S&W Seed Co - Quarter Report: 2013 March (Form 10-Q)

In fiscal 2013, the Company incurred $185,285 of acquisition costs, of which $132,536 was expensed in operations during the third quarters of fiscal 2013.

The following unaudited pro forma financial information presents results as if the acquisition of IVS had occurred on July 1, 2011.

For purposes of the pro forma disclosures above, the primary adjustments for the nine months ended March 31, 2013 include: i) the elimination of acquisition-related charges of $181,285; ii) amortization of acquired intangibles of $81,538; iii) additional interest expense of $2,250 for the unsecured promissory note issued in the acquisition; and iv) adjustments to reflect the additional income tax expense assuming a combined Company's effective tax rate of 37%. The primary adjustments for the nine months ended March 31, 2012 include: i) amortization of acquired intangibles of $244,613; ii) additional interest expense of $8,438 for the unsecured promissory note issued in the acquisition; and iii) adjustments to reflect the additional income tax expense assuming a combined Company's effective tax rate of 36%.

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NOTE 4 - OTHER INTANGIBLE ASSETS

Other intangible assets consist of the following:

Amortization expense totaled $98,169 and $15,196 for the three months ended March 31, 2013 and 2012, respectively. Amortization expense totaled $212,492 and $45,587 for the nine months ended March 31, 2013 and 2012, respectively. Estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

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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 nine months ended March 31, 2013, the Company incurred costs of $5,474,205 in connection with the land purchase.

On December 31, 2012, the Company closed a transaction for the purchase of 182 acres of farmland in the Imperial Valley of California. The Company purchased the property as a tenant-in-common with a third party and paid $843,453--an amount equal to fifty percent of the total purchase price plus certain closing costs and fees--for its interest in the property.

On February 28, 2013, the Company closed a transaction for the purchase of 119 acres of farmland in the Imperial Valley of California. The Company incurred costs of $834,771 in connection with the land purchase.

Components of property, plant and equipment were as follows:

Depreciation expense totaled $56,254 and $49,579 for the three months ended March 31, 2013 and 2012, respectively. Depreciation expense totaled $162,076 and $155,799 for the nine months ended March 31, 2013 and 2012, respectively.

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

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The Company entered into a credit agreement and related loan documents, dated April 1, 2011 (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). 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.

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. The Amended Credit Facility contains customary representations and warranties, affirmative 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.

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 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.

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

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

On 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.

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.

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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 and $109,500 of stock-based compensation expense associated with this grant during the three and nine months ended March 31, 2013, respectively. The value of the award was based on the closing stock price on the date of grant.

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 $3,462,586.

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

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

On March 12, 2013, the Company announced that it had exercised its option to call for redemption the Class A warrants. As of March 31, 2013, 724,409 shares of common stock were issued as a result of 724,409 Class A warrants being exercised. The Company received proceeds, net of fees and expenses, of $5,167,462 as of March 31, 2013. See Note 11 for further discussion on the Class A warrant activity subsequent to March 31, 2013.

On March 16, 2013, the Company issued 280,000 restricted stock units to certain members of the executive management team. The restricted stock units have varying vesting periods whereby 34,000 restricted stock units vest on July 1, 2013 and the remaining 246,000 restricted stock units vest quarterly in equal installments over a four and one-half year period, commencing on July 1, 2013. The Company recorded $65,866 of stock-based compensation expense associated with this grant during the three and nine months ended March 31, 2013, respectively. The fair value of the award was $2,984,800 and was based on the closing stock price on the date of grant.

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

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

The following table summarizes the warrants outstanding at March 31, 2013:

The Company is authorized to issue up to 50,000,000 shares of its $0.001 par value common stock. At March 31, 2013, there were 10,059,506 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.

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NOTE 8 - COMMITMENTS AND 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.

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.

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

Prior to fiscal 2013, Triangle T was one of the Company's alfalfa seed growers and a customer. The Company previously entered 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 nine months ended March 31, 2013 and 2012, the Company purchased from Triangle T $0 and $1,430,984, 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 did not personally receive any portion of these funds.

