Good morning, everyone, and welcome to the S&W Seed Company reports First Quarter Fiscal Year 2019 Financial Results Conference Call. [Operator Instructions]..

Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Robert Blum of Lytham Partners. Sir, please go ahead. .

Thank you so much, and thank you all for joining us today to discuss the financial results for S&W Seed Company for the first quarter of fiscal year 2019, ended September 30, 2018. With us on the call representing the company today are Mark Wong, President and Chief Executive Officer; and Matthew Szot, Chief Financial Officer.

At the conclusion of today's prepared remarks, we'll 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, anticipate, 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, 2018, and other filings made by the company with the Securities and Exchange Commission.

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

Mark?.

Thank you, Robert, and welcome to everyone who's on the call today. Because we talked last week about the Chromatin acquisition, I'm going to keep my comments fairly short today. I just want everyone to know though that the organization as we've announced has hit the road running.

Our new organization geographically organized along the lines of the Americas, North and South America that is, and then all international markets is in place. Don Panter and David Callachor, respectively, have been announced to our organization. We've had a call with all of our employees.

And last week, our senior management team was together, and we started working on the integration plan for S&W and Chromatin asset. .

So we're pretty excited still about the acquisition. The top things that are a peace of mind going forward are really the sales and distribution assets that we acquired with the Chromatin purchase in the U.S. Of course, we're focused on the farmer-dealer system, what its strength is historically, what products we'd move through there.

Chromatin did not spend a lot of money on the farmer-dealer network over the last couple of years because of their own financial problems, and so we're very focused on how to build strength in the farmer-dealer network that we acquired in the U.S., what product we can flow through there in terms of not just the traditional sorghum variety that Chromatin was selling but also cross-selling our sunflower and alfalfa product line.

So we're pretty excited still about the U.S. .

And then internationally, we have many, many new distributors that we're going to be visiting. We've contacted most of them by phone this past week now that we own and we've closed on the Chromatin asset. And that's looking very, very excellent in terms of opportunities there, too. .

The last thing I'd just like to mention is stevia. We haven't talked about that in a call or so. We're still very aggressive on stevia. We planted winter trials in the East Coast for the first time with large farmers in the Carolinas and a couple of other locations.

And we'll be planting with those same farmers a spring trial so that we'll have yield data, both on winter planting and on spring plantings on the East Coast, which we think is going to be a better market for stevia production than maybe our traditional locations on the West Coast.

We also planted West Coast trials, so we should have a lot better data coming in. The harvest season for that would be October of 2019. .

So we're very excited about stevia, and we're continuing to look at the opportunities at Chromatin. And I just wanted to make those several general points on the call, and I'm happy, obviously, with the progress that we've made so far. .

And with that said, I'll make a couple of comments at the end of the call. But I'd like to turn the call over now to Matt, who has the financial report for you all. So Matt, please. .

Thank you, Mark, and thanks to everyone on the call today. For the first quarter, revenue came in at $26.1 million compared to $10.7 million in the first quarter of the prior year. As we stated in our press release, the $15.4 million increase in revenue was due to a $16.7 million increase in revenue to Pioneer.

This increase to Pioneer is solely due to the acceleration of revenue recognition pursuant to our adoption of ASC 606, which is effective July 1, 2018. We expect full year revenues from Pioneer in fiscal '19 to be down compared to fiscal '18. .

The adoption of 606 had a significant impact on our revenue recognition for our distribution and production agreements with Pioneer. However, there were no other changes to our accounting as a result of the new accounting standard.

I want to make clear that this is an acceleration of revenue in the current period of a spread over multiple quarters in the prior year. We recognized approximately 2/3 of our expected fiscal 2019 revenues from Pioneer during the first quarter, with the remaining $9.7 million to be recorded during the second and third quarters of the current year.

Had we reported under the old revenue recognition standard, ASC 605, revenue would have been $8.8 million in the first quarter of 2019. .

