Robert Blum - IR, Lytham Partners Mark Grewal - President and CEO Matthew Szot - CFO.

Mike Malouf - Craig-Hallum Capital Partners Brett Wong - Piper Jaffray Aman Gulani - B. Riley and Company Gerry Sweeney - Roth Capital Ben Klieve - Noble Capital Markets Ian Gilson - Zacks Investment Research Frank Smith - Weirton Fund.

Good afternoon. And welcome to the S&W Seed Company Third Quarter of Fiscal Year 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Robert Blum of Lytham Partners. Please go ahead, sir..

Thank you, Denise. And thank all of you for joining us to discuss the financial results for S&W Seed Company for the third quarter of fiscal year 2017 ended March 31, 2017. With us on the call representing the Company today are Mark Grewal, President and Chief Executive Officer; and Matthew Szot, Chief Financial Officer.

At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. Before we begin with prepared remarks, we submit for the record the following statement.

Statements made by the management team of S&W Seed Company during the course of this conference call may contain 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, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected.

Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risk that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the Company’s 10-K for the fiscal year ended June 30, 2016, and other filings made by the Company with the Securities and Exchange Commission.

With that said, let me turn the call over to Mark Grewal, Chief Executive Officer for S&W Seed Company. Mark, please proceed..

Thank you, Robert, and good afternoon to all of you. We continue to execute on our objectives of driving gross margin improvements and market share expansion despite the uncertainty taking place in Saudi Arabia. We’ve may good progress and our growth drivers are stevia, sorghum and sunflowers.

From a high level, gross profit margins increased by 560 basis points to 27.6% for the third quarter. This comes on a heels of a 480 basis-point improvement from the second quarter year-over-year comparison. Our initiatives to drive down our cost of production while maintaining solid pricing is clearly taking hold.

On the top line, despite the headwinds in Saudi Arabia, we’re seeing growth throughout the rest of the world with year-to-date revenues up 6.8% or $51.2 million excluding Saudi. These improvements in markets outside Saudi Arabia coupled with year-to-date gross profit margins is resulting in a 13.6% increase in our year-to-date adjusted EBITDA.

As we talked about in detail last quarter, we are seeing solid demand and overall stable market across most of the world for alfalfa seed as evidenced by our 6.8% growth year-to-date outside Saudi Arabia. But we’re seeing uncertainly in Saudi as regulatory discussions surrounding water use restrictions continue to occur.

This is particularly having a short-term impact on sales of our Australian drives. I just spent two weeks in Saudi and Sudan. Having come back just last week, I met with and farmers, distributors, government officials and everyone else I could, associated with the alfalfa seed industry in the region.

My meetings reinforced our previous communication that the recent dialog surrounding implementation of water use restrictions has caused certain Saudi distributors, particularly those purchasing Australian based seed to defer purchases and/or limit their inventory levels in the near term.

However, there is a gradual shifting of production to the surrounding countries including Sudan and Egypt. We’re expecting a 44% increase in sales to Middle East, South Africa excluding Saudi Arabia for fiscal 2017.

As there is a large tracks of land in Sudan, 100,000 plus acre ranches that are just starting to utilize S&W’s alfalfa seed, the tremendous planned expansion in the coming years.

While there is all of this planned expansion taking place in the surrounding areas, we’re not yet seeing a sizable decrease in the amount of acres dedicated to alfalfa in Saudi. Farmers are continuing to plant new fields and seed is moving from distributors to the field.

That being said, distributors defiantly appear to be limiting inventory balances in advance of these anticipated shifts taking place and general uncertainty.

As I spoke to distributors and farmers in the regions, there is ultimately a belief that the net utilization in the Middle East, South Africa region over the next few years as a whole will remain the same as it has been for many years.

Consumers and dairies continue to place an emphasis on high-quality dairy production which includes feeding [ph] that alfalfa genetics. I think one of the most promising observations I witnessed was a dominance of S&W varieties at the high end dairy operations.

So, a takeaway to all of this seems to be a decrease in overall inventory carrying levels by distributors, particularly of Australian varieties and an uptake it varieties of higher end California-based varieties in the strong areas at least for the near-term.

So, while we will certainly see an impact to our results in fiscal 2017, if the belief holds true that the overall production will remain consistent across the region, there will be a positive whipsaw effect that will take place. That might be in fiscal 2018 or may it work its way gradually over the next few years.