As one of the Company's previous customers, Triangle T purchased 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 previously sold 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 previously generated revenue from selling milling services to Triangle T under the same commercial terms and conditions as other milling customers. The Company sold $0 and $138,578 of certified alfalfa seed and milling services to Triangle T during the nine months ended March 31, 2013 and 2012, 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 $195,289 of charges from Triangle T during the nine months ended March 31, 2013 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 stevia production. The Company incurred $71,057 of charges from Triangle T during the nine months ended March 31, 2012 for its services and costs in connection with the stevia cultivation program. Mr. Wickersham personally did not receive any portion of these funds.

Amounts due to Triangle T totaled $37,597 and $307,589 at March 31, 2013 and June 30, 2012, respectively.

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 2010, and the parties entered into an Agricultural Sublease in connection with that purchase transaction. The Company subleased a portion of the Leased Property (the "Subleased Property").

The sub-sublease provided 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 was 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 paid for all farming operations and was 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 was 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 used the services of TTP employees and TTP equipment in connection with farming the Subleased Property, as needed. The Company incurred $837,542 of charges from Triangle T for its services and costs in connection with farming operations during the nine months ended March 31, 2013.

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Glen D. Bornt, who recently joined the Company's Board of Directors, is the founder and President of Imperial Valley Milling Co. ("IVM"). He is its majority shareholder and a member of its Board of Directors. Fred Fabre, the Company's Vice President of Sales and Marketing, is a minority shareholder of IVM.  IVM had a 15-year supply agreement with Imperial Valley Seeds, Inc., and this agreement was assigned by IVS to the Company when it purchased the assets of IVS in October 2012. IVM contracts with alfalfa seed growers in California's Imperial Valley and sells its growers' seed to the Company pursuant to a supply agreement. Under the terms of the supply agreement, IVM's entire certified and uncertified alfalfa seed production will be offered and sold to the Company, and the Company will have the exclusive option to purchase all or any portion of IVM's seed production.  The Company paid $8,275,714 to IVM during the nine months ended March 31, 2013.   Total amounts due to IVM at March 31, 2013 totaled $2,209,315.

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

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 December 8, 2012, the Company granted 175,000 stock options to its directors, officers, and employees at an exercise price of $7.20, which was the closing price for the Company's common stock on the date of grant. These options vest in equal quarterly installments over one- and three-year periods, commencing on January 1, 2013, and expire five years from the date of grant.

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 and $109,500 of stock-based compensation expense associated with this grant during the three and nine months ended March 31, 2013, respectively. The value of the award was based on the closing stock price on the date of grant.

On March 16, 2013, the Company issued 280,000 restricted stock units to certain members of the executive management team. The restricted stock units have varying vesting periods whereby 34,000 restricted stock units vest on July 1, 2013 and the remaining 246,000 restricted stock units vest quarterly in equal installments over a four and one-half year period, commencing on July 1, 2013. The Company recorded $65,866 of stock-based compensation expense associated with this grant during the three and nine months ended March 31, 2013, respectively. The fair value of the award was $2,984,800 and was based on the closing stock price on the date of grant.

As of March 31, 2013, options to purchase 852,000 shares of common stock were outstanding and unexercised, 73,000 restricted shares of common stock were outstanding and 280,000 restricted stock units were outstanding. As of March 31, 2013 there were 45,000 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.

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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 nine months ended March 31, 2013 is presented below:

The weighted average grant date fair value of options granted and outstanding at March 31, 2013 was $0.81. At March 31, 2013, the Company had $215,311 of unrecognized stock compensation expense, net of estimated forfeitures, related to the options under the 2009 Plan, which will be recognized over the weighted average remaining service period of 0.5 years. At March 31, 2013, the Company had $306,841 of unrecognized stock compensation expense related to the restricted stock grants, which will be recognized over the weighted average remaining service period of 2.1 years. At March 31, 2013, the Company had $2,918,934 of unrecognized stock compensation expense related to the restricted stock units, which will be recognized over the weighted average remaining service period of 4.5 years. Stock-based compensation expense recorded for stock options and restricted stock grants for the three months ended March 31, 2013 and 2012 totaled $178,851 and $49,030, respectively. Stock-based compensation expense recorded for stock options and restricted stock grants for the nine months ended March 31, 2013 and 2012 totaled $368,811 and $116,333, respectively. The Company settles employee stock option exercises with newly issued shares of common stock.

