committee provides ad-hoc recommendations and guidance to the full Board on issues
related to the financing of the Company. As of September 10, 2017, the Finance Committee was
comprised of Messrs. Matina, Seidler and Wong, with Mr. Matina serving as chairman.
Acquisition and Strategy Committee
The Acquisition and Strategy Committee provides ad-hoc recommendations and guidance to the full
Board in connection with identifying and pricing potential acquisition candidates and transactions. As of
September 10, 2017, the Acquisition and Strategy Committee was comprised of Messrs. Matina, Seidler
and Wong, with Mr. Matina serving as chairman.
Board Independence
At all times throughout fiscal 2017, our Board consisted of a majority of independent directors. Of our
seven directors, throughout fiscal 2017 only the Chief Executive Officer was an employee. Our Board
consults with our counsel to ensure that the Board’s determinations are consistent with relevant securities
and other laws and regulations regarding the definition of “independent,” including those set forth in
pertinent listing standards of the NASDAQ Capital Market, as in effect from time to time. Our Board has
affirmatively determined that four of our directors, namely Dr. Fischhoff and Messrs. Matina, Seidler and,
Wickersham, representing a majority of our directors, are “independent directors” as defined under the
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rules of the SEC and NASDAQ. In reaching its conclusions, the Board of Directors considered all
relevant facts and circumstances with respect to any direct or indirect relationships between us and each
of the directors, including those discussed under the caption “Certain Relationships and Related
Transactions” below. Our Board of Directors determined that any relationships that exist or existed in the
past between us and each of the independent directors, if any, were immaterial on the basis of the
information set forth in the above-referenced sections.
Executive Sessions of Independent Directors
In order to promote open discussion among independent directors, our Board of Directors has a policy of
conducting executive sessions of the independent directors. The board holds regular executive sessions of
the independent directors at least four times per year in connection with regularly-scheduled Board
meetings and holds executive sessions at other times throughout the year as needed or desired. These
directors may designate one of their number to preside at each session, although it need not be the same
director at each session. Regardless of the fact that these executive sessions are required by NASDAQ, we
believe they are important vehicles to encourage open communication. Whether a presiding director is
selected for each session or not, one among the directors present is designated to communicate the results
of each such meeting to the full board.
Board Meetings and Attendance
The Board met six times in fiscal 2017. Each member of the Board attended or participated in 75% or
more of the aggregate of (i) the total number of meetings of the Board held during the period for which
such person has been a director, and (ii) the total number of meetings held by each committee of the
Board on which such person served during the periods that such person served.
Board Attendance at Annual Stockholder Meetings
Our directors are strongly encouraged to attend each annual meeting of stockholders, although such
attendance is not required. All then current directors and our then director nominee attended the 2016
Annual Meeting.
Board Leadership
The Board does not have a formal policy on whether or not the roles of Chairman of the Board and Chief
Executive Officer should be separate and, if they are to be separate, whether the Chairman of the Board
should be selected from the non-employee directors or be an employee. The Board believes that it should
be free to make a choice from time to time in any manner that is in the best interests of our company and
our stockholders. Currently, we separate the role of Chairman and Chief Executive Officer. Mr. Harvey
serves as the Chairman and Mr. Grewal served as Chief Executive Officer through June 19, 2017, and Mr.
Wong assumed that role upon the departure of Mr. Grewal. The Board believes that this separation is
presently appropriate as it allows the Chief Executive Officer to focus primarily on leading the day-to-day
operations of our company, while the Chairman can focus on leading the Board in its consideration of
strategic issues and monitoring corporate governance and other stockholder issues.
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Each of the committees of the Board consists entirely of independent directors.
Our Chairman is selected by a majority of the Board of Directors. The Chairman may be replaced at any
time by a vote of a majority of the Board of Directors then serving; provided, however, that the Chairman
may not be removed as a director of the Company except in accordance with the Nevada Revised
Statutes, our bylaws, and other applicable law.
Role of the Board in Risk Oversight
Our Board of Directors, as a whole and through its committees, has responsibility for the oversight of risk
management. With the oversight of our full Board of Directors, our senior management are responsible
for the day-to-day management of the material risks we face. In its oversight role, our Board of Directors
has the responsibility to satisfy itself that the risk management processes designed and implemented by
management are adequate and functioning as designed. This involvement of the Board of Directors in
setting our business strategy is a key part of its oversight of risk management, its assessment of
management’s appetite for risk and its determination of what constitutes an appropriate level of risk for
us. Additionally, our Board of Directors regularly receives updates from senior management and outside
advisors regarding certain risks we face, including various operating risks. Our senior management
attends meetings of our Board of Directors, and each committee meets with key management personnel
and representatives of outside advisors as necessary. Additionally, senior management makes itself
available to address any questions or concerns raised by the board on risk management and any other
matters.
Each of our board committees oversees certain aspects of risk management.
Board/Committee
Primary Areas of Risk Oversight
Full Board .................................
Strategic, financial and execution risks and exposures associated
with our business strategy, product innovation and sales road
map, policy matters, significant litigation and regulatory
exposures and other current matters that may present material
risk to our financial performance, operations, infrastructure,
plans, prospects or reputation, acquisitions and divestitures
Audit Committee ......................
Risks and exposures associated with financial matters,
particularly financial reporting, tax, accounting, disclosure,
internal control over financial reporting, investment guidelines
and credit and liquidity matters, internal investigations and
enterprise risks
Compensation Committee ........
Risks and exposures associated with leadership assessment,
executive compensation policies and practices and is responsible
for establishing and maintaining compensation policies and
programs designed to create incentives consistent with our
business strategy that do not encourage excessive risk-taking
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Nominating and Governance
Committee ................................
Risks and exposures associated with director and senior
management succession planning, director independence,
corporate governance and overall Board effectiveness
Additional review or reporting on enterprise risks will be conducted as needed or as requested by the
Board of Directors or a committee thereof.
Stockholder Communications with the Board of Directors
Stockholders and interested parties who wish to contact our Board of Directors, our Chairman, any other
individual director, or the non-management or independent directors as a group, are welcome to do so in
writing, addressed to such person(s) in care of our Corporate Secretary. Email correspondence of this
nature should be sent to secretary@swseedco.com, and other written correspondence should be addressed
to S&W Seed Company, 802 North Douty Street, Hanford, CA 93230, Attention: Secretary.
Our Board of Directors has adopted a formal process by which stockholders may communicate with the
Board or any of its members. These communications will be reviewed by our Corporate Secretary, who
will then determine whether the communication is appropriate for presentation to the Board or the
relevant director. The purposes of this screening is to avoid the Board having to consider spam, junk mail,
mass mailings, customer complaints or inquiries, job inquiries, surveys, business solicitations or
advertisements, or patently offensive or otherwise inappropriate or irrelevant material. The Corporate
Secretary will determine, in her discretion, whether any response is necessary and may forward certain
correspondence, such as customer-related inquiries, elsewhere within our company for review and
possible response. Comments or questions regarding our accounting, internal controls or auditing matters
will be referred to the Audit Committee. Comments or questions regarding the nomination of directors
and other corporate governance matters will be referred to the Nominating and Governance Committee.
Comments or questions regarding executive compensation will be referred to the Compensation
Committee.
Item 11. Executive Compensation
As a smaller reporting company, we are not required to provide a separately-captioned “Compensation
Discussion and Analysis” (a “CD&A”) section. However, in order to provide a greater understanding to
our stockholders regarding our compensation policies and decisions with respect to our Named Executive
Officers, we are including the following narrative disclosure to highlight salient portions of a typical
CD&A. This narrative disclosure should be read in conjunction with the Summary Compensation Table
and related tables that are presented elsewhere in this Annual Report on Form 10-K.
Compensation Philosophy and Processes
Compensation for our executives and key employees is designed to attract and retain people who share
our vision and values and who can consistently perform in such a manner that enables the Company to
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achieve its strategic goals. The Compensation Committee believes that the total compensation package for
each of our executive officers is competitive with the market, thereby allowing us to retain executive
talent capable of leveraging the skills of our employees and our unique assets in order to increase
stockholder value. Our Named Executive Officers refers to those executive officers identified in the
Summary Compensation Table below. Our Named Executive Officers for fiscal year 2017 included the
following individuals: Mark S. Grewal, President and Chief Executive Officer through June 19, 2017;
Mark W. Wong, President and Chief Executive Officer beginning on June 19, 2017; Matthew K. Szot,
Executive Vice President of Finance and Administration, Chief Financial Officer and Treasurer; and
Dennis C. Jury, Executive Vice President of Operations and Chief Operating Officer.
The Company’s executive compensation programs are designed to (1) motivate and reward our executive
officers, (2) retain our executive officers and encourage their quality service, (3) incentivize our executive
officers to appropriately manage risks while improving our financial results, and (4) align executive
officers’ interests with those of our stockholders. Under these programs, our executive officers are
rewarded for the achievement of company objectives and the realization of increased stockholder value.
The program seeks to remain competitive with the market while also aligning the executive compensation
program with stockholder interests through the following types of compensation: (i) base salary; (ii)
annual cash-based incentive bonuses; and (iii) equity-based incentive awards.
Key Executive Compensation Objectives
The compensation policies developed by the Compensation Committee are based on the philosophy that
compensation should reflect both Company-wide performance, financially and operationally, and the
individual performance of the executive, including management of personnel under his supervision. The
Compensation Committee’s objectives when setting compensation for our executive officers include:
• Setting compensation levels that are sufficiently competitive such that they will motivate and
reward the highest quality individuals to contribute to our goals, objectives and overall
financial success. This is done in part through reviewing and comparing the compensation of
other companies in our peer group.
• Retaining executives and encouraging their continued quality service, thereby encouraging
and maintaining continuity of the management team. Our competitive base salaries combined
with cash and equity incentive bonuses, retirement plan benefits and the vesting requirements
of our equity-based incentive awards, encourage high-performing executives to remain with
the Company.
•
Incentivizing executives to appropriately manage risks while attempting to improve our
financial results, performance and condition.
• Aligning executive and stockholder interests. The Compensation Committee believes the use
of equity compensation as a key component of executive compensation is a valuable tool for
aligning the interests of our executive officers with those of our stockholders.
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Our compensation program is designed to reward superior performance of both the Company and each
individual executive and seeks to encourage actions that drive our business strategy. In fiscal 2016, we
instituted a process by which the Compensation Committee or a member thereof, meets with each of our
executives quarterly to review performance, goals and expectations so that our annual compensation
decisions, when made, will be more transparent. We found this regular line of communication to be
helpful, both for our executives and for the Compensation Committee, and as such, the process continued
in fiscal 2017.
Oversight of Executive Compensation
The Role of the Compensation Committee in Setting Compensation. Our Compensation Committee
determines and recommends to our Board of Directors the compensation of our executive officers. The
Compensation Committee also administers the 2009 Plan (defined below). The Compensation Committee
reviews base salary levels for executive officers of our company and recommends raises and bonuses
based upon the company’s achievements, individual performance and competitive and market conditions.
The Compensation Committee may delegate certain of its responsibilities, as it deems appropriate, to
compensation subcommittees or to our officers, but it has not elected to do so to date.
The Role of Executives in Setting Compensation. While the Compensation Committee does not delegate
any of its functions to others in setting the compensation of senior management, it includes members of
senior management in the Compensation Committee’s executive compensation process. We have asked
each of our senior executives to annually provide us with input with regard to their goals for the coming
year. These proposals include suggested company-wide and individual performance goals. The individual
goals include not only the goals of such executive but also goals of the employees for whom the executive
is responsible. The Compensation Committee reviews these proposals with the executives and provides
the Committee’s perspective on those aspects that the Committee may feel should be modified. Quarterly
meetings with the executives will permit an ongoing dialog to further our goal of enhancing
communication and managing expectations regarding compensation matters.
The Role of Consultants in Setting Compensation. In fiscal 2017, the Compensation Committee did not
retain compensation consultants to assist it in its review of executive compensation although it is
empowered by its charter to do so. As the Compensation Committee deems necessary or helpful, it may
retain the services of compensation consultants in connection with the establishment and development of
our compensation philosophy and programs in the future.
Compensation Risk Assessment
As part of its risk assessment process, the Compensation Committee reviewed material elements of
executive and non-executive employee compensation. The Compensation Committee concluded that
these policies and practices do not create risk that is reasonably likely to have a material adverse effect on
the Company.
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The structure of our compensation program for our executive officers does not incentivize unnecessary or
excessive risk taking. The base salary component of compensation does not encourage risk taking because
it is a fixed amount. The incentive plan awards have risk-limiting characteristics:
• Annual incentive awards to each of our executive officers are limited to the fixed maximum
specified in the incentive plan;
• Annual incentive awards are based on a review of a variety of performance factors, thus
diversifying the risk associated with any single aspect of performance;
• The Compensation Committee, which is composed of independent members of our Board of
Directors, approves final incentive plan cash and stock awards in its discretion after
reviewing executive and corporate performance; and
• The significant portion of long-term value is delivered in shares of the Company with a multi-
year vesting schedule, which aligns the interests of our executive officers to the long-term
interests of our stockholders.
Elements of Compensation
The material elements of the compensation program for our Named Executive Officers include: (i) base
salary; (ii) cash-based incentive bonuses; and (iii) equity-based incentive awards.
Base Salaries. We provide our Named Executive Officers with a base salary to compensate them for
services rendered during the fiscal year and sustained performance. The purpose of the base salary is to
reflect job responsibilities, value to us and competitiveness of the market. Salaries for our Named
Executive Officers are determined by the Compensation Committee based on the following factors:
nature and responsibility of the position and, to the extent available, salary norms for comparable
positions; the expertise of the individual executive; and the competitiveness of the market for the
executive’s services.
Performance Cash-Based Incentive Bonuses. Our practice is to award cash-based incentive bonuses,
based in part on the achievement of performance objectives or significant accomplishments as established
by the Compensation Committee from time-to-time in its discretion. These performance objectives and
significant accomplishments are, in part, developed in partnership with the executive and are discussed on
an ongoing basis throughout the year.
Equity-Based Incentive Awards. Our equity-based incentive awards are designed to align our interests
with those of our employees and consultants, including our Named Executive Officers. Our
Compensation Committee is responsible for approving equity grants. As of the end of fiscal 2017, our
Named Executive Officers have been granted both stock option awards and restricted stock units. Vesting
of the stock option and restricted stock unit awards is tied to continuous service with us and serves as an
additional retention measure and long-term incentive.
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Key Compensation Decisions and Developments for Fiscal Year 2017
For fiscal 2017, each of our Named Executive Officers was entitled to receive an annual discretionary
incentive bonus of up to 100% of his base salary, payable 65% in cash and 35% in equity. Following the
completion of the 2017 fiscal year, each of these executive officers evaluated himself against his specific
goals and presented his assessment to the Compensation Committee. The Compensation Committee
followed with its own review of these self-assessments, in addition to its review of the fiscal 2017
corporate goals and objectives for these executive officers and their performance in light of these goals
and objectives. Based on its review, in September 2017 the Compensation Committee determined the
fiscal 2017 cash and equity incentive awards for our Named Executive Officers, as follows:
Matthew K. Szot
Dennis C. Jury
75% of base salary
30% of base salary
Mark W. Wong, our Chief Executive Officer and President, was appointed on June 19, 2017, 12 days
before the fiscal year end. Accordingly, Mr. Wong was only compensated as an executive officer for the
last 12 days of fiscal 2017 and was not eligible to receive an annual incentive bonus for fiscal 2017. Mark
S. Grewal, our former Chief Executive Officer and President, served until June 19, 2017. Accordingly,
Mr. Grewal was not eligible to receive an annual incentive bonus for fiscal 2017.
• Base Pay. Pursuant to their respective employment agreements entered into in March 2016,
the current base salaries for our Named Executive Officers eligible to receive an annual
incentive bonus is as follows:
Matthew K. Szot
Dennis C. Jury
$285,000
$178,636
The above base salaries were fixed in 2015 and have remained in place since that time. Mr. Jury’s
base salary has been converted from Australian dollars to U.S. dollars based on an exchange rate
of .7537, which was the average exchange rate during fiscal 2017.
• Cash-Based Incentive Compensation. 65% of each such executive’s bonus was payable in
cash. The following cash incentive bonuses were determined in September 2017 for
performance during fiscal 2017:
Matthew K. Szot
Dennis C. Jury
$138,938
$34,835
Mr. Jury’s cash bonus has been converted from Australian dollars to U.S. dollars based on an
exchange rate of .7537, which was the exchange rate at the time the bonuses were awarded. In
connection with Mr. Grewal’s June 2017 departure, Mr. Grewal received a cash payment of
$175,000 in lieu of a cash bonus for fiscal year 2017.
• Equity-Based Incentive Compensation. The remaining 35% of each such executive’s total
bonus was payable in equity and divided equally into a restricted stock unit award and a stock
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option grant. Based on the final assessments of the Compensation Committee, in September
2017, these executive officers were granted the following equity incentive awards out of our
Amended and Restated 2009 Equity Incentive Plan:
Named Executive
Officer
Stock Options
Restricted Stock
Units (“RSUs”)
Dollar Value of
Options and RSUs
Matthew K. Szot
Dennis C. Jury
29,687
15,625
12,066
6,351
$74,812
$18,756
All of the options and restricted stock units awarded as incentive bonus compensation vest
quarterly over three years, commencing on October 1, 2017.
Executive Officer Compensation
The following Summary Compensation Table sets forth certain information regarding the compensation
earned during fiscal 2017 by (i) the two individuals who served as Chief Executive Officer during fiscal
2017, and (ii) our two most highly compensated executive officers other than our Chief Executive Officer
who were serving as executive officers at the end of the end of fiscal 2017. These individuals are referred
to herein as our “Named Executive Officers.”
Summary Compensation Table
Mark W. Wong (1)
President and
Chief Executive Officer
Mark S. Grewal (4)
Former President and
Chief Executive Officer
Matthew K. Szot
Executive Vice President of Finance and Administration and Chief Financial Officer
Dennis C. Jury (7)
Executive Vice President of Operations and Chief Operating Officer
Salary
Year
($)
Bonus
($)
Stock
Awards
($)(3)
Option
All Other
Awards
Compensation
($)(3)
($)
Total
($)
2017
2016
2015
2017
2016
2015
2017
2016
2015
2017
2016
5,385
-
-
345,983
347,654
338,841
-
-
-
-
-
-
235,806
-
-
102,434 (2)
75,441 (2)
56,824
343,624
75,441
56,824
136,500
-
-
36,751
119,000
-
37,734
141,796
82,772
10,841 (5)
21,594 (5)
22,638
567,809
630,044
444,251
285,000
282,997
267,163
148,200
-
-
39,901
119,000
-
40,968
101,283
76,015
14,600 (6)
15,400 (6)
16,176
528,668
518,680
359,355
169,230 (8)
163,588 (8)
58,057
-
15,552
39,665
15,969
-
29,859 (9)
30,391 (9)
288,667
233,644
_______
(1) Mr. Wong was appointed President and Chief Executive Officer upon the resignation of Mr. Grewal
on June 19, 2017.
(2) Prior to Mr. Wong’s appointment as President and Chief Executive Officer, Mr. Wong received
compensation as an independent director in the amount of $102,434 for the year ended June 30,
2017. Refer to the director summary compensation table for the break-down of these director
compensation fees.
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(3) The amounts shown for stock awards and option awards represent the aggregate grant date fair value
of such awards granted to the Named Executive Officers as computed in accordance with Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718,
Compensation-Stock Compensation. For each award, the grant date fair value is calculated using the
closing price of our common stock on the grant date and, in the case of the restricted stock awards,
assuming 100% probability of achievement of conditions for full vesting as of the grant date. These
amounts do not correspond to the actual value that may be realized by the Named Executive Officers
upon vesting or exercise of such awards. For information on the assumptions used to calculate the
value of the awards, refer to Note 13 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
(4) Mr. Grewal resigned as President, Chief Executive Officer and a director on June 19, 2017.
(5) Includes (a) $10,801 and $10,400 in 401(k) matching employer contributions for fiscal 2017 and
2016, respectively; (b) $0 and $10,500 vehicle allowance in 2017 and 2016; and (c) $9,400 and
$6,000 in 2017 and 2016, respectively, representing the personal use benefit related to a country club
membership, used primarily for business purposes.
(6) Includes (a) $10,600 and $10,400 in 401(k) matching employer contributions for fiscal 2017 and
(7)
2016; and (b) $4,000 and $5,000 in SGI board fees in 2017 and 2016.
Mr. Jury is paid in Australian dollars, while the dollar amounts in the table are in U.S. dollars, using
the average exchange rate over the applicable fiscal year. The exchange rate applied was 0.7537 in
fiscal 2017 and 0.7286 in fiscal 2016.
(8) Mr. Jury’s salary in Australian dollars was $237,012 in fiscal 2017 and $237,012 in fiscal 2016.
(9) Includes for fiscal 2017: (a) $16,453 (AUD $21,830) for the company’s superannuation guarantee
contribution; and (b) $4,000 for SGI board fees. Includes for fiscal 2016: (a) $16,299 (AUD
$22,370) for the company’s superannuation guarantee contribution; and (b) $5,000 for SGI board
fees.
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Outstanding Equity Awards at Fiscal Year End 2017
The following table sets forth information regarding each unexercised option award held by our Named
Executive Officers as of June 30, 2017.
Option Awards
Number of Securities
Underlying Unexercised
Options (#)
Exercisable
Unexercisable
Option
Exercise
Price
($)
Option
Expiration
Date
Mark W. Wong(1)
Mark S. Grewal
Matthew K.
Szot
$
7,000
10,000
-
4,166
25,000
10,000
7,000
49,000
70,000
18,284
25,000
10,000
5,000
33,750
29,162
3,308
-
-
6,632
145,834
-
-
-
-
-
-
-
-
-
11,250
20,838
16,543
(2)
(3)
(4)
(4)
(4)
(4)
(4)
(4)
(5)
(6)
(7)
Dennis C. Jury
21,000
5,000
11,662
1,288
-
-
8,756
6,450
(5)
(7)
12/9/24
12/11/25
12/20/26
6/19/27
12/8/17
12/10/18
1/31/19
12/11/24
7/15/25
10/5/26
12/8/17
12/10/18
1/31/19
12/11/24
7/15/25
10/5/26
12/10/18
1/31/19
12/11/24
10/5/26
3.61
4.25
4.75
3.85
7.20
6.14
6.23
3.95
4.76
4.86
7.20
6.14
6.23
3.95
4.76
4.86
6.14
6.23
3.95
4.86
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Stock Awards
Number
of Shares
or Units
of Stock
that have
not
Vested
(#)
Market
Value of
Shares or
Units of
Stock that
have not
Vested
($)
6,632
(2)
$
27,523
9,448
9,664
6,843
(8)
(9)
(10)
39,209
40,106
28,398
3,225
2,668
(9)
(10)
13,384
11,072
__________
(1) Mr. Wong has received three option grants and one restricted stock units (“RSUs”) award. Other
than the 150,000 options appearing in the fourth row of this table, the equity grants were made to
Mr. Wong as a member of the board of directors and not as an executive officer.
(2) The options and RSUs will vest on December 20, 2017.
(3) The options vest in 36 monthly installments at the end of each month, commencing on June 30, 2017
and continuing through and including May 31, 2020.
(4) Upon Mr. Grewal’s departure as President, Chief Executive Officer and a director on June 19, 2017,
all of his outstanding options and restricted stock units vested pursuant to the accelerated vesting
provisions of the equity awards and his employment agreement. The vested RSU shares were not
issued until July 27, 2017 upon full execution of the Resignation and Separation Agreement by the
parties.
(5) The options vest in 12 quarterly installments on the first day of the fiscal quarter. Vesting
commenced on April 1, 2015 and will continue through January 1, 2018.
(6) The options vest in 12 quarterly installments on the first day of the fiscal quarter. Vesting
commenced on October 1, 2015 and will continue through July 1, 2018.
(7) The options vest in 12 quarterly installments on the first day of the fiscal quarter. Vesting
commenced on January 1, 2017 and will continue through October 1, 2019.
(8) RSUs, which were awarded on March 16, 2013, vest quarterly with the passage of time beginning on
July 1, 2013 and continuing through October 1, 2017. The market value of the RSUs is based on a
closing price of $4.15, which was the closing price on June 30, 2017, the last trading day of fiscal
2017.
(9) RSUs, which were awarded on July 15, 2015, vest quarterly with the passage of time beginning on
October 1, 2015 as to 15% of the total award. Thereafter, vesting continues quarterly for 11
successive quarters through July 1, 2018. The market value of the RSUs is based on a closing price
of $4.15, which was the closing price on June 30, 2017, the last trading day of fiscal 2017.
(10) RSUs, which were awarded on October 5, 2016, vest quarterly with the passage of time beginning on
January 1, 2027 and continuing through October 1, 2019. The market value of the RSUs is based on
a closing price of $4.15, which was the closing price on June 30, 2017, the last trading day of fiscal
2017.
Amended and Restated 2009 Equity Incentive Plan
The S&W Seed Company Amended and Restated 2009 Equity Incentive Plan (the “2009 Plan”)
authorizes the grant and award of options and other equity compensation, including stock appreciation
rights, restricted stock awards, restricted stock units, performance awards and other stock-based
compensation to employees, officers, directors and consultants. A total of 2,450,000 shares of common
stock have been issued or are currently reserved for issuance under the 2009 Plan, which was last
amended to increase the available share pool at our 2015 Annual Meeting.
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Equity Compensation Plan Information
The following table summarizes the information about the options and other equity compensation under
our 2009 Plan as of the close of business on June 30, 2017. We have no equity compensation plans that
have not been approved by our stockholders.
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options and
Rights
(a)
Weighted
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights ($)
(b)
Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
(excluding securities
reflected in column (a)
(c)
1,111,499 (1)
$5.12 (2)
561,278
Plan Category
Equity Compensation
Plans Approved by
Stockholders
________
(1) Represents awards granted under the 2009 Plan. Consists of 990,528 options and 120,971 RSUs.
(2) Represents the weighted average exercise price of outstanding options.
Employment Agreements with Named Executive Officers and Potential Payments upon
Termination of Change of Control
Grewal Employment Agreement
In March 2016, we entered into a three-year employment agreement with Mark S. Grewal (the “Grewal
Employment Agreement”), effective January 1, 2016 and expiring on December 31, 2018, which is no
longer effective in lieu of Mr. Grewal’s June 19, 2017 resignation. The principal terms of the Grewal
Employment Agreement were as follows:
• Mr. Grewal will continue to serve as our President and Chief Executive Officer.
• Mr. Grewal's annual Base Salary is initially fixed at $350,000 per year, which is the salary we
have paid him as of January 1, 2015. The Base Salary is subject to periodic review by the
Compensation Committee, but may not be reduced other than pursuant to a reduction that is
also applied similarly to all other executive officers or to give effect to executive
compensation policies and guidelines of the Compensation Committee, as publicized in
Securities and Exchange Commission filings.
• Bonus compensation will be payable in the discretion of the Compensation Committee upon
consideration of personal and company financial goals mutually agreed upon by the
Compensation Committee and Mr. Grewal. Initially, an annual incentive bonus of up to 100%
of the Base Salary may be paid, which is payable 65% in cash and 35% in equity. The
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amount of the bonus compensation, allocation between cash and equity and the target goals
will be subject to annual review.
• Mr. Grewal will continue to be eligible to participate in our equity incentive plan or plans in
effect from time to time and will be considered for grants and awards at such times and in
such amounts as shall be deemed appropriate by the Compensation Committee.
• Mr. Grewal will be entitled to various executive benefits and perquisites, including, without
limitation, all generally provided company employee benefits, plus the use of a company-
provided automobile, reimbursement of certain country club expenses and life insurance
purchased for his beneficiaries by us.
•
•
In the event Mr. Grewal's employment is terminated without cause (as defined in the Grewal
Employment Agreement), he will be entitled to receive a cash severance payment equal to 12
months of his then-current Base Salary, plus the cash value of the maximum incentive bonus
compensation to which he could be entitled for the current year.
In the event of a change of control, and provided that Mr. Grewal is not offered a comparable
position (as defined in the Grewal Employment Agreement) by the surviving company, he
will be entitled to a severance payment equal to (a) his annual Base Salary as in effect
immediately before the change of control transaction plus (b) the full amount of the current
year's targeted incentive bonus compensation, multiplied by a factor of two; provided,
however, that the multiplier will be increased to a factor of three in the event the price of our
Common Stock payable in connection with the change of control transaction is at least $10
per share. In addition, we will pay, or cause to be paid, Mr. Grewal's health insurance
premiums for two years from the date of the change of control transaction or, in the event the
transaction price is at least $10 per share, for three years.
• Whether due to a termination without cause or a change of control, all equity grants and
awards shall vest in full and be non-forfeitable immediately before the date of termination on
a termination without cause or the change of control event.
Mr. Grewal resigned as our President, Chief Executive Officer and a director in June 2017. In connection
with his resignation, we entered into a Resignation and Consulting Agreement with Mr. Grewal (the
“Separation Agreement”). The Separation Agreement reaffirmed and confirmed the benefits we had
previously agreed to bestow upon Mr. Grewal in the event of his departure, including, among other
provisions, the accelerated vesting of his previously-awarded equity grants, the continued payment of his
Base Salary for the 12-month period following his departure, his cash bonus for fiscal 2017 in the amount
of $175,000 and the payment of health insurance benefits for the period and to the extent provided in the
Grewal Employment Agreement. He also took personal possession of his company-owned vehicle. We
and Mr. Grewal further agreed to a two-year consulting arrangement under the terms of which Mr.
Grewal will provide up to 20 hours per month of consulting services on an as-requested basis, for which
we will pay the annualized rate of $87,500, payable quarterly.
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Wong Employment Agreement
On June 19, 2017 in connection with his appointment as President and Chief Executive Officer, we
entered into an employment agreement with Mr. Wong (the “Wong Employment Agreement”), pursuant
to which Mr. Wong is entitled to receive the following compensation:
•
•
•
annual base salary of $350,000;
eligibility to receive an annual performance bonus, with an initial target bonus of up to
$800,000, payable 70% in equity awards and 30% in cash, of which his cash portion for fiscal
year 2018 is guaranteed at a minimum of $240,000; and
an initial stock option grant under the Company's Amended and Restated 2009 Equity
Incentive Plan, exercisable for up to 150,000 shares of the Company's common stock at an
exercise price per share equal to the fair market value on the date of grant, all of which shares
will be subject to monthly vesting over a three-year period.
In addition, Mr. Wong is entitled to reimbursement of certain business and travel expenses, including up
to $5,000 per month for expenses related to commuting from Colorado to our offices in Sacramento,
California. The Wong Employment Agreement also provides that, in the event Mr. Wong's employment is
terminated without cause, or he resigns for good reason (each as defined in the Wong Employment
Agreement) he will be entitled to:
•
•
the vesting of all of his outstanding equity awards will immediately accelerate in full as of the
date of such termination or resignation, and the exercise period for each stock option held as
of the date of termination will be extended to the remainder of the full term of the option, and
(i) a cash severance payment equal to twelve months of his base salary in effect at the time of
his termination, plus the full amount of the possible bonus compensation to which he would
have been entitled for the current year (the “Cash Severance Payment”), and (ii) payment of
health insurance premiums for twelve months, all subject to the Company's timely receipt of
an effective release and waiver of claims from Mr. Wong.
In addition, in the event of a change of control, or in the event we sell all or substantially all of our assets,
and Mr. Wong is not offered a comparable position with the successor-in-interest resulting from such
transaction, he will be entitled to receive (x) an amount equal to the Cash Severance Payment multiplied
by two (provided that the multiplier shall be increased to three in the event the price of our common stock
payable in connection with such transaction is at least $10 per share); and (y) payment of health insurance
premiums for two years from the date of such transaction (or three years in the event the price of our
common stock payable in connection with such transaction is at least $10 per share). Further, provided
that Mr. Wong is employed by us immediately prior to any such change in control transaction, the vesting
of all of his outstanding equity will accelerate in full as of immediately prior to the effective time of such
transaction, and the exercise period for each stock option held as of the date of such transaction will be
extended to the remainder of the full term of the option.
132
Szot Employment Agreement
In March 2016, we entered into a new three-year employment agreement with Mr. Szot, effective January
1, 2016 and expiring on December 31, 2018. The principal terms of Mr. Szot’s employment agreement are
as follows:
• Mr. Szot will continue to serve as our Executive Vice President of Finance and
Administration and Chief Financial Officer.
• Mr. Szot’s annual Base Salary is initially fixed at $285,000, which is the salary we have paid
him as of January 1, 2015. The Base Salary is subject to periodic review (not less frequently
than annually).
• Bonus compensation shall be payable in the discretion of the Compensation Committee upon
consideration of personal and Company financial goals mutually agreed upon by the
Compensation Committee and Mr. Szot. Initially, an annual incentive bonus of up to 100% of
the Base Salary may be paid, which is payable 65% in cash and 35% in equity. The amount
of the bonus compensation, allocation between cash and equity and the target goals will be
subject to annual review.
• Mr. Szot will continue to be eligible to participate in our equity incentive plan or plans in
effect from time to time and shall be considered for grants and awards at such times and in
such amounts as shall be deemed appropriate by the Compensation Committee.
• Mr. Szot will be entitled to various executive benefits and perquisites, including, without
limitation, all generally provided company employee benefits, plus life insurance purchased
for his beneficiaries by us.
•
•
In the event Mr. Szot’s employment is terminated without cause (as defined in the Szot
Employment Agreement), he will be entitled to receive a cash severance payment equal to 12
months of his then-current Base Salary, plus the cash value of the maximum incentive bonus
compensation to which he could be entitled for the current year.
In the event of a change of control, and provided that Mr. Szot is not offered a comparable
position (as defined in the Szot Employment Agreement) by the surviving company, he will
be entitled to a severance payment equal to (a) his annual Base Salary as in effect
immediately before the change of control transaction plus (b) the full amount of the current
year’s targeted incentive bonus compensation, multiplied by a factor of 1.5; provided,
however, that the multiplier shall be increased to a factor of two in the event the price of our
Common Stock payable in connection with the change of control transaction is at least $10
per share. In addition, we will pay, or cause to be paid, Mr. Szot’s health insurance premiums
for one and a half years from the date of the change of control transaction or, in the event the
transaction price is at least $10 per share, for two years.
• Whether due to a termination without cause or a change of control, all equity grants and
awards shall vest in full and be non-forfeitable immediately before the date of termination on
a termination without cause or the change of control event.
133
Jury Employment Agreement
In March 2016, we entered into a new three-year employment agreement with Mr. Jury (the “Jury
Employment Agreement”), effective January 1, 2016 and expiring on December 31, 2018, which
complements and is intended to supplement his separate employment agreement entered into with our
Australian subsidiary, Seed Genetics International Pty Ltd. (“SGI”). Certain matters pertaining to Mr.
Jury’s employment are governed by Australian law and therefore, in certain respects, his employment
agreement differs from those entered into with other officers. However, in key respects, including the
determination of bonus compensation and payments upon a change of control, the terms of the Jury
Employment Agreement parallel the similar terms provided in the Szot Employment Agreement.
The Jury Employment Agreement includes the following key terms:
• Mr. Jury will continue to serve as our Executive Vice President of Operations and Chief
Operating Officer.
• Mr. Jury’s compensation will continue to be governed primarily pursuant to the terms and
conditions of the SGI Contract of Employment, with oversight provided by the Compensation
Committee.
• Bonus compensation shall be payable in the discretion of the Compensation Committee upon
consideration of personal and company financial goals mutually agreed upon by the
Compensation Committee and Mr. Jury. Initially, an annual incentive bonus of up to 100% of
the Base Salary may be paid, which is payable 65% in cash and 35% in equity. The amount
of the bonus compensation, allocation between cash and equity and the target goals will be
subject to annual review.
• Mr. Jury will continue to be eligible to participate in our equity incentive plan or plans in
effect from time to time and shall be considered for grants and awards at such times and in
such amounts as shall be deemed appropriate by the Compensation Committee.
• Mr. Jury’s executive benefits and perquisites will continue to be governed primarily pursuant
to the SGI Contract of Employment or as otherwise made available to employees of SGI
generally. In addition, we will purchase for his beneficiaries a term life insurance policy.
•
•
In the event Mr. Jury’s employment is terminated without cause (as defined in the Jury
Employment Agreement), he will be entitled to receive a cash severance payment equal to 12
months of his then-current Base Salary, plus the cash value of the maximum incentive bonus
compensation to which he could be entitled for the current year.
In the event of a change of control, and provided that Mr. Jury is not offered a comparable
position (as defined in the Jury Employment Agreement) by the surviving company, he will
be entitled to a severance payment equal to (a) his annual Base Salary as in effect
immediately before the change of control transaction plus (b) the full amount of the current
year’s targeted incentive bonus compensation, multiplied by a factor of 1.5; provided,
however, that the multiplier shall be increased to a factor of two in the event the price of our
Common Stock payable in connection with the change of control transaction is at least $10
134
per share. In addition, we will pay, or cause to be paid, Mr. Jury’s health insurance premiums
for one and a half years from the date of the change of control transaction or, in the event the
transaction price is at least $10 per share, for two years.
• Whether due to a termination without cause or a change of control, all equity grants and
awards shall vest in full and be non-forfeitable immediately before the date of termination on
a termination without cause or the change of control event.
The principal terms of Mr. Jury’s employment agreement with SGI include:
• Mr. Jury will continue to serve as General Manager of SGI.
• Mr. Jury’s compensation includes a (i) base salary of AUD $237,012; and (ii) 9.5% company
contribution to his superannuation (retirement) fund.
Each of the above employment agreements defines “change-of-control” as the sale of all or substantially
all of the assets of the Company or the acquisition of the Company by another entity by means of
consolidation or merger after which the then S&W stockholders before the transaction hold less than 50%
of the voting power of the surviving corporation; provided, however, that a reincorporation of the
Company will not be deemed a Change of Control.
Director Compensation
Overview
Our director compensation programs are designed to provide an appropriate incentive to attract and retain
qualified non-employee board members. The Nominating and Governance Committee is responsible for
reviewing the equity and cash compensation for directors on an annual basis and making
recommendations to the Board, in the event it determines changes are needed.
Director Summary Compensation Table
The following table summarizes the fiscal 2017 compensation earned by each person who served on the
Board at any time during fiscal 2017, other than Mr. Grewal, whose compensation is described under
“Executive Compensation” beginning on page 131.
135
Fees Paid
in Cash
($)
Stock
Awards
($)(1)
Option
Awards
($)(1)
Total
($)
(4)
$
$
$
$
9,773
11,238
-
-
13,030
12,052
11,889
13,682
22,501
25,873
-
-
30,001
27,750
27,374
31,502
18,750
22,876
6,250
178,750
38,750
33,500
68,875
57,250
Glen D. Bornt
David A. Fischhoff (2)
Michael M. Fleming (3)
Mark J. Harvey
Alexander C. Matina
Charles B. Seidler
Grover T. Wickersham
Mark W. Wong
____________
(1) The amounts shown for stock awards and option awards represent the aggregate grant date fair value
of such awards granted to the directors as computed in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-
Stock Compensation. For each award, the grant date fair value is calculated using the closing price
of our common stock on the grant date. These amounts do not correspond to the actual value that
may be realized by the directors upon vesting or exercise of such awards. For information on the
assumptions used to calculate the value of the awards, refer to Note 13 to the Consolidated Financial
Statements included elsewhere in this Form 10-K.
51,024
59,987
6,250
178,750
81,781
73,302
108,138
102,434
(5)
(2) Dr. Fischhoff was elected to the Board in December 2016.
(3) Mr. Fleming did not stand for reelection at our Annual Meeting of Stockholders held in December
2016.
(4) This amount includes an annual stipend of $175,000 paid to Mr. Harvey for his role as Non-
(5)
Executive Chairman of the Board, in addition to the per meeting fees for serving as a Member of
SGI’s Board.
Mr. Wong was paid an additional $5,000 per quarter to consult with the Chairman, the full board or
any committee thereof. This arrangement ceased with Mr. Wong’s appointment as our Chief
Executive Officer and President in June 2017.
Annual Retainer and Per Meeting Fees for Non-Employee Directors
Directors who are also our employees do not receive any additional compensation for their service on the
board. Other than our Chairman and Vice Chairman of the Board, non-employee directors receive an
annual cash retainer of $30,000. In fiscal 2017, the Chairman of the Board and the Vice Chairman of the
Board were paid an annual cash retainer of $175,000 and $75,000, respectively, payable monthly.
Michael M. Fleming, the Chairman of the Audit Committee (until December 2016) and the Compensation
Committee (through December 2015), as well as serving as lead independent director (until December
2016), was paid an additional $20,000 cash retainer in fiscal 2017 for his service in those capacities.
In addition to annual cash retainers, non-employee directors also receive:
136
•
•
an annual restricted stock unit award for a number of shares equal to $22,500 divided by the
price per share of our common stock on the date of grant; and
an annual option grant to purchase a number of shares equal to $22,500 divided by the price
per share of our common stock on the date of grant.
These annual equity awards are granted following our annual stockholders meeting each year, and
vest on the one-year anniversary of the date of grant.
For service on the various committees of our Board, our non-employee directors receive:
•
•
an annual retainer of $25,000, $20,000, $15,000, $15,000 and $25,000 for service as chair of
our Audit Committee, Compensation Committee, Nominating and Governance Committee,
Finance Committee and Acquisition and Strategy Committee, respectively; and
an annual retainer of $12,500, $10,000, $7,500, $7,500 and $25,000 for service as a member
of our Audit Committee, Compensation Committee, Nominating and Governance Committee,
Finance Committee and Acquisition and Strategy Committee, respectively.
These committee retainers are paid 70% in cash and 30% in equity, with the equity portion divided
equally into:
•
•
a restricted stock unit award for a number of shares based on the price per share of our
common stock on the date of grant; and
an option grant to purchase a number of shares based on the price per share of our common
stock on the date of grant.
These equity awards are granted following our annual stockholders meeting each year, and vest on
the one-year anniversary of the date of grant.
We also reimburse non-employee directors for out-of-pocket expenses incurred in connection with
attending Board and committee meetings and for other company-related out-of-pocket expenses they may
incur.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table presents information concerning the beneficial ownership of the shares of our
common stock as of September 14, 2017, by:
•
each person we know to be the beneficial owner of 5% of more of our outstanding shares of
common stock;
• our executive officers named in the Summary Compensation Table and our current directors;
and
137
•
all of our executive officers and directors as a group.
Except as otherwise indicated below, the address of each beneficial owner listed in the table is c/o S&W
Seed Company, 802 North Douty Street, Hanford, CA 93230.
We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by
the footnotes below, we believe, based on the information furnished to us, that the persons and entities
named in the table below have sole voting and investment power with respect to all shares of common
stock that they beneficially own, subject to applicable community property laws.
Applicable percentage ownership is based on 20,692,089 shares of common stock outstanding on
September 14, 2017. In computing the number of shares of common stock beneficially owned by a person
and the percentage ownership of that person, we deemed as outstanding shares of common stock subject
to options held by that person that are currently exercisable or exercisable within 60 days of September
14, 2017 (November 13, 2017). We did not deem these exercisable shares outstanding, however, for the
purpose of computing the percentage ownership of any other person. The applicable footnotes are an
integral part of the table and should be carefully read in order to understand the actual ownership of our
securities, particularly by the 5% stockholders listed in the table.
138
Number of Shares
Name of Beneficial Owners
Beneficially Held
Number of Shares
Subject to Options,
RSUs and Warrants
Exercisable
by November 13,
2017
Total Shares
Beneficially Owned
Number
Percent
5% Stockholders
MFP Partners, LP (1)
Wynnefield Capital Management
LLC and Related Entities
(3)
4,507,838
4,008,023
200,000
0
4,707,838
4,008,023
(2)
21.6 %
19.4
RMB Capital Management
1,002,596
169,999
1,172,595
(5)
4.8
LLC and Related Entities (4)
Directors and Executive Officers
Glen D. Bornt
David A. Fischhoff, Ph.D.
Mark S. Grewal
Mark J. Harvey
Alexander C. Matina
Charles B. Seidler
Grover T. Wickersham
Mark W. Wong
Matthew K. Szot
Dennis C. Jury
All executive officers, directors
as a group (11 persons)
155,000
0
0
223,259
0
57,363
180,211
0
60,643
226,851
904,054
(8)
(12)
(16)
29,000
0
179,284
14,772
13,500
36,500
40,726
20,830
132,701
909
(6)
(7)
(9)
(10)
(11)
(13)
(14)
(15)
(17)
184,000
0
179,284
238,031
13,500
93,863
220,937
20,830
193,344
227,760
363,687
1,267,741
(18)
*
0
*
1.1
*
*
1.1
*
*
4.4
_________
(1) Based solely upon a Schedule 13D/A filed with the SEC on August 18, 2017 by MFP Investors
LLC. MFP Investors LLC is the general partner of MFP Partners, L.P. (“MFP”). Michael F. Price is
the managing partner of MFP and the managing member and controlling person of MFP Investors,
LLC. The address for MFP is 667 Madison Avenue, 25th Floor, New York, NY 10065. Alexander
C. Matina, a member of our Board of Directors, is Vice President, Investments of MFP.
(2) Includes 200,000 shares issuable upon exercise of warrants. The warrants are exercisable only to the
extent that, upon such exercise, MFP will not own shares in excess of 4.99% of the total number of
shares outstanding immediately after giving effect to the exercise, unless MFP gives notice that it
desires to increase the applicable beneficial ownership limit. The total in this table does not take into
account this limitation. Therefore, the actual number of shares of common stock currently
beneficially owned by MFP, after giving effect to the blocker, is less than the number reported in the
table. The information set forth is based on the information provided by MFP’s Schedule 13D/A
filed with the SEC on August 18, 2017. Alexander C. Matina, a member of our Board of Directors,
is Vice President of Investments for MFP.
139
(3) Based solely upon a Schedule 13D filed with the SEC on July 19, 2017 by Wynnefield Partners
Small Cap Value, L.P. The address for Wynnefield Capital Management, LLC and related entities is
450 Seventh Avenue, Suite 509, New York, NY 10123. Of the shares indicated, 1,285,067 shares are
beneficially owned by Wynnefield Partners Small Cap Value, L.P. (“Partners”), 2,053,514 shares are
beneficially owned by Wynnefield Partners Small Cap Value, L.P. I (“Partners I”), 540,2075 shares
are beneficially owned by Wynnefield Small Cap Value Offshore Fund, Ltd. (the “Fund”) and
129,235 shares are beneficially owned by Wynnefield Capital, Inc. Profit Sharing Plan. Wynnefield
Capital Management, LLC has an indirect beneficial interest in the shares held by Partners and
Partners I. Wynnefield Capital, Inc. has an indirect beneficial interest in the shares held by the Fund.
Nelson Obus may be deemed to hold an indirect beneficial interest in the shares held by Partners,
Partners I and the Fund because he is the co-managing member of Wynnefield Capital Management,
LLC and a principal executive officer of Wynnefield Capital, Inc. (the investment manager of the
Fund). Joshua Landes may be deemed to hold an indirect beneficial interest in the shares held by
Partners, Partners I and the Fund because he is the co-managing member of Wynnefield Capital
Management, LLC and a principal executive officer of Wynnefield Capital, Inc. (the investment
manager of the Fund). Mr. Obus and Mr. Landes both disclaim any beneficial ownership of the
shares of common stock reported in this Form 10-K.
(4) RMB Capital Management, LLC (“RMB”) is an investment adviser registered under the Investment
Advisers Act of 1940. The shares shown as owned by RMB are directly owned by funds affiliated
with Iron Road Capital Partners, LLC (“Iron Road”). RMB is the controlling member of Iron Road.
RMB Capital Holdings, LLC is the controlling member of RMB. The address for all of the affiliated
entities is 115 South LaSalle Street, Chicago, IL 60603.
(5) Includes 169,999 shares issuable upon exercise of warrants. The warrants are exercisable only to the
extent that, upon such exercise, RMB/Iron Road will not own shares in excess of 4.99% of the total
number of shares outstanding immediately after giving effect to the exercise, unless RMB/Iron Road
gives notice that it desires to increase the applicable beneficial ownership limit. The total in this table
does not take into account this limitation. Therefore, the actual number of shares of common stock
currently beneficially owned by RMB/Iron Road, after giving effect to the blocker, is less than the
number reported in the table.
(6) Includes 29,000 shares issuable upon exercise of options.
(7) Includes 179,284 shares issuable upon exercise of options.
(8) Includes (i) 11,163 shares owned directly by Mr. Harvey; and (ii) 212,096 shares held in a retirement
fund directed by Mr. Harvey and as to which he is a beneficiary.
(9) Includes (i) 14,000 shares issuable upon exercise of options and (ii) 772 shares issuable upon
settlement of RSUs.
(10) Includes 13,500 shares issuable upon exercise of options.
(11) Includes 36,500 shares issuable upon exercise of options.
(12) Includes (i) 152,266 shares held directly by Mr. Wickersham and (ii) 23,723 shares owed by a
corporation of which Mr. Wickersham is the majority stockholder, and an officer and director. Mr.
Wickersham disclaims beneficial ownership of the shares held indirectly, except to the extent of his
pecuniary interest.
(13) Includes 36,500 shares issuable upon exercise of options and (ii) 4,226 shares issuable upon
settlement of RSUs.
140
(14) Includes 20,830 shares issuable upon exercise of options.
(15) Includes (i) 125,360 shares issuable upon exercise of options and (ii) 7,341 shares issuable upon
settlement of RSUs.
(16) Includes 1,013 shares owned directly by Mr. Jury; and (ii) 225,838 shares owned by a retirement
fund directed by Mr. Jury and as to which he is a beneficiary.
(17) Includes 909 shares issuable upon settlement of RSUs.
(18) Consists of shares beneficially owned by our executive officers and directors and includes, in
addition to the options, warrants and RSU shares in the table for our Named Executive Officers and
directors, an additional 71,875 shares issuable upon exercise of vested options and 2,096 shares
issuable upon settlement of RSUs that will vest by November 9, 2017 that are held by one executive
officer who is not individually named in the table.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Policies and Procedures for Related Person Transactions
Our Audit Committee is responsible for reviewing and approving, in advance, all related party
transactions. Related parties include any of our directors or executive officers, certain of our stockholders
and their immediate family members. This obligation is set forth in writing in the Audit Committee
charter. A copy of the Audit Committee charter is available on our website at
http://www.swseedco.com in the Investors section under “Corporate Governance.” Each year, the Audit
Committee, assisted by our legal counsel, works with our directors, executive officers and certain
stockholders to identify any transactions with us in which the executive officer or director or their family
members have an interest. We review related party transactions due to the potential for a conflict of
interest. A conflict of interest occurs when an individual’s private interest interferes, or appears to
interfere, with our interests.
Additionally, our Code of Conduct and Ethics establishes the corporate standards of behavior for all our
employees, officers, and directors and sets our expectations of contractors and agents. The Code of
Conduct and Ethics is available on our website at http://www.swseedco.com in the Investors section under
“Corporate Governance.” Our Code of Conduct and Ethics requires any person who becomes aware of
any departure from the standards in our Code of Conduct and Ethics to report his or her knowledge
promptly to a supervisor or to the Chairman of the Audit Committee.
Related Person Transactions
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 also IVM’s majority shareholder and a member of its Board of
Directors. Glen D. Bornt is also a majority shareholder of Kongal Seeds Pty. Ltd. (“Kongal”). IVM had a
15-year supply agreement with IVS, 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 must be
141
offered and sold to the Company, and the Company has the exclusive option to purchase all or any
portion of IVM’s seed production. The Company paid $8,482,663 to IVM during the year ended June 30,
2017. Amounts due to IVM totaled $326,941 and $396,027 at June 30, 2017 and June 30, 2016,
respectively. The Company paid $94,744 to Kongal during the year ended June 30, 2017. Amounts due to
Kongal totaled $4,753 at June 30, 2017.
Indemnification
Our bylaws provide for indemnification of our directors and executive officers, and directors of our
wholly-owned subsidiaries, so that they will be free from undue concern about personal liability in
connection with their service to us. We have also entered into indemnity agreements with certain officers
and directors. These agreements provide, among other things, that we will indemnify the director or
executive officer, under the circumstances and to the extent provided for in the agreement, for expenses,
damages, judgments, fines and settlements he or she may be required to pay in actions or proceedings
which he or she is or may be made a party by reason of his or her position as a director or executive
officer, and otherwise to the fullest extent permitted under Nevada law and our bylaws.
Item 14. Principal Accountant Fees and Services
Annual Evaluation and Selection of Independent Auditor
To help assure continuing auditor independence, our Audit Committee annually reviews Crowe Horwath
LLP’s independence and performance in connection with the Committee’s determination of whether to
retain Crowe Horwath LLP or engage another firm as our independent auditor. In the course of these
reviews, our Audit Committee considers, among other things:
• Crowe Horwath LLP’s recent performance on our company audits;
• Crowe Horwath LLP’s institutional knowledge and expertise regarding our company’s global
business, accounting policies and practices and internal control over financial reporting
enhances audit quality;
•
the professional qualifications of Crowe Horwath LLP, the lead audit partner and other key
engagement partners;
• Crowe Horwath LLP’s disclosures related to audit quality and performance, including recent
PCAOB inspections;
the appropriateness of Crowe Horwath LLP’s audit fees; and
the quality and candor of Crowe Horwath LLP’s communications with the Audit Committee
and management.
•
•
142
Principal Accountant Fees and Services
Our Audit Committee is responsible for audit firm compensation. The aggregate fees billed by Crowe
Horwath LLP for the years ended June 30, 2017 and 2016 for the professional services described below
are as follows:
Audit fees (1)
Audit-related fees (2)
Tax fees
All other fees
Total fees
Fiscal Years Ended
June 30, 2017
June 30, 2016
$ 227,345
6,010
-
-
$233,355
$271,580
-
-
-
$271,580
_________
(1) Audit fees relate to professional services rendered in connection with the audit of our annual
financial statements included in our Annual Reports on Form 10-K, quarterly review of financial
statements included in our Quarterly Reports on Form 10-Q, and audit services provided in
connection with other statutory and regulatory filings.
(2) Audit-related fees comprise fees for professional services that are reasonably related to the
performance of the audit or review of our financial statements.
All of the services described above were pre-approved by our Audit Committee. The Committee
concluded that the provision of these services by Crowe Horwath LLP would not affect their
independence.