One other point that I think is important to make. While there are number of outside factors we cannot control and we appear to be maintaining market share is that there is still low-hanging fruit for us with way too much cut [ph] being grown in the region. This simply should not be the case.

The economic benefits of planting S&W varieties overcut [ph] is significant and we simply need to do a better job of communicating the benefits of our varieties and having it reach the farmers. We have great distributor reach and coverage and are poised to benefit from the diversification as production shifts occur.

However, we said we need to do a better job within certain sales and marketing aspects. We will be working to develop certain strategies and outreach efforts to ensure these S&W versus cut benefits are being properly communicated and reach the ultimate decision makers of the region.

As you have probably seen by the recent press releases, many important long-term development initiatives are on with cuts but driving incremental growth to S&W.

We recently launch our high yielding salt tolerant variety S&W9215 Roundup Ready, containing the Roundup Ready technology 9215 Roundup Ready is highly seeded to production to the lower San Joaquin Valley, California, as well as non-dormant growing areas from Southern Arizona through South Texas.

And so to speak, the 9215 Roundup Ready will enable alfalfa farmers to grow a highly productive alfalfa variety in challenging soils under salt and water constraints. Now, with that added ability to apply Roundup, another labeled herbicides containing glyphosphate for convenient and efficient weed control.

The commercial introduction of our highest salt tolerant alfalfa seed variety with the Roundup Ready technology is truly a milestone for S&W and the alfalfa seed industry. We expect the introduction of Roundup Ready to be a revenue driver for us and our U.S. business, and as we expand our production.

And we currently anticipating about 400,000 pounds of S&W’s Roundup Ready varieties coming off production this upcoming fall. Our goal is to offer our customers the broadest spectrum of alfalfa seed traits helping growers around the world address the challenges they are presented with every day.

On the stevia front, we were gratitude two patents, one for the commercial processing property, and one for the fresh and dry leaf market that we believe have the opportunity to have a significant impact on the stevia production landscapes, which is currently limited to a few select varieties. The first patent received in March 2017 was for S&W 201.

201 exhibits unique features including sweet taste and very little bitterness and after taste and is designed to be utilized in the fresh dry leaf stevia market. In addition to its taste attributes, the receipt of this first stevia patent is another milestone for S&W.

We followed that patent up with the receipt of our second patent on April 27 for S&W 107 for the commercial processing market and 107 exhibits 40% higher leaf mass and 60% more Reb-A content compared to the comparison samples of currently available variety.

With few patented stevia varieties in the world today, we’re creating what we consider to be a native alternative in the marketplace with the high-quality variety that exhibits exceptional taste characteristics and enhanced farming attributes.

We look forward to working with stevia producers and companies utilizing stevia within their products in the U.S. and around the world to bring this new variety to the market.

These patents coupled with recently signed agreements with the large and well-known consumer products manufacturer for R&D collaboration has put our stevia program back into the spotlight following of few years of behind the scenes R&D work. Finally, we have made good strides in the commercial production of our sorghum and sunflower operations.

Our move to a vertical production model within hybrid grain sorghum and hybrid forage sorghum aligns more closely with the Company’s existing alfalfa seed operations where we develop, produce through contract growers and sell. This move is paying off and our first harvests having take place in April of 27.

We’re working with our distributors to expand demand for the coming years and we look to sell into channels underneath both branded and private label programs. We see tremendous potential in both our sorghum and sunflower seed operations to expand vertically and drive growth and profits to the future.

As we discussed last quarter, we see this business contributing more than $30 million in annual sales within the next five years. And with that said, let me turn the call over to Mat Szot for a review of the quarterly results.

Matt?.

Thank you, Mark. And thank you to everyone on the call today. For the third quarter, revenue was down $4 million compared to the third quarter of the prior year, largely due to Saudi Arabia. Nearly 80% of our revenues during the third quarter consisted domestic sales, primarily varieties sold into our DuPont Pioneer distribution channel.

Q3 sales to DuPont Pioneer were basically flat with the third quarter of the prior year. Year-to-date sales into Saudi are down $7 million, however we did experience modest growth in the U.S., Mexico and Argentina. As you look for our full year forecast, we’re anticipating revenues to Saudi will be down approximately $15 million for the year.

Now, approximately $10 million of this decrease is coming from our Australian operations Seed Genetics. Now, we’re experiencing a shift to other countries within MENA with our current year sales to MENA excluding Saudi forecasted to be up $3 million or 44%. And total sales for the year excluding Saudi are forecasted to be up 5% to 8%.