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NOTE 11 - SUBSEQUENT EVENTS

On April 1, 2013, the Company, together with its wholly owned subsidiary, S&W Seed Australia Pty Ltd, an Australia corporation ("S&W Australia"), closed the previously announced acquisition of all of the issued and outstanding ordinary shares of Seed Genetics International Pty Ltd, an Australia corporation ("SGI"), from SGI's shareholders (the "Acquisition"). The Acquisition was completed pursuant to the terms of the Share Acquisition Agreement, dated March 14, 2013 (the "Acquisition Agreement"), by and among SGI's shareholders, the Company, S&W Australia and SGI.

At closing, the SGI shareholders were paid a purchase price of approximately US$16.7 million. The purchase price consisted of the following: US$5.0 million in cash; 864,865 newly issued shares of the Company's common stock (with a market value of US$8,709,191 based upon the closing price of the Company's common stock as reported on the Nasdaq Capital Market on April 1, 2013); and US$3.0 million in the form of a three-year, non-interest bearing, unsecured promissory note.

During April and May 2013, 648,232 shares of common stock were issued as a result of 648,232 Class A warrants being exercised at a price of $7.15. The Company received gross proceeds of $4,634,859 from these warrant exercises.

The 27,359 remaining Class A Warrants that were not exercised by the deadline were redeemed by the Company for a price of $0.25 each, for an aggregate redemption cost to S&W of $6,840. There are no remaining Class A Warrants outstanding.

On April 9, 2013, the Company entered into an agreement to terminate a sales consulting agreement with Richard Penner Consulting, Inc. In consideration for the early termination of the consulting agreement, the Company issued 12,000 unregistered shares of S&W common stock to Richard Penner.

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

This Quarterly Report on Form 10-Q, including, but not limited to, this "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, tax provisions, earnings, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding our ability to raise capital in the future; any statements concerning expected development, performance or market acceptance relating to our products or services or our ability to expand our grower or customer bases; any statements regarding future economic conditions or performance; any statements of expectation or belief; any statements regarding our ability to retain key employees; and any statements of assumptions underlying any of the foregoing. These forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "will," "plan," "project," "seek," "should," "target," "will," "would," and similar expressions or variations intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward- looking statements. Risks, uncertainties and assumptions include the possibility that certain foreign markets into which our seed is sold could be adversely impacted by discounted pricing of non-proprietary seed by competitors, our alfalfa seed growers could choose to grow more profitable crops instead of our alfalfa seed 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 our Prospectus Supplement dated and filed with the Securities and Exchange Commission (the "SEC") on January 11, 2013 (as supplemented by the Supplement to the Prospectus Supplement dated and filed with the SEC on January 15, 2013) and that are otherwise described or updated from time to time in our SEC reports.

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

Our business includes (i) our core alfalfa seed business, which was 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 in October 2013, the acquisition of Seed Genetics International in April 2013 and for working capital purposes.

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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; (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; or (iv) the risks of internally farmed operations such as adverse agronomic decisions, weather conditions, natural disasters, crop disease, pests, lack of water and other natural conditions as well as other factors outside our control. While we are attempting to mitigate these risks, agricultural risks will always remain. As a result of these factors and others, including but not limited to the items discussed in the Risk Factors set forth in our Prospectus Supplement dated and filed with the Securities and Exchange Commission (the "SEC") on January 11, 2013 (as supplemented by the Supplement to the Prospectus Supplement dated and filed with the SEC on January 15, 2013) and that are otherwise described or updated from time to time in our SEC reports 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.; (vii) expanded our sales and marketing efforts; and (vii) on April 1, 2013 completed our largest and most strategic acquisition to date by acquiring 100% of Seed Genetics International, based in Adelaide Australia. 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 purchased 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 and the first nine months of fiscal 2013 reflected a significant turnaround in seed revenue.

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, and historical sales have been 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. The acquisition of Seed Genetics International on April 1, 2013 provides us with a geographically diversified and year-round production cycle. This will likely partially mitigate this seasonality of our business as the fourth quarter is typically a significant sales quarter for our newly acquired Australian operation. Tests show that seed that has been held in inventory for over one year improves in quality. Therefore, provided that we have sufficient capital to carry additional inventory, we may increase our seed purchases and planned season end inventory if, in our judgment, we can generate increased margins and revenue with the aged seed. This will also reduce the potential for inventory shortages in the event that we have higher than anticipated demand or other factors, such as growers electing to plant alternative, higher priced crops, reducing our available seed supply in a particular year.

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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, by first leasing farmland in fiscal 2011, and then gaining long-term access to additional farmland in the San Joaquin and Imperial Valleys of California through additional leases entered into in fiscal 2012 and farmland purchases 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.

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-genetically modified organism ("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 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.

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 on a 114-acre property near Chowchilla, CA 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 had 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. In April 2012, we leased a second property, of approximately 156 acres near Los Banos, CA to expand our stevia production. Our second trial harvest took place during the second quarter of fiscal 2013. We again experimented with a different harvesting method and equipment usage.

Our strategy for our stevia operations has been to utilize our research and breeding expertise to develop varieties that can thrive in the state of California, while obtaining attractive taste and yield profiles. Recently, due to weeding control practices, damage to a majority of the fields occurred and we believe it is unlikely that the existing plants will produce the desired levels of leaf that will make it economically viable to continue farming these fields. Stevia plants on the properties in Chowchilla and Los Banos have not emerged from the ground as expected, and we have tentatively concluded that the plants have suffered damage from application of certain herbicides. We are carefully examining the variables related to this year's application of the herbicides and believe that our eventual findings will improve our ongoing research and development of the stevia business. We currently believe that the field in Chowchilla will not produce a commercially viable harvest. We estimate that the Los Banos field has suffered an 80 to 90% loss rate, and expect that we will be able to maintain approximately 20 to 30 acres of stevia production at that site.

Based on our preliminary estimates of the damage to the stevia crops, we recorded an impairment charge of $1,840,209 and $2,140,209 for the three and nine months ended March 31, 2013, respectively. Our harvest of the surviving stevia acreage in Los Banos is expected to occur in August 2013, although the exact timing of the completion of such harvest will depend on the success of our efforts to quantify and mitigate the effects of the herbicides and on factors such as bloom rate and results of our internal tests, as we continue to evaluate and settle upon best farming practices. Our efforts are focused on breeding improved varieties of stevia, perfecting our harvesting and milling techniques, and developing our marketing and distribution programs for stevia products.   In order to minimize risk going forward, we have decided to delay new commercial replanting until we have optimized our farming methodology and our new stevia varieties under development are ready for production.   

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Because 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. In fiscal 2013, we increased our spending on research and development, but also recorded a stevia inventory impairment charge of $2,140,209. We expect our stevia revenue will be nominal in fiscal 2013 and fiscal 2014, but that our stevia expenditures will be substantially lower for these periods as we focus our spending on research and development.

Revenue for the three months ended March 31, 2013 was $4,208,735 compared to $2,549,188 for the three months ended March 31, 2012. The $1,659,547, or 65%, increase in revenue for the 2013 third quarter was primarily due to the acquisition of IVS on October 1, 2012 which contributed $3,803,942 of seed revenue. This was offset by a $2,151,547 decrease in seed and crop revenue from S&W's existing ("organic") business. The $2,151,547 decrease in organic seed and crop revenue resulted from a decrease in volumes primarily due to timing of shipments to our customers internationally, primarily in Saudi Arabia. We continue to expect large orders out of Saudi Arabia, however, the timing of these shipments will likely take place in the company's fourth fiscal quarter this year. 

Total international sales accounted for 89% of our current period revenue compared to 70% in the comparable period in the prior year. Domestic revenue accounted for 11% and 30% of our total revenue for the three months ended March 31, 2013 and 2012, respectively. The increase in the international sales percentage was due to the acquisition of IVS. Revenue for the three months ended March 31, 2013 included approximately $22,759 of milling and other services compared to $15,607 for the three months ended March 31, 2012.

The following table is a summary of revenue, costs of revenue and gross profits:

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Cost of revenue of $5,677,409 in the three months ended March 31, 2013 was 135% of revenue, while the cost of revenue of $1,747,644 in the three months ended March 31, 2012 was 69% of revenue. The dollar increase in cost of revenue for the current year was primarily attributable to the $1,840,209 stevia inventory impairment charge taken during the quarter as well as the cost of revenue from IVS, offset by decreased cost of revenue from S&W's organic business.

