UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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)
|
|
|
|
|
|
7108 North Fresno Street, Suite 380
Fresno, CA 93720
(Address of Principal Executive Offices, including Zip Code)
(559) 884-2535
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. x YES ¨ NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES
x NO ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer ¨ |
Accelerated filer ¨ |
Non-accelerated filer ¨
|
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨
NO x
As of May 13, 2016, 16,836,023 shares of the registrant's common stock were outstanding.
S&W SEED COMPANY 1
FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never
materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Report that
are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are subject to the "safe harbor" created by those sections.
All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to expectations as to source of revenue, the
extent of future research and development expense, patent application timing, seed costs, and any projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other
financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any statements
concerning expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases; any statements regarding
future economic conditions or performance; any statements of expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions
underlying any of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe,"
"can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan,"
"project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-
looking statements. We have based these forward-looking statements on our current expectations about future events. Such forward-looking statements are subject to risks, uncertainties and
other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward- looking statements. Risks,
uncertainties and assumptions include the following: 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 our Annual Report on Form 10-K for the fiscal year ended June 30, 2015. 2
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Many factors discussed in this Report, some of which are beyond our control, will be important in determining our future performance. Consequently, actual results may differ materially from
those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Report
as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. 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 speak only as of the date of
this Report. 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. 3
Part I FINANCIAL INFORMATION Item 1. Financial Statements
S&W SEED COMPANY
See notes to consolidated financial statements. 4
S&W SEED COMPANY
See notes to consolidated financial statements. 5
S&W SEED COMPANY
See notes to consolidated financial statements. 6
S&W SEED COMPANY
See notes to consolidated financial statements. 7
S&W SEED COMPANY
See notes to consolidated financial statements. 8
S&W SEED COMPANY 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. 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 most recently when on December 31,
2014, 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"). 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. 9
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. Unaudited Interim Financial Information The Company has prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC") for interim financial reporting. These consolidated financial statements are unaudited and, in the Company's opinion, include all adjustments, consisting of normal recurring
adjustments and accruals, necessary for a fair presentation of the Company's consolidated balance sheets, statements of operations, comprehensive income (loss), cash flows and
stockholders' equity for the periods presented. Operating results for the periods presented are not necessarily indicative of the results to be expected for the full year ending June 30, 2016.
Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been
omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
accompanying notes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2015, as filed with the SEC. 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, 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. One customer accounted for 65% of its revenue for the three months ended March 31, 2016 and three customers accounted for 83% of its revenue for the three months ended
March 31, 2015. One customer accounted for 50% of its revenue for the nine months ended March 31, 2016, and three customers accounted for 56% of its revenue for the nine months
ended March 31, 2015. 10
Three customers accounted for 40% of the Company's accounts receivable at March 31, 2016. Three customers accounted for 53% of the Company's accounts receivable at June 30, 2015. In addition, the Company sells a substantial portion of its products to international customers. Sales direct to international customers represented 35% and 23% of revenue during the
three months ended March 31, 2016 and 2015, respectively. Sales direct to international customers represented 45% and 50% of revenue during the nine months ended March 31, 2016 and
2015, respectively. The net book value of fixed assets located outside the United States was 17% and 11% of total assets at March 31, 2016 and June 30, 2015, respectively. Cash balances
located outside of the United States may not be insured and totaled $2,506,021 and $1,039,326 at March 31, 2016 and June 30, 2015, respectively. The following table shows revenue from external sources by destination country: 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. 11
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. 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 $162,945 and
$155,595 at March 31, 2016 and June 30, 2015, respectively. Inventories Inventory Inventories consist of alfalfa 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. 12
Growing Crops Expenditures on growing crops are valued at the lower of cost or market and are deferred and charged to cost of products sold when the related crop is harvested and sold. The
deferred growing costs included in inventories in the consolidated balance sheets consist primarily of labor, lease payments on land, interest expense on farmland, cultivation and on-going
irrigation, harvest and fertilization costs. Costs included in growing crops relate to the current crop year. Costs that are to be realized over the life of the crop are reflected in crop production
costs. The Company has exited all internal farming operations and accordingly, there are no growing crop costs as of March 31, 2016. Components of inventory are: Property, Plant and Equipment Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset - periods of 18-28 years for buildings, 3-10 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, 20 years for customer relationships and trade names and 2-20 for other intangible
assets. The weighted average estimated useful lives are 24 years for technology/IP/germplasm, 20 years for customer relationships and trade names and 22 years for other intangible assets. Goodwill Goodwill originated from acquisitions of Imperial Valley Seeds, Inc. ("IVS") and SGI during the fiscal year 2013 and the acquisition of the alfalfa business from DuPont
Pioneer in fiscal year 2015. Goodwill is assessed annually, or when certain triggering events occur, for impairment using fair value measurement techniques. These events could include a
significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors. The
Company 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
13
carrying amount, including goodwill. The Company uses a discounted cash flow methodology to estimate the fair value of a reporting unit. A discounted cash flow analysis requires various judgmental assumptions including
assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the Company's budget and long-term plans.
Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the
reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. The Company determined it has two reporting units for goodwill impairment testing purposes. Its
reporting units are the United States operations and the Australia operations. The Company conducted a qualitative assessment of goodwill and determined that it was more likely than not
that there was no impairment at June 30, 2015. 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. Loss on equity method investment totaled $28,916 and $252,619 for the three months and nine months ended March 31, 2016, respectively. This represents the Company's 50% share of
losses incurred by the joint corporation (S&W Semillas S.A.) in Argentina during the two periods. 14
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. Income Taxes Deferred tax assets and liabilities are determined based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net
operating loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable income. A valuation allowance is established,
when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized. Impairment of Long-Lived Assets The Company 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 December 31, 2014 prompted a review of
certain farmland-related costs. The carrying value of these assets was deemed in excess of fair value, and the Company recorded an impairment charge of $500,198 in the consolidated
statement of operations during the quarter ended December 31, 2014. 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. 15
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: 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. No assets or liabilities were
valued at fair value on a non-recurring basis as of March 31, 2016 or June 30, 2015. 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 March 31, 2016, the fair value and carrying value of the
convertible debentures was $10,641,587 and $8,910,997, 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. 16
Assets and liabilities that are recognized and measured at fair value on a recurring basis are categorized as follows: 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. Recent Accounting Pronouncements 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. NOTE 3 - BUSINESS COMBINATIONS On December 31, 2014, the Company purchased certain alfalfa research and production facilities and conventional (non-GMO) alfalfa germplasm assets (and assumed certain
related liabilities) of DuPont Pioneer. The acquisition expanded the Company's production capabilities, diversified its product offerings and provided access to new distribution
channels. The DuPont Pioneer Acquisition was consummated pursuant to the terms of an asset purchase and sale agreement. The purchase price under the Agreement was up to $42,000,000,
consisting of $27,000,000 in cash (payable at closing), a three year secured promissory note (the "Pioneer Note") payable by the Company 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 Note) of up to $5,000,000 based on S&W sales under
distribution and production agreements as well as other Company sales of products 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. Principal on the Pioneer Note is payable at
maturity on December 31, 2017. The DuPont Pioneer 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 DuPont Pioneer Acquisition. 17
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of December 31, 2014: The acquisition-date fair value of the consideration transferred consisted of the following: The excess of the purchase price over the fair value of the net assets acquired, amounting to $5,353,317, 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, technology and the assembled workforce of
DuPont Pioneer. 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 and the multi-period excess earnings method. The
contingent consideration requires the Company to increase the principal amount of the Seller note by up to an additional $5,000,000 if the Company meets certain performance metrics during
the three-year period following the acquisition. The fair value of the contingent consideration arrangement at the acquisition date was $2,004,000. The fair value of the contingent