Gross profit margins during the third quarter were 27.6% compared to 22% in the third quarter of last year. The 560 basis-point improvement in gross profit margins was largely attributable to decreases in cost of goods sold and favorable sales mix to higher margin dormant verities.

We continue to anticipate gross margins to improve over the course of fiscal 2017 versus 2016, and this should partially offset the decreases in revenue that Mark mentioned. SG&A for the third quarter was $2.7 million, which was up $260,000 compared to the third quarter of the prior year. R&D was at $715,000, up about $88,000.

And depreciation and amortization was flat at approximately $800,000 versus the same period in the prior year.

We did incur an impairment charge of $319,000 during the third quarter related to the carrying value of certain stand establishment assets which were deemed impaired and uncollectible from a certain sub-leasee; examples are now fully written down.

Overall, excluding the impairment charge, operating expenses increased by about $360,000 compared to the third quarter of the prior year and this increase is largely due to our SVG operations, which were not included in the same period in the prior year.

We successfully retired the entire $27 million convertible debt over an accelerated 26 months timeframe, demonstrating our ability to execute under strategic initiatives and continue to drive value for our shareholders.

The deleveraging of our balance sheet has had a significant amount of flexibility and strength, which allows to decrease our cost of capital and take advantage of future opportunities. Over the past 26 months, we’ve incurred approximately $2.3 million in cash interest expense associated with convertible debentures.

The retirement of the convertible debt will result in a decrease -- result in cash interest savings along with completion of the amortization of debt discount. Both of these are expected to have a positive impact on the company’s financial results going forward.

Adjusted EBITDA for the third quarter was $2.7 million which was flat with the third quarter of prior year. Adjusted EBITDA as a percentage of revenue improved to 12.7% versus 10.9% in the third quarter of the prior year. This increase was driven by gross profit margin improvements we’ve delivered.

Year-to-date adjusted EBITDA increased to $3.9 million, an increased $463,000 or 14% compared to the nine months period in the prior year.

On a GAAP basis, net income for the third quarter was $1.3 million or $0.07 per basic and $0.03 per diluted share compared to GAAP net income of $568,000 or $0.04 per basic and diluted share in the third quarter of the prior year.

The difference between our GAAP basic EPS and diluted EPS in the current year is being driven by the accounting treatment of non-cash gain and derivative warrant liabilities.

For Q3, non-GAAP net income was $830,000 or $0.05 per basic and diluted share, compared to non-GAAP net income of $556,000 or $0.04 per basic and diluted share in the prior year. Again, this backs out certain non-recurring expenses, as well as non-cash gains and losses.

As you saw in the press release, the Saudi dynamics will have an impact on our fiscal 2017 results and it’s most pronounced within our Australian subsidiary SGI. Our management team in SGI is confident that they will sell the rest of the 2017 crop by January of 2018.

With that being said, we are executing on our gross margin initiatives as evidenced by our strong performance within the third quarter and are now anticipating an increase to our fiscal 2017 gross margin levels from our prior expectations. That should partially offset the decrease in forecasted revenue. I know we went through a lot of data here.

So, if you have any questions, please feel free to ask. Let me turn it back over to Mark..

Thank you, Matt. Before we turn the call over to your questions, let me discuss the exciting development we announced yesterday, as we’ve reached an agreement with Generic Genetics and Dr. Dave Stalker to be a developing novel alfalfa seed varieties containing seed biotechnology traits that are coming off patent in the next number of years. Dr.

Stalker was one of the early pioneers in agricultural biotechnology having work for Calgene, Monsanto, Scotts Miracle-Gro, and Advanta, and has a unique background in understanding patent protection strategies. During his career, he has been instrumental in the introduction of transgenic traits in soybean, canola and cotton.

We’ll look to leverage Generic Genetics of the patent landscape and scientific expertise to create varieties specific to S&W, utilizing current transgenic traits coupled with other trade technologies proprietary to Generic Genetics.

This is an exciting development for us and it’s yet another example of our commitment to develop high-quality alfalfa seed varieties. And despite Saudi, we had a solid quarter and year-to-date.