Excluding the charge for the stevia impairment, total gross profit margins for the current period totaled 8.8% versus 31.4% in the comparable period of the prior year. The decrease in gross profit margins can be attributed to the following factors: 1) the newly acquired IVS business, which represented over 90% of the revenues for the quarter and generated gross profit margins of 10.0%; 2) an increase in seed costs in the current year on S&W's organic operations due to higher average costs paid to third party contract growers as well as higher costs of production on internally operated fields that have been in production less than one year; 3) while the Company has obtained increases in seed sales prices to offset increased costs of production, these increases have not yet offset the increased costs of production; and 4) the company had to burden its cost of goods sold during the third quarter with additional farming related expenses of approximately $70,000 not previously recognized.

We expect to obtain stable or increased sales pricing for the remainder of the fiscal year and anticipate that we will improve gross margins in our core business for the remainder of the fiscal year. Gross margins from our IVS operations improved in the third quarter of fiscal 2013 from 10.0% compared to the preceding second quarter of fiscal 2013 of 8.5%. Gross margins in S&W's organic business, excluding the stevia reserve, were a negative 2.4% in the third quarter of fiscal 2013.  As mentioned above, the company had to burden its cost of goods sold during the third quarter with additional farming related expenses of $70,000 not previously recognized that negatively impacted the third quarters gross margins. 

We began our stevia initiative in fiscal 2010 on a leased 114-acre property near Chowchilla. 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 had 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. In April of 2012, we leased a second property, of approximately 156 acres near Los Banos, to expand our stevia production. Our second trial harvest took place during the second quarter of fiscal 2013. We again experimented with a different harvesting method and equipment usage. We have experienced substantial herbicide damage to our current stevia crops on both the Chowchilla and Los Banos properties, and currently expect that we will be able to maintain limited commercial production of stevia on approximately 20 to 30 acres of the Los Banos property. We expect to ship modest quantities of stevia leaf to PureCircle in the fourth quarter of fiscal 2013. Based on our current preliminary estimates of the damage to the stevia crops, we recorded an impairment charge of $1,840,209 for the three months ended March 31, 2013. Our next harvest is expected to occur in August 2013, although the exact timing of the completion of such harvest will depend on the success of our efforts to quantify and mitigate the effects of the herbicides, and on factors such as bloom rate and results of our internal tests, as we continue to evaluate and settle upon best farming practices.

Our strategy for our stevia operations has been to utilize our research and breeding expertise to develop varieties that can thrive in the state of California, while obtaining attractive taste and yield profiles. Recently, due to weeding control practices, damage to a majority of the fields occurred and we believe it is unlikely that the existing plants will produce the desired levels of leaf that will make it economically viable to continue farming these fields. Stevia plants on the properties in Chowchilla and Los Banos have not emerged from the ground as expected, and we have tentatively concluded that the plants have suffered damage from application of certain herbicides. We are carefully examining the variables related to this year's application of the herbicides and believe that our eventual findings will improve our ongoing research and development of the stevia business. We currently believe that the field in Chowchilla will not produce a commercially viable harvest. We estimate that the Los Banos field has suffered an 80 to 90% loss rate, and expect that we will be able to maintain approximately 20 to 30 acres of stevia production at that site.

Based on our preliminary estimates of the damage to the stevia crops, we recorded an impairment charge of $1,840,209 and $2,140,209 for the three and nine months ended March 31, 2013, respectively. Our harvest of the surviving stevia acreage in Los Banos is expected to occur in August 2013, although the exact timing of the completion of such harvest will depend on the success of our efforts to quantify and mitigate the effects of the herbicides and on factors such as bloom rate and results of our internal tests, as we continue to evaluate and settle upon best farming practices.

Our efforts are focused on breeding improved varieties of stevia, perfecting our harvesting and milling techniques, and developing our marketing and distribution programs for stevia products.   In order to minimize risk going forward, we have decided to delay new commercial replanting until we have optimized our farming methodology and our new stevia varieties under development are ready for production.   

