Good day, and welcome to the S&W Seed Company Fourth Quarter and Fiscal Year 2019 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 this event is being recorded.

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

Thank you so much, and thank all of you for joining us today to discuss the financial results for S&W Seed Company for fiscal year 2019 ended June 30, 2019. 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 I 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 risks 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.

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

Mark?.

Thank you very much, and welcome everyone today to the call. Matt and I would like to use this opportunity to really recap 2019 and the progress that S&W made, which we think was important and substantial in that fiscal year that has just ended and that we’re reporting on today.

As you all know, who follow the company, we did a couple of really important and large transactions in 2019. The first in October of 2018 closing was acquisition of the Chromatin assets. Chromatin was a large, important company in the sorghum market in the U.S. and around the world.

In the top five, probably, we were able to acquire the company and all of its production assets, its production plants, its breeding germplasm, its breeding stations, the technology that they had in herbicide resistance in sorghum.

And most importantly, sales and marketing organization and products that were ready to go-to-market in the next year, the 2020 S&W fiscal year. And we were able to do all of that at probably a $0.30 and the $1 kind of sales price versus what the assets have cost us, if we – if the company had not been in so much difficulty financially.

So that was a huge opportunity for us, which we were able to complete. It was a competitive process. So we had a big European company that we outbid for the asset. So we were very pleased to acquire those assets that I just summarized in the Chromatin acquisition.

In addition, we – I think we showed in 2019 that we were not just the guys who could buy things at the right price, but we were also people who understood how to sell things at a good price. And so our second transaction was a sale of alfalfa assets that we had acquired about five years ago for under $30 million.

We sold those back to the original seller that we bought it from, now reorganized into Corteva. Corteva decided they wanted to be back in the alfalfa business.

So we cut the deal with them, where we basically kept the production plant again, and the research facilities and all of the germplasm, so that we could restart our alfalfa business in the Americas and in the rest of the world.

And what we sold back to them was really the remaining production years on our contract and the profits that would have been earned from that and a couple of research selections out of our existing research program.

But there remains in that program plenty of new products for our own customers that will be different from the ones that Corteva is selling. And we basically sold them all of the inventory that they would need for the next three years.

So the sum total value of that transaction was about $70 million, $25 million in inventory and $45 million for the license varieties and the production contract.

It just appears to me that, given that the markets – given the market’s valuation of the company that this was a tremendous sale by S&W, it allowed us to really finally get our debt paid off and give us some room in our balance sheet to make future acquisitions, which has always been our plan.

And it left us also with all of the assets that we need to continue our alfalfa business all around the world, and it allowed us to focus our alfalfa business, at least, in the Americas through a much improved sales and marketing organization that was part of the acquisition.

So we were extremely pleased by both of those transactions, one, buying assets, one, selling assets. I just like to mention a third transaction that wasn’t done in the 2019 fiscal year, but we’ve announced it on August 30, 2019. We purchased the paid up – exclusive paid up license, a 15-year license for wheat varieties in Australia from Corteva.

It was a program that seven or eight years old, probably has roughly $17 million invested in it. We acquired it for $2.6 million. So, again, I think it shows our ability to recognize assets that have future value to S&W and acquired those at a very reasonable price.

The Australian wheat market is very different than any other wheat market around the world. It’s about a 30 million acre market. So it’s really a large market. And there’s, what is known as endpoint royalty.

So the Australian government has organized the industry, so that seed companies that do proprietary breeding and create new wheat varieties are paid a royalty by the purchaser of that wheat grain at the elevator before the products are shipped either to the – internally to their final use within Australia or externally to other Asian countries, and about 70% of the wheat that is produced in Australia goes to other Asian countries around the world.

So we think it’s a great opportunity. We are – we acquired the rights to the three major varieties that Corteva has in the market, and so those royalties will be coming to us. And the – in the seed business, you have to be kind of patient. So, this deal took more than a year to finish.

We hired the wheat breeder, a guy who we really think highly of Nick Willey. In 2018, he’d been the wheat breeder in the program. And under S&W, he’s supervising that wheat breeding program, plus other research operations in Australia. But it took over a year, and we’re super pleased with how it all turned out.

And we’re happy with the deal we got and we’re happy with the opportunity in the future that we think that wheat represents in Australia. And given that the current political environment between the U.S. and China and these tariff wars that we all read about, which is very, very difficult on the ag sector in the Americas, especially in the USA proper.

We think that sort of having assets outside of the U.S. and Australia with access to other Asian markets is a really good way for us to hedge against the future U.S.-China tariff issues that have not all been figured out yet between the U.S. and China.

But that – so that’s what I wanted to say on the three acquisitions – well, two acquisitions in the sale that we made. In 2019, again, I think it was a very, very important year for S&W.

But acquisitions and buying or selling at the right price are one thing, but the important thing for any company is integration into the existing company of all of those new operations. So that the company is profitable, self-funding and can fund its own acquisitions in the future. So that’s really the focus for the 2020 year is integration.

We really think that our new focus on geographic markets like I’ve talked about in the last couple of calls, where we have Don Panter running all the Americas, that’s Canada, the U.S., Mexico, and then South America, Brazil, Argentina, the other important countries there.

And David Callachor, who are running our international operations, as far the Australian markets and our assets there and then our operations in South Africa are – with our JV partners and our operations in Asia, in Europe, and the Middle East, where we have separate salespeople responsible for all of those that report to David.

We think that that’s just the right way to go. We continue to believe that it focuses on the customer – on the customers’ needs. And it allows us to really fine tune our sales force and rebuild some of the investment that wasn’t made by Chromatin in that sales force and we basically are doing that.

And if you look at our expenditure numbers, you’ll see that investing in sales and marketing is a big expense for 2020 for us and on purpose. So, we’re supplying more information to customers all around the world, especially in the U.S.. We’re looking at our trialing program.

We’re communicating with thousands of farmers and people in the dealer networks with eblast and through social media on our product offerings, our new products and our tried and true sort of important products from the past. That’s something that the company has not done before. Remember, the company mainly sold through distributors before.

And while we still sell through distributors internationally, now we have a couple of JVs internationally, where we’re able to reach down into the organization and distribution a little bit towards the farmer. And then in the U.S. for sure, we are trying to build our farmer dealer network and our network to other distributors.

So that we can have more market power, more influence over what our customers are actually buying, because they understand the quality of S&W products and they understand how S&W products perform in the farmers’ field against the products are – of our competitors. So that’s really important. We think that that’s going well.

We’re looking for roughly from our existing businesses, plus Chromatin, which now we consider an existing business after this year of integration about a 10% double-digit sort of unit growth rate.

And we’re pretty happy that, that things are going well, especially given how tight and difficult the ag markets are around the world taking share from other people, because these markets aren’t really growing that much, is not an easy task, it’s a difficult thing to do. I just like to talk a couple of minutes just about traits.

So, traits are hugely profitable for seed companies. In looking at the the two traits that we’re developing, which is the digestibility trait in alfalfa with our partners Calyxt. Those product development process is going very well. We’ve developed markers, so that we can sort through all the alleles in our germplasm.

We are in the process of putting out field testing to evaluate how more digestible our alfalfa varieties with this gene knockout are and we’re pretty happy with what we’ve seen so far. In addition, we have a second trait, which I’ve mentioned, I think on our last call, which is a trait that we acquired in the Chromatin acquisition.

It’s herbicide resistance in sorghum to a herbicide ACCAs. This herbicide is a grass herbicide, so how it’s used is, sorghum is a grass also, corn is a grass also.

And in the case of sorghum, the problem is, wheats that our grass is growing when the sorghum plants are just emerging from the soil and the sorghum plants are very small and can’t compete really with some of the wheat population.