We continue to successfully execute on our DuPont Pioneer distribution agreement, saw growth in areas outside of Saudi Arabia with 6.8% revenue growth compared to the year ago period, improved gross margins to 27.6%, a 560 basis-point improvement from a year ago period, are making progress on the product development front and advancing key traits that farmers around the world are looking for with the introduction of Roundup Ready, salt tolerant alfalfa seed varieties, while looking at future opportunities within biotech with partnering agreements such as KLX [ph] and Generic Genetics, commenced commercial scale production and saw a first harvest of our sorghum and sunflower operations, which will allow us to capture a higher gross profit dollar and move forward -- and move closer to the end customer, and that reached a number of significant milestones in our stevia program with the granting of two new patents and an R&D collaboration with a major consumer productions company.

While the uncertainty in Saudi Arabia is continuing to create a disruption, S&W continues to maintain its leadership position within the alfalfa seed industry.

Overall, the transition of hay production regions around the world such as what is taking place in our Saudi Arabia, creates an opportunity for us with our strong product diversification and brand distribution to gain market share long-term. As always, we thank you for your support. And now, let’s open up the call for your questions.

Operator?.

[Operator Instructions] And the first question will comes from Mike Malouf of Craig-Hallum Capital Partners. Please go ahead..

If I could just drill down a little bit into the Saudi situation, if I understand as the water restrictions have decreased the ability for Saudi to grow alfalfa and that a lot of the farmers in Sudan are going to come and take up that demand for the alfalfa by growing it in Sudan. I think that’s right.

And then, regarding the distributors, do you have the same distributors in Saudi and Sudan?.

Basically, we have some of the same and we have other individual distributors that have been with us are now becoming our main distributors to various operations in Sudan..

And there is enough acreage in Sudan to sort of take over what Saudi is not doing?.

Mike, there is more acres in Sudan than anything we’ve never lost in Saudi; it is unbelievable. Four major farms I went on are hundreds and hundreds of thousands acres. One’s going to develop over 1 million acres, 2.1 million acres, there is [indiscernible] there is DAL, there is so many. It’s gigantic; it’s amazing. So you’re going to see -- GLB.

I mean, there are so many big operations going in that one long it’s going to be moving 20,000 head [ph] a month out to various regions and the seed demands are just large. So, they’ve got the Nile river, they’re plugging right into the Nile, major, major diversified operations that are mainly based on alfalfa.

So, it is very exciting, some tremendous opportunities and made some very good connections with new guys, and we look forward to working with them as they develop these ranches..

Okay, great. And so, your folks over in Australia think their just basically going to sit on the inventory, until Sudan comes on and starts ordering in a major way, which is….

They’re pretty confident that by January of this coming year that all that seed that they have will be out in the marketplace..

Yes. And Mike, let me clarify, we’re still expecting that Australian seed is sold into Saudi Arabia. Australian subsidiary has not placed orders yet, but we certainly expect -- they are going to have to buy the seed at some point and there is absolutely still demand in Saudi Arabia.

So, they’ll have to come back to market and we think those sales will gradually happen over the next six months or so..

And you expect the gross margins that you were expecting on that seed to remain similar to what you’re expecting or will you have….

Yes. Remember with our Australian operations, we do have responsibility of an adjusted price paid to growers. So, we have the ability to increase or decrease the contracted price for Australian growers, depending on how that product sells through, so we can maintain margins that we’re targeting of roughly 25% for Australian operation.

But in broader perspective, we do see our gross margin initiatives continuing to play out in the coming quarters and years..

Mike, Saudi is still growing, they’re still taking large seed orders. This is a gradual change if it occurs, and guys are just trying to figure out is the King going to mandate this or is he going to change his mind like he just recently did on his reduction of employee benefits to the government officials of 20% and he reversed his decision.

So, nobody knows exactly what the King’s going to end up doing, but it is going to be gradual, but we’re preparing for it, and we’re getting the trialing done and we’re getting the varieties in place with the distributors and the surrounding countries to offset this as this occurs if it’s continually doing a gradual shift. .

And then just a final question. You talked a lot about your cost initiatives that are driving down your cost to produce, which is certainly showing up in your gross margins.

Can you flush out that a little bit? What are you exactly doing to reduce the cost and increase the gross margins, so much?.

Mike, one thing we did for -- in the U.S. our contracting. We eliminated all grower contracts that had fixed price per acre component since we were carrying farming risk and yield risk. So, now by contracting all in a fixed priced per unit or per pound, we’ve got a lot more predictability in our margins.