consideration was estimated using a probability-weighted cash flow 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 income approach were as follows: 24% present value discount factor and probability adjusted revenue assumptions based on the
number of expected units produced. As of March 31, 2016, the estimated fair value of the contingent consideration is $2,079,490. The values and useful lives of the acquired DuPont Pioneer
intangibles are as follows: 18
The Company incurred $863,048 of acquisition costs associated with the DuPont Pioneer Acquisition that have been recorded in selling, general and
administrative expenses on the consolidated statement of operations during the year ended June 30, 2015. The newly acquired business generated revenue of approximately $30.8 million
during the nine months ended March 31, 2016. In the transaction, 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"). The Company was interested in acquiring the GMO assets at the time it acquired the conventional (non-GMO) alfalfa seed assets, and DuPont Pioneer was interested in selling
those assets, but terms could not be agreed-upon, in part because of the need for agreements with the third parties from whom the Third Party GMO Traits are licensed. The agreements related to the DuPont Pioneer Acquisition provide that both the Company and DuPont Pioneer will work towards obtaining the necessary consents from and agreements
with third parties such that the GMO assets can be transferred from DuPont Pioneer to the Company. If such consents and agreements are obtained before November 30, 2017, the
Company has committed to buy, and DuPont Pioneer has committed to sell, the GMO assets at a price of $7,000,000 on or before December 29, 2017. The following unaudited pro forma financial information presents results as if the DuPont Pioneer Acquisition occurred on July 1, 2014. Pro forma financial information for the three
months ended March 31, 2015 is not necessary as the Consolidated Statement of Operations include the acquired operations for this period. The primary adjustments for the nine months ended March 31, 2015 include: (i) the reduction of DuPont Pioneer historical revenue to reflect the shift from end
customer to wholesale pricing; (ii) the reduction of cost of revenue to remove DuPont Pioneer's historical sales incentives included in cost of sales; (iii) amortization of acquired intangibles of
$698,050; (iv) depreciation of acquired property, plant and equipment of $221,884; (v) additional interest expense on the convertible notes issued concurrent with the acquisition, including
non-cash amortization of debt issuance costs and accretion of debt discount of $3,097,299; (vi) additional interest expense of $150,000 for the Pioneer Note included in total consideration for
the DuPont Pioneer Acquisition; and (vii) adjustments to reflect the additional income tax expense assuming a combined effective tax rate of 23.4%. 19
NOTE 4 - GOODWILL AND INTANGIBLE ASSETS The following table summarizes the activity of goodwill for the nine months ended March 31, 2016 and the year ended June 30, 2015, respectively. Intangible assets consist of the following: Amortization expense totaled $558,358 and $464,044 for the three months ended March 31, 2016 and 2015, respectively. Amortization expense totaled
$1,673,048 and $931,705 for the nine months ended March 31, 2016 and 2015, respectively. Estimated aggregate remaining amortization is as follows: 20
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT Components of property, plant and equipment were as follows: Depreciation expense totaled $237,704 and $202,107 for the three months ended March 31, 2016 and 2015, respectively. Depreciation expense totaled
$703,053 and $364,759 for the nine months ended March 31, 2016 and 2015, respectively. NOTE 6 - DEBT Total debt outstanding, excluding convertible debt addressed in Note 7, are presented on the consolidated balance sheet as follows: 21
From 2011 until September 22, 2015, the Company had one or more revolving credit facility agreements with Wells Fargo Bank, National Association
("Wells Fargo"). From February 21, 2014 through September 22, 2015, the Company had two working capital facilities with Wells Fargo (collectively, the "Wells Facilities"), both of which
terminated as of September 22, 2015. The Wells Facilities included (i) a domestic revolving facility of up to $4,000,000 for working capital purposes, and (ii) an export-import revolving facility
of up to $10,000,000 for financing export-related accounts receivable and inventory (the "Ex-Im Revolver"). The Wells Facilities were secured by a first priority lien on accounts receivable and other rights to payment, general intangibles, inventory and equipment, subject to the priority rights of
the senior secured debentures issued by the Company in December 2014 and Pioneer Hi-Bred International, Inc. The Wells Facilities were further secured by a lien on, and a pledge of, 65%
of the stock of the Company's wholly-owned subsidiary, S&W Australia Pty Ltd. The Wells Facilities were subject to customary representations and warranties, affirmative and negative
covenants and customary events of default. The interest rate on the Wells Facilities was either (i) at a fluctuating rate per annum determined by Wells Fargo to be 2.75% above the daily one-month LIBOR Rate in effect from time to
time (increased from 2.25%), or (ii) at a fixed rate per annum determined to be 2.75% (increased from 2.25%) above LIBOR in effect on the first day of the applicable fixed rate term. On
September 22, 2015, the Company paid all outstanding principal and accrued interest owing under the Wells Facilities. 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 amount revolving credit facility (the "KeyBank Credit Facility"). In addition to paying off the Wells Facility, the proceeds from advances under the
KeyBank Credit Facility are to be used for ongoing working capital requirements and to provide for general corporate purposes. All amounts of unpaid principal and interest due under the
KeyBank Credit Facility must be paid in full on or before September 21, 2017. The KeyBank Credit Facility generally establishes a borrowing base of up to 85% of eligible accounts receivable (90% if insured), 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% 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 shall maintain one or more lockbox or cash collateral accounts at KeyBank, in KeyBank's name, which shall 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 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 March 31, 2016. The outstanding
balance on the KeyBank Credit Facility was $15,745,791 at March 31, 2016. 22
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 $200,000 at March 31, 2016. On April 1, 2013, the Company issued a three-year subordinated promissory note to the selling shareholders of SGI in the principal amount of USD $2,482,317 (the "SGI
Note"), with a maturity date of April 1, 2016 (the "SGI Maturity Date"). The SGI note is non-interest bearing.
Since the note is non-interest bearing, the Company recorded a debt discount of $156,880 at the time of issuance for the estimated net
present value of the obligation and accretes the net present value of the SGI Note obligation up to the face value of the SGI Note obligation using the effective interest method as a
component of interest expense. Accretion of the debt discount totaled $40,185 and $39,320 for the nine months ended March 31, 2016 and 2015, respectively. The SGI Note was paid down
to $150,000 on March 31, 2016 and the remaining balance was paid in full on April 1, 2016. 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. SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank ("NAB"). The current facility, referred to as the NAB Credit Facilities, was
amended as of March 31, 2015 and expires on March 31, 2016. As of March 31, 2016, AUD $7,779,097 (USD $5,965,012) was outstanding under the NAB Credit Facilities. The NAB Credit
Facilities were amended in May 2016. See Note 14 (Subsequent Events). The NAB Credit 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
$751,464 at March 31, 2016) and a trade refinance facility (the "Trade Refinance Facility"), having a credit limit of AUD $12,000,000 (USD $9,201,600 at March 31, 2016). The Trade Refinance 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 March 31, 2016, the Trade Refinance Facility accrued interest on Australian dollar
drawings at approximately 5.22%, calculated daily. The Trade Refinance 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). 23
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 March 31, 2016, the Overdraft Facility accrued interest at
approximately 7.12% calculated daily. For both the Overdraft Facility and the Trade Refinance 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 Trade Refinance Facility and the Overdraft Facility upon the occurrence of an event of default). The NAB
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 NAB facility agreements. Both the Overdraft Facility and the Trade Refinance Facility 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 2015 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 March 31, 2016. In January 2015, NAB and SGI entered into a flexible rate loan (the "Keith Building Loan") in the amount of AUD $650,000 (USD $498,420 at March 31, 2016) and a
machinery and equipment facility (the "Keith Machinery and Equipment Facility") of up to AUD $1,350,000 (USD $1,035,180 at March 31, 2016). In February 2016 the Keith
Machinery and Equipment Facility was restructured into three separate equipment loans as follows; (1) AUD $914,497 (USD $701,237 at March 31, 2016) at an interest rate of 4.99%, expiring in March 2021. (2) AUD $53,381 (USD $40,932 at March 31, 2016) at an interest rate of 5.04%, expiring in February 2021. (3) AUD $25,524 (USD $19,571 at March 31, 2016) at an interest rate of 4.98%, expiring in March 2021. The unused balance of AUD $356,598 (USD $273,440 at March 31, 2016) is still available for future use under the Keith Machinery and Equipment Facility. The Keith Building Loan and the Keith Machinery and Equipment Facility, collectively referred to as the Keith Credit Facilities, have a combined maximum credit amount of AUD
$2,000,000 (USD $1,533,600 at March 31, 2016). The Keith Credit Facilities are being used for the construction of a new building on SGI's Keith, South Australia property and for the
machinery and equipment to be purchased for use in the operations of the new building. The Keith Building Loan matures on November 30, 2024, bears interest payable in arrears that
varies from pricing period to pricing period based on the weighted average of a specified basket of interest rates (6.295% as of March 31, 2016). The Keith Machinery and Equipment Facility
permits SGI to draw down additional amounts up to the maximum still available of AUD $356,598 (USD $273,440 at March 31, 2016) for periods of up to 180 days, at interest rates, 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. At March 31, 2016,
the principal balance on the Keith Building Loan was AUD $650,000 (USD $498,420). 24
The annual maturities of short-term and long-term debt, excluding convertible debt addressed in Note 7, are as follows: 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. See Note 3 for further discussion of the DuPont Pioneer
Acquisition. 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 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. As required under the terms of the Debentures, following the sale of 759 acres of farmland property in the Imperial Valley of California in March 2015, which resulted in sale proceeds of
$7,100,000, the Company redeemed $5,000,000 in principal amount of the Debentures. The reduction in principal was applied on the back end of the term, moving the final scheduled
payment from November 30, 2017 to June 1, 2017. During the quarter ended March 31, 2016, the Company accelerated three redemption payments totaling $2,830,049. 25
Taking into account the accelerated redemption payments, the final payment on the Debentures will be March 1, 2017. As of March 31, 2016, the scheduled principal payments on the Debentures are as follows: 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. As of March 31, 2016, the remaining outstanding Debentures were potentially convertible into 2,306,653 shares.