Now as we discussed during our conference call last week, we closed on the Chromatin acquisition on October 25 and, therefore, we'll have approximately 8 months of financial activity in 2019 from the Chromatin business.

We expect the newly acquired business to generate approximately $14 million to $15 million of revenue in fiscal 2019 and $17 million to $20 million in fiscal 2020.

From a seasonality perspective, we estimate that sorghum revenues from the acquired operations will be approximately 20% in the first quarter, 25% in both the second and third quarters and 30% in the fourth quarter. And these are rough estimates. .

Now moving to gross margins. Gross margins during the first quarter of fiscal 2019 were 20.9% compared to gross margins of 21.8% in the first quarter of the prior year.

The decrease in gross profit margins was due to a product sales mix during the current period, where we had higher concentrations of sales as a percentage of total revenue to Pioneer under our production agreement. .

The sales pricing under our production agreement, which expires in May 2019, and this production agreement specifically covers the GMO varieties we sell to Pioneer, is lower. The pricing on that is lower than the prior year.

We estimate that gross margins of our organic business, excluding any impact from the Chromatin acquisition, will slightly decrease from 2018 due to the anticipated sales mix as less revenue during 2019 will come from higher-margin Pioneer business. .

Now turning to our expectations of the acquired operations. We expect gross margins will be higher than our historical operations. We currently estimate that the newly acquired operations will generate gross margins ranging from 30% to 40% depending on specific hybrid. .

Operating expenses were $4.7 million in the first quarter of fiscal 2019 compared to $4.5 million in the first quarter of the prior year.

As we mentioned in our press release, during the first quarter, we incurred $409,000 of transaction expenses related to our acquisition, while the first quarter of 2018 including a minimal $29,000 of transaction-related expenses.

Excluding these onetime transaction expenses, our operating expenses totaled $4.3 million in the current quarter compared to $4.4 million in the prior year. .

Now if we look to the individual line items within operating expenses. SG&A was down nearly $400,000 when backing out transaction expenses. R&D was up approximately $250,000, and depreciation and amortization was relatively flat.

As we've mentioned in the past, we're going to continue to focus on controlling costs and operating efficiencies and -- while maintaining an investment in developing next-generation products that are intended to drive growth and revenues as well as gross profit margins. .

Now I want to spend a few minutes providing clarity on our new operating expense structure. Including the Chromatin operations, we expect SG&A to be approximately $14.3 million in total for fiscal '19, and that number excludes transaction expenses. And we expect SG&A to be approximately $15 million in fiscal 2020.

R&D expenses are expected to be total $6.6 million for fiscal '19 and $7.4 million in 2020. Our depreciation and amortization cannot be accurately forecasted until we perform further work on our purchase price allocation, so we'll be able to provide further guidance on this number in the next quarter. .

Adjusted EBITDA for the first quarter of '19 was $2.1 million compared to a loss of $967,000 in the first quarter of the prior year. Again, the adoption of the new revenue recognition standard, 606, drove the increase over the first quarter of the prior year.

As we mentioned last week, we expect positive EBITDA contribution in fiscal 2020 from the Chromatin operations with minimal impact to our adjusted EBITDA in 2019. .

Now I want to spend a few minutes or 2 providing further clarity on the cap structure and our shares outstanding. Upon completion of our shareholders' vote taking place this November, on November 20, the 22.5 million Series A preferred stock issued to MFP will automatically convert to common stock at $3.11 per common share.

Upon conversion of the Series A preferred, we're going to have approximately 33.2 million shares of common shares outstanding. .

Now moving to the balance sheet. We're making measured progress in better aligning our seed inventory balances with our sales demand. And as we've discussed over the last quarter -- several quarters, we are carrying higher levels of inventory.

We planted very few new acreage for crop year 2019, and we expect the production volumes from the upcoming harvest to continue to decrease. And we expect our inventory balances to further decrease over the next 12 to 18 months and become more in line with historical carrying levels. .

Now as we mentioned last week, we did acquire a number of tangible assets in our recent acquisition. So to help you update your pro forma balance sheet, included in this was approximately $11 million of inventory in accounts receivable, and $9 million in property and plant equipment.