That coupled with continuing to expand production in Australia and other lower cost regions if we want to get in too many specifics around that and more and more increasing the sale of our high quality dormant varieties which are driving higher margins for us.

Combination of those initiatives are all contributing to the margin expansion that we’re experiencing and we continue experience, start to experience..

The next question will come from Brett Wong of Piper Jeffery. Please go ahead. .

First, I wanted to dig into the revenue guidance. You indicated earlier that there were delays in Saudi, but this downward provision [ph] is a lot lower than I thought it was going to be in and really a significant portion of that total Saudi business.

So, what’s changed that’s really driving the significant downward provision?.

The biggest change right now is the big distributors don’t want to hold a lot of inventory because they are uncertain on what’s going to happen in Saudi. So, it’s more of an inventory deal. And when you look at our SGI part, that’s a $10 million reduction on where we probably would have been just two months ago..

And you did get a lot of clarity on that Mark when you were over there? Is that why you’ve got -- because when you were talking about your expectations on your last update to the Street, I mean this was not as significant as $15 million decline in sales..

It wasn’t Brett, I think at the end of the -- probably the biggest development over the last week or two are two largest distributors who buy SGI material have not placed orders. They will place orders, they are absolutely going to place orders but they haven’t placed orders yet.

So, we don’t have confidence that we’re going to get this product shipped by the end of June. And that’s $10 million of our $15 million year-over-year decline in Saudi Arabia. The remaining $5 million decrease in Saudi is attributed to our largest customer in Saudi, a very loyal distributor of ours.

And that distributor talking optimistically about the long-term prospects, he’s asking us to be patient with him as he works through his inventory levels and there is more certainty in the market..

Brett, one of these distributors for SGI quite frankly is 25% of their average revenue number. So, this is a very big meeting at the International Seed Federation in mid May that all of our top marketing guys are going to be at. And this is when the major orders are taken.

But, we’re just being conservative and putting out the worst case scenario right now and then seeing hopefully some of this might -- there might be a lot of upside. But, we’re just calling it like it is, right now..

Okay. And that’s helpful on the timing of that. Looking out into next year, we’re still going to have this regulatory overhang.

So, I’m just wondering, what the confidence is that you’re not going to just continue to see distributors delaying their purchases in until they -- at the very end? I mean and also kind of brings my question what gives you the confidence….

Well, it’s not going to affect the small guys. So, it’s not going to affect to smaller farmers. The regulations don’t affect the smaller farmers. So, when they’re on the main rotation, our main distributors or maybe 70% of your market is the smaller guy.

They’re going to be set up better, because they have a large inventory of Australian seed in their warehouse; they’re going to work that down. And once that’s down, coupled with the smaller anticipated crop out of the harvesting here in Australia, all things should get back in equal basis..

Okay. And then, from your conversations in the past couple of weeks, Mark, over in the Middle East, what is the most up-to-date expectation around timing of implementation? I know you said that this could be gradual but any idea or color you could provide there on expectations.

You’ve talked about this being a few-year potential? Any thoughts there is helpful..

Okay. Brett, the water restrictions don’t come into effect at all period with any farm until 2020. You’re seeing a reduction. You’re seeing guys shift, big giant farmers are looking at other countries to move their production of forage in anticipation of what the King may impose.

So, they’re taking a proactive stance and actually buying up or going in partners like for example, the main production areas in Sudan or actually government sponsored positions where Sudan is taking a 40% share in the ranch by giving them the land and then they’re doing all the infrastructure.

These are 500 plus million dollar land operations that are going into effect with major sprinkle systems, 200 plus pivots on a farm just to start with, literally millions of acres and is basically all alfalfa and Rhodes grass. So, as they develop these and as they transition the production three and then into the -- and that’s only two days away.

So, they feel very confident that they can maintain fairly good pricing on that export hay versus say Amarai going to Argentina and shipping that all the way over and then not having a same type of the quality because of the moisture or the rain that hits the alfalfa.

So, they’re lot more proactive on these operations as they were just in Saudi Arabia themselves. And a lot of these are Saudi people and they’re coming in with high-end managers. And so, it’s pretty exciting. I met four very high-end guys and we’ve hit it out quite well, and we’re going to be developing some big trialing.

As it’s very positive; it’s exceptional to see S&W variety take a commanding position in the Middle East..

That’s helpful. Thanks, Mark. And just last one for me. Can you just provide a little more color on the Australian crop? Obviously you talked about some declines here..