No further adjustments of the conversion price are provided for, except in the case of stock splits and similar recapitalization events. The Company has a one-time optional forced conversion
right, exercisable if specified conditions are satisfied. The Debentures are the Company's senior secured obligations, subject only to certain secured obligations of KeyBank and DuPont Pioneer (limited to a purchase money security interest
in the purchased assets). The rights of KeyBank, DuPont Pioneer and the holders of the Debentures are set forth in an intercreditor and subordination agreement that was initially entered into
in connection with the closing of the issuance of the Debentures. 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 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. 26
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 March 31, 2016, the fair value of the Warrants was estimated at $4,081,200. The Warrants were valued at March 31, 2016 using
the Monte Carlo simulation model, under the following assumptions: (i) remaining expected life of 4.25 years, (ii) volatility of 49.4%, (iii) risk-free interest rate of 1.08% and (iv) dividend rate of zero. 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 is being amortized over the term of the Debentures using the effective interest method. Debt issuance costs totaling $1,931,105 are also being amortized over the term of the
Debentures using the effective interest method. In addition, the reduction in the conversion price of 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. Accounting for the Redemption The redemption of $5,000,000 in principal amount of the Debentures was accounted for as a partial extinguishment of the borrowing, as well as the settlement of the derivative
recognized initially. The redemption resulted in a loss of $1,183,687, which was included in the interest expense - amortization of debt discount line item on the consolidated statement of
operations for the three months ended March 31, 2015. Total convertible debt outstanding, excluding debt addressed in Note 6, is presented on the consolidated balance sheet as follows: 27
NOTE 8 - WARRANTS The following table summarizes the total warrants outstanding at March 31, 2016: The warrants issued in December 2014 are subject to down-round price protection. See Note 7 for further discussion. NOTE 9 - 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 $1,911,193 at March 31, 2016 and their maturities range from April 2016 to July 2016. 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
$75,691 at March 31, 2016 compared to foreign currency contract liabilities of $59,116 at June 30, 2015. The Company recorded a gain on foreign exchange contracts of $110,346 and a loss
of $275,123, which is reflected in cost of revenue for the three and nine months ended March 31, 2016, respectively. The Company recorded a loss on foreign exchange contracts of
$116,004 and $445,468, which is reflected in cost of revenue for the three and nine months ended March 31, 2015, respectively. NOTE 10 - 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"). 28
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. Contingencies The Company is not currently a party to any pending or threatened legal proceedings. Based on information currently available, management is not aware of any matters that would
have a material adverse effect on the Company's financial condition, results of operations or cash flows. NOTE 11 - 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 its majority shareholder and a
member of its Board of Directors. Fred Fabre, the Company's Vice President of Sales and Marketing, is a minority shareholder of IVM. IVM had a 15-year supply agreement with 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 $10,793,199 to IVM during the nine months
ended March 31, 2016. Amounts due to IVM totaled $90,711 and $834,158 at March 31, 2016 and June 30, 2015, respectively. Simon Pengelly, who served as SGI's Chief Financial Officer through January 11, 2016, has a non-controlling ownership interest in the partnership Bungalally Farms ("BF").
BF is one of SGI's contract alfalfa seed growers. SGI currently has entered into seed production contracts with BF on the same commercial terms and conditions as with the other growers
with whom SGI contracts for alfalfa seed production. During nine months ended March 31, 2016, the Company purchased a total of $12,105 of alfalfa seed that BF grew and sold to SGI
under contract seed production agreements. SGI currently has seed production agreements with BF for 123 hectares of various seed varieties as part of its contract production for which SGI
paid BF the same price it agreed to pay its other growers. Mr. Pengelly did not personally receive any portion of these funds. Amounts due to BF totaled $0 and $293,772 at March 31, 2016
and June 30, 2015, respectively. 29
NOTE 12 - 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. 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. Beginning with the quarter ended December 31, 2014, the Company began utilizing 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. The fair value of grants issued prior to
the quarter ended December 31, 2014 were estimated using a lattice model. The weighted average assumptions used in the Black-Scholes-Merton model are: (i) 1.5% - 1.6% risk free rate of
interest; (ii) 0% dividend yield and (iii) 50.4% - 50.8% volatility of common stock. The Company applied forfeiture assumptions averaging 3.3% to the estimated fair values to determine the net
expense to record in the consolidated financial statements. On December 8, 2012, the Company granted 175,000 stock options to its directors, officers, and employees at an exercise price of $7.20, which was the closing price for the Company's
common stock on the date of grant. These options vest in equal quarterly installments over one- and three-year periods, commencing on January 1, 2013, and expire five years from
the date of grant. During the year ended June 30, 2014, the Company granted 270,000 stock options to its officers and employees at exercise prices ranging from $5.94 to $8.29, which was
the closing price for the Company's common stock on the respective dates of grant. These options vest in equal quarterly installments over periods ranging from six months to three years and
expire five years from the date of grant. During the year ended June 30, 2015, the Company granted 227,197 stock options to its directors, officers and employees at exercise prices ranging from $3.61 to $6.25. These
30
options vest in equal quarterly installments over periods ranging from one to three years and expiration dates range from five to ten years from the date of grant.
During the nine months ended March 31, 2016, the Company granted 203,500 stock options to its directors and officers at exercise prices ranging from $4.25 to $4.76. These options vest in
quarterly installments over periods ranging from one to three years and expire ten years from the date of grant. A summary of stock option activity for the nine months ended March 31, 2016 and year ending June 30, 2015 is presented below: The weighted average grant date fair value of options granted and outstanding at March 31, 2016 was $1.24. At March 31, 2016, the Company had $452,897 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 1.67 years. The Company settles employee stock option exercises with newly issued shares of common stock. On March 16, 2013, the Company issued 280,000 restricted stock units to certain members of the executive management team. The restricted stock units have varying vesting periods
whereby 34,000 restricted stock units vested on July 1, 2013 and the remaining 246,000 restricted stock units vest quarterly in equal installments over a four and one-half year period,
commencing on July 1, 2013. The fair value of the award was $2,984,800 and was based on the closing stock price on the date of grant. 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 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. 31
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. The Company recorded $192,719 and $142,262 of stock-based compensation expense associated with grants of restricted stock units made under the 2009 Plan during the three months
ended March 31, 2016 and 2015, respectively. The Company recorded $586,564 and $433,108 of stock-based compensation expense associated with grants of restricted stock units made
under the 2009 Plan during the nine months ended March 31, 2016 and 2015, respectively. A summary of activity related to non-vested restricted stock units is presented below: At March 31, 2016, the Company had $1,267,818 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized
over the weighted average remaining service period of 1.8 years. At March 31, 2016, there were 690,611 shares available under the 2009 Plan for future grants and awards. Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the three months ended March 31, 2016 and 2015 totaled $289,314
and $233,848, respectively. Stock-based compensation expense recorded for stock options, restricted stock grants and restricted stock units for the nine months ended March 31, 2016 and
2015 totaled $917,489 and $680,923, respectively. NOTE 13 - 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 nine months ended March 31, 2016 and 2015, respectively. 32
NOTE 14 - SUBSEQUENT EVENTS On April 1, 2016, the Company paid the remaining balance of $150,000 due on the promissory note payable to the shareholders of SGI. By Business Letter of Advice dated April 28, 2016 (the "Business Letter of Advice"), SGI's credit facilities with NAB were modified. SGI agreed to the modifications by
execution of the Business Letter of Advice executed on May 6, 2016. Under the terms of the Business Letter of Advice, the Trade Refinance Facility of AUD $12,000,000 was extended to
March 30, 2018. In addition, the NAB Business Markets - Flexible Rate Loan increased from AUD $650,000 to AUD $800,000. The Business Letter of Advice also made changes to the
covenants and undertakings by eliminating those that no longer apply and adding certain additional lending covenants and undertakings. The Overdraft Facility and the equipment loans, as well as the Company's guarantee, were not modified by the Business Letter of Advice and remain in place as described in Note 6. 33
Item 2. 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 I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q. In addition to our historical consolidated financial information, the following discussion
contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as referred
to on page 2 of this Quarterly Report on Form 10-Q. Factors that could cause or contribute to these differences include those discussed in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2015, particularly in Part I, Item 1A, "Risk Factors." Executive Overview Founded in 1980 and headquartered in the Central Valley of California, we believe we are the leading producer and distributor of alfalfa seed in the world. Our production capabilities
span both hemispheres in the world's key alfalfa seed production regions, with operations in the San Joaquin and Imperial Valleys of California, other Western states, South Australia and
Canada. We sell our seed varieties in more than 30 countries across the globe primarily through a network of distributors. Historically, we have been recognized as the leading producer of
non-dormant alfalfa seed varieties, which varieties 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, has made us a leading producer of dormant, high yield alfalfa seed varieties, which are the varieties suitable for cold weather conditions. As a result of the above activity, 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. In addition to alfalfa seed production and sales, which is our core business, we also conduct an ongoing stevia breeding program. Following our initial public offering in fiscal year 2010, we expanded certain pre-existing business initiatives and added new ones, including: 34
We have accomplished these expansion initiatives through a combination of organic growth and strategic acquisitions, foremost among them: 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. We also own and operate seed-cleaning and processing facilities in Five Points, California and Nampa, Idaho. Our Nampa facility, which we acquired in the DuPont Pioneer acquisition,
sits on approximately 80 acres and includes conditioning, treating, bagging and warehouse facilities that had been used by DuPont Pioneer for its alfalfa seed processing needs. 35
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. Fiscal year 2016 is the first full fiscal year in which we will have a full range of non-dormant and dormant varieties, which will 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 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 a 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 alfalfa 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 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. These
costs are expensed as incurred. 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 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 filing of three patent applications through March 31, 2016. We filed a fourth patent application in April 2016. 36
Our research and development operation and 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. Overall, we have been focused on 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 to be relatively flat on an annualized basis for the foreseeable future, although our research and development expenses may fluctuate from period to period as a result of the timing
of various research and development projects. Our research and development costs are charged to expense as they are incurred. Therefore, 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, 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 18-28 years for buildings, 3-10 years for machinery and equipment and 3-5 years for vehicles. Other Expense Other expense consists 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 obligation and interest expense in connection with amortization of debt discount. In addition, interest expense consists of interest costs related to our outstanding borrowings on
our Wells Fargo revolving lines of credit, which terminated on September 22, 2015, our outstanding borrowings on our KeyBank revolving line of credit, which replaced the Wells Fargo credit
facilities, and on SGI's credit facilities in South Australia, our 8% senior secured convertible debentures that were issued in December 2014 and are expected to be paid off by March 2017,
our three-year secured promissory note issued in connection with the DuPont Pioneer acquisition, our five-year subordinated promissory note that matures in October 2017 that was issued in
connection with the IVS acquisition and our term loan for a vehicle purchase that matures in February 2018. 37
Income Tax Expense (Benefit) Our effective tax rate is based on income, statutory tax rates 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 than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not 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. Results of Operations Three Months ended March 31, 2016 Compared to the Three Months ended March 31, 2015 Revenue and Cost of Revenue Revenue for the three months ended March 31, 2016 was $25,013,779 compared to $30,527,798 for the three months ended March 31, 2015. The $5.5 million decrease in revenue for the
three months ended March 31, 2016 was primarily attributable to the timing of sales under our distribution and production agreements with DuPont Pioneer. During the second quarter of fiscal
year 2016, we were ahead of seasonal shipping expectations as we were able to process and ship seed earlier than anticipated. This resulted in additional sales to DuPont Pioneer in our
second quarter and a corresponding decrease in sales to DuPont Pioneer in the three months ended March 31, 2016. During the three months ended March 31, 2016, we recorded sales of
approximately $16.1 million from our distribution and production agreements with DuPont Pioneer versus $23.0 million in the comparable period of the prior fiscal year. Revenue from our
legacy businesses (revenue generated outside of our distribution and production agreements with DuPont Pioneer) increased 17% in the three months ended March 31, 2016, versus the
comparable period in the prior fiscal year. Sales direct to international customers represented 35% and 23% of revenue during the quarter ended March 31, 2016 and 2015, respectively. Domestic revenue accounted for 65% and
77% of our total revenue for the quarter ended March 31, 2016 and 2015, respectively. The decrease in domestic revenue as a percentage of total revenue was primarily due to the
timing of shipments to DuPont Pioneer. Sales to DuPont Pioneer represented 65% of revenues for the three months ended March 31, 3016 versus 75% for the three months ended March 31, 2015. Cost of revenue of $19,500,605 for the three months ended March 31, 2016 was 78.0% of revenue, while the cost of revenue of $23,410,046 for the three months ended March 31,
2015 was 76.7% of revenue. Cost of revenue decreased on a dollar basis as a direct result of the decrease in revenue due to the timing differences mentioned above. 38
Gross profit margins during the third quarter of fiscal year 2016 were 22.0% compared to gross profit margins of 23.3% in the third quarter of fiscal year 2015. While we benefitted from
sales and margin contributions from our DuPont Pioneer agreements, these benefits were partially offset by higher seed costs within our non-dormant operations, driven by lower than
expected yields on the recent alfalfa seed harvests. These lower yields and clean out weights resulted in higher per unit production costs on contracts where we carry farming and yield risk.