And on the intangible side, we acquired a customer base and valuable distribution channels, including a farmer-dealer network, a robust portfolio of products and elite germplasm, a leading R&D and breeding program, product registrations and trade names. And we assumed minimal liabilities. .

So I know we went through a lot of data here, so if you have any questions, please feel free to ask. And I'll turn the presentation back over to Mark. .

1 became part of Dow; 2 others I sold to Monsanto. And I have to say in the 40 years that I've been in the seed biotech business, I have not had much more personal excitement than right now. I really believe that S&W is becoming the platform that we thought it would be for the middle-market seed industry -- seed biotech industry.

What I mean by the platform is we have breeding and technology that are generating new products and a new product line for our customers. We have production assets all around the world to grow our 3 target crops, alfalfa, sorghum and sunflower.

And now thanks to the Chromatin acquisition in the U.S., with our farmer-dealer network and internationally with our new distributor contacts and customers, we really have the ability to take those products, introduce them to farmers all around the world and get those farmers, based on the quality of those products, to purchase.

And that's what we mean by our platform. .

We continue to look for acquisitions. The next couple we're looking at, frankly, are in the Australian market. So we'll be telling you more information about that in the future as we work our way through those. But it's a wonderful, exciting time for S&W Seed.

The Chromatin acquisition has really given the company so much more in terms of opportunities than we had before. And it's a pleasure, as always, to be on these calls and update all of you. And I think I'll end my comments there and just wait and see if there's any questions. .

So operator, thank you very much. .

[Operator Instructions] Our first question today comes from Sarkis Sherbetchyan from B. Riley FBR. .

So just to start off on the inventory balances first. It seems like you're carrying a pretty high level, as you mentioned in the prepared remarks, sum.

And given that we're kind of in fall here, can you give us kind of the cadence of whether you expect inventory to go up from here, given the acquisition and the fact that we're in fall, and then just kind of the trajectory of your expectation of working it down in the next 12 to 18 months? Just kind of help us understand that please. .

Matt, you want to try to take that one, please. .

Yes, sure. So Sarkis, with the acquisition of Chromatin, our inventory balances, probably at the peak level, be an additional $10 million higher than they otherwise would with the new Chromatin inventory. But that inventory -- that incremental inventory should be primarily sold down through the period end in June. There's not much carryover inventory.

I think I mentioned in my prepared remarks that roughly sales for the newly acquired business should be about 25% of annual sales, should be about 25% in both the second and third quarters, and 30% in the fourth quarter. .

But as we look to our overall seed balances, Sarkis, we are and continue to be long from an alfalfa standpoint. We're probably long, $20 million to $25 million. But we see that working through the balance sheet over the 12 to 18 months as we just normally fulfill our sales contracts. And the seed is of high quality.

It's been stored properly, so we're not concerned about any deterioration and germination. And we've got the working capital facilities to see us through this position of longer inventory balances. .

Okay, great. That's really helpful. And if I can move on and ask a question regarding your expected sales to be recorded to Pioneer here in 2Q and 3Q. I think you said the balance was about $9.7 million, so call it $10 million or so.

How do we expect that to kind of materialize here in 2Q and 3Q, please?.

Yes, so Sarkis, so in the first quarter under the new revenue recognition standard, we recorded about 2/3 of our revenue in Q1. And then probably 20% of the annual revenue will be recorded in Q2, and then with the trickling amounts coming in, in Q3 and Q4. So it's definitely front loaded into the first half of the year. .

Okay, got it. Good. And then I think you gave us some kind of combined operating expense targets for the business once you factor in Chromatin.

Can you just remind us if you expect the fiscal '20 OpEx structure to move kind of up and to the right? Or does the integration kind of take care of any incrementals given the full year versus the 8 months?.

So the total operating expense structure that -- in 2020 is going to be higher than '19 because we don't have -- we're going to have an incremental 4 months of additional operating expenses as we move into 2020. We're absolutely focused on obtaining synergies and cost efficiencies at the SG&A level and the R&D level.