Okay. This is my personal belief, I think it’s going to be a off as much as half in an average year. So, if we expect 10 million pounds, we’re going to be around the 5 million pound range of production. That’s going to bode well going into this fall. It’s going take the edge up the many inventory position people had and I think it’s going to even up.

And so, it’s just an uncertain -- it’s a sad thing for our growers there because some of them got crop [ph] pretty good and they’ve got a lot of moisture on the other side that it’s going to allow us to really restructure our positioning who we’re dealing with, our distributors and really get into there, continue to work on our margin profile..

The next question will come from Aman Gulani of B. Riley and Company. Please go ahead..

Sorry, if you already covered this. So, as you think -- you’ve reduced guidance about 15 million and 20 million from previous quarter.

Do you think we can expect that come in next year?.

If we have a standard year, there was no reason for us not to do what we anticipate and doing. So, it just depends on the inventory levels on the way the seed comes off. So, I mean, I think we’re very confident that we’re going to surpass where we’re at the current time. Have you got any comment on that, Matt..

Yes. I think one of the hurdles will be because the Australian crop is smaller, that’s the finite number on seed, that’s we expect to get in the next six months or so either with our two largest customers buying from Australia, sort of sitting on the sidelines right now. They are going to have to by seed at some point.

And we’re just going to wait [ph]. But then that really is contingent upon what the Australian harvest looks like next year, what’s its harvest in May and how quickly we can get out of the door [ph] by the end of June. But it is reasonable to assume that we are going to see more normalized revenues in the coming year..

Okay. And then, your gross margin was a lot better than previous quarters.

Do you think -- you can expect that to continue for the coming quarters?.

Well, I don’t think the 27% plus gross margins that we delivered this quarter, I wouldn’t expect us to be doing that quarter after quarter. But that being said, I do think year-over-year we will continue to drive gross margin improvements.

I think at this point, we’re seeing our gross margins for the full year on a consolidated basis probably coming in around the 21.5% to 22.5%, which is higher than our prior model. And that itself is contributing to additional EBITDA contribution partially offsetting the revenue decrease that we’re experiencing..

And my final question was just regarding sorghum, I think on the last call you said that you should hit about a $1 million in sales for sorghum.

Are we still expecting that for this year?.

Yes. The number is slightly down, it’s going to about 750,000 based on the latest projections we’re seeing..

And are you still expecting 30 million over the next five year?.

Yes, they are. That hasn’t changed. The slight decrease from 750,000 is really just inventory level that we’re just harvesting our crop now..

Okay. All right. That’s all the questions I have. I’ll jump back in the queue..

I think on the positive note, maybe Matt can expand on it, but when we look at the amount of revenue that we are in the Middle East area right now, our EBITDA is holding pretty stable. So, I think we’re doing a pretty good job on managing what we’re going through right now..

The next question will come from Gerry Sweeney of Roth Capital. Please go ahead..

On the gross margin front.

Some of that 27% gross margin actually benefiting from not selling into Saudi?.

Well, I wouldn’t -- I don’t know if I call it not selling to Saudi, I would say that majority of the sales for the quarter were domestic sales of our dormant varieties, which carry a higher margin profile..

Okay. But that revenue -- I mean, if revenue would....

Our margins into the Saudi can range anywhere from 10% to 25% and our domestic dormant business is more profitable than that..

Well, I mean, you had a higher mix of that, I assume, because less sales are. Okay. But, I mean that’s what I came at. So, I mean just to get back on 20 basis. Okay. And then on the -- I mean most of -- I’m not going to beat the Saudi question anymore. But on assortment front, 30 million over five years.

I mean, what’s sort of progression on that beginning year one through five? Does go with 1 million, 5 million…..

Yes, probably [multiple speakers] it is going to accelerate in year 3, 4 and 5. So, roughly going 1 to 3 to 6, 15... .

Okay. Got it. And then, on the patent [ph] front, obviously making headway, you had agreement with consumer products company et cetera. What should we be looking for sort of next steps to see how that develops and creates additional value, whether it be just moving down the commercialization chain to some type of revenue…..

Gerry, we have two more patent pending, in addition to that, you’re going to see more details that we’re going to be working on with some of those patents. So, hopefully, will be disclosing that information..

The next question will be Ben Klieve of Noble Capital Markets. Please go ahead. .