Rotation of Lead Audit Partner
The Audit Committee requires the lead audit partner to be rotated at least every five years. The process
for selection of our company’s lead audit partner pursuant to this rotation is expected to involve
discussions with Crowe Horwath to consider issues related to the timing of such rotation and the
transition to new lead and reviewing partners and a meeting between the Chair of our Audit Committee
and the candidate for the role as well as discussion by the full Audit Committee and management.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services Performed by the
Independent Registered Public Accounting Firm
We maintain an auditor independence policy that bans our auditors from performing non-financial
consulting services, such as information technology consulting and internal audit services. This policy
mandates that the Audit Committee approve the audit and non-audit services and related budget in
advance, and that the Audit Committee be provided with quarterly reporting on actual spending. This
policy also mandates that we may not enter into auditor engagements for non-audit services without the
express approval of the Audit Committee. In accordance with this policy, the Audit Committee pre-
approved all services to be performed by our independent registered public accounting firm.
143
PART IV
Item 15. Exhibits and Financial Statement Schedules
(1)
Financial Statements:
Reference is made to the Index to Consolidated Financial Statements of S&W Seed Company under Item 8 in Part II
of this Form 10-K.
(2)
Financial Statement Schedules:
As a smaller reporting company, no financial statement schedules are required.
(3)
Exhibits:
The information required by this Section (3) of Item 15 is set forth on the exhibit index that follows the Signatures
page of this Form 10-K.
144
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 20, 2017
S&W SEED COMPANY
By:
/s/ Mark W. Wong
Mark W. Wong
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Mark W. Wong and Matthew K. Szot, or any of them, his attorneys-in-fact, for
such person in any and all capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Mark W. Wong
Mark W. Wong
President, Chief Executive Officer and Director
(Principal Executive Officer)
September 20, 2017
/s/ Matthew K. Szot
Matthew K. Szot
/s/ Mark J. Harvey
Mark J. Harvey
Executive Vice President, Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
September 20, 2017
Chairman of the Board
September 20, 2017
/s/ Glen D. Bornt
Glen D. Bornt
Director
September 20, 2017
145
/s/ David A. Fischhoff
Director
David A. Fischhoff
/s/ Alexander C. Matina
Director
Alexander C. Matina
/s/ Charles B. Seidler
Director
Charles B. Seidler
/s/ Grover T. Wickersham
Director
Grover T. Wickersham
September 20, 2017
September 20, 2017
September 20, 2017
September 20, 2017
146
Exhibit
Number
2.1
INDEX TO EXHIBITS
Exhibit Description
Form
Incorporated by Reference
Exhibit
SEC File
Number
Number
Filing
Date
Filed
Herewith
Asset Acquisition Agreement among the
Registrant, Imperial Valley Seeds, Inc.
(“IVS”), Glen D. Bornt, Fred Fabre and
the Bornt Family Trust, dated September
28, 2012
8-K
000-34719
2.1
10/2/12
2.2
Asset Purchase and Sale Agreement
8-K
000-34719
2.1
12/29/14
2.3
between the Registrant and Pioneer Hi-
Bred International, Inc. (“Pioneer”),
dated December 19, 2014
First Amendment to Asset Purchase and
Sale Agreement between the Registrant
and Pioneer, dated December 31, 2014
8-K
000-34719
2.1
1/7/15
2.4
Second Amendment to the Asset
10-K
000-34719
2.6
9/28/15
2.5
Purchase and Sale Agreement between
the Registrant and Pioneer, dated April
23, 2015
Third Amendment to Asset Purchase and
Sale Agreement between the Registrant
and Pioneer, dated July 23, 2015
10-K
000-34719
2.7
9/28/15
2.6
Asset Acquisition Agreement between
8-K
000-34719
2.1
5/31/16
3.1
3.2
4.1
4.2
10.1
10.2
10.3
the Registrant and SV Genetics Pty Ltd,
dated May 26, 2016
Registrant’s Articles of Incorporation
Registrant’s Amended and Restated
Bylaws, together with Amendments One,
Two and Three thereto
Form of Common Stock Certificate
Form of Common Stock Purchase
Warrant
Assignment and Assumption Agreement
between the Registrant and IVS, dated
October 1, 2012
Supply Agreement between IVS and
Imperial Valley Milling Co. (“IV
Milling”), dated October 1, 2012
(assigned to the Registrant)
Subordinated Promissory Note made by
the Registrant in favor of IVS, dated
October 1, 2012
8-K
10-K
001-34719
000-34719
3.1
3.2
12/19/11
9/28/15
S-3
8-K
8-K
333-219726
000-34719
4.3
10.3
8/4/17
12/31/14
000-34719
10.1
10/2/12
10-Q
000-34719
10.2
2/13/13
8-K
000-34719
10.3
10/2/12
10.4
Service Level Agreement with IV
10-K
000-34719
10.45
9/24/14
10.5
Milling dated April 4, 2014
Roundup Ready® Alfalfa Co-Breeding
Agreement between the Registrant and
Forage Genetics International, LLC,
dated March 21, 2013(2)
10-K
000-34719
10.28
9/30/13
147
10.6
Contract Alfalfa Production Services
8-K
000-34719
10.2
1/7/15
Agreement between the Registrant and
Pioneer, dated December 31, 2014)(1)(2)
10.7
First Amendment to Contract Alfalfa
10-K
000-34719
10.7
9/28/15
10.8
Production Services Agreement between
the Registrant and Pioneer, dated July
23, 2015
Second Amendment to Contract Alfalfa
Production Services Agreement between
the Registrant and Pioneer, dated August
7, 2015
8-K
000-34719
10.2
8/17/15
10.9
Alfalfa Distribution Agreement between
8-K
000-34719
10.1
1/7/15
10.10
10.11
the Registrant and Pioneer, dated
December 31, 2014(1)(2)
First Amendment to Alfalfa Distribution
Agreement between the Registrant and
Pioneer, dated July 23, 2015
Second Amendment to Alfalfa
Distribution Agreement between the
Registrant and Pioneer, dated August 7,
2015
10-K
000-34719
10.10
9/28/15
8-K
000-34719
10.1
8/17/15
10.12
Research Agreement between the
8-K
000-34719
10.3
1/7/15
10.13
Registrant and Pioneer, dated December
31, 2014(1)(2)
Non-Exclusive Alfalfa Licensing and
Assignment Agreement between the
Registrant and Pioneer, dated December
31, 2014(2)
8-K
000-34719
10.4
1/7/15
10.14
Lease Agreement between the Registrant
8-K
000-34719
10.5
1/7/15
10.15
and Pioneer, dated December 31,
2014(1)(2)
Information Technology Transition
Services Agreement between the
Registrant and Pioneer, dated December
31, 2014(1)(2)
8-K
000-34719
10.6
1/7/15
10.16
Promissory Note issued by the
8-K
000-34719
10.7
1/7/15
Registrant in favor of Pioneer, dated
December 31, 2014(1)
10.17
Security Agreement between the
8-K
000-34719
10.8
1/7/15
Registrant and Pioneer, dated December
31, 2014
10.18
Mortgage from the Registrant to Pioneer,
dated December 31, 2014
10.19
Deed of Trust, Assignment of Rents,
8-K
8-K
000-34719
10.9
1/7/15
000-34719
10.10
1/7/15
Security Agreement and Fixture Filing
among the Registrant, TitleOne
Corporation, as trustee, and Pioneer, as
beneficiary, dated December 31, 2014
Patent License Agreement between the
Registrant and Pioneer, dated December
31, 2014
10.20
8-K
000-34719
10.11
1/17/15
10.21
Patent Assignment Agreement between
8-K
000-34719
10.12
1/7/15
the Registrant and Pioneer, dated
December 31, 2014(2)
148
10.22
Know-How Transfer Agreement
8-K
000-34719
10.13
1/7/15
between the Registrant and Pioneer,
dated December 31, 2014(2)
10.23
Data Transfer Agreement between the
8-K
000-34719
10.14
1/7/15
10.24
10.25
10.26
Registrant and Pioneer, dated December
31, 2014(2)
Assignment Agreement of Plant Variety
Certificates, Plant Breeders’ Rights,
Maintenance Rights and Registration
Rights between the Registrant and
Pioneer, dated December 31, 2014(2)
First Amendment to the Assignment
Agreement of Plant Variety Certificates,
Plant Breeders’ Rights, Maintenance
Rights and Registration Rights between
the Registrant and Pioneer, dated April
23, 2015
Assignment and Assumption Agreement
between the Registrant and Pioneer,
dated December 31, 2014
8-K
000-34719
10.15
1/7/15
10-K
000-34719
10.25
9/28/15
8-K
000-34719
10.16
1/7/15
10.27
General Warranty Deed by Pioneer in
8-K
000-34719
10.17
1/7/15
favor of the Registrant, dated December
31, 2014
10.28
Warranty Deed by Pioneer in favor of
the Registrant, dated December 31, 2014
10.29
Form of Indemnification Agreement
8-K
8-K
000-34719
10.18
1/7/15
000-34719
10.1
7/24/14
10.30
10.31
with Officers, Directors and Employees
of the Registrant and Subsidiaries
Amended and Restated 2009 Equity
Incentive Plan as amended through
Amendment No. 2, forms of Stock
Option Grant and Agreement, Restricted
Stock Unit Grant and Restricted Stock
Award*
Employment Agreement between the
Registrant and Mark S. Grewal, dated
March 18, 2016*
10-K
000-34719
10.34
9/28/15
8-K
000-34719
10.1
3/23/16
10.32
Employment Agreement between the
8-K
000-34719
10.2
3/23/16
10.33
10.34
10.35
10.36
10.37
Registrant and Matthew K. Szot, dated
March 18, 2016*
Employment Agreement between the
Registrant and Dennis C. Jury, dated
March 18, 2016*
Contract of Employment between Seed
Genetics International Pty, Ltd. and
Dennis C. Jury, dated as of March 28,
2013*
Employment Agreement between the
Registrant and Mark W. Wong, dated
June 19, 2017*
Employment Agreement between the
Registrant and Danielson B. Gardner,
dated August 15, 2016*
Collaboration Agreement between the
Registrant and Calyxt, Inc., dated May
8-K
000-34719
10.3
3/23/16
8-K
000-34719
10.1
4/5/13
X
X
10-K
000-34719
10.39
9/28/15
149
10.38
10.39
10.40
10.41
28, 2015 and entered into by the
Registrant on June 4, 2015CTR
Credit and Security Agreement between
the Registrant and KeyBank, National
Association (“KeyBank”), dated
September 22, 2015
First Amendment to Credit and Security
Agreement between the Registrant and
KeyBank, dated June 29, 2016
Second Amendment to Credit and
Security Agreement between the
Registrant and KeyBank, dated October
4, 2016
Third Amendment to Credit and Security
Agreement between the Registrant and
KeyBank, dated March 13, 2017
10.42
Revolving Credit Note dated September
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
22, 2015 in favor of KeyBank
Intellectual Property Security Agreement
of the Registrant in favor of KeyBank,
dated September 22, 2015
Pledge Agreement by the Registrant in
favor of KeyBank, dated September 22,
2015
Security Agreement (Subsidiary) by U.S.
Subsidiaries of Registrant in favor of
KeyBank, dated September 22, 2015
Guaranty of Payment (Subsidiary) by
U.S. Subsidiaries of Registrant in favor
of KeyBank, dated September 22, 2015
Form of Registration Rights Agreement
among the Registrant and purchasers of
the 8% Senior Secured Convertible
Debentures and Warrants
Registration Rights Agreement between
the Registrant and MFP Partners, L.P.,
dated November 23, 2015
Securities Purchase Agreement between
the Registrant and MFP Partners, L.P.,
dated December 31, 2014
Securities Purchase Agreement between
the Registrant and MFP Partners, L.P.
dated November 23, 2015
Business Letter of Offer dated January
19, 2015 from NAB for SGI credit
facilities
Business Letter of Offer dated April 13,
2015 from NAB for SGI credit facilities
Business Letter of Advice dated April
13, 2015 from NAB modifying SGI
Farm Management Overdraft Facility
Corporate Guarantee executed by the
Registrant on April 21, 2015 in favor of
National Australia Bank with respect to
SGI credit facilities
8-K
000-34719
10.1
9/23/15
X
X
X
8-K
8-K
000-34719
10.2
9/23/15
000-34719
10.4
9/23/15
8-K
000-34719
10.3
9/23/15
8-K
000-34719
10.6
9/23/15
8-K
000-34719
10.5
9/23/15
8-K
000-34719
10.4
12/31/14
8-K
000-34719
10.2
11/24/15
8-K
000-34719
4.1
12/31/14
8-K
000-34719
10.1
11/24/15
10-K
000-34719
10.43
9/28/15
10-K
000-34719
10.44
9/28/15
10-K
000-34719
10.45
9/28/15
10-K
000-34719
10.46
9/28/15
150
10.55
Business Letter of Advice to SGI dated
8-K
000-34719
10.1
5/12/16
10.56
10.57
10.58
10.59
10.60
21.1
23.1
24.1
31.1
31.2
32.1
as of April 28, 2016 (executed by SGI on
May 6, 2016) from NAB for SGI credit
facilities
Form of Registration Rights Agreement
among the Registrant and purchasers of
the 8% Senior Secured Convertible
Debentures and Warrants
Form of Security Agreement among the
Registrant and purchasers of the 8%
Senior Secured Convertible Debentures
Form of Guaranty provided by Seed
Holding, LLC and Stevia California,
LLC in favor of the purchasers of the 8%
Senior Secured Convertible Debentures
Form of Intercreditor and Subordination
Agreement among Wells Fargo Bank,
N.A., Hudson Bay Fund LP, in its
capacity as agent for the holders of the
8% Senior Secured Convertible
Debentures and Pioneer
Registration Rights Agreement between
the Registrant and MFP Partners, L.P.,
dated November 23, 2015
Subsidiaries of the Registrant
Consent of Independent Registered
Public Accounting Firm
Power of Attorney (see signature page)
Chief Executive Officer Certification
pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Chief Financial Officer Certification
pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Chief Executive Officer Certification
pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002**
32.2
Chief Financial Officer Certification
pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002**
101
The following materials from
the Company's Annual Report
on Form 10-K for the fiscal
year ended June 30, 2017,
formatted in XBRL (eXtensible
Business Reporting Language):
(i) the Consolidated Balance
Sheets at June 30, 2017 and
June 30, 2016; (ii) the
Consolidated Statements of
Operations for the Fiscal Years
8-K
000-34719
10.4
12/31/14
8-K
000-34719
10.5
12/31/14
8-K
000-34719
10.6
12/31/14
8-K
000-34719
10.7
12/31/14
8-K
000-34719
10.2
11/24/15
X
X
X
X
X
X
X
X
151
Ended June 30, 2017 and 2016;
(iii) the Consolidated
Statements of Comprehensive
(Loss) Income for the Fiscal
Years Ended June 30, 2017 and
2016; (iv) the Consolidated
Statement of Stockholders'
Equity; (v) the Consolidated
Statement of Cash Flows for the
Fiscal Years Ended June 30,
2017 and 2016; and (vi) the
Notes to Consolidated Financial
Statements
__________
CTR
*
**
Portions of this exhibit have been omitted pursuant to an Order Granting Confidential Treatment
under the Securities Exchange Act of 1934, as amended.
Management contract or compensatory plan or arrangement.
This certification accompanies the Form 10-K to which it relates, is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of
Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended (whether made before or after the date of the Form 10-K), irrespective of any general
incorporation language contained in such filing.
(1) Exhibits and schedules to this agreement have been omitted pursuant to Item 601(b) of Regulation
S-K. The Registrant hereby undertakes to furnish supplementally a copy of any omitted exhibit or
schedule to the Securities and Exchange Commission upon request.
(2) Portions of this exhibit have been omitted pursuant to an effective order for confidential treatment.
152
OFFICERS & DIRECTORS
Officers & Executive Management
Board Members
Mark M. Wong
Chief Executive Officer
Matthew K. Szot
Executive Vice President,
Chief Financial Officer
Dennis Jury
Executive Vice President,
Chief Operations Officer
Danielson B. Gardner
Chief Marketing and Technology Officer
Management
Daniel Z. Karsten
Vice President, Processing
Robin Newell
Vice President, North American Sales
Kirk Rolfs
Vice President, Supply Chain
Mark Smith
Vice President, Breeding and Genetics
Walter van Leeuwen
Vice President, International Sales
Corporate Headquarters
S&W Seed Company
106 K Street, Suite 300
Sacramento, CA 95814 United States
www.swseedco.com
Independent Registered Public Accounting Firm
Crowe Horwath LLP
San Francisco, CA
Mark J. Harvey, Chairman
Chairman of the Board, S&W Seed Company
Grover Wickersham, Esq., Vice Chairman
Private Investor, Vice Chairman of SenesTech
Chairman Eastside Distilling
Mark M. Wong
Chief Executive Officer, S&W Seed Company
Glen D. Bornt
President, Imperial Valley Milling Co.
David A. Fischhoff
Monsanto Company, retired
Alexander C. Matina
Vice President, Investments at MFP Investors LLC
Charles B. Seidler
Portfolio Manager, London-based City Financial
hedge fund group
Stock Exchange Listing
S&W Seed Company’s common stock is traded
on the NASDAQ Capital Market under the symbol
SANW
Transfer Agent & Registrar
Transfer Online, Inc.
512 SE Salmon Street
Portland, OR 97214
www.transferonline.com
Form 10-K
The Company’s complete filings with the Securities and Exchange Commission, including the Form 10-K included in the
report and all exhibits, are available without charge through the Company’s website at www.swseedco.com under “Investor
Relations” as well as on the SEC’s website at www.sec.gov.
Forward-Looking Statements
This report contains statements that discuss our future expectations, contains projections of our results of operations and
financial condition and includes other forward-looking statements within the meaning of Section 27A of the Securities and
Exchange Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Our actual
results may differ significantly and materially from those expressed in these forward-looking statements as a result of risks
and uncertainties, including those detailed in our Annual Report on Form 10-K. We disclaim any intent or obligation to
update these forward-looking statements, and you should not unduly rely on them.
S&W SEED COMPANY
2017 ANNUAL REPORT
S&W Seed Company
106 K Street, Suite 300
Sacramento, CA 95814
Phone: 559.884.2535
Fax: 559.884.2750
www.swseedco.com