To limit variability of future production costs due to farming yields, we have terminated production arrangements where our production costs are variable on a per unit basis, and we are
increasing our contracted grower acreage where our production costs are generally fixed on a per unit basis. We are anticipating an approximate 15% increase in contracted acreage during calendar year 2016 as compared to 2015, which is expected to be a key contributor to both revenue
growth and improved margins in future years. Selling, General and Administrative Expenses SG&A expense for the three months ended March 31, 2016 totaled $2,459,737 compared to $2,260,978 for the three months ended March 31, 2015. The $198,759 increase in
SG&A expense for the three months ended March 31, 2016 over the three months ended March 31, 2015 was primarily due to the expenses associated with the newly acquired DuPont
Pioneer business and the related increase in personnel and related costs to accommodate the growth in operations. We also incurred $61,951 in transaction expenses associated with
implementing a tax planning strategy. As a percentage of revenue, SG&A expenses were 9.8% in the third quarter of fiscal year 2016 compared to 7.4% in the three months ended
March 31, 2015. Research and Development Expenses R&D for the three months ended March 31, 2016 totaled $626,316 compared to $611,688 in the three months ended March 31, 2015. The slight increase of $14,628 from 2015
to 2016 was primarily driven by additional research and development activities acquired from DuPont Pioneer. Depreciation and Amortization Depreciation and amortization expense for the three months ended March 31, 2016 was $796,062 compared to $580,365 for the three months ended March 31, 2015. Included in the
amount was amortization expense for intangible assets, which totaled $558,358 in the three months ended March 31, 2016 and $464,044 in the three months ended March 31, 2015. The
$215,697 increase in depreciation and amortization expense for the three months ended March 31, 2016 over the three months ended March 31, 2015 was the result of depreciation and
amortization of assets acquired from DuPont Pioneer. Foreign Currency Loss We recorded a foreign currency loss of $87,342 for the three months ended March 31, 2016 compared to a loss of $33,503 for the three months ended March 31, 2015. The foreign
currency gains and losses are associated with SGI, our wholly-owned subsidiary in Australia. 39
Change in Derivative Warrant Liability The derivative warrant liability is considered a level III fair value financial instrument and will be measured at each reporting period. The $694,800 gain from the non-cash change in
derivative warrant liability represented the decrease in fair value of the outstanding warrants issued in December 2014 during the reporting period ended March 31, 2016. The 14.5%
decrease in fair value of the warrants was primarily driven by a decrease in the closing stock price at March 31, 2016, from the previous measurement date of December 31, 2015. Change in Contingent Consideration Obligation The contingent consideration obligation is considered a level III fair value financial instrument and will be measured at each reporting period. The $48,963 loss from non-cash change
in contingent consideration obligation represents the increase in the estimated fair value of the contingent consideration obligation during the reporting period ended March 31,
2016. Loss on Equity Method Investment Loss on equity method investment totaled $28,916 for the three months ended March 31, 2016. This represents our 50% share of losses incurred by the joint corporation (S&W
Semillas S. A.) in Argentina. Interest Expense - Amortization of Debt Discount Non-cash amortization of debt discount expense for the three months ended March 31, 2016 was $1,150,412 compared to $2,020,472 for the three months ended March 31, 2015.
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.
The expense for the three months ended March 31, 2016 includes $258,887 of accelerated amortization expense as a result of the election to accelerate three monthly redemption payments
in the third quarter of fiscal year 2016. The discount is amortized using the effective interest method, and the quarterly expense will decrease as the net carrying value of the convertible
debentures decreases over time. Interest Expense - Convertible Debt and Other Interest expense during the three months ended March 31, 2016 totaled $438,879 compared to $728,957 for the three months ended March 31, 2015. Interest expense for the third
quarter of fiscal year 2016 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 NAB and KeyBank. The $290,078 decrease in interest expense in the third quarter of
fiscal year 2016 is primarily driven by a $278,967decrease in interest expense on the convertible debentures as the outstanding principal balance has decreased since the comparable period
in the prior year. 40
Provision (Benefit) For Income Taxes Income tax expense totaled $5,901 for the three months ended March 31, 2016 compared to income tax expense of $244,471 for the three months ended March 31, 2015. Our
effective tax rate was 1.0% during the three months ended March 31, 2016 compared to (108.7%) for the three months ended March 31, 2015. The increase in our effective tax rate for the
three months ended March 31, 2016 was primarily attributed to the tax benefit associated with the change in the valuation of our warrants. The income associated with the warrant fair
value adjustments are not taxable for federal income tax purposes. Net Income (Loss) We had net income of $567,873 for the three months ended March 31, 2016 compared to a net loss of $469,328 for the three months ended March 31, 2015. The increase in our net
income for the third quarter of fiscal year 2016 was attributable primarily to the change in the fair value of derivative warrant liabilities coupled with a decrease in interest expense associated
with the convertible debentures discussed above. The net income per basic and diluted common share was $0.04 for the three months ended March 31, 2016 compared to net loss per basic
and diluted share of $(0.04) for the three months ended March 31, 2015. Nine months ended March 31, 2016 Compared to the Nine months ended March 31, 2015 Revenue and Cost of Revenue Revenue for the nine months ended March 31, 2016 was $61,409,948 compared to $52,485,798 for the nine months ended March 31, 2015. The $8.9 million increase in revenue for
the nine months ended March 31, 2016 was primarily attributable to sales under our distribution and production agreements with DuPont Pioneer. We recorded sales of approximately $30.8
million from our distribution and production agreements with DuPont Pioneer during the nine months ended March 31, 2016 versus $23.0 million during the comparable period of the prior
year. For the fiscal year ending June 30, 2016, we expect annual revenue to be approximately $95 million. Sales direct to international customers represented 45% and 50% of revenue during the nine months ended March 31, 2016 and 2015, respectively. Domestic revenue accounted for 55%
and 50% of our total revenue for the nine months ended March 31, 2016 and 2015, respectively. The increase in domestic revenue as a percentage of total revenue was primarily due to the
sales with DuPont Pioneer. Cost of revenue of $49,890,460 for the nine months ended March 31, 2016 was 81.3% of revenue, while the cost of revenue of $42,093,045 for the nine months ended March 31,
2015 was 80.2% of revenue. Cost of revenue increased on a dollar basis as a direct result of the increase in revenue. Total gross profit margins for the nine months ended March 31, 2016 was 18.7% compared to 19.8% in the comparable period of the prior year. During the first quarter of fiscal year 2016,
the Company incurred losses of approximately $260,000 in connection with its non-seed crop farming which the company has ceased operating in. The decrease in gross profit margins was
primarily due to higher seed costs within our non-dormant operations, driven by lower than expected yields on the recent alfalfa seed harvests. These lower yields and clean out weights
41
resulted in higher per unit production costs on contracts where we carry farming and yield risk. To limit variability of future production costs due to farming yields, we have terminated production
arrangements where our production costs are variable on a per unit basis, and we are increasing our contracted grower acreage where our production costs are generally fixed on a per unit basis. Selling, General and Administrative Expenses SG&A expense for the nine months ended March 31, 2016 totaled $7,231,911 compared to $7,040,906 for the nine months ended March 31, 2015. Excluding transaction expenses of
$1,256,170 related to the DuPont Pioneer acquisition during the nine months ended March 31, 2015, SG&A expenses increased $1,455,085 over the comparable period of the prior year.
The increase was primarily due to the expenses associated with the newly acquired DuPont Pioneer business and the related increase in personnel and related costs to accommodate the
growth in operations. As a percentage of revenue, SG&A expenses were 11.8% for the nine months ended March 31, 2016 compared to 13.4% for the nine months ended March 31, 2015. Research and Development Expenses R&D for the nine months ended March 31, 2016 totaled $2,049,332 compared to $1,052,226 for the nine months ended March 31, 2015. The increase of $997,106 from 2015 to
2016 was primarily driven by additional research and development activities acquired from DuPont Pioneer. Depreciation and Amortization Depreciation and amortization expense for the nine months ended March 31, 2016 was $2,376,101 compared to $1,210,676 for the nine months ended March 31, 2015. Included in
the amount was amortization expense for intangible assets, which totaled $1,673,048 in the nine months ended March 31, 2016 and $931,705 in the nine months ended March 31, 2015. The
$1,165,425 increase in depreciation and amortization expense over the comparable period of the prior year is primarily driven by depreciation and amortization of assets acquired from
DuPont Pioneer. Impairment Charges During the nine months ended March 31, 2016, we did not record an impairment charge, whereas, we recorded an impairment charge of $500,198 during the nine months ended
March 31, 2015. The 2015 impairment charge related to the carrying value of certain farmland related assets which were deemed in excess of net realizable value. These farmland assets
were sold in March 2015, and an additional loss on disposal of $24,646 was recorded during the nine months ended March 31, 2015. Foreign Currency (Gain) Loss We recorded a foreign currency gain of $164,471 for the nine months ended March 31, 2016 compared to a loss of $116,392 for the nine months ended March 31, 2015. The foreign
currency gains and losses were associated with SGI, our wholly-owned subsidiary in Australia. 42
Change in Derivative Warrant Liability The derivative warrant liability is considered a level III fair value financial instrument and will be measured at each reporting period. The $2,176,800 gain from the non-cash change in
derivative warrant liability represents the decrease in fair value of the outstanding warrants issued in December 2014. The decrease in fair value of the warrants is primarily driven by a $0.70
decrease in the closing stock price at March 31, 2016, from the measurement date of June 30, 2015, partially offset by a decrease in the exercise price of the warrants from $5.00 to $4.53.
Change in Contingent Consideration Obligation The contingent consideration obligation is considered a level III fair value financial instrument and will be measured at each reporting period. The $1,490 loss from non-cash change in
contingent consideration obligation represents the increase in the estimated fair value of the contingent consideration obligation during the nine months ended March 31, 2016. Loss on Equity Method Investment Loss on equity method investment totaled $252,619 for the nine months ended March 31, 2016. This represents our 50% share of losses incurred by the joint corporation (S&W
Semillas S. A.) in Argentina. Interest Expense - Amortization of Debt Discount Non-cash amortization of debt discount expense for the nine months ended March 31, 2016 was $3,111,866 compared to $2,046,615 for the nine months ended March 31, 2015. 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. The
increase is primarily due to fact that the current period expense includes nine months of amortization versus only three months in the prior period. The nine months ended March 31, 2016
amount includes $258,887 of accelerated amortization expense as a result of the election to accelerate three monthly redemption payments in the third quarter of fiscal year 2016. The
discount is amortized using the effective interest method and the quarterly expense will decrease as the net carrying value of the convertible debentures decrease. Interest Expense - Convertible Debt and Other Interest expense during the nine months ended March 31, 2016 totaled $1,672,863 compared to $1,137,208 for the nine months
ended March 31, 2015. Interest expense for the nine months ended March 31, 2016 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 NAB, KeyBank and Wells
Fargo. The $535,655 increase in interest expense is primarily driven by $487,918 of interest on the convertible debentures, and $150,000 on the DuPont Pioneer Note, all of which were
issued on December 31, 2014, partially offset by reductions in interest expense on the lines of credit. 43
Provision (Benefit) for Income Taxes Income tax benefit totaled $2,773,294 for the nine months ended March 31, 2016 compared to income tax benefit of $931,808 for the nine months ended March 31, 2015. Our
effective tax rate was 102.0% during the nine months ended March 31, 2016 compared to 24.4% for the nine months ended March 31, 2015. The increase in our effective tax rate benefit for
the nine months ended March 31, 2016 was primarily attributable to a tax benefit recorded during the second quarter of fiscal year 2016 related to an unrealized foreign currency exchange
loss on an inter-company loan to our subsidiary in Australia. We have previously treated the inter-company loan as long-term in investment nature and during the second quarter of fiscal year
2016 we determined that the inter-company note would be settled in the foreseeable future. The change in this determination resulted in us recording a tax benefit in the second quarter of
fiscal year 2016 as the inter-company loan is denominated in Australian dollars and has devalued since the issuance of the loan. 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 increase in our effective tax rate benefit for the nine months ended
March 31, 2016 was also attributed to the tax benefit associated with the change in the valuation of our warrants and the tax benefit related to the tax law change to extend the research tax
credit retroactively and permanently prospectively, which occurred during the second quarter. The income associated with the warrant fair value adjustments are not taxable for federal
income tax purposes. Net Income (Loss) We had net income of $55,426 for the nine months ended March 31, 2016 compared to a net loss of $2,886,306 for the nine months ended March 31, 2015. The net income
improvement of $2,941,732 in the nine months ended March 31, 2016 over the net loss incurred in comparable period of the prior year was attributable primarily to the increase in gross profit
dollars, offset by increases in research and development expenses and depreciation and amortization, as well as the gain from the change in fair value of the derivative warrant liability. Net
income per basic and diluted common share was $0.00 for the nine months ended March 31, 2016 compared to net loss per basic and diluted share of $(0.24) for the nine months ended
March 31, 2015. 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 California contracted growers
progressively, starting in the second fiscal quarter. In fiscal year 2016, we paid our California growers from our non-dormant business approximately 50% in October 2015 and the balance in
February 2016. The grower base acquired in the DuPont Pioneer Acquisition are paid on a schedule similar to our historical North American grower base. 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 progressive
payment schedule of our North American grower base. 44
Historically, due to the concentration of sales to certain distributors, which typically represented a significant percentage of alfalfa seed sales, our month-to-month and quarter-to-quarter
sales and associated cash receipts were highly dependent upon the timing of deliveries to and payments from these distributors, 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, one in each of the first, third and fourth fiscal quarters. Our future revenue and cash collections pertaining to the production and distribution agreements with DuPont Pioneer will
provide us with greater predictability, as sales to DuPont Pioneer will be primarily concentrated in our second, third and fourth fiscal quarters, and payments will be received in three
installments over the September to mid-April 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. 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. 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 monthly interest is payable cash, in shares of our common stock, provided all of the applicable
"equity conditions" defined in the debentures are satisfied, or in any combination of cash and shares, at our option. Beginning on July 1, 2015, we were required to begin making
monthly redemption payments, payable, at our option, in cash, shares of our common stock or any combination thereof, provided (in the event we elect to pay in shares) all of the applicable
equity conditions are satisfied. The debentures contain certain rights of acceleration and deferral at the holder's option and contain certain limited acceleration rights of the Company, if we
have elected to redeem in cash and provided certain other conditions are satisfied. The debentures also provided for redemption of up to $5,000,000 in principal amount, payable in cash
without prepayment penalty, if redeemed by July 1, 2015. Such early redemption was required in the event of certain real estate sales and otherwise was optional. In March 2015, following
the sale of farmland we previously owned in California's Imperial Valley, we redeemed $5,000,000 in principal amount of the debentures on a pro rata basis. In the quarter ended March 31,
2016, we accelerated three monthly redemption payments, thereby reducing the principal amount of the debentures by an additional $2,830,049. The debentures are senior secured
obligations, subject only to certain secured obligations of KeyBank (which replaced Wells Fargo as our secured lender on September 22, 2015) and DuPont Pioneer (limited to a purchase
money security interest in the assets purchased in the DuPont Pioneer Acquisition). The rights of those secured creditors are set forth in an intercreditor and subordination agreement that
was initially entered into in connection with the closing of the issuance of the debentures (the "Intercreditor Agreement"). 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. 45
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. From 2011 until September 22, 2015, we had one or more ongoing revolving credit facility agreements with Wells Fargo. On February 21, 2014, we replaced our prior Wells Fargo credit
facility by entering into credit agreements with Wells Fargo and thereby became obligated under two working capital facilities (collectively, the "Wells Facilities," both of which were
terminated as of September 22, 2015. The Wells Facilities included (i) a domestic revolving facility of up to $4,000,000 to refinance our outstanding credit accommodations from Wells Fargo
and for working capital purposes, and (ii) an export-import revolving facility of up to $10,000,000 for financing export-related accounts receivable and inventory (the "Ex-Im
Revolver"). The Wells Facilities bore interest either (i) at a fluctuating rate per annum determined by Wells Fargo to be 2.75% above the daily one-month LIBOR Rate in effect from time to time, or (ii)
at a fixed rate per annum determined to be 2.75% above LIBOR in effect on the first day of the applicable fixed rate term. Interest is payable each month in arrears. The Wells Facilities were
satisfied in full and terminated on September 22, 2015 as a result of our new credit facility with KeyBank, described below. 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. Key
provisions of the KeyBank Credit Facility include: 46
At March 31, 2016, we were in compliance with all KeyBank debt covenants. At March 31, 2016, we had outstanding $10,679,803 in principal amount of the convertible debentures. In December 2015, we gave notice to the holders of the debentures that we would
accelerate redemption payments in January, February and March 2016. The accelerated payments will result in the debentures being fully retired by March 2017. SGI finances the purchase of most of its seed inventory from growers pursuant to a seasonal credit facility with National Australia Bank Ltd ("NAB"). In April 2015, the NAB working capital credit facilities were amended and renewed and will expire on March 31, 2016 (the "2015 NAB Capital Facilities"). The 2015 NAB
Capital Facilities, as currently in effect, comprise two distinct facility lines: (i) an overdraft facility (the "Overdraft Facility"), having a credit limit of AUD $980,000 (USD $751,464 at
March 31, 2016) and a trade refinance facility (the "Trade Refinance Facility"), having a credit limit of AUD $12,000,000 (USD $9,201,600 at March 31, 2016). Key provisions of the
2015 NAB Capital Facilities include: Interest is payable each month in arrears on both the Overdraft Facility and the Trade Refinance Facility. In the event of a default, as defined in the NAB Facility Agreement, the interest
rate will increase on both facilities by 4.5% per annum. Both facilities constituting the 2015 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
us as noted above. The 2015 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 March 31, 2016. 47
In January 2015, SGI and NAB entered into a new business markets - flexible rate loan in the amount of AUD $650,000 (USD $498,420 at March 31, 2016) (the "Keith Building
Loan") and a machinery and equipment facility in the amount of up to AUD $1,350,000 (USD $1,035,180 at March 31, 2016) (the "Keith Machinery and Equipment Facility").
The Keith Building Loan and Keith Machinery and Equipment Facility (collectively, the "Keith Credit Facilities") are being used for the construction of a new building on SGI's Keith,
South Australia property and for the machinery and equipment to be purchased for use in the operations of the new building. Key provisions of the Keith Credit Facilities include: The Keith Credit Facilities are both secured by a lien on all the present and future rights, property and undertakings of SGI, our corporate guarantee and a mortgage on SGI's Keith, South
Australia property. At March 31, 2016, the principal balance on the Keith Building Loan was AUD $650,000 (USD $498,420), and the principal balance on the Keith Machinery and Equipment
Facility was AUD $993,402 (USD $761,740). In May 2016, NAB and SGI modified the terms of the Trade Refinance Facility to extend its expiration date to March 30, 2018 and to increase the credit limit of the NAB Business Markets
- Flexible Rate Loan to AUD $800,000. Certain modifications were made to the covenants and undertakings applicable to these credit facilities in connection with the amendments. 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. We intend to use the proceeds from the private placement primarily to partially redeem our 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 notes. 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. 48
Summary of Cash Flows The following table shows a summary of our cash flows for the nine months ended March 31, 2016 and 2015: Operating Activities For the nine months ended March 31, 2016, operating activities used $3,333,662 in cash. Net income plus and minus the adjustments for non-cash items as detailed on the statement of
cash flows provided $1,090,408 in cash and changes in operating assets and liabilities as detailed on the statement of cash flows used $4,424,070 in cash. The decrease in cash from changes
in operating assets and liabilities was primarily driven by increases in inventory of $16,946,534 attributed to the 2016 Australian harvest, partially offset by decreases in accounts receivable of
$13,498,542. For the nine months ended March 31, 2015, operating activities provided $9,343,484 in cash. Net loss plus and minus the adjustments for non-cash items as detailed on the statement of
cash flows provided $1,884,790 in cash, and changes in operating assets and liabilities as detailed on the statement of cash flows generated $7,458,694. The increase in cash from changes in
operating assets and liabilities was primarily driven by decreases in accounts receivable and inventory balances of $8,167,899 and $10,179,531, respectively, partially offset by a reduction of
payables of $10,826,862. Investing Activities Investing activities during the nine months ended March 31, 2016 used $2,377,320 in cash. These activities consisted of 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. In addition, we invested $439,038 in our
50% owned joint corporation, S&W Semillas S.A. Investing activities during the nine months ended March 31, 2015 used $30,628,046 in cash. The DuPont Pioneer Acquisition accounted for $36,688,881 of the cash used in investing
activities, proceeds from the March 2015 sale of the Calipatria (Imperial Valley) farmland provided $7,100,000 and $1,034,183 was used in additions to property, plant and equipment,
primarily for the build out of the new packaging and distribution facility in Keith, Australia. Financing Activities Financing activities during the nine months ended March 31, 2016 provided $8,434,719 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 $7.8 million on our
lines of credit and made $11.3 million of redemptions on our convertible debentures as well as $2.0 million of other debt payments. 49
Financing activities during the nine months ended March 31, 2015 provided $22,563,758 in cash. The convertible debt offering consummated concurrently with the DuPont Pioneer
Acquisition provided gross proceeds of $27,000,000, less $1,915,417 of debt issuance costs. The equity offering that closed concurrently with the DuPont Pioneer Acquisition provided net
proceeds of $4,169,025, consisting of $4,658,400 in gross proceeds and $488,975 of related fees. We used the proceeds from the sale of our Calipatria farmland to pay off the Term Loan
with Wells Fargo and to redeem $5,000,000 in principal amount (and accrued interest thereon) of convertible debentures. 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. Off Balance Sheet Arrangements We did not have any off-balance sheet arrangements during the three months or nine months ended March 31, 2016. Capital Resources and Requirements Our future liquidity and capital requirements will be influenced by numerous factors, including: Critical Accounting Policies The accounting policies and the use of accounting estimates are set forth in the footnotes to our consolidated financial statements. 50
In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2 - Significant Accounting Policies 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. 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. Beginning with the three months ended December 31, 2014, we adopted 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
51
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. 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. 52
Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company and therefore, we are not required to provide information required by this item of Form 10-Q. Item 4. Controls and Procedures. Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of
March 31, 2016. 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 March 31, 2016, our Chief Executive Officer and Chief Financial
Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that
occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no
assurance that any system of controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 53
Part II OTHER INFORMATION We are not a party to any material legal proceedings. Our business and results of operations are subject to a number of risks and uncertainties. While there have been no material changes to the risk factors previously disclosed under
the heading "Risk Factors" in our Annual Report, which was filed with the SEC on September 28, 2015, you should carefully consider the risk factors described therein. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable. On May 6, 2016, SGI executed a Business Letter of Advice with National Bank of Australia ("NAB") dated April 28, 2016 (the "Business Letter of Advice"),
modifying certain terms and conditions of SGI's existing Trade Refinance Facility and Keith Building Loan. The Trade Refinance Facility and Keith Building Loan are two components of SGI's
credit facilities with NAB, which also include an overdraft facility and a machinery and equipment loan. The material changes provided in the Business Letter of Advice include the following: 54
All other terms and conditions of the Overdraft Facility, the Trade Refinance Facility, the Keith Building Loan and the Keith Machinery and Equipment Loan, including the Company's
guarantee, remain in unchanged and in full force and effect. See the Exhibit Index immediately following the signature page of this Quarterly Report, which is incorporated herein by reference, for the exhibits filed as part of this Quarterly
Report. 55
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 13th day of May, 2016. S&W SEED COMPANY By: /s/ Matthew K. Szot Matthew K. Szot Executive Vice President of Finance and Administration and Chief Financial Officer
Table of Contents
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31,
June 30,
2016
2015
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
6,267,622
$
3,535,458
Accounts receivable, net
12,970,876
26,728,741
Inventories, net
43,049,181
25,521,747
Prepaid expenses and other current assets
2,079,983
797,199
Deferred tax assets
286,734
286,508
TOTAL CURRENT ASSETS
64,654,396
56,869,653
Property, plant and equipment, net
12,889,609
11,476,936
Intangibles, net
35,978,261
38,004,916
Goodwill
9,496,202
9,630,279
Deferred tax assets
7,305,559
4,060,156
Other assets
2,324,268
2,301,127
TOTAL ASSETS
$
132,648,295
$
122,343,067
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
$
15,605,814
$
13,722,900
Accounts payable - related parties
90,711
1,128,630
Deferred revenue
371,383
525,530
Accrued expenses and other current liabilities
1,506,130
1,802,819
Foreign exchange contract liabilities
-
59,116
Lines of credit
21,710,803
13,755,800
Current portion of long-term debt
428,681
2,223,465
Current portion of convertible debt, net
8,910,997
9,265,929
TOTAL CURRENT LIABILITIES
48,624,519
42,484,189
Contingent consideration obligation
2,079,490
2,078,000
Long-term debt, less current portion
11,181,481
10,682,072
Convertible debt, net, less current portion
-
8,777,041
Derivative warrant liabilities
4,081,200
6,258,000
Other non-current liabilities
158,137
188,160
TOTAL LIABILITIES
66,124,827
70,467,462
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;
16,839,666 issued and 16,814,666 outstanding at March 31, 2016;
13,479,101 issued and 13,454,101 outstanding at June 30, 2015;
16,839
13,479
Treasury stock, at cost, 25,000 shares
(134,196)
(134,196)
Additional paid-in capital
77,118,847
62,072,379
Accumulated deficit
(4,924,045)
(4,979,471)
Accumulated other comprehensive loss
(5,553,977)
(5,096,586)
TOTAL STOCKHOLDERS' EQUITY
66,523,468
51,875,605
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
132,648,295
$
122,343,067
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
Nine Months Ended
March 31,
March 31,
2016
2015
2016
2015
Revenue
$
25,013,779
$
30,527,798
$
61,409,948
$
52,485,798
Cost of revenue
19,500,605
23,410,046
49,890,460
42,093,045
Gross profit
5,513,174
7,117,752
11,519,488
10,392,753
Operating expenses
Selling, general and administrative expenses
2,459,737
2,260,978
7,239,821
7,040,906
Research and development expenses
626,316
611,688
2,049,332
1,052,226
Depreciation and amortization
796,062
580,365
2,376,101
1,210,676
Impairment charges
-
-
-
500,198
Disposal of property, plant and equipment loss (gain)
(2,427)
24,646
(2,427)
24,646
Total operating expenses
3,879,688
3,477,677
11,662,827
9,828,652
Income (loss) from operations
1,633,486
3,640,075
(143,339)
564,101
Other expense
Foreign currency loss (gain)
87,342
33,503
(164,471)
116,392
Change in derivative warrant liabilities
(694,800)
1,082,000
(2,176,800)
1,082,000
Change in contingent consideration obligation
48,963
-
1,490
-
Loss on equity method investment
28,916
-
252,619
-
Gain on sale of marketable securities
-
-
(123,038)
-
Interest expense - amortization of debt discount
1,150,412
2,020,472
3,111,866
2,046,615
Interest expense - convertible debt and other
438,879
728,957
1,672,863
1,137,208
Income (loss) before income taxes
573,774
(224,857)
(2,717,868)
(3,818,114)
Provision (benefit) for income taxes
5,901
244,471
(2,773,294)
(931,808)
Net income (loss)
$
567,873
$
(469,328)
$
55,426
$
(2,886,306)
Net income (loss) per common share:
Basic
$
0.04
$
(0.04)
$
0.00
$
(0.24)
Diluted
$
0.04
$
(0.04)
$
0.00
$
(0.24)
Weighted average number of common shares outstanding:
Basic
15,420,308
13,166,004
14,278,107
12,179,184
Diluted
15,420,308
13,166,004
14,278,107
12,179,184
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended
Nine Months Ended
March 31,
March 31,
2016
2015
2016
2015
Net income (loss)
$
567,873
$
(469,328)
$
55,426
$
(2,886,306)
Foreign currency translation adjustment, net of income taxes
383,723
(774,795)
(457,391)
(3,360,977)
Comprehensive income (loss)
$
951,596
$
(1,244,123)
$
(401,965)
$
(6,247,283)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock
Treasury Stock
Additional
Paid-In
Accumulated
Accumulated
Other
Comprehensive
Total
Stockholders'
Shares
Amount
Shares
Amount
Capital
Deficit
Loss
Equity
Balance, June 30, 2014
11,665,093
$
11,666
(25,000)
$
(134,196)
$
55,121,876
$
(1,816,344)
$
(1,668,767)
$
51,514,235
Stock-based compensation - options, restricted stock, and RSUs
-
-
-
-
680,923
-
-
680,923
Net issuance to settle RSUs
27,382
27
-
-
(61,696)
-
-
(61,669)
Proceeds from sale of common stock, net of fees and expenses
1,294,000
1,294
-
-
4,167,731
-
-
4,169,025
Exercise of stock options, net of withholding taxes
284,951
285
-
-
1,079,715
-
-
1,080,000
Other comprehensive loss
-
-
-
-
-
-
(3,360,977)
(3,360,977)
Net loss for nine months ended March 31, 2015
-
-
-
-
-
(2,886,306)
-
(2,886,306)
Balance, March 31, 2015
13,271,426
$
13,272
(25,000)
$
(134,196)
$
60,988,549
$
(4,702,650)
$
(5,029,744)
$
51,135,231
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
-
-
-
-
917,487
-
-
917,487
Beneficial conversion feature
-
-
-
-
871,862
-
-
871,862
Net issuance to settle RSUs
45,410
45
-
-
(83,848)
-
-
(83,803)
Proceeds from sale of common stock, net of fees and expenses
3,306,404
3,306
-
-
13,306,410
-
-
13,309,716
Exercise of stock options, net of withholding taxes
8,751
9
-
-
34,557
-
-
34,566
Other comprehensive loss
-
-
-
-
-
-
(457,391)
(457,391)
Net income for nine months ended March 31, 2016
-
-
-
-
-
55,426
-
55,426
Balance, March 31, 2016
16,839,666
$
16,839
(25,000)
$
(134,196)
$
77,118,847
$
(4,924,045)
$
(5,553,977)
$
66,523,468
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
55,426
$
(2,886,306)
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities
Stock-based compensation
917,487
680,923
Change in allowance for doubtful accounts
(7,350)
17,264
Impairment charges
-
500,198
Depreciation and amortization
2,376,101
1,296,464
(Gain) loss on disposal of property, plant and equipment
(2,427)
24,646
Change in deferred tax asset
(2,974,375)
(904,887)
Change in foreign exchange contracts
(55,817)
27,873
Change in derivative warrant liabilities
(2,176,800)
1,082,000
Change in contingent consideration obligation
1,490
-
Amortization of debt discount
3,111,866
2,046,615
Intercompany foreign exchange gain
(284,774)
-
Gain on sale of marketable securities
(123,038)
-
Loss on equity method investment
252,619
-
Changes in operating assets and liabilities, net:
Accounts receivable
13,498,542
8,167,899
Inventories
(16,946,534)
10,179,531
Prepaid expenses and other current assets
(974,732)
(546,449)
Other non-current assets
(140,569)
249,005
Accounts payable
1,632,353
(12,595,681)
Accounts payable - related parties
(1,021,524)
1,768,819
Deferred revenue
(163,211)
242,250
Accrued expenses and other current liabilities
(277,084)
(13,038)
Other non-current liabilities
(31,311)
6,358
Net cash (used in) provided by operating activities
(3,333,662)
9,343,484
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
(2,089,420)
(1,034,183)
Proceeds from disposal of property, plant and equipment
28,100
7,100,000
Acquisition of business
-
(36,688,881)
Investment in Bioceres
-
(4,982)
Purchase of marketable securities
(316,000)
-
Sale of marketable securities
439,038
-
Equity method investment
(439,038)
-
Net cash used in investing activities
(2,377,320)
(30,628,046)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock
13,309,716
4,169,025
Net proceeds from exercise of common stock options
34,566
1,080,000
Taxes paid related to net share settlements of stock-based compensation awards
(83,803)
(61,669)
Borrowings and repayments on lines of credit, net
7,822,160
(715,779)
Proceeds from sale of convertible debt and warrants
-
27,000,000
Borrowings of long-term debt
601,341
493,956
Debt issuance costs
-
(1,915,417)
Repayments of long-term debt
(1,974,582)
(2,486,358)
Repayments of convertible debt
(11,274,679)
(5,000,000)
Net cash provided by financing activities
8,434,719
22,563,758
EFFECT OF EXCHANGE RATE CHANGES ON CASH
8,427
189,464
NET INCREASE IN CASH AND CASH EQUIVALENTS
2,732,164
1,468,660
CASH AND CASH EQUIVALENTS, beginning of the period
3,535,458
1,167,503
CASH AND CASH EQUIVALENTS, end of period
$
6,267,622
$
2,636,163
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
$
1,732,502
$
922,561
Income taxes
205,154
205,225
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended March 31,
Nine Months Ended March 31,
2016
2015
2016
2015
United States
$
16,249,772
65%
$
23,576,518
77%
United States
$
33,897,998
55%
$
26,502,537
50%
Saudi Arabia
3,388,514
14%
3,363,651
11%
Saudi Arabia
14,220,065
23%
12,385,209
24%
Mexico
680,250
3%
792,356
3%
Mexico
3,767,040
6%
4,909,325
9%
Argentina
704,059
3%
521,925
2%
Argentina
2,202,967
4%
1,901,548
4%
Peru
297,809
1%
289,654
1%
Peru
1,223,190
2%
566,591
1%
South Africa
-
0%
563,577
2%
Australia
729,647
1%
407,334
1%
China
212,017
1%
-
0%
Malaysia
497,452
1%
188,125
0%
Sudan
18,507
0%
-
0%
South Africa
283,554
0%
831,853
2%
Other
3,462,851
14%
1,420,117
4%
Other
4,588,035
7%
4,793,276
9%
Total
$
25,013,779
100%
$
30,527,798
100%
Total
$
61,409,948
100%
$
52,485,798
100%
March 31,
June 30,
2016
2015
Raw materials and supplies
$
370,388
$
276,339
Work in progress and growing crops
18,672,270
5,415,402
Finished goods
24,006,523
19,830,006
$
43,049,181
$
25,521,747
Fair Value Measurements as of March 31, 2016 Using:
Level 1
Level 2
Level 3
Foreign exchange contract asset
$
-
$
75,691
$
-
Contingent consideration obligation
-
-
2,079,490
Derivative warrant liabilities
-
-
4,081,200
Total
$
-
$
75,691
$
6,160,690
Fair Value Measurements as of June 30, 2015 Using:
Level 1
Level 2
Level 3
Foreign exchange contract liability
$
-
$
59,116
$
-
Contingent consideration obligation
-
-
2,078,000
Derivative warrant liabilities
-
-
6,258,000
Total
$
-
$
59,116
$
8,336,000
December 31, 2014
Inventory
$
22,055,300
Property, plant and equipment
6,712,535
Distribution agreement
7,690,000
Production agreement
670,000
Grower relationships
76,000
Technology/IP - germplasm
13,340,000
Technology/IP - seed varieties
5,040,000
Goodwill
5,353,317
Current liabilities
(12,248,506)
Total acquisition cost allocated
$
48,688,646
December 31, 2014
Cash
$
27,000,000
Promissory note
10,000,000
Contingent earn-out
2,004,000
Amount payable to seller
9,684,646
$
48,688,646
Estimated
Useful Life
(Years)
Estimated
Fair Value
Distribution agreement
20
$
7,690,000
Production agreement
3
670,000
Grower relationships
10
76,000
Technology/IP - germplasm
30
13,340,000
Technology/IP - seed varieties
15
5,040,000
Total identifiable intangible assets
$
26,816,000
Nine Months Ended
March 31, 2015
Revenue
$
62,558,103
Net loss
$
(3,135,656)
Net loss per share basic and diluted share
$
(0.23)
Balance at
Acquisition
Foreign Currency
Balance at
July 1, 2015
Additions
from Subsidiary
Translation
March 31, 2016
Goodwill - United States
$
6,755,317
$
-
$
2,740,885
$
-
$
9,496,202
Goodwill - Australia
2,874,962
-
(2,740,885)
(134,077)
-
$
9,630,279
$
-
$
-
$
(134,077)
$
9,496,202
Balance at
Acquisition
Foreign Currency
Balance at
July 1, 2014
Additions
from Subsidiary
Translation
June 30, 2015
Goodwill - United States
$
1,402,000
$
5,353,317
$
-
$
-
$
6,755,317
Goodwill - Australia
3,537,462
-
-
(662,500)
2,874,962
$
4,939,462
$
5,353,317
$
-
$
(662,500)
$
9,630,279
Balance at
Foreign Currency
Balance at
July 1, 2015
Additions
Amortization
Translation
March 31, 2016
Intellectual property
$
4,805,951
$
-
$
(127,890)
$
(225,307)
$
4,452,754
Trade name
1,377,840
-
(61,322)
(11,846)
1,304,672
Technology/IP
924,107
-
(153,753)
-
770,354
Non-compete
301,354
-
(93,896)
(6,540)
200,918
GI customer list
93,131
-
(5,373)
-
87,758
Grower relationships
2,183,485
-
(90,232)
(98,980)
1,994,273
Supply agreement
1,304,679
-
(56,724)
-
1,247,955
Customer relationships
968,619
-
(42,490)
(10,934)
915,195
Distribution agreement
7,497,750
-
(288,374)
-
7,209,376
Production agreement
558,334
-
(167,498)
-
390,836
Technology/IP - germplasm
13,117,666
-
(333,497)
-
12,784,169
Technology/IP - seed varieties
4,872,000
-
(251,999)
-
4,620,001
$
38,004,916
$
-
$
(1,673,048)
$
(353,607)
$
35,978,261
2016
2017
2018
2019
2020
Thereafter
Amortization expense
$
558,360
$
2,224,796
$
2,078,230
$
1,931,664
$
1,931,664
$
27,253,547
March 31,
June 30,
2016
2015
Land and improvements
$
2,911,534
$
2,247,379
Buildings and improvements
6,207,756
5,439,712
Machinery and equipment
3,820,705
3,520,168
Vehicles
953,227
940,627
Construction in progress
1,487,502
1,113,137
Total property, plant and equipment
15,380,724
13,261,023
Less: accumulated depreciation
(2,491,115)
(1,784,087)
Property, plant and equipment, net
$
12,889,609
$
11,476,936
March 31,
June 30,
2016
2015
Working capital lines of credit
KeyBank
$
15,745,791
$
-
Wells Fargo
-
10,000,000
National Australia Bank Limited
5,965,012
3,755,800
Total working capital lines of credit
21,710,803
13,755,800
Current portion of long-term debt
Term loan - Ally
-
8,994
Keith facility (building loan) - National Australia Bank Limited
38,340
-
Keith facility (machinery & equipment loan) - National Australia Bank Limited
140,339
154,657
Unsecured subordinate promissory note - related party
100,000
100,000
Promissory note - SGI selling shareholders
150,002
2,000,000
Debt discount - SGI
-
(40,186)
Total current portion
428,681
2,223,465
Long-term debt, less current portion
Term loan - Ally
-
15,590
Keith facility (building loan) - National Australia Bank Limited
460,080
466,482
Keith facility (machinery & equipment loan) - National Australia Bank Limited
621,401
-
Unsecured subordinate promissory note - related party
100,000
200,000
Promissory note - Dupont Pioneer
10,000,000
10,000,000
Total long-term portion
11,181,481
10,682,072
Total debt
$
11,610,162
$
12,905,537
Fiscal Year
Amount
2016
$
194,905
2017
335,312
2018
10,369,779
2019
309,729
2020
237,018
Thereafter
163,419
Total
$
11,610,162
Fiscal Year
Amount
2016
$
2,830,049
2017
7,849,754
Thereafter
-
Total
$
10,679,803
March 31, 2016
June 30, 2015
Current portion of convertible debt, net
Senior secured convertible notes payable
$
10,679,803
$
11,274,678
Debt discount
(1,768,806)
(2,008,749)
Total current portion
8,910,997
9,265,929
Convertible debt, net, less current portion
Senior secured convertible notes payable
-
10,679,804
Debt discount
-
(1,902,763)
Total long-term portion
-
8,777,041
Total convertible debt, net
$
8,910,997
$
18,042,970
Issue Date
Exercise Price
Per Share
Expiration
Date
Outstanding as of
June 30, 2015
New Issuances
Expired
Outstanding as of
March 31, 2016
Underwriter warrants
May 2012
$
6.88
Feb 2017
50,000
-
-
50,000
Warrants
Dec 2014
$
4.53
Jun 2020
2,699,999
-
-
2,699,999
2,749,999
-
-
2,749,999
Weighted -
Weighted -
Average
Average
Remaining
Aggregate
Number
Exercise Price
Contractual
Intrinsic
Outstanding
Per Share
Life (Years)
Value
Outstanding at June 30, 2014
1,087,000
$
5.17
2.5
$
1,562,712
Granted
227,197
3.89
9.5
-
Exercised
(400,000)
4.00
-
-
Canceled/forfeited/expired
(12,500)
7.75
-
-
Outstanding at June 30, 2015
901,697
5.33
4.1
392,850
Granted
203,500
4.56
9.7
-
Exercised
(8,751)
3.95
-
-
Canceled/forfeited/expired
(25,500)
-
-
-
Outstanding at March 31, 2016
1,071,446
5.12
4.6
68,777
Options vested and exercisable at March 31, 2016
750,881
5.35
3.0
42,860
Options vested and expected to vest as of March 31, 2016
1,070,220
$
5.12
4.6
$
68,591
Nine Months Ended March 31, 2016
Weighted -
Number of
Weighted -
Average
Nonvested
Average
Remaining
Restricted
Grant Date
Contractual
Stock Units
Fair Value
Life (Years)
Beginning nonvested restricted units outstanding
136,672
$
10.66
-
Granted
119,392
4.62
-
Vested
(63,633)
8.54
-
Forfeited
-
-
-
Ending nonvested restricted units outstanding
192,431
$
7.62
1.8
Nine Months Ended
March 31,
2016
2015
Increase in non-cash net assets of subsidiary due to foreign currency translation loss, net of income tax
$
(457,391)
$
(3,360,977)
Fair value of assets acquired
-
60,937,152
Cash paid for the acquisition
-
(27,000,000)
Promissory note issued
-
(10,000,000)
Contingent consideration issued
-
(2,004,000)
Amount payable to seller
-
(9,684,646)
Liabilities assumed
$
-
$
12,248,506
Nine Months Ended
March 31,
2016
2015
Cash flows from operating activities
$
(3,333,662)
$
9,343,484
Cash flows from investing activities
(2,377,320)
(30,628,046)
Cash flows from financing activities
8,434,719
22,563,758
Effect of exchange rate changes on cash
8,427
189,464
Net increase in cash and cash equivalents
2,732,164
1,468,660
Cash and cash equivalents, beginning of period
3,535,458
1,167,503
Cash and cash equivalents, end of period
$
6,267,622
$
2,636,163
(duly authorized on behalf of the registrant and
principal financial and accounting officer)
56
INDEX TO EXHIBITS
|
Exhibit |
Description |
|
|
3.1(1) |
Registrant's Articles of Incorporation. |
|
|
3.2(2) |
Registrant's Second Amended and Restated Bylaws. |
|
|
4.1 |
Reference is made to Exhibits 3.1 and 3.2. |
|
|
4.2(3) |
Form of Common Stock Certificate. |
|
|
4.3(4) |
Form of Underwriter Warrant Issued to Rodman & Renshaw, LLC |
|
|
4.4(5) |
Form of 8% Senior Secured Convertible Debentures |
|
|
4.5(5) |
Form of Common Stock Purchase Warrant |
|
|
10.1*(6) |
Employment Agreement between the Registrant and Mark S. Grewal dated March 18, 2016. |
|
|
10.2*(6) |
Employment Agreement between the Registrant and Matthew K. Szot dated March 18, 2016. |
|
|
10.3*(6) |
Employment Agreement between the Registrant and Dennis C. Jury dated March 18, 2016. |
|
|
31.1 |
Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
101.INS |
XBRL Instance Document |
|
|
101.SCH |
XBRL Taxonomy Extension Schema Document |
|
|
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
_________
* Indicates a management contract or compensatory plan or arrangement
(1) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on December 19, 2011.
(2) Incorporated by reference to the Registrants' Current Report on Form 8-K, filed on December 16, 2015.
(3) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 333-164588), filed on April 23, 2010.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on May 18, 2012.
(5) Incorporated by reference to the Registration's Current Report on Form 8-K, filed on January 7, 2015.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K, filed on March 23, 2016.