Thanks for taking my questions here. Just two quick ones, on Saudi and one on stevia here. Regarding Saudi Arabia, and I’m curious about kind of the broader regulatory risk in the North African and Middle Eastern region.

I’m guessing, in Sudan, given the public investment in the alfalfa production that you’re seeing that there is probably significantly less regulatory risk in Sudan relative to Saudi Arabia.

And I guess, I’m wondering first of all, is that accurate? And second of all, do you feel that way about other Middle Eastern and North African markets?.

I don’t know a lot of the markets personally other than Saudi Arabia and Sudan and Egypt. There is definitely a pro farming water use going on off the Nile river for the Sudan operations, so it’s very pro, it’s very pro ag, it’s pro development.

So, from that standpoint, yes, it doesn’t have the regulation pressures that Saudi Arabia is imposing on it. So, I think you’re seeing some major -- that’s why you’re seeing all the money go in there. I think it [indiscernible] out, it’s going to take couple of years to get everything worked out.

But, look, they have so many animal units even in Saudi, millions of sheeps, camels, they are not just going to let the these things die. 70,000 head [ph], they got to feed them. So, it’s all about basically where they are going to bring the feed in from to these animal units.

And dairy is so too big of component and it’s too bigger part of their culture to let anything happen to it. So, I think it’s a short term blip and it’s something we’ve got to work through and get better at.

But, I can tell you that it’s very exciting as an agronomist to see our breeders and their varieties perform in such an outstanding way on these farms from field after field after field, 9720, 9620A S&W 10, these varieties are renowned and they are wanted. So, it’s exciting from that stand point.

Everywhere you go, yes these are the varieties we want, our cattles to have the high quality protein is there and we needed them to our feed rations. So, this is very good news. It shows that we’re on the forefront and we’re better known there than we are in Texas.

So, it’s pretty exciting from these last travels I just got back from to see how impressive our operations are and how impressive our breeders have done delivering fine quality products to the farmer..

That was quite a trip, okay. And one other question regarding stevia here is, and I’m sorry if I missed this on call, or missed this on the press or anything. But I’m wondering if you could provide a little bit of timing guidance.

Are there -- are you expecting to have meaningful new here in the next quarter or two or is this still very much in the early stages and this more of a 2018 or beyond event..

I would say, basically it’s still early, a lot of R&D going on, there is lot of upside potential. So, it’s still early..

And the next question will be from Ian Gilson of Zacks Investment Research. Please go ahead. .

The tax rate, what is the estimated GAAP tax rate for the year?.

Just over 40%..

So, it’s more below that of the current rate, is it correct?.

Yes. Because we’re -- the closer we get to a breakeven number, a permanent [ph] item had a more dramatic impact on your tax rate. But for you model, you can assume 40% to 42% of the effective tax rate..

Okay. Inventory levels and letter of credit are not same [ph] they need to balance. And inventory is down year-over-year but from the second quarter to third quarter, your letter of credit went up significantly.

What’s going on in that floating debt?.

Well, there it is two very different things. Our lines of credit are going to vary based on when we pay our growers, and we’ve said all of our U.S. grower payments in the third quarter, which requires draw down on line. Our inventory balances in Q3 are most dependent on the timing of the Australia harvest.

The Australia harvest is later this year than it was last year, so inventory management..

What were the U.S.

sales in the third quarter?.

U.S. sales for the third quarter were $17 million -- $17.8 million, which is roughly flat with the same period last year, Ian..

Okay, okay. I had 17, so that’s close enough. What was the big problem in Australia in a sense that 50% decline in your production, it’s abnormal, unusual, whatever you want to call..

Nothing is abnormal or unusual on Australia. I had a tomato crop and one day we were ready to harvest it and we had 7 inches of rain one hour and it covered and it was gone, nothing is unpredictable on Australia..

So, was this a rain problem, significant continued rain problem?.

It was a cool summer and it was -- there were definitely rain events that affected the harvest and the seed and it reduced the yields. And we do see amount and at as some levels, even some of the fields probably wanting to get harvested at all..

I think, this is a situation that was unique to the SGI and [indiscernible] of alfalfa seed in Australia is very far below average yield this year. That shortage supply should trigger increase in demand and pricing power any month to come. But as it’s translated to demand, [indiscernible] play out in the coming months..

As we look at prices, are they generally moving up on average for S&W year-over-year or the trend line; what is the direction of pricing at the moment?.

For the S&W, pricing is stable or just seeing slight increases. So, I’d say strong. And the Australian pricing is more of a fluid situation at the moment..

Okay.

If I remember correctly, a few years ago you purchased your Saudi distributorship, or the Middle East distributorship I should say, are those guys still with you?.

Yes, By far our largest -- the customer list and relationship back in 2011, they are still our largest and most reliable distributors in the region..

And are they heading for business or heading [ph] for sales?.

What I mentioned earlier on the call was our largest S&W distributor, his orders for Q4 are off about $5 million year-over-year.

So that is partially due to going to the season with more carryover stock we historically have had, couple that with his high base less reluctant to make commitments rights now, because of the uncertainty that’s out there in Saudi.

People are not willing to load up the warehouses as much as they would anytime they typically would this time of the year..

But is water available today and that the restrictions are in the future?.

Correct. Water is still available today..

Rational behavior would have been plant every single acre, cross the roads [indiscernible] beaches, whatever, they are not doing that?.

They are just doing their standard moves, they do every year. This is really not out of the ordinary right now. So, the key is how much seed is going to move in June and July to the main part of the season, when they first start planting in August and September..

Okay.

So, we could in fact see a significant improvement at from last year in 2018 and the first quarter?.

It’s possible. We don’t know exactly when these products are going to ship. And the big international seed federation meeting in Hungary is occurring at the end of this month and that is our number one sales event to meet all the distributors, go through their markets, go through their geographies and pin down all the orders.

That has not occurred yet; it will occur in a couple of weeks. All of our vice presidents and expert marketing guys will be at those meetings. So, what’s going to go on in Europe, what’s going to go on in parts of the Middle East, what’s going to go on in Argentina, Mexico whatever.

So, all of those meetings still have to be completed and the guys are just totally tied up and they are going to be tied up and that will determine where we end up year at June 30..

So, do you have any idea what the inventory level of the seed in Saudi are at the current time..

Yes, we do. We’re low on S&W high [indiscernible] and they have a pretty good supply currently from last year’s Australian seed component, that’s why there is the flux on how much want to get, how much want in the other. They are ordering. Those orders are coming in slowly, but we are starting to ship..

The next question will come from Frank Smith of Weirton Fund. Please go ahead. .

Congratulations on the getting those stevia patents, nice to see that happen..

You’re welcome Frank. Thank you..

Question for you on the GMO.

You mentioned about the estimated possible production in the, I guess in the fall, non-dormant alfalfa?.

Correct..

So, what does that equate to potential revenue wise?.

Probably over 1.5 million, 2 million bucks..

In 2017?.

2018. Yes, considering June 30th, Frank. So, these sales....

So, 2018, right. Okay..

This will come [multiple speakers]. There will be in the numbers a year from now..

Right, okay. And how stable is -- you’ve mentioned this before.

But the shelf wise, the saved inventory, how long can you sit on it for?.

The American genetics, you can sit on it quite well. So, two to three is very solid. But we’re very [indiscernible] that one Frank. The Australian, you try to get it out a little quicker. It has a little bit benefit -- it doesn’t have the shelf life of say California variety. But it’s little grower and as long as it’s stored properly.

Te problem you get into is when you go into the Middle East at 50 degree centigrade, 110 plus degrees and sitting on a dock for a month, it’s not going to last compared to cold storage. So, how are they taking care of, how are they storing it, if it’s done properly, it’s going to last a long time.

It’s not so, we want to make sure seed hanging in there that has taking care of problem..

Got you. Okay. Last question, I can open this PDF, it’s just too small for me to read right now.

But how many warrants were retired and converted over in the quarter?.

No. All two place, 7 million warrants that were issued in December 14th are outstanding. The convertible debentures, the convertible debt is fully retired, the balance is zero..

Zero. Thanks a lot. I appreciate it. Good job, you guys..

And ladies and gentlemen, this concludes our question-and-answer session. I would like to hand the conference back over to Mark Grewal for his closing remarks..

Many thanks to everybody that participated on today’s call. I want to let our investors know that S&W will be participating in the B. Riley Conference in LA on May 25th, 26th we’ll be at the Craig-Hallum Conference in Minneapolis on May 31st, and we’re also going to be getting into the LD Micro in early June.

So, we’re out, we’re available for anybody’s questions. We’re here and we’re very rock solid on our strategy and where we’re heading. So, please feel free to call at any time. Have a great day..

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today’s presentation. You may now disconnect your lines..