But we still need to work through those, Sarkis, so the numbers that we guided to is basically what are expense structure is now without reflecting those further cost reductions that we think can be achieved in the coming periods. We just need further time to work through them. .

[Operator Instructions] Our next question comes from Ben Klieve from National Securities. .

First, Mark, quick question for you regarding stevia planting. Are these on schedule with -- in terms of what your prior estimates were? Or were there any delays in the plantings on the East Coast? Specifically, I'm thinking about Hurricane Florence and Michael that came through in September, October.

Did that have any impact on this initiative at all?.

Not really. I mean, we were always scheduled to plant in October, and that's the month we got them done. Remember that stevia -- with stevia, you plant clones, so you're planting small plants.

So you -- one of the problems with the crop is that you don't have a lot of time if you have a delay due to a hurricane or something to sort of have the clones be the right size to plant them. So we're very, very careful about the schedule and about the production schedule for the clones.

And that's why one of the project goals of stevia is to look at possibly making our crop into a seeded crop, so that our farmers can plant seeds rather than clones. Because those seeds, obviously, are much cheaper, and they also have a much longer shelf life.

They'll be like most of the other crops, probably 3 years if you keep them stored under good conditions. And that's obviously very beneficial when you're doing big ramp-up of acreage to be able to produce the seeds up in the -- a long time in advance of the actual demand for planting. .

Got it, perfect. Another question here. In the past, you've -- kind of pre-Chromatin, you always talked about sorghum and sunflower kind of lumped together. In the past, you'd said that $25 million, $30 million business kind of 5 years out.

Now it's Chromatin and I'm wondering if you can kind of update us on how this acquisition will impact your sunflower business. And then also, curious if you can kind of break out kind of a mid- to longer-term revenue target from the sunflower business. .

Yes. So the reason I always put the 2 together, sorghum and sunflower, because of the acquisition we did in Australia, which was the original germplasm we had of both those crops. And so we look at them as sort of a pair of crop.

And they're both annual crops, so that's different than alfalfa, which is sowed every 3 to 7 years depending on where you are in the world. And so sunflower and sorghum have a lot more in common from sort of farmer practice than they do alfalfa. .

We're really not ready to talk about what the future projection looks like. We will be maybe in the next quarter or 2. But right now, as I said in my comment, we're in the process of going around to all of our new customers in the U.S., cross-selling alfalfa probably because of where our farmer-dealer network is.

There's more opportunity there than cross-selling sunflower in the U.S. But we really do have a lot of distributor -- new distributor contacts internationally. And those people, we're just starting to visit with. .

So we really don't have a forecast yet of what the longer-term sales picture's going to be for sunflower and for sorghum. As Matt said, the inventory that came out of 2018 harvest, so we're harvesting now in Texas for the Northern Hemisphere. Crop's almost 100% in. So we're happy about that, it removes the weather risk from our crop production.

And we'll start cleaning the seeds. And we've already started cleaning the first seeds that came in, but we'll start cleaning the seed and -- through the winter here and have that seed ready to go to our farmer-dealers network kind of in the January, February, March time frame and internationally, also in that same time frame. .

So we're really getting a handle on that. We're pretty optimistic. Most of the distributors internationally seem to be very positive about doing business with us. Maybe it's an indication that there aren't really very many integrated seed companies in the middle market, like we've talked about, that they can do business with.

Some of the distributors are seed companies that don't have breeding programs in the same crops we do. Other distributors are more pure distributors with warehouses and locations and no breeding whatsoever. So we're in the process of understanding the demand from all those customers.

And it's frankly going to take 2, 3, 4 months to get all that figured out. So we'll have an update for you in the future. But right now, very, very difficult to predict that. .

Okay. Yes, very good. And I guess that kind of ties into my next question with the visibility here.

I'm curious, your visibility today versus this time in prior fiscal years, do you have any revenue sources here that you -- that have kind of higher uncertainty today versus prior years? And how does your visibility for the balance of the year -- how does that impact your decision here regarding revenue guidance on this call?.

Yes, I mean, I think what people should be hearing from our call now -- this might be our fifth call, the fifth quarter we're reporting on since I've become CEO, is just that we've been trying to establish opportunities, whether it be buying companies like Chromatin, or internally generated opportunities. .

I'll give you one example. So we see good customer demand in Europe for our alfalfa seed varieties, and so we put our first crop, planted our first crop in Europe this year. And we'll be harvesting -- well, that's harvested pretty much now.

And all of that seed is sold, it's about $4 million or so in revenue, and we're pretty happy that we're going to be sold out. And we'll be planting a bigger crop next year because we didn't supply all the orders that we had. .

So things like that are positive. The sunflower business is going pretty well. It's a little bit less development time than sorghum for lots of different reasons but sales are pretty good in sunflower.

So there's -- I think what people should understand is our job is to generate more shots on goal, right? And then if all of them don't work every single year because of weather or customer condition or whatever, economic crop conditions in these various countries around the world, we have lots of shots on goal.

We're not depending on all of them to work. We're depending on the majority of them to work to generate our sales projection.

So that's what we've been trying to do, is give ourselves more possibilities to make those sales projections much more stable and predictable because it's built up from 5 or 6 different businesses rather than just depending on our alfalfa sales in the Middle East.

So we're taking risk out of the projections, and people should be seeing that as we move forward through 2019 and 2020 fiscal years. The projections will be a lot more dependable. .

Our next question comes from Mike Malouf from Craig-Hallum Capital. .

If I could just sort of back up a little bit on Chromatin.

And can you give us some perspective on where their revenues have been over the last 3 to 5 years? And I guess, just given the amount of money that they've spent on R&D over that period and the -- obviously, the amount of new product that they've also brought to market, sort of curious what specifically was the reason why they weren't able to capture a little bit more market share than they -- than you would've thought.

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Yes. So I think one thing to remember about the ag business in general, but the seed business in particular, is that it's a pretty long sales cycle, right? It's not like a software company that has a 30-day sales cycle. A new product come in and within 6 months, you can sort of see the effect of those on your sales numbers.

Yes, we get 2 sales seasons a year. We get a Northern Hemisphere spring season. We get a Southern Hemisphere spring season, which is really the Northern Hemisphere fall season clearly. But you're really only getting 2 seasons a year. So like me, 40 years in the seed biotech business, you get 80 seasons, 80 sales cycle in 40 years.

And so you have to make the best use of every single one of those cycles because you don't get that many. And most people don't stay in the business for 40 years, I'll have to say. But those of us who do, we're very proud of our history in the industry. We think we understand the business, we think we understand the big opportunities strategically.

We have our eyes on the horizon on those, and we think we understand the small things that a seed company has to do to be successful. .

One of the problems Chromatin had was they kept having to raise money to pay their operating expenses, right? Because they were really still in the venture sort of pre-new product state. Yes, they had sales. They hit $30 million in sales I think one of the last couple of years.

I can't go back for you, to your question over the last 4 or 5 years because I don't remember their numbers. But they really sort of -- their sales, the profits generated from their sales never caught up to the expenses that they had, and so they were funding their development cost out of new equity routes. And that's a tough place to be.

And I take my hat off to them. I think they did a pretty good job. .

They didn't do the greatest of sins in my view, which is cut your R&D. It's easy to, when you don't have enough money, to sort of cut the thing that has a 6-year product cycle and hope that nobody notices because you cut 6 years before you get them. And they didn't do that, and they kept their breeding staff on.

They kept their molecular biology staff together, and the result is that we have some really interesting projects, like herbicide resistance and other things in sorghum that we're pretty excited about. And we have a big pipeline of products coming in. .

I think no one asked the question but there -- in one of the exhibits we put out, I think it might have been for the last call, there was a lot of products put into the market by Chromatin about 2 or 3, maybe it was 3 or 4 years ago. That was when they were making up for a shortfall that they had. They were acquiring companies.

They were trying to make their product line uniform. And they had a lot more introductions in those years than in the past couple of years, where they've been introducing 4, 5 hybrids a year, which is probably the more normalized number. And they did a great job on the product pipeline and on R&D.

And they really probably didn't have enough money to really push the sales and marketing part the way, if they had more time, they would have. So it's a complicated situation. .

When you take a look -- and I know that the sales were 30% of 50% higher than they are now. What would lead to that sales falling off? Especially given the fact that there aren't very many sales cycles, and I would assume that the products are pretty robust.

And so if a farmer's using this new product, it's sold on the new product through a long process. You don't jump over a year to start switching to a consumer's product. So I'd like to -- just a couple of comments on that would be helpful. .

Yes, sure. So of their sales, I would say there was a big component that were -- the product that we're excited about, the ones coming out of their own research that had shown well in trials, and farmers were excited about. And they were producing seed and selling those. So that was a big piece of their sales, maybe half.

But a lot of their sales was stuff they were purchasing and just going through their distributor system at pretty low margins. That's where they had such big losses. And they were doing that to make their sales number look bigger, Mike. That's all I can tell you. I'm not going to guess their motivation.

I'm not going to say much about that because it's only going to get me in trouble with some of the people who were there that are still my friends. I'm just not going to go there. But some of their sales, a big portion of their sales were purchased by them. So that way, we're just pushing through their sales organization. .

Got it. That makes a lot more sense. And then just a quick question. If you could -- do you have any update at all -- or any perspective, new perspective on what's going on in the Middle East, that would be helpful. .

Yes. I mean, we're still trying to understand when those sales are coming back in terms of the planted acres. We still believe that the dairies are doing about 4 different things. So they are still buying alfalfa from local, small alfalfa producers because the Saudis have given those guys water where the big producers have been cut off.

They're still importing hay. So number two, they're importing hay from around the world, including California. So the hay price has been reasonably strong the last year on a per bale basis, if people want to check that number. They are expanding outside of Saudi Arabia.

So they have the big dairies, like Almarai, are -- have bought land in California, have bought land in Argentina, and are taking their own hay back to their cows in Saudi but also talking about building dairies in those areas so they can take milk back.

And we've also seen from export data, the fourth thing, that they have been buying some milk directly. So they're buying from the EU. They're buying some milk from New Zealand, and they're rebottling that in Saudi for their Saudi customer base and their customer base in the Middle East.

Because they sell -- the big dairies are so big, they sell to most of the Middle Eastern countries. They're the milk supply for most of the Middle Eastern countries. Again, they're 150,000 cows. The 2 couple biggest dairies when -- the biggest dairy in the U.S. is about 35,000 cows. So they're big, really big. .

[Operator Instructions] Our next question comes from Walter Young from Thompson, Davis. .

It's Walter. My question has already been answered. .

And ladies and gentlemen, at this time, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Mark Wong for any closing remarks. .

Thanks very much. So just to everyone on the call, thank you again for following the company. We're very, very excited about the opportunities that Chromatin has given us. I apologize for being a little short on the details, but we only closed the purchase a couple of weeks ago.

And in those little weeks, as I've said, we've put our new organization in place, and we're much more focused on markets now because we are geographically organized, as in functionally organized. And we'll have a good -- a better and good understanding of our business, and we'll be able to convey that to you guys in future calls.

So it's -- for me, as I said, now, it's a very exciting time. When I came into the seed business, there were 500 corn seed companies in the U.S. And now there's like 5. So we've lived through consolidation. We've lived through the introduction of biotechnology crops, of GMOs. The industry's made many, many changes.

And I think, as I've said, this is one of the most exciting companies that I've had the privilege to be the CEO of. And I'm totally excited, and I think our people are totally excited about what we're going to bring for our shareholders and our customers in terms of value. So thanks very much, everybody, and we appreciate your support for sure.

Bye-bye now. .

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines..