UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended December 31, 2023

or

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

For the transition period from _____________ to _____________

Commission File Number: 001-34719

S&W SEED COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada		27-1275784
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
2101 Ken Pratt Blvd, Suite 201, Longmont, CO		80501
(Address of Principal Executive Offices)		(Zip Code)

(720) 506-9191

(Registrant's Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	SANW	The Nasdaq Capital Market

 

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 such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large, accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒		Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares outstanding of common stock of the registrant as of February 7, 2024 was 43,314,975.

---

S&W SEED COMPANY

TABLE OF CONTENTS

 

PART I.		FINANCIAL INFORMATION		Page No.
Item 1.		Financial Statements (Unaudited):		4
		Condensed Consolidated Balance Sheets at December 31, 2023 and June 30, 2023		4
		Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended December 31, 2023 and 2022		5
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months and Six Months Ended December 31, 2023 and 2022		6
		Condensed Consolidated Statements of Mezzanine Equity and Stockholders’ Equity for the Three Months and Six Months Ended December 31, 2023 and 2022		7
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2023 and 2022		8
		Notes to Condensed Consolidated Financial Statements		9
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		37
Item 4.		Controls and Procedures		37
PART II.		OTHER INFORMATION		38
Item 1.		Legal Proceedings		38
Item 1A.		Risk Factors		38
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.		Defaults Upon Senior Securities		38
Item 4.		Mine Safety Disclosures		38
Item 5.		Other Information		38
Item 6.		Exhibits		39

 

 

 

---

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact could be deemed forward-looking statements, including, but not limited to: statements concerning our loan agreements, including our ability to comply with and/or secure refinancing for such loan agreements; the potential effects of global macroeconomic events and the COVID-19 pandemic on our business; the plans, strategies and objectives of management for our future operations, including our expectations for new product introductions during fiscal 2024; our implementation of our recently implemented strategic review (which includes our plans to reduce annual operating expenses) our recent partnership with Shell and its role in enabling us to reduce our operating expenses and sharpen our focus on key growth priorities; our ability to raise capital in the future; expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases or to diversify our product offerings; future economic conditions or performance; our ability to retain key employees; and our assumptions, expectations and beliefs 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,” “designed,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. 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, including certain assumptions, that, if they never materialize or prove incorrect, could cause our 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 described above.

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 Quarterly Report on Form 10-Q, some of which are beyond our control, will be important in determining our future performance. Consequently, these statements are inherently uncertain and actual results may differ materially from those that might be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a forward-looking statement in this Quarterly Report on Form 10-Q as a representation by us that our plans and objectives will be achieved, and you should not place undue reliance on such forward-looking statements. All forward-looking statements included herein are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Furthermore, such forward-looking statements represent our views as of, and speak only as of, the date of this Quarterly Report on Form 10-Q, and such statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. We undertake no obligation to publicly update any forward-looking statements, or to update the reasons why actual results could differ materially from those anticipated in any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

When used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “the Company,” “S&W” and “S&W Seed” refer to S&W Seed Company and its subsidiaries or, as the context may require, S&W Seed Company only. Our fiscal year ends on June 30, and accordingly, the terms “fiscal 2024,” “fiscal 2023” and “fiscal 2022” in this Quarterly Report on Form 10-Q refer to the respective fiscal year ended June 30, 2024, 2023 and 2022, respectively, with corresponding meanings to any fiscal year reference beyond such dates. Trademarks, service marks and trade names of other companies appearing in this report are the property of their respective holders.

---

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

S&W SEED COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

ASSETS		As of December 31, 2023				As of June 30, 2023
CURRENT ASSETS
Cash and cash equivalents		$	1,114,370			$	3,398,793
Accounts receivable, net			19,983,583				24,622,727
Notes receivable, net			6,974,357				6,846,897
Inventories, net			46,008,080				45,098,268
Prepaid expenses and other current assets			2,974,177				4,099,027
TOTAL CURRENT ASSETS			77,054,567				84,065,712
Property, plant and equipment, net			10,350,887				10,082,168
Intellectual property, net			20,958,076				21,650,534
Other intangibles, net			7,808,412				8,082,325
Right of use assets - operating leases			2,825,742				2,983,303
Equity method investments			21,624,643				23,059,705
Other assets			3,051,182				2,066,081
TOTAL ASSETS		$	143,673,509			$	151,989,828
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable		$	14,891,078			$	13,312,180
Deferred revenue			5,504,204				464,707
Accrued expenses and other current liabilities			6,004,829				8,804,456
Current portion of working capital lines of credit, net			43,597,213				44,900,779
Current portion of long-term debt, net			4,445,442				3,808,761
TOTAL CURRENT LIABILITIES			74,442,766				71,290,883
Long-term debt, net, less current portion			4,862,340				4,499,334
Other non-current liabilities			2,063,641				2,102,030
TOTAL LIABILITIES			81,368,747				77,892,247
MEZZANINE EQUITY
Preferred stock, $0.001 par value; 3,323 shares authorized; 1,695 issued and outstanding at December 31, 2023 and June 30, 2023			5,518,624				5,274,148
TOTAL MEZZANINE EQUITY			5,518,624				5,274,148
STOCKHOLDERS' EQUITY
Common stock, $0.001 par value; 75,000,000 shares authorized; 43,317,044 issued and 43,292,044 outstanding at December 31, 2023; 43,004,011 issued and 42,979,011 outstanding at June 30, 2023			43,317				43,004
Treasury stock, at cost, 25,000 shares			(134,196	)			(134,196	)
Additional paid-in capital			168,270,300				167,768,104
Accumulated deficit			(104,595,765	)			(91,932,808	)
Accumulated other comprehensive loss			(6,832,156	)			(6,987,791	)
Non-controlling interests			34,638				67,120
TOTAL STOCKHOLDERS' EQUITY			56,786,138				68,823,433
TOTAL LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY		$	143,673,509			$	151,989,828

 

See notes to condensed consolidated financial statements.

---

S&W SEED COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended December 31,							Six Months Ended December 31,
		2023			2022				2023				2022
Revenue		$	10,864,809		$	12,937,802			$	27,297,275			$	32,803,667
Cost of revenue			7,575,685			10,188,511				18,996,837				25,549,865
Gross profit			3,289,124			2,749,291				8,300,438				7,253,802
Operating expenses
Selling, general and administrative expenses			5,892,922			6,242,212				11,679,502				11,298,469
Research and development expenses			994,648			1,503,473				2,081,160				3,018,853
Depreciation and amortization			1,076,019			1,253,904				2,145,042				2,590,338
Gain on disposal of property, plant and equipment			(68,734	)		(751	)			(101,690	)			(4,411	)
Total operating expenses			7,894,855			8,998,838				15,804,014				16,903,249
Loss from operations			(4,605,731	)		(6,249,547	)			(7,503,576	)			(9,649,447	)
Other (income) expense
Foreign currency loss			244,298			176,624				616,486				367,539
Gain on sale of equity investment			—			(32,030	)			—				(32,030	)
Gain on disposal of intangible assets			—			(1,796,252	)			—				(1,796,252	)
Interest expense - amortization of debt discount			446,017			578,112				901,591				861,755
Interest expense, net			1,337,992			1,092,327				2,743,759				1,879,006
Other (income) expenses			(59,336	)		546				(96,896	)			(43,724	)
Loss before income taxes			(6,574,702	)		(6,268,874	)			(11,668,516	)			(10,885,741	)
Benefit from income taxes			(756,985	)		(282,296	)			(755,778	)			(383,960	)
Loss before equity in net earnings of affiliates			(5,817,717	)		(5,986,578	)			(10,912,738	)			(10,501,781	)
Equity in loss of equity method investees, net of tax			676,329			4,015				1,538,225				4,015
Net loss		$	(6,494,046	)	$	(5,990,593	)		$	(12,450,963	)		$	(10,505,796	)
Loss attributable to non-controlling interests			(25,194	)		(4,588	)			(32,482	)			(10,850	)
Net loss attributable to S&W Seed Company		$	(6,468,852	)	$	(5,986,005	)		$	(12,418,481	)		$	(10,494,946	)
Calculation of net loss per share:
Net loss attributable to S&W Seed Company		$	(6,468,852	)	$	(5,986,005	)		$	(12,418,481	)		$	(10,494,946	)
Dividends accrued for participating securities and accretion			(124,431	)		(114,062	)			(244,476	)			(228,123	)
Net loss attributable to common shareholders		$	(6,593,283	)	$	(6,100,067	)		$	(12,662,957	)		$	(10,723,069	)
Net loss attributable to S&W Seed Company per common share, basic and diluted		$	(0.15	)	$	(0.14	)		$	(0.29	)		$	(0.25	)
Weighted average number of common shares outstanding, basic and diluted			43,091,438			42,651,270				43,050,329				42,627,645

 

See notes to condensed consolidated financial statements.

---

S&W SEED COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

		Three Months Ended December 31,								Six Months Ended  December 31,
		2023				2022				2023				2022
Net loss		$	(6,494,046	)		$	(5,990,593	)		$	(12,450,963	)		$	(10,505,796	)
Foreign currency translation adjustment, net of income taxes			316,614				539,520				155,635				(174,775	)
Comprehensive loss			(6,177,432	)			(5,451,073	)			(12,295,328	)			(10,680,571	)
Comprehensive loss attributable to non-controlling interests			(25,194	)			(4,588	)			(32,482	)			(10,850	)
Comprehensive loss attributable to S&W Seed Company		$	(6,152,238	)		$	(5,446,485	)		$	(12,262,846	)		$	(10,669,721	)

 

See notes to condensed consolidated financial statements.

---

S&W SEED COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

		Mezzanine Equity								Shareholders' Equity
		Preferred Stock								Common Stock								Treasury Stock								Additional Paid-In				Accumulated				Non- controlling				Accumulated Other Comprehensive				Total Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Interests				Loss				Equity
Balance, September 30, 2022			1,695			$	4,918,880				42,632,585			$	42,633				(25,000	)		$	(134,196	)		$	164,486,927			$	(110,496,559	)		$	35,576			$	(7,274,895	)		$	46,659,486
Stock-based compensation			—				—				—				—				—				—				305,894				—				—				—				305,894
Series B detachable warrant			—				25,838				—				—				—				—				—				(25,838	)			—				—				(25,838	)
Accrued dividends on Series B convertible preferred stock			—				88,224				—				—				—				—				—				(88,224	)			—				—				(88,224	)
Net issuance to settle RSUs			—				—				155,838				155				—				—				(4,894	)			—				—				—				(4,739	)
Subordinated loan & security agreement warrants			—				—				—				—				—				—				656,427				—				—				—				656,427
Other comprehensive income			—				—				—				—				—				—				—				—				—				539,520				539,520
Net loss			—				—				—				—				—				—				—				(5,986,005	)			(4,588	)			—				(5,990,593	)
Balance, December 31, 2022			1,695			$	5,032,942				42,788,423			$	42,788				(25,000	)		$	(134,196	)		$	165,444,354			$	(116,596,626	)		$	30,988			$	(6,735,375	)		$	42,051,933
Balance, September 30, 2023			1,695			$	5,394,193				43,047,951			$	43,048				(25,000	)		$	(134,196	)		$	168,011,474			$	(98,002,482	)		$	59,832			$	(7,148,770	)		$	62,828,906
Stock-based compensation			—				—				—				—				—				—				283,327				—				—				—				283,327
Series B detachable warrant			—				25,838				—								—				—				—				(25,838	)			—				—				(25,838	)
Accrued dividends on Series B convertible preferred stock			—				98,593				—				—				—				—				—				(98,593	)			—				—				(98,593	)
Net issuance to settle RSUs			—				—				269,093				269				—				—				(11,919	)			—				—				—				(11,650	)
Proceeds from sale of common stock, net of expenses			—				—				—				—				—				—				(12,582	)			—				—				—				(12,582	)
Other comprehensive income			—				—				—				—				—				—				—				—				—				316,614				316,614
Net loss			—				—				—				—				—				—				—				(6,468,852	)			(25,194	)			—				(6,494,046	)
Balance, December 31, 2023			1,695			$	5,518,624				43,317,044			$	43,317				(25,000	)		$	(134,196	)		$	168,270,300			$	(104,595,765	)		$	34,638			$	(6,832,156	)		$	56,786,138
		Mezzanine Equity								Shareholders' Equity
		Preferred Stock								Common Stock								Treasury Stock								Additional Paid-In				Accumulated				Non- controlling				Accumulated Other Comprehensive				Total Stockholders'
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				Interests				Loss				Equity
Balance, June 30, 2022			1,695			$	4,804,819				42,608,758			$	42,609				(25,000	)		$	(134,196	)		$	163,892,575			$	(105,873,557	)		$	41,838			$	(6,560,600	)		$	51,408,669
Stock-based compensation			—				—				—				—				—				—				762,006				—				—				—				762,006
Subordinated loan & security agreement warrants			—				—				—				—				—				—				802,901				—				—				—				802,901
Series B detachable warrant			—				51,676				—				—				—				—				—				(51,676	)			—				—				(51,676	)
Accrued dividends on Series B convertible preferred stock			—				176,447				—				—				—				—				—				(176,447	)			—				—				(176,447	)
Net issuance to settle RSUs			—				—				179,665				179				—				—				(13,128	)			—				—				—				(12,949	)
Other comprehensive loss			—				—				—				—				—				—				—				—				—				(174,775	)			(174,775	)
Net loss			—				—				—				—				—				—				—				(10,494,946	)			(10,850	)			—				(10,505,796	)
Balance, December 31, 2022			1,695			$	5,032,942				42,788,423			$	42,788				(25,000	)		$	(134,196	)		$	165,444,354			$	(116,596,626	)		$	30,988			$	(6,735,375	)		$	42,051,933
Balance, June 30, 2023			1,695			$	5,274,148				43,004,011			$	43,004				(25,000	)		$	(134,196	)		$	167,768,104			$	(91,932,808	)		$	67,120			$	(6,987,791	)		$	68,823,433
Stock-based compensation			—				—				—				—				—				—				695,147				—				—				—				695,147
Series B detachable warrant			—				51,676				—				—				—				—				—				(51,676	)			—				—				(51,676	)
Accrued dividends on Series B convertible preferred stock			—				192,800				—				—				—				—				—				(192,800	)			—				—				(192,800	)
Net issuance to settle RSUs			—				—				313,033				313				—				—				(27,139	)			—				—				—				(26,826	)
Proceeds from sale of common stock, net of expenses			—				—				—				—				—				—				(165,812	)			—				—				—				(165,812	)
Other comprehensive income			—				—				—				—				—				—				—				—				—				155,635				155,635
Net loss			—				—				—				—				—				—				—				(12,418,481	)			(32,482	)			—				(12,450,963	)
Balance, December 31, 2023			1,695			$	5,518,624				43,317,044			$	43,317				(25,000	)		$	(134,196	)		$	168,270,300			$	(104,595,765	)		$	34,638			$	(6,832,156	)		$	56,786,138

See notes to condensed consolidated financial statements.

---

S&W SEED COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Six Months Ended December 31,
		2023				2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(12,450,963	)		$	(10,505,796	)
Adjustments to reconcile net income (loss) from operating activities to net
cash used in operating activities:
Stock-based compensation			695,147				762,006
Bad debt expense			472,411				(125,209	)
Inventory write-down			787,085				685,200
Depreciation and amortization			2,145,042				2,590,338
Gain on disposal of property, plant and equipment			(101,690	)			(4,411	)
Gain on disposal of intangible assets			—				(1,796,252	)
Gain on sale of equity investment			—				(32,030	)
Equity in loss of equity method investees, net of tax			1,538,225				4,015
Change in deferred tax provision			(712,063	)			(259,747	)
Change in foreign exchange contracts			(639,143	)			19,466
Foreign currency transactions			1,276,525				(200,666	)
Amortization of debt discount			901,591				861,755
Accretion of note receivable			(127,476	)			—
Changes in:
Accounts receivable			4,326,500				(3,968,108	)
Inventories			(1,300,241	)			557,442
Prepaid expenses and other current assets			356,779				20,736
Other non-current assets			47,015				(677,938	)
Accounts payable			1,381,305				(385,529	)
Deferred revenue			5,039,497				5,578,365
Accrued expenses and other current liabilities			(2,231,490	)			(1,256,423	)
Other non-current liabilities			32,768				(207,625	)
Net cash provided by (used in) operating activities			1,436,824				(8,340,411	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment			(1,077,055	)			(154,997	)
Proceeds from disposal of property, plant and equipment			160,958				3,660
Capital contributions to partnerships			(88,543	)			(59,242	)
Proceeds from partnership transaction			—				2,000,000
Net proceeds from sale of equity investment			—				400,000
Net cash provided by (used in) investing activities			(1,004,640	)			2,189,421
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock			(165,812	)			—
Taxes paid related to net share settlements of stock-based compensation awards			(26,825	)			(12,949	)
Borrowings and repayments on lines of credit, net			(2,762,758	)			6,598,076
Borrowings of long-term debt			595,175				285,005
Repayments of long-term debt			(152,214	)			(1,063,661	)
Debt issuance costs			(237,278	)			(359,527	)
Net cash provided by (used in) financing activities			(2,749,712	)			5,446,944
EFFECT OF EXCHANGE RATE CHANGES ON CASH			33,105				(24,290	)
NET DECREASE IN CASH & CASH EQUIVALENTS			(2,284,423	)			(728,336	)
CASH AND CASH EQUIVALENTS, beginning of the period			3,398,793				2,056,508
CASH AND CASH EQUIVALENTS, end of period		$	1,114,370			$	1,328,172

 

See notes to condensed consolidated financial statements.

---

S&W SEED COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

 

---

 

---

 

 

 

 

 

 

---

 

 

---

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 condensed consolidated financial statements and the related notes included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. In addition to our historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements as referred to under the heading “Forward-Looking Statements” in this Quarterly Report on Form 10-Q. Factors that could cause or contribute to these differences include those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023, particularly in Part I, Item 1A., “Risk Factors.”

Strategic Review

We have maintained our strategic path for operations and future growth in sorghum while continuing to execute and refine our key centers of value for our international forage and pastures and alfalfa businesses. With grower adoption of our Double Team grain sorghum solution accelerating since its fiscal 2022 launch and the technological development of Double Team planned for forage and grain sorghum products in fiscal 2024, we believe we are in a unique position to be the leading technology provider of this important global crop.

We have continued to align our cost structure to support our key centers of value in order to drive the business towards profitability. We have decided to pause our development of stevia leaf and re-evaluate its longer-term profit opportunity with our partners. We have reduced obsolescence costs through improved life cycle management and SKU optimization efforts with the reduction of low margin forage lines and seed treatment offerings. In fiscal 2024, we have already recognized and expect to further recognize improvement in our seed cost position as additional operational efficiency plans are implemented and guided by best-in-class cost standards.

In fiscal 2023, we entered into a partnership with Equilon Enterprises LLC (dba Shell Oil Products, or Shell), Vision Bioenergy Oilseeds LLC, or Vision Bioenergy, that we believe will generate value while strengthening our balance sheet. This partnership intends to develop camelina and other oilseed species from which oil and meal can be extracted for future processing into animal feed, biofuels, and other bioproducts. With a limited supply of arable land, camelina provides a long-term opportunity of maximizing farmland food production. The partnership has either met or exceeded all initial cropping acre thresholds and expects to carry out initial grain production later this calendar year on the more than 7,000 acres of camelina planted. Shell is expected to buy all the grain that Vision Bioenergy produces through the offtake agreement that is in place.

Global Economic Conditions

We are subject to additional risks and uncertainties as a result of adverse geopolitical and macroeconomic events, such as the continued impact of the COVID-19 pandemic, the ongoing military conflict between Ukraine and Russia and related sanctions, the armed conflict in Sudan, the war between Israel and Hamas, uncertain market conditions, including higher inflation and supply chain disruptions, recent bank failures, and other global events, which have had and may continue to have an adverse impact on our business, operations and the markets and communities in which we, our partners and customers operate.

In 2023, we experienced a lessening of the severity of these supply chain issues related to the COVID-19 pandemic, though continue to experience negative effects in certain jurisdictions. We continue to work closely with our customers, business units, third party contractors and suppliers, and other external business partners to minimize the potential impact on our business. The extent of the impact of the COVID-19 pandemic on our sales, operating results and financial condition will depend on certain developments, including the location, duration and spread of future outbreaks, and the resulting specific impacts felt by our customers, employees, and vendors, all of which are uncertain and cannot be predicted.

Following the invasion of Ukraine by Russia in early 2022, the U.S. and global financial markets experienced volatility, which has led to disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity globally. In response to the invasion, the United States, United Kingdom and European Union, along with others, imposed significant new sanctions and export controls against Russia, Russian banks and certain Russian individuals and may implement additional sanctions or take further punitive actions in the future. The full economic and social impact of the sanctions imposed on Russia and possible future punitive measures that may be implemented, as well as the counter measures imposed by Russia, in addition to the ongoing military conflict between Ukraine and Russia and related sanctions, which could conceivably expand into the surrounding region, remains uncertain; however, both the conflict and related sanctions have resulted and could continue to result in disruptions to trade, commerce, pricing stability, credit availability, supply chain continuity and reduced access to liquidity on acceptable terms, in both Europe and globally, and has introduced significant uncertainty into global markets.

The armed conflict in Sudan, which began in April 2023, has disrupted our shipments to the country. We have shipped $1.4 million of our product to Sudan in the first half of fiscal 2024 and do not expect any additional sales to occur in fiscal 2024, although we will continue to monitor and assess conditions. In Saudi Arabia, the government has extended an additional five years, subsidies for farmers to grow wheat in response to ongoing disruptions to grain supply from Ukraine. We believe the subsidy program will result in farmers shifting to production of grains for human consumption instead of fodder for hay production, which would have a negative impact on our ability to sell products into Saudi Arabia.

---

While the subsidies are expected to impact the total volume of alfalfa seed exported to Saudi Arabia, we believe some farmers or regions will not be adequately equipped to shift to wheat production and importantly, we believe the animal herd size in Saudi Arabia has not changed. Given these factors, we expect the alfalfa market in Saudi Arabia may see a decline in sales, but that some level of sales will continue. To help mitigate any reduction in seed sales to Saudi Arabia, we are actively exploring sales into adjacent markets in the region.

Additionally, in October 2023, Hamas initiated an attack against Israel, resulting in a state of war. The conflict, and the potential escalation or expansion of the conflict, could result in sanctions, cause disruptions to global economic conditions and affect the stability of the Middle East region and our business in that region. For example, we have experienced disruptions and significant delays in shipping through this region due to threats of piracy in the Red Sea area, in which Jeddah, Saudi Arabia (a main port of entry for Saudi Arabia) is located, and which is the primary access point for shipments through the Suez canal.

Our product revenue is predicated on our ability to timely fulfill customer orders, which depends in large part upon the consistent availability and operation of shipping and distribution networks operated by third parties. Farmers typically have a limited window during which they can plant seed, and their buying decisions can be shaped by actual or perceived disruptions in our distribution and supply channels, or concerns about our ability to timely fulfill their orders. If our customers delay or decrease their orders due to potential disruptions in our distribution and supply channels, including as a result of the COVID-19 pandemic or other adverse geopolitical and macroeconomic events, this will adversely affect our product revenue.

During the fiscal year ended June 30, 2023 and the six months ended December 31, 2023, we experienced numerous logistical challenges due to limited availability of trucks for product deliveries, congestion at the ports, and overall volatility of shipping and transportation costs. We expect these logistical challenges to persist throughout fiscal 2024, which may, among other things, delay or reduce our ability to recognize revenues within a particular fiscal period and harm our results of operations.

The ultimate impact that COVID-19 and other adverse geopolitical and macroeconomic events will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic and any broad-based supply chain disruptions, labor shortages, rising levels of inflation and interest rates, tightening of credit markets or other developments resulting from the pandemic or recent geopolitical and macroeconomic events, as well as the economic recovery and actions taken in response to local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of those potential and evolving impacts to our business and condensed consolidated financial statements.

Components of Our Statements of Operations Data

Revenue

We derive most of our revenue from the sale of our proprietary seed varieties and hybrids. We expect that over the next several years, a substantial majority of our revenue will be generated from the sale of alfalfa, sorghum, and pasture seed, although we are continually assessing other possible product offerings or means to increase revenue, including expanding into higher margin crops.

The mix of our product offerings will continue to change over time with the introduction of new seed varieties and hybrids resulting from our robust research and development efforts. Potential sources of new revenue include expansion of novel, non-GMO product lines, entry into gene-edited product markets, entry into specialty crop markets, such as biofuels, and additional strategic transactions.

Our revenue will fluctuate depending on the timing of orders from our customers and distributors and the extent to which markets are impacted by sources of instability and volatility in global markets and industries, including, among other things, the COVID-19 pandemic, the military conflict between Russia and Ukraine, the armed conflict in Sudan, the war between Israel and Hamas, supply chain issues and global inflation. Because some of our large customers and distributors order in bulk only one or two times per year, our product revenue can fluctuate significantly from period to period. Some of this fluctuation is offset by having operations in both the northern and southern hemispheres. In addition, due to the numerous logistical challenges we have experienced in our shipping and distribution networks resulting from current geopolitical and macroeconomic events, our product revenue has fluctuated, and our ability to recognize revenues within a particular fiscal period has been impacted. We expect our product revenue will fluctuate from period to period as a result of current geopolitical and macroeconomic conditions.

Our specialty crops, including our biofuels program, have yet to generate any meaningful revenue. However, management continues to evaluate this portion of our business and assess various opportunities to monetize the results of our research and development efforts. Such potential opportunities include possible collaborations, partnerships and/or joint ventures, licensing agreements and royalty-based agreements. For example, we entered into our Vision Bioenergy partnership with Shell in February 2023 in order to develop commercially viable camelina sativa and other oilseeds varieties that produce grain from which oil and meal can be extracted for future processing into biofuels, feed and other potential bioproducts. Although we have received upfront payments from Shell pursuant to the partnership and will be entitled to receive an additional payment from Shell upon the one-year anniversary of our entry into the partnership, there can be no assurance that this will generate any meaningful revenue.

---

Cost of Revenue and Gross Margin

Cost of revenue relates to sale of our seed products and consists of the cost of procuring seed, plant conditioning and packaging costs, direct labor and raw materials and overhead costs. Gross margin represents the profit remaining after deducting these costs from total revenue. As Double Team sorghum continues to gain market acceptance, we expect to see additional favorability in our gross margin.

Operating Expenses

Selling, General and Administrative Expenses

Selling, general, and administrative expenses consist primarily of employee costs, including salaries, employee benefits and share-based compensation, as well as professional service fees, insurance, marketing, travel and entertainment expense, public company expense and other overhead costs. We proactively take steps on an ongoing basis to control selling, general and administrative expenses as much as is reasonably possible.

Research and Development Expenses

Research and development expenses consist of costs incurred in the discovery, development, breeding and testing of new products incorporating the traits we have specifically selected. These expenses consist primarily of employee salaries and benefits, consultant services, land leased for field trials, chemicals and supplies and other external expenses.

Overall, we have been focused on controlling research and development expenses, while balancing that objective against the recognition that continued advancement in product development is an important part of our strategic planning. We intend to focus our resources on high value activities. For alfalfa seed, we plan to invest in further development of differentiating forage quality traits. For sorghum, we plan to invest in higher value grain products, proprietary herbicide tolerance traits and improved safety and palatability in forage products. We expect our research and development expenses will fluctuate from period to period as a result of the timing of various research and development projects.

Our internal research and development costs are expensed as incurred, while third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. The costs associated with equipment or facilities acquired or constructed for research and development activities that have alternative future uses are capitalized and depreciated on a straight-line basis over the estimated useful life of the asset.

Depreciation and Amortization

We amortize intangible assets, including those acquired from Pasture Genetics Ltd., or Pasture Genetics, in 2020, Chromatin Inc. in 2018 and from SV Genetics Pty Ltd in 2016, using the straight-line method over the estimated useful life of the asset, consisting of periods of 10 to 30 years for technology/IP/germplasm, 5 to 20 years for customer relationships and trade names and 10 to 20 years for other intangible assets. Property, plant and equipment is depreciated using the straight-line method over the estimated useful life of the asset, consisting of periods of 5 to 35 years for buildings, 3 to 20 years for machinery and equipment and 3 to 5 years for vehicles.

Other (Income) Expense

Other (income) expense consists of foreign currency losses, interest expense, interest expense resulting from the amortization of debt discount, and other income. Interest expense and interest expense - amortization of debt discount primarily consists of interest costs related to outstanding borrowings on our working capital credit facilities. Amortization of the MFP Letter of Credit (as defined below) asset is also recorded to Interest expense - amortization of debt discount.

Provision (Benefit) for Income Taxes

Our effective tax rate is based on income, statutory tax rates, differences in the deductibility of certain expenses and inclusion of certain income items between financial statement and tax return purposes, and tax planning opportunities available to us in the various jurisdictions in which we operate. Under U.S. generally accepted accounting principles, or GAAP, if we determine that a tax position is more likely than not of being sustained upon audit, based solely on the technical merits of the position, we recognize the benefit. Tax regulations require certain items to be included in the tax return at different times than when those items are required to be recorded in the condensed consolidated financial statements. As a result, our effective tax rate reflected in our condensed consolidated financial statements is different from that reported in our tax returns. Some of these differences are permanent, such as meals and entertainment expenses that are not fully deductible on our tax return, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which we have already recorded the tax benefit in our condensed consolidated statements of operations. Based on projections of taxable income, we had previously determined that it is more likely than not that the deferred tax assets in the United States and South Africa will not be realized. We also previously determined that the deferred tax assets related to certain Australian intangible assets more likely than not would not be realized. Accordingly, a valuation allowance was recorded against the net deferred tax assets in the United States and South Africa and a partial valuation allowance was recorded to Australian deferred tax assets.

---

Results of Operations

Three Months Ended December 31, 2023 Compared to the Three Months Ended December 31, 2022

The following table presents our results of operations for the periods indicated:

		Three Months December 31,
		2023								2022								Change
		$				% of Revenue(1)				$				% of Revenue(1)				$				% Change
Revenue		$	10,864,809				100.0	%		$	12,937,802				100.0	%		$	(2,072,993	)			(16.0	)%
Cost of revenue			7,575,685				69.7	%			10,188,511				78.7	%			(2,612,826	)			(25.6	)%
Gross profit			3,289,124				30.3	%			2,749,291				21.3	%			539,833				19.6	%
Operating expenses
Selling, general and administrative expenses			5,892,922				54.2	%			6,242,212				48.2	%			(349,290	)			(5.6	)%
Research and development expenses			994,648				9.2	%			1,503,473				11.6	%			(508,825	)			(33.8	)%
Depreciation and amortization			1,076,019				9.9	%			1,253,904				9.7	%			(177,885	)			(14.2	)%
Gain on disposal of property, plant and equipment			(68,734	)			(0.6	)%			(751	)			(0.0	)%			(67,983	)			9052.3	%
Total operating expenses			7,894,855				72.7	%			8,998,838				69.6	%			(1,103,983	)			(12.3	)%
Loss from operations			(4,605,731	)			(42.4	)%			(6,249,547	)			(48.3	)%			1,643,816				(26.3	)%
Other (income) expense
Foreign currency loss			244,298				2.2	%			176,624				1.4	%			67,674				38.3	%
Gain on sale of equity investment			—				—				(32,030	)			(0.2	)%			32,030				(100.0	)%
Gain on disposal of intangible assets			—				—				(1,796,252	)			(13.9	)%			1,796,252				(100.0	)%
Interest expense - amortization of debt discount			446,017				4.1	%			578,112				4.5	%			(132,095	)			(22.8	)%
Interest expense, net			1,337,992				12.3	%			1,092,327				8.4	%			245,665				22.5	%
Other (income) expenses			(59,336	)			(0.5	)%			546				0.0	%			(59,882	)			(10967.4	)%
Loss before income taxes			(6,574,702	)			(60.5	)%			(6,268,874	)			(48.5	)%			(305,828	)			4.9	%
Benefit from income taxes			(756,985	)			(7.0	)%			(282,296	)			(2.2	)%			(474,689	)			168.2	%
Loss before equity in net earnings of affiliates			(5,817,717	)			(53.5	)%			(5,986,578	)			(46.3	)%			168,861				(2.8	)%
Equity in loss of equity method investees, net of tax			676,329				6.2	%			4,015				0.0	%			672,314				16745.1	%
Net loss		$	(6,494,046	)			(59.8	)%		$	(5,990,593	)			(46.3	)%		$	(503,453	)			8.4	%

(1) Amount in column may not foot due to rounding

The discussion and analysis presented below is concerned with material changes in our results of operations between the three months ended December 31, 2023 and the three months ended December 31, 2022. All comparisons presented are with respect to the prior year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC on September 27, 2023.

Revenue

The $2.1 million quarter-over-quarter decrease in revenue is due to a $3.5 million decrease in Middle East and North Africa, or MENA, region sales caused by management's decision to not discount non-dormant alfalfa as cheaper European seed disrupted the market and government incentives to produce wheat in Saudi Arabia reduced demand, a $1.1 million decrease in Australia pasture products and non-dormant alfalfa due to dry planting conditions, and a $0.3 million decrease in Asia sales due to COVID causing inventory carryover into fiscal 2024 leading to lost sales. This decrease was offset by a $2.8 million increase in Double Team sorghum revenue.

Cost of Revenue and Gross Margin

Cost of revenue decreased quarter-over-quarter and the gross margin percentage improved from 21.3% to 30.3% compared to the prior year period. The margin improvement was driven by a 17.0% increase related to Double Team margins due to increased sales of our high margin Double Team traited sorghum and a 1.0% increase in the Australian domestic market due to favorable product mix. This was offset by a 5.0% decrease in margins related to market prices in the MENA region and a 4.0% decrease in North America margins outside of Double Team traited sorghum driven by lower margin grain sorghum sales to Mexico.

Selling, General and Administrative Expenses

The $0.3 million decrease in selling, general and administrative expenses is attributable to a $0.4 million decrease in compensation and benefits and other employee related expenses, a $0.2 million decrease in legal fees, and a $0.1 million decrease related to expenses attributable to services provided to Vision Bioenergy. These cost savings were partially offset by a $0.3 million increase in our bad debt allowance related to our international business and a $0.1 million increase in advertising and marketing expense.

Research and Development Expenses

The quarter-over-quarter decrease in research and development expenses of $0.5 million is attributable to a $0.3 million decrease in salaries, wages, and related employment expenses as a result of management's cost reduction efforts and narrowed R&D program focus and a $0.2 million decrease in Australia field trial and outside service related expenses.

---

Depreciation and Amortization

Depreciation and amortization expenses decreased by $0.2 million following contributions of intangible and fixed assets to the Trigall and Vision Bioenergy partnerships.

Gain on Disposal of Property, Plant, and Equipment

There was a $0.1 million increase in gain recognized on the disposal of property, plant, and equipment related to the disposal of fixed assets held in the United States and Australia.

Foreign Currency Loss

The increase in foreign currency loss was attributable to fluctuations in foreign currency exchange rates between the Australian dollar and U.S. dollar.

Gain on Disposal of Intangible Assets

The $1.8 million gain on disposal of intangible assets occurred in the second quarter of fiscal 2023, as a result of the contribution of our Australia-based wheat breeding program and related assets to Trigall Australia in furtherance of the partnership with Trigall Australia.

Interest Expense - Amortization of Debt Discount

The decreased debt amortization expense is due to the amortization of the financial commitment asset established in conjunction with the granted MFP Warrants in fiscal 2023 and decreased amortization of costs associated with the completion of refinancing our CIBC Credit Facility.

Interest Expense, Net

Interest expense for the three months ended December 31, 2023 and 2022 primarily consisted of interest incurred on our working capital credit facilities with CIBC and NAB, the MFP Loan, and equipment capital leases. The $0.2 million increase was primarily driven by increases in average borrowings and increased interest rates on the working capital credit facilities.

Benefit from Income Tax

The income tax benefit totaled ($0.8) million for the three months ended December 31, 2023, compared to a ($0.3) million income tax benefit for the three months ended December 31, 2022. Our effective tax rate was 10.6% during the three months ended December 31, 2023 compared to 4.5% for the three months ended December 31, 2022. Our effective tax rate for the three months ended December 31, 2023 was due primarily to the valuation allowance recorded against substantially all of our deferred tax assets. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operation results, with the exception of our operations in Australia.

Equity in Loss of Equity Method Investees, Net of Tax

The loss on equity investments of $0.7 million was related to our proportionate share of loss from our 34% interest in Vision Bioenergy and our 20% interest in Trigall Australia.

---

Six Months Ended December 31, 2023 Compared to the Six Months Ended December 31, 2022

The following table presents our results of operations for the periods indicated:

		Six Months Ended December 31,
		2023								2022								Change
		$				% of Revenue(1)				$				% of Revenue(1)				$				% Change
Revenue		$	27,297,275				100.0	%		$	32,803,667				100.0	%		$	(5,506,392	)			(16.8	)%
Cost of revenue			18,996,837				69.6	%			25,549,865				77.9	%			(6,553,028	)			(25.6	)%
Gross profit			8,300,438				30.4	%			7,253,802				22.1	%			1,046,636				14.4	%
Operating expenses
Selling, general and administrative expenses			11,679,502				42.8	%			11,298,469				34.4	%			381,033				3.4	%
Research and development expenses			2,081,160				7.6	%			3,018,853				9.2	%			(937,693	)			(31.1	)%
Depreciation and amortization			2,145,042				7.9	%			2,590,338				7.9	%			(445,296	)			(17.2	)%
Gain on disposal of property, plant and equipment			(101,690	)			(0.4	)%			(4,411	)			(0.0	)%			(97,279	)			2205.4	%
Total operating expenses			15,804,014				57.9	%			16,903,249				51.5	%			(1,099,235	)			(6.5	)%
Loss from operations			(7,503,576	)			(27.5	)%			(9,649,447	)			(29.4	)%			2,145,871				(22.2	)%
Other (income) expense
Foreign currency loss			616,486				2.3	%			367,539				1.1	%			248,947				67.7	%
Gain on sale of equity investment			—				—				(32,030	)			(0.1	)%			32,030				(100.0	)%
Gain on disposal of intangible assets			—				—				(1,796,252	)			(5.5	)%			1,796,252				(100.0	)%
Interest expense - amortization of debt discount			901,591				3.3	%			861,755				2.6	%			39,836				4.6	%
Interest expense, net			2,743,759				10.1	%			1,879,006				5.7	%			864,753				46.0	%
Other (income) expenses			(96,896	)			(0.4	)%			(43,724	)			(0.1	)%			(53,172	)			121.6	%
Loss before income taxes			(11,668,516	)			(42.7	)%			(10,885,741	)			(33.2	)%			(782,775	)			7.2	%
Benefit from income taxes			(755,778	)			(2.8	)%			(383,960	)			(1.2	)%			(371,818	)			96.8	%
Loss before equity in net earnings of affiliates			(10,912,738	)			(40.0	)%			(10,501,781	)			(32.0	)%			(410,957	)			3.9	%
Equity in loss of equity method investees, net of tax			1,538,225				5.6	%			4,015				0.0	%			1,534,210				38212.0	%
Net loss		$	(12,450,963	)			(45.6	)%		$	(10,505,796	)			(32.0	)%		$	(1,945,167	)			18.5	%

(1) Amount in column may not foot due to rounding

The discussion and analysis presented below is concerned with material changes in our results of operations between the six months ended December 31, 2023 and the six months ended December 31, 2022. All comparisons presented are with respect to the prior year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC on September 27, 2023.

Revenue

The $5.5 million year-over-year decrease in revenue is due to a $6.4 million decrease in Middle East and North Africa region sales caused by management's decision to not discount non-dormant alfalfa as cheaper European seed disrupted the market and government incentives to produce wheat in Saudi Arabia reduced demand, a $2.4 million decrease in Mexico non-dormant alfalfa sales due to wet conditions causing missed plantings, a $1.7 million decrease in Australia sales from sorghum, pasture products, forage cereals and non-dormant sales due to dry planting conditions, and a $1.0 million decrease in Asia sales due to COVID causing inventory carryover into fiscal 2024 leading to lost sales. This decrease was offset by a $3.3 million increase in Double Team sorghum revenue, a $1.2 million increase in South Africa sorghum sales from the addition of a new customer, a $0.8 million increase in grain sorghum sales into Mexico due to increased focus of selling sorghum in the market, and a $0.7 million increase in non-dormant alfalfa sales due to softened demand.

Cost of Revenue and Gross Margin

Cost of revenue decreased year-over-year and the gross margin percentage improved from 22.1% to 30.4% compared to the prior year period. The margin improvement was driven by a 6.6% increase related to Double Team margins due to increased sales of our high margin Double Team traited sorghum, a 1.7% increase due to higher margin sorghum sales in South Africa, and a 0.7% increase in the Australian domestic market due to favorable product mix. This was offset by a 0.7% decrease in North America margins driven by higher inventory write-offs of non-dormant alfalfa year-over-year and product mix.

Selling, General and Administrative Expenses

The $0.4 million increase in selling, general and administrative expenses is attributable to a $0.6 million increase in our bad debt allowance with $0.2 million attributable to an allowance reversal in the prior year, a $0.4 million increase in payroll and other employee compensation related expenses, a $0.2 million increase in accounting fees attributable to the fiscal 2023 audit and a $0.2 million increase in advertising and marketing. The cost increases were partially offset by a $0.4 million decrease in incentive compensation, a $0.3 million decrease in expenses attributable to services provided to Vision Bioenergy and $0.4 million in other cost savings seen across the business during the quarter.

---

Research and Development Expenses

The year-over-year decrease in research and development expenses of $0.9 million is attributable to a $0.5 million decrease in salaries, wages, and related employment expenses as a result of management's cost reduction efforts and narrowed R&D program focus and a $0.4 million decrease in other R&D expenses including outside services, yield trials, and field expenses as a result of management's cost reduction efforts and narrowed R&D program focus.

Depreciation and Amortization

Depreciation and amortization expenses decreased by $0.4 million following contributions of intangible and fixed assets to the Trigall and Vision Bioenergy partnerships.

Gain on Disposal of Property, Plant, and Equipment

There was a $0.1 million increase in gain recognized on the disposal of property, plant, and equipment related to the disposal of fixed assets held in the United States and Australia.

Foreign Currency Loss

The increase in foreign currency loss was attributable to fluctuations in foreign currency exchange rates between the Australian dollar and U.S. dollar.

Gain on Disposal of Intangible Assets

The $1.8 million gain on disposal of intangible assets occurred in the second quarter of fiscal 2023, as a result of the contribution of our Australia-based wheat breeding program and related assets to Trigall Australia in furtherance of the partnership with Trigall Australia.

Interest Expense, Net

Interest expense for the six months ended December 31, 2023 and 2022 primarily consisted of interest incurred on our working capital credit facilities with CIBC and NAB, the MFP Loan, and equipment capital leases. The $0.9 million increase was primarily driven by increases in average borrowings and increased interest rates on the working capital credit facilities.

Benefit from Income Tax

The income tax benefit totaled ($0.8) million for the six months ended December 31, 2023, compared to a ($0.4) million income tax benefit for the six months ended December 31, 2022. Our effective tax rate was 6.4% during the six months ended December 31, 2023 compared to 3.5% for the six months ended December 31, 2022. Our effective tax rate for the six months ended December 31, 2023 was due primarily to the valuation allowance recorded against substantially all of our deferred tax assets. Due to the valuation allowance, we do not record the income tax expense or benefit related to substantially all of our current year operation results, with the exception of our operations in Australia.

Equity in Loss of Equity Method Investees, Net of Tax

The loss on equity investments of $1.5 million was related to our proportionate share of loss from our 34% interest in Vision Bioenergy and our 20% interest in Trigall Australia.

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 pay our North American contracted growers progressively, starting in the second fiscal quarter. In fiscal year 2023, we paid our North American growers approximately 50% of amounts due in the fall of 2022 and the balance was paid in the spring of 2023. We expect this payment cycle to our growers to be similar in fiscal year 2024. S&W Australia and Pasture Genetics, our Australia-based wholly owned subsidiaries, have production cycles that are counter-cyclical to North America; however, the timing of payments to Australian growers, which occurs in the second through fourth quarters, also puts a greater demand on our working capital and working capital requirements during these periods.

Historically, due to the concentration of sales to certain distributors, our month-to-month and quarter-to-quarter sales and associated cash receipts are highly dependent upon the timing of deliveries to and payments from these distributors, which varies significantly from year to year.

We continuously monitor and evaluate our credit policies with all of our customers based on historical collection experience, current economic and market conditions and a review of the current status of the respective trade accounts receivable balance. Our principal working capital components include cash and cash equivalents, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable and our working capital lines of credit.

In addition to funding our business with cash from operations, we have historically relied upon occasional sales of our debt and equity securities and credit facilities from financial institutions, both in the United States and Australia.

---

Capital Resources and Material Cash Requirements

We are not profitable and have had negative cash flow from operations for the last several years, excluding the fiscal 2023 gain recognized in relation to the Vision Bioenergy partnership. To help fund our operations, we have relied on equity and debt financings, and we will need to obtain additional funding to finance our operations in the future. Accordingly, we are actively evaluating financing and strategic alternatives, including debt and equity financings and potential sales of assets or certain lines of business.

We believe that cash flow from operations, cash payments from Trigall and Shell in fiscal 2024 pursuant to their partnership agreements, where we received $1.0 million from Trigall in January 2024 and $6.0 million from Shell in February 2024, and availability under our existing debt facilities will be sufficient to meet our cash requirements over the next 12 months. We expect to meet our longer-term expected future cash requirements and obligations beyond the next 12 months through a combination of existing cash and cash equivalents, cash flow from operations, our debt facilities and issuances of equity securities or debt offerings, among other sources of capital. Our ability to fund longer-term operating needs will depend on our ability to generate sufficient cash flows through sales of our products, our ability to maintain compliance with, and secure additional funds from, our existing debt facilities, and our ability to access the capital markets, the impacts of adverse geopolitical and macroeconomic events, and other factors, including those discussed under the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2023, as filed with the SEC on September 27, 2023.

Below is a summary of material changes to our sources of capital during the six months ended December 31, 2023:.

CIBC Loan Agreement

Our Loan and Security Agreement with CIBC Bank USA, or CIBC, as amended to date, or the CIBC Loan Agreement, provides for a $25.0 million credit facility. The following amendments to the CIBC Loan Agreement occurred during the six months ended December 31, 2023:

All amounts outstanding under the Amended CIBC Loan Agreement, including, but not limited to, accrued and unpaid principal and interest due under the CIBC Credit Facility, will be due and payable in full on August 31, 2024.

NAB Finance Agreement

On November 17, 2023, S&W Seed Company Australia Pty Ltd, or S&W Australia, a wholly owned subsidiary of S&W Seed Company, entered into an amended and restated finance agreement with National Australia Bank Limited, or NAB, pursuant to which, among other things:

MFP Loan Agreement

No amendments have occurred to the MFP Loan Agreement for the six months ended December 31, 2023.

Summary

The CIBC Loan Agreement and our debt facilities with NAB contain various operating and financial covenants. Adverse geopolitical and macroeconomic events and uncertain market conditions have increased the risk of our inability to comply with these covenants, which could result in acceleration of our repayment obligations and foreclosure on our pledged assets. In addition, these loan agreements contain cross-default provisions, such that certain defaults or breaches under any of our loan agreements may entitle CIBC to invoke default remedies. We were not in compliance with certain covenants in the CIBC Loan Agreement and NAB Finance Agreement as of June 30, 2023 and were required to obtain waivers and/or amendments from CIBC and NAB for such non-compliance.

---

For the three months ended December 31, 2023, we were in compliance with all covenants related to the CIBC Loan Agreement and the NAB Finance Agreement.

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

We cannot assure you that we will be successful in renewing or refinancing our existing debt, raising additional capital, securing future waivers and/or amendments from CIBC, NAB, or our other lenders, or securing new financing. If we are unsuccessful in doing so, we may need to reduce the scope of our operations, repay amounts owing to our lenders, finance our cash needs through a combination of equity and debt financings, enter into collaborations, strategic alliances and licensing arrangements, sell certain assets or divest certain operations.

If we are required or desire to raise additional capital in the future, whether as a condition to loan refinancing or separately, such additional financing may not be available on favorable terms, or available at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest would be diluted and the terms of these securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, may be secured by all or a portion of our assets, and may be on terms less favorable than our existing loans. If we fail to obtain additional capital as and when required, such failure could have a material impact on our business, results of operations and financial condition.

As a result of the COVID-19 pandemic and actions taken to slow its spread, the ongoing military conflict between Russia and Ukraine, the armed conflict in Sudan, the war between Israel and Hamas, and other geopolitical and macroeconomic factors beyond our control, the global credit and financial markets have experienced extreme volatility, including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. On March 10, 2023, the Federal Deposit Insurance Corporation took control and was appointed receiver of Silicon Valley Bank. While we did not have deposits at Silicon Valley Bank, if other banks and financial institutions enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our existing cash, cash equivalents and investments may be threatened and could have a material adverse effect on our business and financial condition. It is possible that further deterioration in credit and financial markets and confidence in economic conditions will occur. If equity and credit markets deteriorate, it may affect our ability to raise equity capital, borrow on our existing facilities, access our existing cash, or make any additional necessary debt or equity financing more difficult to obtain, more costly and/or more dilutive. In addition, while we are currently in compliance with our loan agreements or have received waivers of non-compliance, our ability to comply with the terms of our loan agreements can be compromised in the future and could result in an event of default. If an event of default were to occur, our lenders could accelerate our repayment obligations or enforce their other rights under our agreements with them. Any such default may also require us to seek additional or alternative financing, which may not be available on commercially reasonable terms or at all.

---

Summary of Cash Flows

The following table shows a summary of our cash flows for the six months ended December 31, 2023 and 2022:

		Six Months Ended December 31,
		2023				2022
Cash flows from operating activities		$	1,436,824			$	(8,340,411	)
Cash flows from investing activities			(1,004,640	)			2,189,421
Cash flows from financing activities			(2,749,712	)			5,446,944
Effect of exchange rate changes on cash			33,105				(24,290	)
Net decrease in cash and cash equivalents			(2,284,423	)			(728,336	)
Cash and cash equivalents, beginning of period			3,398,793				2,056,508
Cash and cash equivalents, end of period		$	1,114,370			$	1,328,172

Operating Activities

For the six months ended December 31, 2023, operating activities provided $1.4 million in cash. Of this, the net loss excluding non-cash items as detailed on the statement of cash flows used $6.2 million in cash and changes in operating assets and liabilities as detailed on the statement of cash flows provided $7.6 million in cash. The increase in cash from changes in operating assets and liabilities was primarily driven by a $5.0 million increase in deferred revenue from prepayments for our fiscal 2024 United States domestic business, a $4.3 million decrease in accounts receivable, a $1.4 million increase in accounts payable, and a $0.4 million decrease in prepaid expenses and other current assets, offset by a $2.2 million decrease in accrued expenses and other current liabilities and a $1.3 million increase in inventories.

For the six months ended December 31, 2022, operating activities used $8.3 million in cash. Of this, the net loss excluding non-cash items as detailed on the statement of cash flows used $8.0 million in cash and changes in operating assets and liabilities as detailed on the statement of cash flows used $0.3 million in cash. The decrease in cash from changes in operating assets and liabilities was primarily driven by a $5.6 million increase in deferred revenue from prepayments for our fiscal 2023 United States domestic business and decreased inventories of $0.6 million, offset by a $4.0 million increase in accounts receivable, a $1.3 million decrease in accrued expenses and other current liabilities, a $0.6 million increase in other non-current assets, a $0.4 million decrease in accounts payable, and a $0.2 million decrease in other non-current liabilities.

Investing Activities

Investing activities during the six months ended December 31, 2023 used $1.0 million in cash, which resulted from $1.1 million in additions to property, plant and equipment for our United States and Australian facilities and $0.1 million in capital contributions to the Trigall partnership offset by $0.2 million in proceeds from the disposal of property, plant and equipment from our United States and Australia facilities.

Investing activities during the six months ended December 31, 2022 provided $2.2 million in cash, which resulted from $2.0 million in proceeds from the partnership transaction between Trigall Genetics and S&W Australia, $0.4 million in proceeds from the sale of our remaining shares of Bioceres stock, offset by $0.1 million in additions to property, plant and equipment for our United States and Australia facilities and $0.1 million in capital contributions to the Trigall partnership.

Financing Activities

Financing activities during the six months ended December 31, 2023 used $2.7 million in cash, consisting of $2.8 million in net borrowings and repayments on the working capital lines of credit, $0.2 million in net proceeds from sale of common stock, $0.2 million in debt issuance costs, and $0.1 million in repayments of long term debt, offset by $0.6 million from borrowings of long-term debt.

Financing activities during the six months ended December 31, 2022 provided $5.4 million in cash, consisting of $6.6 million in net borrowings on the working capital lines of credit and $0.3 million of borrowings of long-term debt, partially offset by repayments of long-term debt of $1.1 million and debt issuance costs of $0.4 million.

Inflation Risk

Inflationary pressures on labor and commodity price increases directly impacted our condensed consolidated results of operations during the six months ended December 31, 2023 and we expect this to continue throughout the remainder of fiscal year 2024. We attempt to manage any inflationary costs through selective price increases and changes in product mix, but rapidly changing inflationary pressures from global commodity prices and logistics could impact our costs of goods before pricing adjustments can be implemented. Delays in implementing such price increases, competitive pressures, and other factors may limit our ability to recover such cost increases in the future. Inherent volatility experienced in certain commodity markets could have a significant effect on our results of operations and may have an adverse effect on us in the future. The extent of any impact will depend on our ability to manage such volatility through the product mix that we sell and selective price increases.

---

Critical Accounting Estimates

In preparing our unaudited condensed consolidated financial statements, we must select and apply various accounting policies in accordance with GAAP. In applying our accounting policies, we often need to make estimates, judgments and assumptions that we believe are reasonable, based upon the information available to us. 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 compared to its fair value, with an impairment loss recognized if the estimated fair value is below carrying value. Fair values are typically estimated using discounted cash flow techniques. 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, or ASC, 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. Stock options issued to non-employees are accounted for at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest.

We utilize the Black-Scholes-Merton option pricing model to estimate the fair value of options granted under share-based compensation plans. The Black-Scholes-Merton model requires us to estimate a variety of factors including, but not limited to, the expected term of the award, stock price volatility, dividend rate, risk-free interest rate. The input factors to use in the valuation model are based on subjective future expectations combined with management judgment. The expected term used represents the weighted-average period that the stock options are expected to be outstanding. We have used the historical volatility for our stock for the expected volatility assumption required in the model, as it is more representative of future stock price trends. We use a risk-free interest rate that is based on the implied yield available on U.S. Treasury issued with an equivalent remaining term at the time of grant. We have not paid dividends in the past and currently do not plan to pay any dividends in the foreseeable future, and as such, dividend yield is assumed to be zero for the purposes of valuing the stock options granted. We evaluate the assumptions used to value stock awards on a quarterly basis. If factors change, and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. When there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. 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 condensed 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 condensed 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 net realizable value. Inventories consist of raw materials and finished goods. 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 and this may require us in some cases to make significant judgments.

---

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.

Allowance for Doubtful Accounts

We regularly assess the collectability of receivables and provide an allowance for doubtful trade receivables equal to the estimated uncollectible amounts. That estimate is based on historical collection experience, current economic and market conditions and a review of the current status of each customer’s trade accounts receivable. Our estimates are judgmental in nature and are made at a point in time. Management believes the allowance for doubtful accounts is appropriate to cover anticipated losses in our accounts receivable under current conditions; however, unexpected, significant deterioration in any of the factors mentioned above or in general economic conditions could materially change these expectations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a smaller reporting company and, therefore, we are not required to provide information typically disclosed under this item.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and our Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. 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 December 31, 2023, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation that have significantly affected, or are reasonably likely to significantly affect, our internal control over financial reporting.

---

Part II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we are involved in lawsuits, claims, investigations and proceedings, including pending opposition proceedings involving patents that arise in the ordinary course of business. There are no matters pending that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

Item 1A. Risk Factors.

We are a smaller reporting company, and, as such, we are not required to provide the information under this Item of Form 10-Q.

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.

Item 5. Other Information.

None.

---

Item 6. Exhibits.

Exhibit No.		Description
3.1(1)		Registrant's Articles of Incorporation, as amended.
3.2(2)		Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock.
3.3(3)		Registrant's Third Amended and Restated Bylaws.
4.1		Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(4)		Form of Common Stock Certificate.
4.3(5)		Form of Warrant issued on February 18, 2022.
4.4(6)		Common Stock Purchase Warrant issued to MFP Partners, L.P. on September 22, 2022.
4.5(7)		Common Stock Purchase Warrant issued to MFP Partners, L.P. on October 28, 2022.
4.6(8)		Common Stock Purchase Warrant issued to MFP Partners, L.P. on December 22, 2022.
4.7(9)		Common Stock Purchase Warrant issued to MFP Partners, L.P. on March 22, 2023.
10.1		Amendment and Restatement Deed, dated November 17, 2023, by and between National Australia Bank Limited and S&W Seed Company Australia Pty Ltd.
10.2+		S&W Seed Company Amended and Restated Non-Employee Director Compensation Policy
10.3+		Employment Agreement by and between the Registrant and Vanessa Baughman, dated February 9, 2024.
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		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

---

* This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

+ Indicates management contract or compensatory plan.

---

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.

 

	S&W SEED COMPANY
Date: February 14, 2024	By:		/s/Vanessa Baughman
			Vanessa Baughman
			Chief Financial Officer (On behalf of the registrant in her capacity as Principal Financial and Accounting Officer)

 

---