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As of March 31, 2013, we have incurred $967,912 in stevia expenditures that are included in work in process inventories but these balances have been fully reserved for as part of the impairment charge and as such the net stevia balance in work in process inventory is $0. As of March 31, 2013, we have also incurred $1,167,636 of stevia expenditures which have been recorded as crop production costs, which is a long-term asset on the balance sheet. The net stevia crop production costs balance is $55,339 after deducting the $1,112,297 valuation reserve which was recorded during the three months ended March 31, 2013. The remaining costs have been expensed to research and development expense on the consolidated statement of operations.

Because we are still in the earliest stages of commercial stevia development and the current crops have suffered substantial herbicide damage, it is currently unknown whether the remaining stevia crop 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 decline in the remainder of fiscal 2013 and in fiscal 2014 as we delay the expansion of our commercial production and focus on breeding improved varieties of stevia, improving our harvesting and milling techniques, and developing our marketing and distribution programs for stevia products.

Selling, general and administrative expenses ("SG&A") for the three months ended March 31, 2013 totaled $1,280,563 compared to $633,024 for the three months ended March 31, 2012. The $647,539, or 102%, 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 $178,851 in the current period versus $49,030 in the comparable period of the prior year and $132,536 of non-recurring transaction costs associated with the acquisition of Seed Genetics International. In addition the Company had an increase in personnel costs as the Company continues to invest in personnel to support its overall growth. As a percentage of revenue, SG&A expenses were 30% in the current period compared to 25% in the third quarter ended March 31, 2012.

Research and development expenses ("R&D") for the three months ended March 31, 2013 totaled $69,835 compared to $44,393 in the comparable period in the prior year. R&D expenses increased $25,442 in the current quarter due to a $13,495 increase in our alfalfa seed product development expenses and an $11,947 increase in stevia product development expenses.

Depreciation and amortization expense for the three months ended March 31, 2013 was $154,423 compared to $64,775 for the three months ended March 31, 2012. Included in the amount was amortization expense for intangibles assets, which totaled $98,169 in the current quarter and $15,196 in comparable period of the prior year. The $82,973 increase in amortization expense in the current quarter was directly attributable to the addition of intangible assets acquired in the IVS business combination.

Interest expense, net during the three months ended March 31, 2013 totaled $8,804 compared to $4,363 for the three months ended March 31, 2012. Interest expense consisted of interest incurred on the Company's credit facility plus the fees for the unused credit facility, partially offset by interest income derived from cash and cash equivalents.

Income tax benefit totaled $1,109,925 for the three months ended March 31, 2013 compared to income tax expense of $36,178 for the three months ended March 31, 2012.

We had a net loss of $1,872,374 for the three months ended March 31, 2013 compared to net income of $20,641 for the three months ended March 31, 2012. The decrease in profitability was attributable primarily to the stevia inventory impairment charge and overall decreased gross profit margins, as discussed above. The net loss per basic and diluted common share for the current quarter was $0.21, compared to net income per basic and diluted common share of $0.00 for the three months ended March 31, 2012.

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Nine Months Ended March 31, 2013 Compared to the Nine Months Ended March 31, 2012

Revenue for the nine months ended March 31, 2013 was $24,614,353 compared to $13,392,896 for the nine months ended March 31, 2012. The $11,221,457 or 84%, increase in revenue for the 2013 period was primarily due to acquisition of IVS on October 1, 2012 which contributed $11,102,595 of seed revenue and the remainder of the increase was due to a $520,031 increase in seed and crop revenue from S&W's existing ("organic") business partially offset by a $401,169 decrease in milling and other services. The $520,031 or 4% increase in organic seed and crop revenue was due to an increase in pricing partially offset by a decrease in volumes sold. The improved results were partially offset by limited seed inventory levels. International sales accounted for 81% of our current period revenue compared to 72% in the comparable period in the prior year. Domestic revenue accounted for 19% and 18% of our total revenue for the nine months ended March 31, 2013 and 2012, respectively. The increase in the international sales percentage was due to the acquisition of IVS. Revenue for the nine months ended March 31, 2013 included approximately $498,969 of milling and other services compared to $900,138 for the nine months ended March 31, 2012. The decrease was due to lower volumes of grain processing.

The following table is a summary of revenue, costs of revenue and gross profits: