UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
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
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25552 South Butte Avenue
Five Points, CA 93624
(559) 884-2535
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 ¨
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Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨
NO x
As of November 12, 2012, 7,873,000 shares of the registrant's common stock were outstanding.
PDF, as a courtesy
S&W SEED COMPANY 2
Part I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
S&W SEED COMPANY
See notes to consolidated financial statements. 3
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 NOTE 1 - BACKGROUND AND ORGANIZATION Organization The original business of the Company, that is, breeding, growing, processing and selling agricultural commodities, such as
alfalfa seed, and to a lesser extent, wheat and small grains, began as S&W Seed Company, a general partnership, in July 1980.
The corporate entity, S&W Seed Company, was incorporated in Delaware in October 2009. The corporation is the
successor entity to Seed Holding, LLC, which had purchased a majority interest in the general partnership between June 2008 and
December 2009. Following the Company's initial public offering in May 2010, the Company purchased the remaining general
partnership interests and became the sole owner of the business. Seed Holding, LLC is a consolidated subsidiary of the Company. In December 2011, S&W Seed Company consummated a merger (the "Reincorporation") with and into its wholly-owned
subsidiary, S&W Seed Company, a Nevada corporation, pursuant to the terms and conditions of an Agreement and Plan of
Merger. As a result of the Reincorporation, the Company is now a Nevada corporation. Business Overview Since its establishment, the Company, including its predecessor entities, has been principally engaged in breeding,
growing, processing and selling agricultural commodities, including alfalfa seed, and to a lesser extent, wheat and small grains. The
Company owns a 40-acre seed cleaning and processing facility located in Five Points, California that it has operated since its inception.
The Company's products are primarily grown under contract by farmers in the San Joaquin and Imperial Valleys of California, as well as
by the Company itself under a small direct farming operation. Though the Company's proprietary alfalfa seed varieties have been a
mainstay of the business for decades, S&W has in the past derived material revenue from the processing of wheat and other small
grains. The Company began its stevia initiative in fiscal 2010 and moved from a pilot program to commercial production in fiscal 2011.
The Company recorded its first stevia revenue in the second quarter of fiscal 2012 under a commercial supply agreement with a major
stevia processor. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Principles of Consolidation The Company maintains its accounting records on an accrual basis in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP"). The consolidated financial statements include the accounts of Seed Holding, LLC and its other wholly-owned
subsidiary, Stevia California, LLC. All significant intercompany balances and transactions have been eliminated. 7
Unaudited Interim Financial Information The accompanying consolidated balance sheet as of September 30, 2012, consolidated statements of operations for
the three months ended September 30, 2012 and 2011, consolidated statement of owners' equity for the three months ended
September 30, 2012 and consolidated statements of cash flows for the three months ended September 30, 2012 and 2011 are
unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP"). In the opinion of the Company's management, the unaudited interim
consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include
all adjustments necessary for the fair presentation of the Company's statement of financial position at September 30, 2012 and its
results of operations and its cash flows for the three months ended September 30, 2012 and 2011. The results for the three months
ended September 30, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending June 30,
2013. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect
many items in the financial statements. These include allowance for doubtful trade receivables, sales returns and allowances, inventory
obsolescence, asset impairments, provisions for income taxes, grower accruals (an estimate of amounts payable to farmers who grow
seed for the Company), contingencies and litigation. Significant estimates and assumptions are also used to establish the fair value and
useful lives of depreciable tangible and certain intangible assets as well as valuing stock-based compensation. Actual results may differ
from those estimates and assumptions, and such results may affect income, financial position or cash flows. Certain Risks and Concentrations The Company's revenue is principally derived from the sale of alfalfa seed, the market for which is highly competitive. The
Company depends on a core group of significant customers. One customer accounted for 79% and 88% of its net revenue for the three
months ended September 30, 2012 and 2011, respectively. Two customers comprised 86% of the Company's accounts receivable at September 30, 2012 and 2011, respectively.
Sales direct to international customers represented 78% and 83% of revenue during the three months ended September 30,
2012 and 2011, respectively. All of the Company's sales to international customers are transactions which are denominated in U.S.
Dollars. Accordingly, the Company's operations are not subject to foreign currency transactions or foreign currency translation. Revenue Recognition The Company derives its revenue primarily from sale of seed and other crops and milling services. Revenue from
seed and other crop sales is recognized when risk and title to the product is transferred to the customer, which usually occurs at the
time shipment is made from the Company's facilities. 8
When the right of return exists in the Company's seed business, sales revenue is reduced at the time of sale to reflect
expected returns. In order to estimate the expected returns, management analyzes historical returns, economic trends, market
conditions and changes in customer demand. At September 30, 2012, no customers had the right of return. The Company recognizes revenue from milling services according to the terms of the sales agreements and when delivery has
occurred, performance is complete, no right of return exists and pricing is fixed or determinable at the time of sale. Additional conditions for recognition of revenue for all sales include the requirements that the collection of sales proceeds must
be reasonably assured based on historical experience and current market conditions, the sales price is fixed and determinable and that
there must be no further performance obligations under the sale. Shipping and Handling Costs The Company records purchasing and receiving costs, inspection costs and warehousing costs in cost of goods sold. In
some instances, products are shipped F.O.B. shipping point and, as a result, the Company is not obligated to pay for shipping or any
costs associated with delivering its products to its customers. In these instances, costs associated with the shipment of products are not
included in the Company's consolidated financial statements. When the Company is required to pay for outward freight and/or the costs
incurred to deliver products to its customers, the costs are included in cost of goods sold. Sales Commissions Sales commission expenses are accrued for when the applicable sale is completed, and all such expenses are classified
as selling, general and administrative expenses on the consolidated statements of operations. Commissions paid to the Company's
international sales consultant were accounted for consistent with the aforementioned treatment. Cash and Cash Equivalents For financial statement presentation purposes, the Company considers time deposits, certificates of deposit and all
highly liquid investments with original maturities of three months or less to be cash and cash equivalents. Cash and cash equivalents
consist of the following: The Company maintains cash balances at financial institutions that are insured by the
Federal Deposit Insurance Corporation ("FDIC"). Accounts are guaranteed by the FDIC up to $250,000 under current
regulations. Cash equivalents held in money market funds are not FDIC insured. Cash deposits with these banks may exceed the
amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear
minimal risk. The Company had approximately $5,179,994 and $4,764,771 in excess of FDIC insured limits at September 30, 2012 and
June 30, 2012, respectively. 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 $0 at September 30, 2012 and June 30, 2012,
respectively. 9
Inventories Alfalfa Seed Inventory Inventories consist of alfalfa seed purchased from the Company's growers under production contracts as well as
packaging materials. Inventories are stated at the lower of cost or market, and an inventory reserve would permanently reduce the cost basis of
inventory. Inventories are valued as follows: Actual cost is used to value raw materials such as packaging materials, as well as goods in
process. Costs for substantially all finished goods, which include the cost of carryover crops from the previous year, are valued at actual
cost. Actual cost for finished goods includes plant conditioning and packaging costs, direct labor and raw materials and manufacturing
overhead costs based on normal capacity. The Company records abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage) as current period charges and allocates fixed production overhead to the costs of finished goods based on
the normal capacity of the production facilities. Inventory is periodically reviewed to determine if it is marketable, obsolete or impaired. Inventory that is determined to not be
marketable is written down to market value. Inventory that is determined to be obsolete or impaired is written off to expense at the time
the impairment is identified. Because the germination rate, and therefore the quality, of alfalfa seed improves over the first year of
proper storage, inventory obsolescence is not a material concern. The Company sells its inventory to distributors, dealers and directly
to growers. Growing Crops Expenditures on growing crops are valued at the lower of cost or market and are deferred and charged to cost of products sold
when the related crop is harvested and sold. The deferred growing costs included in inventories in the consolidated balance sheets
consist primarily of labor, lease payments on land, cultivation, on-going irrigation, harvest and fertilization costs. Costs included in
growing crops relate to the current crop year. Costs that are to be realized over the life of the crop are reflected in crop production
costs. Components of inventory are: 10
Crop Production Costs Expenditures on stevia and other crop production costs are valued at the lower of cost or market and are deferred and
charged to cost of products sold when the related crop is harvested and sold. The deferred crop production costs included in the
consolidated balance sheets consist primarily of the cost of plants and the transplanting, intermediate life irrigation equipment and land
amendments and preparation. Crop production costs are estimated to have useful lives of three to five years depending on the crop and
nature of the expenditure and are amortized to growing crop inventory each year over the estimated life of the crop. Components of crop production costs are: Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. The cost of plant and equipment is
depreciated using the straight-line method over the estimated useful life of the asset - periods of approximately 18-28 years
for buildings, 3-7 years for machinery and equipment and 3-5 years for vehicles. Long-lived assets are reviewed for
impairment whenever in management's judgment conditions indicate a possible loss. Such impairment tests compare estimated
undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its fair value or, if
fair value is not readily determinable, to an estimated fair value based on discounted cash flows. Fully depreciated assets are retained
in property, plant and equipment and accumulated depreciation accounts until they are removed from service. In case of disposals of
assets, the assets and related accumulated depreciation are removed from the accounts, and the net amounts after proceeds from
disposal are credited or charged to income. Intangible Assets Intangible assets acquired in the business acquisition of the S&W general partnership in 2008 are reported at
their initial fair value less accumulated amortization. Intangible assets acquired in the acquisition of the customer list in July 2011 and
the acquisition of proprietary alfalfa germ-plasm in August 2012 are reported at their initial cost less accumulated amortization. See
Note 3 for further discussion. The intangible assets are amortized based on useful lives ranging from 3-20 years. 11
Research and Development Costs The Company is engaged in ongoing research and development ("R&D") of proprietary seed and stevia varieties.
The Company accounts for R&D under standards issued by the Financial Accounting Standards Board ("FASB"). Under these
standards, all R&D costs must be charged to expense as incurred. Accordingly, internal R&D costs are expensed as incurred.
Third-party R&D costs are expensed when the contracted work has been performed or as milestone results have been achieved.
The costs associated with equipment or facilities acquired or constructed for R&D activities that have alternative future uses are
capitalized and depreciated on a straight-line basis over the estimated useful life of the asset. The amortization and depreciation for
such capitalized assets are charged to R&D expenses. Stock-Based Compensation The Company has in effect a stock incentive plan under which incentive stock options have been granted to employees
and non-qualified stock options have been granted to employees and non-employees, including members of the Board of Directors.
The Company accounts for its stock-based compensation plan by expensing the estimated fair value of stock-based awards over the
requisite service period, which is the vesting period. The measurement of stock-based compensation expense is based on several
criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock
price volatility, dividend rate, risk-free interest rate, attrition rate and exercise price. The input factors to use in the valuation model are
based on subjective future expectations combined with management judgment. The Company estimates the fair value of stock options
using the binomial lattice valuation model and the assumptions shown in Note 10. The excess tax benefits recognized in equity related
to equity award exercises are reflected as financing cash inflows. See Note 10 for a detailed discussion of stock-based compensation.
Net Income (Loss) Per Common Share Data Basic net income (loss) per common share, or earnings per share ("EPS"), is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting
outstanding shares, assuming any dilutive effects of options and common stock warrants calculated using the treasury stock method.
Under the treasury stock method, an increase in the fair market value of the Company's common stock results in a greater dilutive
effect from outstanding options, restricted stock awards and common stock warrants. 12
Potentially dilutive securities not included in the calculation of diluted net income (loss) per
share because to do so would be anti-dilutive are as follows: Income Taxes The Company accounts for income taxes in accordance with standards of disclosure propounded by the FASB and
any related interpretations of those standards sanctioned by the FASB. Accordingly, deferred tax assets and liabilities are determined
based on differences between the financial statement and tax bases of assets and liabilities, as well as a consideration of net operating
loss and credit carry forwards, using enacted tax rates in effect for the period in which the differences are expected to impact taxable
income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount that is more likely than not
to be realized. Impairment of Long-Lived Assets The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment ("ASC
360-10"). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The
Company evaluates its long-lived assets for impairment annually or more often if events and circumstances warrant. Events relating to
recoverability may include significant unfavorable changes in business conditions, recurring losses or a forecasted inability to achieve
break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted,
based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also
requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. The Company
performed an annual review for impairment and none existed as of June 30, 2012. 13
Fair Value of Financial Instruments In the first quarter of fiscal year 2009, the Company adopted Accounting Standards Codification subtopic 820-10, Fair
Value Measurements and Disclosures ("ASC 820-10"). ASC 820-10 defines fair value, establishes a framework for measuring fair value
and enhances fair value measurement disclosure. ASC 820-10 delays, until the first quarter of fiscal year 2009, the effective date for
ASC 820-10 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value
in the financial statements on a recurring basis (at least annually). The adoption of ASC 820-10 did not have a material impact on the
Company's consolidated financial position or operations, but does require that the Company disclose assets and liabilities that are
recognized and measured at fair value on a non-recurring basis, presented in a three-tier fair value hierarchy, as follows: • Level 1. Observable inputs such as quoted prices in active markets; • Level 2. Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly; and • Level 3. Unobservable inputs in which there is little or no market data, which require
the reporting entity to develop its own assumptions. No assets were valued at fair value on a recurring or non-recurring basis as of September 30, 2012 or June 30, 2012, respectively. Effective October 1, 2008, the Company adopted Accounting Standards Codification subtopic 820-10, Fair Value
Measurements and Disclosures ("ASC 820-10") and Accounting Standards Codification subtopic 825-10, Financial
Instruments ("ASC 825-10"), which permits entities to choose to measure many financial instruments and certain other items
at fair value. Neither of these statements had an impact on the Company's financial position, results of operations or cash flows. The
carrying value of cash and cash equivalents, accounts payable and short-term borrowings, as reflected in the balance sheets,
approximate fair value because of the short-term maturity of these instruments. Recent Accounting Pronouncements In December 2010, the FASB issued FASB ASU No. 2010-28, "When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts," which is now codified under FASB ASC
Topic 350, "Intangibles - Goodwill and Other." This ASU provides amendments to Step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not a goodwill impairment exists. When determining whether it is more likely than not an
impairment exists, an entity should consider whether there are any adverse qualitative factors, such as a significant deterioration in
market conditions, indicating an impairment may exist. FASB ASU No. 2010-28 is effective for fiscal years (and interim periods
within those years) beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an
entity with reporting units having carrying amounts which are zero or negative is required to assess whether is it more likely than not the
reporting units' goodwill is impaired. If the entity determines impairment exists, the entity must perform Step 2 of the goodwill
impairment test for that reporting unit or units. Step 2 involves allocating the fair value of the reporting unit to each asset and liability,
with the excess being implied goodwill. An impairment loss results if the amount of recorded goodwill exceeds the implied goodwill. Any
resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of
adoption. The adoption of this ASU did not have a material impact to the Company's consolidated financial statements. 14
In December 2010, the FASB issued FASB ASU No. 2010-29, "Disclosure of Supplementary Pro Forma
Information for Business Combinations," which is now codified under FASB ASC Topic 805, "Business Combinations."
A public entity is required to disclose pro forma data for business combinations occurring during the current reporting period. This ASU
provides amendments to clarify the acquisition date to be used when reporting the pro forma financial information when comparative
financial statements are presented and improves the usefulness of the pro forma revenue and earnings disclosures. If a public
company presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though
the business combination(s) which occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The supplemental pro forma disclosures required are also expanded to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. FASB ASU No. 2010-29 is effective on a prospective basis for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010,
with early adoption permitted. The adoption of this ASU did not have a material effect on the Company's consolidated statement of
financial position, results of operations or cash flows. In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, "Fair Value Measurement (Topic 820):
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs."
This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value
measurements that are estimated using significant unobservable (Level 3) inputs. This update is effective on a
prospective basis for annual and interim reporting periods beginning on or after December 15, 2011, which for the Company
was January 1, 2012. The adoption of this update did not have a material impact on its consolidated financial statements. NOTE 3 - ACQUISITION OF CUSTOMER LIST On July 6, 2011, the Company entered into a Customer List Purchase Agreement (the "Purchase Agreement") by and
between Richard Penner ("Mr. Penner"), the former owner of Genetics International, Inc., a California corporation ("Genetics
International"), and the Company. For more than two decades, Genetics International was the Company's international distributor in the
Middle East region and other international locations and provided the majority of the Company's international distribution. In connection
with the sale of Genetics International's vegetable seed business to new owners, Mr. Penner acquired the right to sell Genetics
International's alfalfa seed business customer list. Pursuant to the Purchase Agreement, the Company acquired the list of customers
and related information (the "Customer List") from Mr. Penner related to Genetics International's customer list. Pursuant to the Purchase Agreement, the Company paid $165,000 in cash. The Company also entered into a consulting
agreement with Mr. Penner's consulting company. The transaction closed on July 7, 2011. The Purchase Agreement includes
customary representations, warranties and covenants. The Purchase Agreement also contains a five-year non-competition
provision. The purchase was accounted for as an asset acquisition and the consideration paid of $165,000 was allocated to the intangible
assets acquired based on their relative fair values on the acquisition date. 15
The following table summarizes the final allocation of the purchase price and the estimated useful lives of the acquired
intangibles: NOTE 4 - OTHER INTANGIBLE ASSETS Other intangible assets consist of the following: Amortization expense totaled $16,154 and $15,196 for the three months ended September 30, 2012 and 2011, respectively.
Estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: 16
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT In July 2012, the Company purchased 640 acres of farmland in the Imperial Valley of California to be used for alfalfa seed
production. During the three months ended September 30, 2012, the Company incurred costs of $5,467,488 in connection with the
land purchase. Components of property, plant and equipment were as follows: Depreciation expense totaled $53,675 and $55,899 for the three months ended September 30, 2012 and 2011, respectively. NOTE 6 - SHORT TERM DEBT The Company entered into a credit agreement and related loan documents, dated April 1, 2011 (the "Credit Agreement") with Wells
Fargo Bank, National Association. The Credit Agreement provided the Company with a revolving credit facility of up to $5,000,000 that
can be used for working capital requirements. Effective April 1, 2012, the Company entered into a First Amendment to Credit
Agreement, increasing the revolving credit facility to $7,500,000 (the "Amended Credit Facility"). The Amended Credit
Facility terminates on April 1, 2014, at which time all amounts outstanding become due and payable. Any borrowings will bear interest
at a rate per annum equal to the daily one month LIBOR rate for the applicable interest period plus two percent. Interest is payable
each month in arrears. In the event of a default, as defined in the Amended Credit Facility, the principal balance will thereafter bear
interest at an increased rate per annum equal to four percent above the interest rate that would otherwise have been in effect from time
to time under the terms of the Amended Credit Facility. There is no borrowing base under the terms of the Amended Credit Facility.
Under the Amended Credit Agreement, the Company incurs certain fees, including, without limitation, a fee of 0.5% of the unused
portion of the credit facility, calculated quarterly. No borrowings have been made under the Credit Facility since its inception.
Accordingly, during the fiscal year ended June 30, 2012 and the quarter ended September 30, 2012, the Company incurred $29,236
and $9,583, respectively, of fees for the unused portion of the credit facility. Borrowings under the Amended Credit Facility are secured by all of the Company's existing and after-acquired goods, tools,
machinery, furnishings, furniture and other equipment. The Company has also granted Wells Fargo a continuing security interest in all
existing and after-acquired "Rights to Payment" and "Inventory," both as defined in the Continuing Security Agreement - Rights to
Payment and Inventory. The Amended Credit Facility contains customary representations and warranties, affirmative
17
and negative covenants and customary events of default that permit the Lender to accelerate the Company's outstanding obligations, all as set forth
in the Amended Credit Agreement. The Company has not yet drawn down on the line of credit. In July 2012, the Company entered into a new Credit Agreement with Wells Fargo (the "July 2012 Credit Agreement") and related
term loan. The July 2012 Credit Facility amends and restates the Amended Credit Agreement covering the $7,500,000 revolving line of
credit for working capital and adds a new term loan in the amount of $2,625,000 (the "Term Loan"). The Term Loan bears
interest at a rate per annum equal to 2.35% above LIBOR in effect on the from time to time as specified in the term loan. Under the
Term Loan, the Company is also required to pay both monthly and annual principal reduction as follows: The first installment of monthly
principal repayments commenced in August 2012 and will continue at a fixed amount per month until the first annual increase in July
2013. Thereafter the amount of monthly principal reduction will increase in August of each year through August 2018. The last monthly
payment will be made in July 2019. The monthly principal repayments will range from $8,107 per month through the July 2013 payment
up to a high of $9,703 per month in the final year (August 2018 through July 2019). Annual principal payments will be payable in August
2013 and 2014 in the amount of $56,000, with a final installment, consisting of all remaining unpaid principal due and payable in full on
July 5, 2019. The Company may prepay the principal at any time, provided that a minimum of the lesser of $100,000 or the entire
outstanding principal balance is prepaid at any one time. The Company applied the proceeds from the Term Loan to pay a portion of the purchase price for 640 acres of farmland it
purchased in July 2012. In connection therewith, the Company executed and delivered a Deed of Trust and Assignment of Rents and
Leases to American Securities Company for the benefit of the Bank. The Term Loan balance was $2,608,786 at September 30,
2012. NOTE 7 - STOCKHOLDERS' EQUITY On May 7, 2010, the Company closed its initial public offering ("IPO") of 1,400,000 units, which priced at
$11.00 per unit, raising gross proceeds of $15,400,000. Each unit consisted of two shares of common stock, one Class A warrant and
one Class B warrant. In connection with the IPO, the Company issued Representative's Warrants to Paulson Investment Company, Inc.
and Feltl and Company to purchase up to an aggregate of 140,000 units at $13.20, expiring May 3, 2015. Equity offering costs included
$1,424,500 of underwriters' fees and $1,153,444 of other equity offering costs. Each Class A warrant entitles its holder to purchase one share of the Company's common stock at an exercise price
of $7.15. Each Class B warrant entitles its holder to purchase one share of common stock at an exercise price of $11.00. The
Class A warrants and Class B warrants are exercisable at any time until their expiration on May 3, 2015. The
Class A warrants and Class B warrants are redeemable at the Company's option for $0.25 upon 30 days'
prior written notice beginning November 3, 2010, provided certain conditions are met. The Class A warrants are redeemable
provided that the Company's common stock has closed at a price at least equal to $8.80 for at least five consecutive trading days. The
Class B warrants are redeemable on the same terms, provided the Company's common stock has closed at a price at least
equal to $13.75 for five consecutive trading days. On May 7, 2012, the Company issued 73,000 shares of restricted common stock to certain members of the executive management
team. The restricted common shares vest annually in equal installments over a three-year period, commencing one year from the date
of the grant. The Company recorded $36,500 of stock-based compensation expense associated with this grant during the three months
ended September 30, 2012. The value of the award was based on the closing stock price on the date of grant. 18
On May 23, 2012, the Company closed its underwritten confidentially marketed public offering ("CMPO") of 1,000,000
common shares, which priced at $5.50 per share. The Company received total proceeds, net of underwriting discounts and equity
offering costs, of $5,006,311. In connection with the CMPO, the Company issued Representative's Warrants to Rodman &
Renshaw LLC to purchase up to an aggregate of 50,000 shares of the Company's common stock at an exercise price of $6.875 per
share, which expire on February 8, 2017. On September 24, 2012, the Company sold 600,000 unregistered shares of its common stock for $5.85 per share, to one
accredited investor. The Company received total proceeds, net of equity offering costs, of $5,467,488. The following table summarizes the warrants outstanding: The Company is authorized to issue up to 50,000,000 shares of its $0.001 par value common stock. At September 30, 2012, there
were 7,473,000 shares issued and outstanding. At June 30, 2012, there were 6,873,000 shares issued and outstanding. See Note 10 for discussion on equity-based compensation. NOTE 8 - COMMITMENTS AND CONTINGENCIES Contingencies The Company is not currently a party to any pending or threatened legal proceedings. Based on information currently
available, management is not aware of any matters that would have a material adverse effect on the Company's financial condition,
results of operations or cash flows. Lease of Imperial Valley Farmland On July 27, 2012, the Company entered into a five-year farmland lease effective as of July 1, 2012, covering
approximately 1,240 acres on two parcels located in the Imperial Valley owned by Coast Imperial Partners. The two parcels are
adjacent to the 640 acres of farmland the Company purchased concurrently from Coast Imperial Partners. The Company intends to
use the leased and purchased farmland to further expand the production of its proprietary alfalfa seed varieties. The lease provides for
annual escalating rental rates per acre ranging from $150 per acre per year in the first year of the lease, when 920 acres will be
available for production, to $275 per acre per year in the fifth year. The full 1,240 acres will be available to the Company beginning in
the second year and thereafter for the duration of the lease term and any extensions thereof. Rents are recorded on a
straight-line basis over the life of the lease. 19
NOTE 9 - RELATED PARTY TRANSACTIONS Grover T. Wickersham, the Company's Chairman of the Board, also serves as the chairman of the board of
managers and is a principal owner of Triangle T Partners, LLC ("Triangle T "). Triangle T and its predecessor entity
owned and operated Triangle T Ranch (the "Ranch"), which in the past has been one of our major alfalfa seed growers. The
Ranch was sold to an unaffiliated party in October 2010, and the relationship between the Company and Triangle T has been in
transition since then. Triangle T is one of the Company's alfalfa seed growers and is also a customer. The Company enters into annual alfalfa seed
production contracts with Triangle T on the same commercial terms and conditions as with the other growers with whom the
Company contracts for alfalfa seed production. For the three months ended September 30, 2012 and 2011, the Company purchased
from Triangle T $0 and $1,390,569, respectively, of alfalfa seed Triangle T grew and sold to the Company under one-year
production agreements. The Company entered into agreements with Triangle T to plant 893 acres of various alfalfa seed
varieties as part of its calendar 2011 production for which the Company paid Triangle T the same price it agreed to pay its
other growers. Mr. Wickersham, the sole remaining related party affiliated with both Triangle T and the Company, did not
personally receive nor will he receive any portion of these funds. As one of the Company's customers, Triangle T purchases certified alfalfa seed from the Company to plant alfalfa on its own
property for the production of alfalfa hay and to grow alfalfa seed for the Company. The Company sells certified alfalfa seed to Triangle
T under the same commercial terms and conditions as other alfalfa seed customers in the San Joaquin Valley. The Company also
generates revenue from selling milling services to Triangle T under the same commercial terms and conditions as other milling
customers. The Company sold $0 and $36,915 of certified alfalfa seed and milling services to Triangle T during the three months ended
September 30, 2012 and 2011, respectively. Triangle T also worked with the Company as the initial service provider for the
Company's stevia cultivation program, and the Company has planted its stevia plantings on Triangle T property. The Company incurred
$97,145 of charges from Triangle T during the three months ended September 30, 2012 for its services and costs in connection with the
stevia cultivation program including $3,420 in monthly rent charges for the use of the 114-acre main plot being used for commercial
stevia production. The Company incurred $40,638 of charges from Triangle T during the three months ended September 30, 2011 for
its services and costs in connection with the stevia cultivation program. Mr. Wickersham personally did not receive any portion
of these funds. There were no amounts due from Triangle T at September 30, 2012 and June 30, 2012, respectively. Amounts due to Triangle T
totaled $250,437 and $307,589 at September 30, 2012 and June 30, 2012, respectively. In July 2011, the Company purchased 20 bee trailers from Triangle T for a total price of $85,000. In December 2011, the Company
purchased 38 additional bee trailers from Triangle T for a total price of $76,000. Mr. Wickersham personally did not receive any portion
of these funds. On November 22, 2011, the Company entered into a one-year Agricultural Sub-Sublease Agreement with Triangle T under the
terms of which the Company agreed to sublease approximately 1,400 acres of farmland in Madera County for seed alfalfa production
and approximately 1,000 acres for the planting of other crops (collectively, the "Leased Property") owned by John Hancock Life
Insurance Company (U.S.A.) ("John Hancock"). John Hancock purchased the property known as Triangle T Ranch from Triangle T in
2009, and the parties entered into an Agricultural Sublease in connection with that purchase transaction. The Company is now
subleasing a portion of the Leased Property (the "Subleased Property"). 20
The sub-sublease provides for a lump sum payment of $352,000 in exchange for the right to farm the Subleased Property through
November 15, 2012. Although the sub-sublease is between the Company and Triangle T, payment was made directly to John Hancock,
with Triangle T receiving no payment as the lessor. In addition to the annual rent payment, the Company will pay for all farming
operations and will be responsible for keeping, maintaining and repairing the Subleased Property, including buildings, roads, pumping
drainage and irrigation systems, equipment, as well as paying the costs of insurance, utilities, assessments and other costs incidental
to the farming and maintenance of the Subleased Property. The Company will be entitled to all income and proceeds from the farming
operations on the Subleased Property, including but not limited to income and proceeds from all crops, crop insurance, government
payments and subsidies. The Company may use the services of TTP employees and TTP equipment in connection with farming the
Subleased Property, as needed. The Company incurred $798,326 of charges from Triangle T for its services and costs in connection
with farming operations during the three months ended September 30, 2012. NOTE 10 - EQUITY-BASED COMPENSATION 2009 Equity Incentive Plan In October 2009 and January 2010, the Company's Board of Directors and stockholders, respectively, approved the 2009
Equity Incentive Plan (the "2009 Plan"). The plan authorized the grant and issuance of options, restricted shares and other
equity compensation to the Company's directors, employees, officers and consultants, and those of the Company's subsidiaries and
parent, if any. Initially, 750,000 shares of common stock have been reserved for issuance under the 2009 Plan. 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. On October 24, 2011, the Company granted 259,500 stock options to its directors, officers, employees and certain consultants at
an exercise price of $4.20, 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 two year periods, commencing on January 1, 2012, and expire five years from the
date of grant. On May 7, 2012, the Company issued 73,000 shares of restricted common stock to certain members of the executive management
team. The restricted common shares vest annually in equal installments over a three year period, commencing one year from the date
of the grant. The Company recorded $36,500 of stock-based compensation expense associated with this grant during the three months
ended September 30, 2012. The value of the award was based on the closing stock price on the date of grant. As of September 30, 2012, options to purchase 677,000 shares of common stock were outstanding and unexercised, and 73,000
restricted shares of common stock were outstanding. There are no remaining shares available under the 2009 Plan for future grants
and awards. The Company has adopted ASC 718, Stock Compensation, ("ASC 718"). ASC 718
requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services
in exchange for the award. 21
The Company accounts for equity instruments, including stock options, issued to non-employees in accordance with authoritative
guidance for equity based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for
at their estimated fair value. The fair value of options granted to non-employees is re-measured as they vest. For stock-based awards granted, the Company amortizes stock-based compensation expense on a straight-line basis over the
requisite service period. The fair value of employee option grants are estimated on the date of grant and the fair value of options granted to non-
employees are re-measured as they vest. Fair value is calculated using a binomial lattice model. The weighted average assumptions
used in the models are outlined in the following table: A summary of activity related to the Company's 2009 Plan for the year ended June 30, 2012 and three months ended September
30, 2012 is presented below: The weighted average grant date fair value of options granted and outstanding at June 30, 2012 was $0.75. At September 30,
2012, the Company had $168,118 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options
under the 2009 Plan, which will be recognized over the weighted average remaining service period of 0.7 years. Stock-based
compensation expense recorded for stock options and restricted stock grants for the three months ended September 30, 2012 and
2011 totaled $90,831 and $24,320, respectively. The Company settles employee stock option exercises with newly issued shares of
common stock. 22
NOTE 11 - SUBSEQUENT EVENTS On October 1, 2012, the Company purchased substantially all of the assets of Imperial Valley Seeds, Inc. ("IVS").
Pursuant to the acquisition agreement, the Company purchased substantially all of the assets of IVS not including cash on hand, all
accounts and other receivables of IVS, and all inventory of the IVS alfalfa seed business. The Company did not assume any IVS
liabilities. Pursuant to the acquisition agreement, the Company paid the following consideration: cash in the amount of $3,000,000, a five-year
unsecured, subordinated promissory note in the principal amount of $500,000, 400,000 shares of the Company's unregistered
common stock valued at $2,432,000 and $250,000 to be paid over a five-year period for a non-competition
agreement, for total consideration of $6,182,000. The non-compete portion of the consideration will be paid in five annual installments
of $50,000 to Mr. Fabre, who joined the Company as Vice President of Sales and Marketing. 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q, including, but not limited to, this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains forward-looking statements that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from
those expressed or implied by such forward-looking statements. The statements contained in this Report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any
projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any
statements concerning expected development, performance or market acceptance relating to our products or services or our ability to
expand our grower or customer bases; any statements regarding future economic conditions or performance; any statements of
expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions underlying any
of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to,
"anticipate," "believe," "can," "continue," "could," "estimate,"
"expect," "intend," "may," "will," "plan," "project,"
"seek," "should," "target," "will," "would," and similar expressions or variations
intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations about
future events. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual
results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements.
Risks, uncertainties and assumptions include the possibility that certain foreign markets into which our seed is sold could be adversely
impacted by discounted pricing of non-proprietary seed by competitors, our alfalfa seed growers could choose to grow more profitable
crops instead of our alfalfa seed and the dairy industry decline might not recover as quickly as we anticipate. Other risks, uncertainties
and assumptions include macro-economic and geopolitical trends and events; the execution and performance of contracts by our
company and our customers, suppliers and partners; the challenge of managing asset levels, including inventory; the difficulty of
aligning expense levels with revenue changes; the outcome of pending or future legislation or court decisions and pending or future
accounting pronouncements; and other risks that are described herein, including but not limited to the items discussed in the Risk
Factors set forth in Item 1A of Part I of our Annual Report on Form 10-K, filed with the Commission on September 27, 2012 and that are
otherwise described or updated from time to time in our Securities and Exchange Commission reports. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements. Many factors discussed in this Report, some of which are beyond our
control, will be important in determining our future performance. Consequently, actual results may differ materially from those that might
be anticipated from the forward-looking statements. In light of these and other uncertainties, you should not regard the inclusion of a
forward-looking statement in this Report as a representation by us that our plans and objectives will be achieved, and you should not
place undue reliance on such forward-looking statements. Furthermore, such forward-looking statements speak only as of the date of
this Report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. 24
Executive Overview Our business includes (i) our core alfalfa seed business, which has been expanded in fiscal 2012 to include our own
farming operations; (ii) our more recently initiated stevia breeding and production operations; and (iii) our seed and small grain cleaning
and processing operations that leverage the excess capacity in our mill. Until we incorporated in 2009, our business was operated for
almost 30 years as a general partnership and was owned by five general partners. We incorporated in October 2009, bought
out the former partners between June 2008 and May 2010 and raised capital in our May 2010 initial public offering in order both to grow
the existing alfalfa seed business and take the company in a new direction. Since our initial public offering, we have raised additional
capital to help fund the purchase of Imperial Valley farmland, the acquisition of Imperial Valley Seeds and for working capital
purposes. Our alfalfa seed business consists of breeding our proprietary alfalfa seed varieties in order to be able to offer seed with the
traits sought by our customers such as high salt and heat tolerance and high yields, fulfilling our seed requirements both by contracting
with farmers in the San Joaquin and Imperial Valleys of California and internally farming acreage we have leased or purchased,
processing and bagging the seed at our facility and marketing and selling it as certified seed to agribusiness firms and farmers
throughout the world. Our principal business is subject to uncertainty, caused by the following factors, among others: (i) our seed
growers may decide to grow different crops when prices for alternative commodities are on the rise, which can create a shortage of our
certified seed; (ii) farmers who typically purchase our seed to grow alfalfa hay may plant alternative crops either in reaction to a decline
in the dairy industry, which in turn causes shrinking demand for alfalfa hay or because they can make a higher profit planting alternative
crops, either way, with the result that smaller quantities of our seed are purchased; or (iii) farmers may choose to convert their hay
crops to non-certified common seed, and an overabundance of non-certified seed entering the market can drive down the overall
market price for alfalfa seed, including the market for certified alfalfa seed. While we are attempting to mitigate these risks by our new
direct farming operations, agricultural risks will always remain. Consequently our revenue and margins can be difficult to project. In connection with our alfalfa seed operations since our May 2010 IPO, we have (i) leased acreage in Kern and Madera
Counties in California's San Joaquin Valley and in California's Imperial Valley, on which we are producing a portion of our alfalfa seed
supply ourselves; (ii) purchased farmland in the Imperial Valley; (iii) purchased the customer list of our principal international distributor
from its owner in order to sell our alfalfa seed directly to customers in Saudi Arabia and other Middle Eastern and African countries such
as Sudan, Egypt and Morocco; (iv) acquired the rights to a portfolio of dormant alfalfa seed varieties in order to expand our product
offerings into new geographic regions; (v) contracted with additional farmers to grow our proprietary seed; (vi) completed our first
material acquisition by purchasing substantially all of the assets of Imperial Valley Seeds, Inc. and (vii) expanded our sales and
marketing efforts. We began direct international sales in June 2011. Our first crop of internally-produced alfalfa seed was planted in the
second fiscal quarter of 2012 and was harvested, cleaned, bagged and made available for sale to our customers in the first and second
quarters of fiscal 2013, along with the seed we purchase from our contract growers. While the dairy business on which our alfalfa seed business is largely dependent is subject to significant cycles of over-supply
and under-supply, these fluctuations are generally localized. Consequently, although we are subject to the volatility of local markets, the
breadth of our market and the quality niche of our certified seed have resulted in relatively stable demand in most years. However, the
supply of seed in the marketplace is subject to substantial swings. Fiscal 2011 proved to be a particularly challenging year, but fiscal
2012 reflected a significant turnaround in seed revenue. 25
From inception until 2003, almost all our seed sales were to distributors who exported our products to international markets.
Modest sales efforts in the western U.S. were initiated around 2003, and in the fiscal year ended June 30, 2010, our seed shipments
were allocated approximately 51% to the domestic market and 49% to distributors who sold into international markets. In fiscal 2011,
both markets were negatively impacted by events beyond our control: The domestic market continued to be impacted by the dairy
industry downturn that began in fiscal 2009 when dairy prices declined due to over-supply. While in normal years, we are typically able
to offset this situation with sales to our distributors in our international markets, in fiscal 2011, our Middle East distributor experienced
the most challenging year in its history due to an over-supply of uncertified common seed being sold at significantly reduced prices. We
and our distributor elected to hold back much of our certified proprietary seed rather than sell into that depressed market in fiscal 2011.
As a result of all of these factors, seed sales were down in fiscal 2011 compared to the prior year. However, because of our decisions in
fiscal 2011, we had strong levels of certified seed inventory available for sale in fiscal 2012 when most of the common seed that glutted
those markets in fiscal 2011 had been sold out. This allowed us to meet expected demand and, to some extent, control pricing during
our first year selling directly into international markets. We plan to continue to expand our served markets and therefore minimize the
risks associated with any specific geographic market. Our alfalfa seed business is seasonal, with sales concentrated in the first six months of our fiscal year (July through
December) when customers are planting their fields. This coincides with the period during which seed growers harvest and deliver seed
to us. We contract with growers based upon our anticipated market demand; we mill, clean and stock the seed during the harvest
season and ship from inventory throughout the year. Tests show that seed that has been held in inventory for over one year improves
quality of the seed. Therefore, provided that we have sufficient capital to carry additional inventory, we may increase our seed
purchases and planned season end inventory if, in our judgment, we can generate increased margins and revenue with the aged seed.
This will also reduce the potential for inventory shortages in the event that we have higher than anticipated demand or other factors,
such as growers electing to plant alternative, higher priced crops, reducing our available seed supply in a particular year. Although we believe an opportunity exists to materially expand our alfalfa seed business without substantially overhauling our
operations, we could nevertheless encounter unforeseen problems. For example, in fiscal 2011 and 2012, some of our seed growers
elected to grow alternative crops, such as cotton, that yielded greater profit than alfalfa seed, and this could reoccur from time to time
as commodity prices shift. However, having first leased farmland in fiscal 2011, and then gained long-term access to additional
farmland in the San Joaquin and Imperial Valleys of California through additional leases entered into in fiscal 2012 and a farmland
purchase in fiscal 2013, we now have the ability to grow a portion of our alfalfa seed production ourselves, which could partially mitigate
this risk in future years. Although we have an experienced farming management and operations staff, this recently implemented direct
farming opportunity poses new challenges. As we obtain additional farmland, by lease or purchase, both our farming costs and risks
could continue to climb, and as our direct farming operations account for an increasingly significant portion of our seed requirements,
the farming decisions we make could have a significant negative impact on our results of operations. Nevertheless, we believe that by
vertically integrating our alfalfa seed business to include our own production, we can leverage our management infrastructure, our
experienced agronomics team and our milling capacity, while reducing our costs and more directly controlling our inventory. 26
Beginning in fiscal 2011, we also faced the new challenge created by the availability of Roundup Ready alfalfa
("RRA") in the U.S. We are still uncertain as to the extent to which RRA might negatively impact our business, if at all, but
lack of regulations regarding field isolation could raise concerns about contamination of our non-GMO seed. In fiscal 2012, the first year
in which RRA was planted in the San Joaquin Valley, some field contamination was discovered. Moreover, we sell into regions of the
world that have a zero tolerance policy regarding GMO seed, so we will have to be able to maintain the integrity of our seed in order to
sell in certain parts of the world. We have entered into a series of agreements with Monsanto Corporation and Forage Genetics
International to produce and sell genetically modified organism (GMO) alfalfa seed. Due to issues surrounding field contamination and
the widespread ban of GMO-based crops in many international markets, including markets that are critical to our business, we will be
required to take particular care in the planting of any GMO-based alfalfa seed we grow. We currently are using less than 25% of our mill capacity, leaving room for substantial revenue growth without having to incur
significant capital costs. In particular, we clean, process and bag seed and small grains for growers in the Five Points, California area
during the periods in which we are not using the mill for our alfalfa seed business. Although only representing a small portion of our
business, our milling services operations have historically represented the highest margin portion of our business. We have also been developing our stevia business, working closely with PureCircle, one of the world's top stevia breeders and
the world's largest stevia processor, in an effort to breed and select the best stevia varieties for the climate, soil and water conditions in
the San Joaquin Valley. In July 2010, we entered into a five-year supply agreement with PureCircle under which it agreed to purchase
our dried stevia leaf produced from seeds, plants and plant materials sourced from the processor or its agents that meets the
contractual specifications, up to 130% of the quantity agreed upon by the parties on an annual basis. In May 2011, we commenced the
planting of our first commercial crop of stevia and harvested a portion of that crop in the fall of 2011. We earned a modest amount of
revenue from that harvest during the second quarter of fiscal 2012 when the dried leaf was shipped to our customer. In that initial
commercial planting operation, our agronomists focused their efforts on ensuring our plantation has a healthy stand for the first winter
months, not on maximizing yield. This was essentially a test harvest in which we cut only the top portion of the plants and experimented
with harvesting methods and equipment settings. The next stevia harvest is taking place in the second quarter of fiscal 2013, although
the exact timing of the completion of such harvest will depend on factors such as bloom rate and results of our internal tests, as we
continue to evaluate and settle upon best farming practices. In April 2012, we leased additional farmland for our stevia production near Los Banos, California, located in the heart of
California's Central Valley. This newly leased farmland became our second stevia field, which was planted during the summer of 2012
and will also be harvested in the second quarter of fiscal 2013. Inasmuch as this is a new line of business for us, and the incorporation of stevia extracts into food and beverages sold in the
U.S. is still a relatively new industry, our plans may not succeed to the extent we expect or on the time schedule we have planned, or at
all. We incurred substantial expenses and earned no revenue during the 2011 fiscal year as we entered the stevia production business.
In fiscal 2012, we moved into commercial production of stevia leaf, but we earned only nominal revenue from our stevia operations. We
expect our stevia revenue to grow significantly in fiscal 2013 although it will remain a small portion of our total revenue for the
foreseeable future. 27
Results of Operations Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011 Revenue and Cost of Revenue Seed and Crop Revenue and Milling and Other Services Revenue for the three months ended September 30, 2012 was $6,719,735 compared to $6,115,679 for the three months
ended September 30, 2011. The $604,056, or 10%, increase in revenue for the 2013 fiscal quarter was due to a $470,740 increase in
seed and crop revenue coupled with a $133,316 increase in milling and other services. The increase in seed and crop revenue was due
primarily to continued demand for the Company's proprietary alfalfa seed varieties internationally. The improved results were partially
offset by limited seed available for shipment. The fall 2012 harvest commenced later in the season than in the previous year and the
Company's on hand inventory balances were lower moving into the current quarter; therefore the Company was more heavily
dependent upon the fall 2012 harvest and partially limited in its capability to process and prepare all seed for shipment prior to the end
of the quarter. The Company anticipates that it will see continued sell through of seed in the second quarter that was not available in
time during the first quarter. International sales accounted for 78% of our current period revenue compared to 83% in the comparable
period in the prior year. Domestic revenue accounted for 22% and 17% of our total revenue for the three months ended September 30,
2012 and 2011, respectively. Revenue for the three months ended September 30, 2012 included approximately $363,683 of milling and
other services compared to $230,367 for the three months ended September 30, 2011. The increase is due to timing difference of
milling services being performed. Cost of revenue of $5,641,333 in the three months ended September 30, 2012 was 84% of revenue, while the cost of revenue of
$4,364,387 in the three months ended September 30, 2011 was 71% of revenue. The dollar increase in cost of revenue for the current
year was primarily attributable to an increase in the costs paid to third-party contract growers coupled with higher costs of production on
internally operated fields that have been in production less than one year. Our average cost per pound of seed sold increased
approximately 36% from the comparable period in the prior year. Margins on seed and crop revenue totaled 13% in the current quarter
versus 27% in the comparable period in the prior year. Total gross profit margins for the current period totaled 16.0% versus 28.6% in the comparable period of the prior year. The
significant increase in seed costs in the current year principally contributed to the decrease in the total gross profit margins in the
current period. Although we experienced a 12% increase in the average selling price during the first quarter versus the comparable
period in the prior year, there was a delay implementing further price increases necessary to cover our increased costs of production.
The Company is obtaining further increases in sales pricing in the second quarter compared with that obtained in the first quarter of the
current year and anticipates that it will be improve gross margins in its core business for the remainder of the fiscal year. Stevia Breeding and Production Program We began our stevia initiative in fiscal 2010. We moved from a pilot program to commercial production in fiscal 2011,
planting the first commercial crop in the spring and summer of 2011. We earned our first stevia revenue of $25,382 during the second
fiscal quarter of 2012 under a commercial supply agreement with a major stevia processor. Our agronomists focused their efforts on
ensuring our plantation has a healthy stand for the first winter months, not on maximizing yield. This was essentially a
28
test harvest in which we cut only the top portion of the plants and experimented with harvesting methods and equipment settings. We expect
the next stevia harvest of this crop, as well as new acreage we planted in the summer of 2012, will take place in the first half of fiscal
2013. As of September 30, 2012, we have incurred $702,228 in stevia expenditures that are included in work in process inventories and
$1,184,905 has been recorded as crop production costs, which is a long-term asset and the remaining costs have been expensed to
research and development expense on the consolidated statement of operations. Inasmuch as we are still in the earliest stages of commercial stevia development, it is currently unknown whether these early crops
will produce multiple cuttings and whether the cuttings will result in improved yields, although we expect future harvests will provide
crop improvements as we develop best agronomic practices for stevia. We further expect that our costs will be highest in the first year
of production and will decline in subsequent years as we continue to harvest crops planted in earlier years. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") for the three months ended September 30, 2012
totaled $750,351 compared to $707,953 for the three months ended September 30, 2011. The $42,398 or 6% increase in SG&A
expense versus the comparable period prior year was primarily due to an increase in non-cash stock based compensation which
totaled $90,831 in the current period versus $24,320 in the comparable period of the prior year. As a percentage of revenue,
SG&A expenses were 11% in the current period compared to 12% in the quarter ended September 30, 2011. Research and Development Expense Research and development expenses ("R&D") for the three months ended September 30, 2012 totaled
$103,431 compared to $92,876 in the comparable period in the prior year. R&D expenses increased $10,555 in the current quarter
due to a $16,032 increase in stevia product development expenses partially offset by a $5,477 decrease in our alfalfa seed product
development expenses. We do expect to increase our stevia product development expenses in fiscal 2013. Depreciation and Amortization Depreciation and amortization expense for the three months ended September 30, 2012 was $69,785 compared to
$71,095 for the three months ended September 30, 2011. Included in the amount is amortization expense for intangibles assets, which
totaled $16,154 in the current quarter and $15,196 in comparable period of the prior year. Interest (Income) Expense, Net Interest expense, net during the three months ended September 30, 2012 totaled $7,868 compared to $4,162 for the three
months ended September 30, 2011. Interest expense consisted of the fee for the unused credit facility, partially offset by interest
income derived from cash and cash equivalents. Income Tax Expense Income tax expense totaled $58,211 for the three months ended September 30, 2012 compared to $352,441 for the three
months ended September 30, 2011. 29
Net Income We had net income of $88,756 for the three months ended September 30, 2012 compared to net income of $522,765 for
the three months ended September 30, 2011. The decrease in profitability was attributable primarily to the increase in our costs of seed
production which adversely impacted our gross margins, as discussed above. The net income per basic and diluted common share for
the current quarter was $0.01, compared to net income per basic and diluted common share of $0.09 for the three months ended
September 30, 2011. 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 is highest in the second and third fiscal quarters
(October through March) because we typically pay our contracted growers progressively, starting in the second quarter. Because of our
long-standing, excellent relationships with most of our growers, we have the ability to negotiate extended payment terms. In fiscal 2012,
we paid our growers approximately 33% of the amount owed in October 2011, an additional 33% in February 2012, and the remaining
34% in May 2012. In fiscal 2013, we paid our growers approximately 50% in October 2012, and the remaining 50% will be paid in
February 2013. Alfalfa seed harvest occurs during our first fiscal quarter (August and September), and we typically process most of our
alfalfa seed during September, October and November. Therefore, the value of inventory is the highest in the first and second quarters,
as are our labor costs. But we also generate the greatest amount of cash receipts during the planting season in the second fiscal
quarter (October through December). Historically, due to the concentration of sales to certain distributors and key customers, which typically represented a significant
percentage of alfalfa seed sales, our month-to-month and quarter-to-quarter sales and associated cash receipts were highly dependent
upon the timing of deliveries to and payments from these distributors and customers, which varied significantly from year to year. At the
end of fiscal 2011, our largest international distributor left the alfalfa seed sales business, and we purchased its customer list in July
2011. We commenced direct international sales in June 2011. Although we had no history of directly selling into the Middle East and
other international markets prior to June 2011, we believe that we have successfully transitioned into our direct sales model into the
Middle East. We expect that as direct sellers, we will experience similar timing constraints to that which we were accustomed when we
sold into these markets through our former distributor. 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 and accounts payable. In May 2012, we sold 1,000,000 shares of our common stock in a confidentially marketed public offering that priced at $5.50 per
share. We received total proceeds, net of underwriting discounts and equity offering costs, of $5,006,311. In September 2012, we sold
600,000 shares of our common stock in a private placement to one accredited investor, which was priced at $5.85 per share, resulting
in gross proceeds received by us of $3,510,000. In fiscal 2012, we increased our working capital line of credit with Wells Fargo Bank under the terms of which we are able to draw
down up to $7,500,000 to fund our seasonal working capital needs. The outstanding principal balance of the line of credit bears interest
at the one month LIBOR plus 2%, which equals 2.22% per annum as of September 21, 2012. The line of credit bears a standby fee on
one-half percent per annum on the average daily unused amount of the line of credit, for a maximum of
30
$25,000 if the line is not utilized.
As of November 12, 2012, we have not drawn down on the line, and during the three months ended September 30, 2012, we incurred
$9,583 of fees for the unused portion of the credit facility. In July 2012, we obtained a term loan from Wells Fargo in a principal amount of up to $2,625,000 (the "Term
Loan"), which we used to fund a portion of the purchase of the 640 acres of Imperial Valley farmland. The Term Loan bears
interest at a rate per annum equal to 2.35% above LIBOR in effect on the from time to time as specified in the term note. Under the
term loan, we are also required to pay both monthly and annual principal reduction as follows: The first installment of monthly principal
repayments commenced in August 2012 and will continue at a fixed amount per month until the first annual increase in July 2013.
Thereafter, the amount of monthly principal reduction will increase in August of each year through August 2018. The last monthly
payment will be made in July 2019. The monthly principal repayments will range from $8,107 per month through the July 2013 payment
up to a high of $9,703 per month in the final year (August 2018 through July 2019). Annual principal payments will be payable in August
2013 and 2014 in the amount of $56,000, with a final installment, consisting of all remaining unpaid principal due and payable in full on
July 5, 2019. We may prepay the principal at any time, provided that a minimum of the lesser of $100,000 or the entire outstanding
principal balance is prepaid at any one time. Summary of Cash Flows The following table shows a summary of our cash flows for the three months ended September 30, 2012 and 2011: As of September 30, 2012, we had cash and cash equivalents of approximately $8.7 million. Cash and cash equivalents
consist of cash and money market accounts. To date we have experienced no loss or lack of access to our invested cash or cash
equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by
adverse conditions in the financial markets. Amounts deposited with third-party financial institutions exceed the Federal Deposit Insurance Corporation, or FDIC, and
Securities Investor Protection Corporation, or SIPC, insurance limits, as applicable. These cash and cash equivalents balances could
be impacted if the underlying financial institutions fail or are subjected to other adverse conditions in the financial markets. To date we
have experienced no loss or lack of access to our cash and cash equivalents. Operating Activities For the three months ended September 30, 2012, operating activities used $129,446 in cash, as a result of net income of
$88,756 and an increase in accounts receivable of $3,352,476 and an increase in inventories of $2,156,882 partially offset by an
increase in accounts payable (including related party) of $5,574,936. For the three months ended September 30, 2011, operating activities provided $711,754 in
31
cash, as a result of net income of $522,765 and an increase in accounts payable (including related
party) of $4,652,093, partially offset by an increase in accounts receivable of $4,292,112. Due to the seasonality of our business, our inventory and accounts payable balances are typically at their highest levels during the
first and second quarters of the fiscal year. Because the germination rate, and therefore the quality, of alfalfa seed improves over the
first year of storage, inventory obsolescence is not a material concern. We do not see any recoverability issues with respect to our
current inventory balances of alfalfa seed on hand. We may choose to carry higher levels of inventory in future periods to meet
anticipated demand, although the anticipated timing of such possible increased demand, if any, cannot be ascertained. Our largest customer, which is located in Saudi Arabia, owed us approximately $4.5 million at September 30, 2012. These
outstanding invoices have 90 day payment terms. Our relationship with this customer is strong, and we intend to continue to do a
significant amount of business together. In future periods, we may also further extend credit to this customer. Investing Activities Our investing activities during the three months ended September 30, 2012 totaled $5,524,988. These activities consisted
primarily of the purchase of 640 acres of farmland in the Imperial Valley of California which will be used for alfalfa seed production.
Investing activities also included the acquisition of proprietary alfalfa seed varieties. Our investing activities during the three months
ended September 30, 2011 totaled $258,400. These activities consisted primarily of the purchase of our distributor's customer list for
$165,000 and the purchase of bee trailers and irrigation equipment totaling $93,400. During fiscal 2013, we expect to have ongoing
capital expenditure requirements to support our alfalfa seed and stevia production plans and other infrastructure needs. Financing Activities Our financing activities during the three months ended September 30, 2012 consisted of a private placement of 600,000
common shares, which was completed in September 2012. We received proceeds, net of equity offering costs, of $3.5 million from this
transaction. We also entered into a long-term loan with Wells Fargo generating proceeds of $2,625,000 all of which were used for the
purchase of Imperial Valley farmland. We did not have any financing activities during the three months ended September 30, 2011. Inflation Risk We do not believe that inflation has had a material effect on our business, financial condition or results of 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 ended September 30, 2012.
32
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 the unaudited
consolidated financial statements. In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are
described in Note 2 - Significant Accounting Policies set forth in the notes to the financial statements. In order to apply our
accounting policies, we often need to make estimates based on judgments about future events. In making such estimates, we rely on
historical experience, market and other conditions, and on assumptions that we believe to be reasonable. However, the estimation
process is by its nature uncertain given that estimates depend on events over which we may not have control. If market and other
conditions change from those that we anticipate, our results of operations, financial condition and changes in financial condition may be
materially affected. In addition, if our assumptions change, we may need to revise our estimates, or to take other corrective actions,
either of which may also have a material effect on our results of operations, financial condition or changes in financial condition.
Members of our senior management have discussed the development and selection of our critical accounting estimates, and our
disclosure regarding them, with the audit committee of our board of directors, and do so on a regular basis. We believe that the following estimates have a higher degree of inherent uncertainty and require our most significant
judgments. In addition, had we used estimates different from any of these, our results of operations, financial condition or changes in
financial condition for the current period could have been materially different from those presented. Intangible Assets: All amortizable intangible assets are assessed for impairment whenever
events indicate a possible loss. Such an assessment involves estimating undiscounted cash flows over the remaining useful life of the
intangible. If the review indicates that undiscounted cash flows are less than the recorded value of the intangible asset, the carrying
amount of the intangible is reduced by the estimated cash-flow shortfall on a discounted basis, and a corresponding loss is charged to
the consolidated statement of operations. Significant changes in key assumptions about the business, market conditions and prospects
for which the intangible asset is currently utilized or expected to be utilized could result in an impairment charge. Stock-Based Compensation: We account for stock-based compensation in accordance with Financial Accounting
Standards Board ("FASB") Accounting Standards Codification Topic 718 Stock Compensation, which establishes
accounting for equity instruments exchanged for employee services. Under such provisions, stock-based compensation cost is
measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense, under the straight-line
method, over the employee's requisite service period (generally the vesting period of the equity grant). 33
We account for equity instruments, including stock options, issued to non-employees in accordance with authoritative guidance for
equity based payments to non-employees (FASB ASC 505-50). Stock options issued to non-employees are accounted for at their
estimated fair value. The fair value of options granted to non-employees is re-measured as they vest. We use the binomial lattice valuation model to estimate the fair value of options granted under share-based compensation plans.
The binomial lattice valuation model requires us to estimate a variety of factors including, but not limited to, the expected term of the
award, stock price volatility, dividend rate, risk-free interest rate, attrition rate, and exercise rate. The input factors to use in the valuation
model are based on subjective future expectations combined with management judgment. The expected term used represents the
weighted-average period that the stock options are expected to be outstanding. We use the historical volatility of a comparable peer
group to derive the expected volatility of our common stock. The peer group historical volatility is used due to the limited trading history
of our common stock. 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. Income Taxes: We regularly assess the likelihood that deferred tax assets will be recovered from future taxable
income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation
allowance is established. When a valuation allowance is established or increased, an income tax charge is included in the consolidated
financial statements and net deferred tax assets are adjusted accordingly. Changes in tax laws, statutory tax rates and estimates of the
Company's future taxable income levels could result in actual realization of the deferred tax assets being materially different from the
amounts provided for in the consolidated financial statements. If the actual recovery amount of the deferred tax asset is less than
anticipated, we would be required to write-off the remaining deferred tax asset and increase the tax provision, resulting in a reduction of
net income and stockholders' equity. Inventories: All inventories are accounted for on a lower of cost or market basis. Inventories consist of raw
materials and finished goods as well as in the ground crop inventories. Depending on market conditions, the actual
amount received on sale could differ from our estimated value of inventory. In order to determine the value of inventory at the balance
sheet date, we evaluate a number of factors to determine the adequacy of provisions for inventory. The factors include the age of
inventory, the amount of inventory held by type, future demand for products and the expected future selling price we expect to realize
by selling the inventory. Our estimates are judgmental in nature and are made at a point in time, using available information, expected
business plans and expected market conditions. We perform a review of our inventory by product line on a quarterly basis. Recently Adopted and Recently Enacted Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic
820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
This update clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value
measurements that are estimated using significant unobservable (Level 3) inputs. This update is effective on a prospective basis for annual and
34
interim reporting periods beginning on or after December 15, 2011, which for the Company
was January 1, 2012. The adoption of this update did not have a material impact on its consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We are a smaller reporting company and therefore, we are not required to provide information required by this item of Form 10-Q. Item 4. Controls and Procedures. Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of September 30, 2012. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls
and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation
of our disclosure controls and procedures as of September 30, 2012, our Chief Executive Officer and Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried
out our evaluation which have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting. Potential investors should be aware that the design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance that any system of controls and procedures will succeed
in achieving its stated goals under all potential future conditions, regardless of how remote. Part II OTHER INFORMATION We are not a party to any material legal proceedings. 35
There have been no material changes to the risk factors previously disclosed under the caption "Risk Factors"
in the Form 10-K for the fiscal year ended June 30, 2012. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None that were not previously included in a Current Report on Form 8-K. Item 3. Defaults Upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable. None. Exhibit No. Description 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 (1) XBRL Instance Document 101.SCH (1) XBRL Taxonomy Extension Schema Document 101.CAL (1) XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB (1) XBRL Taxonomy Extension Label Linkbase Document 101.PRE (1) XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF (1) XBRL Taxonomy Extension Definition Linkbase Document (1) Pursuant to Rule 405(a)(2) of Regulation S-T, the registrant is relying upon the applicable 30-day grace period for
the initial filing of its first Interactive Data File required to contain detail-tagged footnotes and schedules. The registrant intends to file
the required detail-tagged footnotes or schedules by the filing of an amendment to this Quarterly Report on Form 10-Q within the
30-day period. 36
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 November 2012.
S&W SEED COMPANY By: /s/ Matthew K. Szot Matthew K. Szot Senior Vice President Finance and Chief Financial Officer
Table of Contents
(A NEVADA CORPORATION)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
June 30,
2012
2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
8,652,433
$
8,235,495
Accounts receivable, net
6,069,461
2,716,985
Inventories
8,273,667
6,116,785
Prepaid expenses and other current assets
96,374
138,236
Deferred tax asset
158,277
215,688
TOTAL CURRENT ASSETS
23,250,212
17,423,189
Property, plant and equipment, net of accumulated depreciation
7,855,043
2,441,186
Other intangibles, net
647,999
606,653
Crop production costs
1,358,160
1,098,292
Deferred tax asset - long term
464,375
464,375
TOTAL ASSETS
$
33,575,789
$
22,033,695
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
$
6,773,250
$
1,141,162
Accounts payable - related party
250,437
307,589
Accrued expenses and other current liabilities
170,711
454,512
Current portion of long-term debt
153,776
-
TOTAL CURRENT LIABILITIES
7,348,174
1,903,263
Long-term debt, less current portion
2,455,010
-
TOTAL LIABILITIES
9,803,184
1,903,263
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;
7,473,000 issued and outstanding at September 30, 2012; 6,873,000
issued and outstanding at June 30, 2012
7,473
6,873
Additional paid-in capital
23,349,793
19,796,976
Retained earnings
415,339
326,583
TOTAL STOCKHOLDERS' EQUITY
23,772,605
20,130,432
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
33,575,789
$
22,033,695
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
2012
2011
Revenue
Seed and crop revenue
$
6,356,052
$
5,885,312
Milling and other revenue
363,683
230,367
Total revenue
6,719,735
6,115,679
Cost of revenue
Cost of seed and crop revenue
5,549,419
4,297,945
Cost of milling and other revenue
91,914
66,442
Total cost of revenue
5,641,333
4,364,387
Gross profit
1,078,402
1,751,292
Operating expenses
Selling, general and administrative expenses
750,351
707,953
Research and development expenses
103,431
92,876
Depreciation and amortization
69,785
71,095
Total operating expenses
923,567
871,924
Income from operations
154,835
879,368
Other expense
Interest expense, net
7,868
4,162
Net income before income tax expense
146,967
875,206
Income tax expense
58,211
352,441
Net income
$
88,756
$
522,765
Net income per common share:
Basic
$
0.01
$
0.09
Diluted
$
0.01
$
0.09
Weighted average number of common shares outstanding:
Basic
6,839,560
5,800,000
Diluted
6,950,155
5,836,607
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional
Retained
Total
Common Stock
Paid-In
Earnings
Stockholders'
Shares
Amount
Capital
(Deficit)
Equity
Balance, June 30, 2011
5,800,000
$
5,800
$
14,604,716
$
(48,252)
$
14,562,264
Stock-based compensation - options
-
-
165,363
-
165,363
Restricted stock grant to executives
73,000
73
21,586
-
21,659
Proceeds from equity offering net of underwriter fees and expenses
1,000,000
1,000
5,005,311
-
5,006,311
Net income for the year ended June 30, 2012
-
-
-
374,835
374,835
Balance, June 30, 2012
6,873,000
$
6,873
$
19,796,976
$
326,583
$
20,130,432
Stock-based compensation - options and restricted stock
-
-
90,831
-
90,831
Proceeds from equity offering net of expenses
600,000
600
3,461,986
-
3,462,586
Net income for the three months ended September 30, 2012
-
-
-
88,756
88,756
Balance, September 30, 2012
7,473,000
$
7,473
$
23,349,793
$
415,339
$
23,772,605
(A NEVADA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
2012
2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
$
88,756
$
522,765
Adjustments to reconcile net income (loss) from operating activities to net
cash provided by (used in) operating activities
Stock-based compensation
90,831
24,320
Change in allowance for doubtful accounts
-
(3,587)
Depreciation and amortization
69,785
71,095
Changes in:
Accounts receivable
(3,352,476)
(4,292,112)
Inventories
(2,156,882)
(111,040)
Prepaid expenses and other current assets
41,862
(44,534)
Crop production costs
(259,868)
(334,557)
Deferred tax asset
57,411
313,929
Accounts payable
5,632,088
3,638,013
Accounts payable - related party
(57,152)
1,014,080
Accrued expenses and other current liabilities
(283,801)
(86,618)
Net cash provided by (used in) operating activities
(129,446)
711,754
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment
(5,467,488)
(93,400)
Acquisition of customer list
-
(165,000)
Acquisition of germ plasm
(57,500)
-
Net cash used in investing activities
(5,524,988)
(258,400)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock
3,462,586
-
Borrowings of long-term debt
2,625,000
-
Repayents of long-term debt
(16,214)
-
Net cash provided by financing activities
6,071,372
-
NET INCREASE OR (DECREASE) IN CASH
416,938
453,354
CASH AND CASH EQUIVALENTS, beginning of the period
8,235,495
3,738,544
CASH AND CASH EQUIVALENTS, end of period
$
8,652,433
$
4,191,898
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
$
17,635
$
-
Income taxes
-
-
(A NEVADA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30,
June 30,
2012
2012
Cash
$
5,429,994
$
5,014,771
Money market funds
3,222,439
3,220,724
$
8,652,433
$
8,235,495
September 30,
June 30,
2012
2012
Raw materials and supplies
$
41,210
$
73,386
Work in progress and growing crops
1,465,904
4,122,506
Finished goods
6,766,553
1,920,893
$
8,273,667
$
6,116,785
September 30,
June 30,
2012
2012
Stevia
$
1,184,905
$
935,466
Alfalfa seed production
86,297
73,031
Alfalfa hay
86,958
46,067
Wheat and triticale
-
43,728
Total crop production costs
$
1,358,160
$
1,098,292
Three Months Ended
September 30,
2012
2011
Net income
$
88,756
$
522,765
Net income per common share:
Basic
$
0.01
$
0.09
Diluted
$
0.01
$
0.09
Weighted average number of common shares outstanding:
Basic
6,839,560
5,800,000
Diluted
6,950,155
5,836,607
September 30,
2012
2011
Class A warrants
1,400,000
1,400,000
Class B warrants
1,400,000
1,400,000
Underwriter warrants
330,000
280,000
Other warrants
-
50,000
Stock options
-
480,000
Total
3,130,000
3,610,000
Useful Lives
Customer list
$
121,786
17
Non-compete
43,214
5
$
165,000
Balance at
Balance at
July 1, 2011
Additions
Amortization
June 30, 2012
Trade name
$
210,351
$
-
$
(12,372)
$
197,979
Customer relationships
108,620
-
(6,396)
102,224
Technology/IP
183,465
-
(26,208)
157,257
Non-compete
-
43,214
(8,644)
34,570
GI customer list
-
121,786
(7,163)
114,623
$
502,436
$
165,000
$
(60,783)
$
606,653
Balance at
Balance at
July 1, 2012
Additions
Amortization
September 30, 2012
Trade name
$
197,979
$
-
$
(3,093)
$
194,886
Customer relationships
102,224
-
(1,599)
100,625
Technology/IP
157,257
57,500
(7,510)
207,247
Non-compete
34,570
-
(2,161)
32,409
GI customer list
114,623
-
(1,791)
112,832
$
606,653
$
57,500
$
(16,154)
$
647,999
2013
2014
2015
2016
2017
Amortization expense
$
57,407
$
66,529
$
66,529
$
66,529
$
57,886
September 30,
June 30,
2012
2012
Land and improvements
$
5,736,540
$
289,827
Buildings and improvements
2,021,018
2,021,018
Machinery and equipment
698,182
677,407
Vehicles
123,551
123,551
Total property, plant and equipment
8,579,291
3,111,803
Less: accumulated depreciation
(724,248)
(670,617)
Property, plant and equipment, net
$
7,855,043
$
2,441,186
Grant
Warrants
Exercise Price
Expiration
Date
Outstanding
Per Share
Date
Class A warrants
May 2010
1,400,000
$
7.15
May 2015
Class B warrants
May 2010
1,400,000
$
11.00
May 2015
Underwriter warrants - units
May 2010
140,000
$
13.20
May 2015
Other warrants
May 2010
50,000
$
4.00
May 2015
Underwriter warrants
May 2012
50,000
$
6.88
Feb 2017
3,040,000
Employee Options
Non-Employee Options
September 30,
September 30,
2012
2011
2012
2011
Risk-free rate of interest
-
-
-
-
Dividend yield
-
-
-
-
Volatility of common stock
-
-
-
-
Exit / attrition rates
-
-
-
-
Target exercise factor
-
-
-
-
Weighted -
Weighted -
Average
Average
Remaining
Number
Exercise Price
Contractual
Outstanding
Per Share
Life (Years)
Outstanding at June 30, 2011
417,500
$
4.00
3.75
Granted
259,500
4.20
4.33
Exercised
-
-
-
Canceled/forfeited/expired
-
-
-
Outstanding at June 30, 2012
677,000
$
4.08
3.36
Granted
-
-
-
Exercised
-
-
-
Canceled/forfeited/expired
-
-
-
Outstanding at September 30, 2012
677,000
$
4.08
3.11
Options vested and exercisable at September 30, 2012
425,438
$
4.05
2.92
Three Months Ended
September 30,
2012
2011
Cash flows from operating activities
$
(129,446)
$
711,754
Cash flows from investing activities
(5,524,988)
(258,400)
Cash flows from financing activities
6,071,372
-
Net increase in cash
416,938
453,354
Cash and cash equivalents, beginning of period
8,235,495
3,738,544
Cash and cash equivalents, end of period
$
8,652,433
$
4,191,898
(Principal Accounting and Financial Officer and Duly Authorized Signatory)
37