So farmers want to spray over the top with cold and farmer lingo of the sorghum crop and have this – the herbicide kill all of these weedy grasses, but not affect the sorghum. And so that’s what our herbicide tolerance does, our ACCAs tolerance.

It allows – it’s a product that allows the farmer to spray over the top of our sorghum varieties with ACCAs herbicides to kill emerging grasses, but not affect the sorghum plant. So ACCAs is a class of herbicides, it’s an old class of herbicides. That’s actually a good thing, because they’re relatively cheap versus some of the new herbicides.

And the decision for the farmer is always, what is the cost of the gene in the sorghum, plus what he’s going to have to spend for his ACCAs herbicide. And is that cost reasonable, given what yield enhancement he can make by controlling the weeds and getting more sorghum grain for every acre that he plants.

And so we think, in our research trials that we have evaluated that and that it looks like a very positive economic benefits to the farmer that will allow us, obviously, to make a profit on our ACCAs tolerance, but gene, but it will also allow the farmers to make the profit on their increased yields of sorghum in the acres that they plant with our proprietary sorghum hybrids.

The level of resistance looks very good. We’ve done this before in prior companies that I’ve run, and we’re pretty happy with that. And our field trials are going well. We’re planning a fairly large field trial in many locations for – spring of 2020.

So we’ll keep everybody aware in the next six or nine months of how those look, as they come out of the ground, and as we spray them with ACCAs herbicide and see how they react in the farmers’ field. So we’re pretty happy with all that. So our two teams are really progressing well.

We’re starting to talk to our partners, potential partners, obviously, with ACCAs. We need a herbicide partner, someone we’re going to partner with that’s going to supply the herbicides. So those discussions are ongoing.

And we’re pretty excited about both of those gene opportunities, digestibility in alfalfa and herbicide resistance or tolerance in sorghum. On the stevia front, we continue with our program.

We, as you all know, we’ve transferred really the breeding part of the program to the southeast, where we think things are better under a new R&D head, Jeff Klingenberg, who we knew from prior relationships in other companies and who is a tried and experienced breeder, and he is moving the program forward.

Our beverage partner continues to be supporting the program and investing with us in moving these products forward. And we are in discussions with several other partners for the 2020 production season to see if there will be a crop we can put in the ground for them. And so that’s going well.

Basically, what our breeding program does, just to remind everybody is, there’s lots of different stevianoids within stevia that provide the sweetness. And so we’re taking those apart a little bit. There’s sort of 15 or so important ones and trying to figure out, which ones we can amplify in our breeding lines.

So that the ones that taste good, basically more of those are produced and the ones that maybe have a bitter taste or don’t combine as well in beverages or food products, we can minimize those. And so it’s a very efficient, but scientifically complicated program, not everyone could do it. And we’re very happy that Jeff Klingenberg has joined us.

In that, he has the breeding expertise to really bring this program to successful completion. So, that’s really what I wanted to say from operating standpoint. I wanted to remind everybody, what acquisitions and sales we sort of did in 2019. I wanted to remind everybody that traits are still important, that stevia is still important to us.

But it’s the integration of those acquisitions and the opportunity that they offer to S&W, that is really the focus of S&W for 2020. So we expect, as I said, a 10% unit growth in alfalfa and sorghum from our existing business. We have enough inventory to supply that kind of growth rate.

We were pretty sure when we put the last crop out in the spring of 2019, that we would be producing enough to satisfy that demand. We believe that our new traits are coming along well, digestibility in alfalfa and herbicide tolerance in sorghum.

We think that our strength and balance sheet take some pressure off of us to be sort of quarter-to-quarter, but we still are trying to look at acquisitions. That’s a big part of what – of the company we want to build.

So buying things at a good price, getting us into new species, new geographic areas and doing it, so that we can integrate it into our existing operations is what our strategy is all about. And that’s what we continue to concentrate on.

So we’re hoping that 2010 will be another really good year for us – excuse me, 2020 will be another really good year for us like 2019 was and we’ve strengthened our management team. We’ve added quite a few new sales and marketing people. So we’re looking forward to a really excellent year in 2020 also.

So with that, I will turn the discussion over to Matt, who will go through the financial picture of S&W for 2019 and looking forward a bit. Matt, please..

Thank you, Mark, and thanks to everyone on the call today. We do have a quite a bit to cover given the new licensing agreement with Pioneer and its impact on not only the historical financials, but our go-forward expectations and guidance for 2020. I’m assuming everyone has access to the various financial statements that we put in our press release.

So I’ll provide further color on some key topics. So I’m going to get right to it. Revenue for fiscal 2019 was approximately $110 million, compared to $64 million in fiscal 2018.

Now to break this down further, we recognized $34.2 million from the new Pioneer licensing agreement in fiscal 2019, $37.6 million from sale exceed the Pioneer under the legacy distribution and production agreements, and the remaining $38 million coming from our non-Pioneer, alfalfa, sorghum and sunflower operations.

As this last portion is really our core business going forward, we are referring to this as core revenue to help provide clarity of the business on a go-forward comparable basis.

Core revenue of $38 million in fiscal 2019 increased nearly $13.3 million from fiscal 2018, which was primarily driven by the increases from the acquired Chromatin operation, as well as single-digit organic growth and the other aspect of our business.

Now given the trend of decreasing revenue from our organic operation during the last few years, we are certainly pleased with the transition we’ve made to once again delivering growth in our core business. More exciting, however, are the expectations we have for 2020.

We’re going to be – we’re currently expecting growth in core revenues of 9% to 16%, and I’m going to dive into this further in a moment.

Now as we discussed during our May 23 conference call dedicated to discussing the revised Pioneer agreement, Pioneer paid us $45 million in cash upfront and we’ll make additional cash payments totaling $25 million between September 2019 and February 2021. So the total consideration from this transaction is $70 million.

The exact payment details will be highlighted in our Form 10-K. And as I just mentioned, $34.2 million of the foregoing amounts were reported as licensing revenue for fiscal 2019, with the remaining amounts of approximately $34 million will be recognized as revenue through February of 2021 as alfalfa seed is delivered to Pioneer.

Now of this $34 million of future revenue, we’re expecting approximately $22 million in fiscal 2020 and $12 million in revenue in fiscal 2021. These future sales to Pioneer will contribute approximately $11 million for the gross profits over the combined fiscal years of 2020 and 2021.

So as we look to fiscal 2020, excluding any acquisitions that we’re pursuing, we’re looking at core revenues of approximately $41 million to $44 million, which would represent organic growth of approximately 9% to 16% compared to the prior year.

Including revenue contributions from Pioneer, we expect total revenue for fiscal 2020 to be in a range of $64 million to $67 million. Now turning to gross margins. Total gross profit margins for fiscal 2019 were 37.1%, compared to 23% in fiscal 2018.

The increase in gross profit margins was primarily due to the license agreement with Pioneer, partially offset by a lower cost for market adjustment made to inventory, whereby we wrote down $8.8 million of inventory. Now approximately $5 million of this inventory write-down is directly attributed to the Pioneer agreement.

When you exclude the benefit of a license revenue and the write-down of inventory, gross margins would have been 20% for fiscal 2019. Now as we look to 2020, we are expecting gross margins of approximately 25%. We are seeing strong pricing in our proprietary sorghum and sunflower programs and some continued softness in certain alfalfa seed markets.

This dynamic can certainly reinforce the proactive moves we have taken to diversify our crop portfolio and transition towards higher-value traits, which command a much richer margin profile. Now quickly on the operating expense line item.

The $5.7 million increase in adjusted SG&A expense compared to 2018 was due to $2.1 million of additional expenses pertaining to Chromatin,, which was acquired in October, coupled with additional investments in our sales and marketing and product development functions, both of which we’ve discussed during the last few calls.

Now on R&D, consistent with what we’ve discussed over the last few quarters, we increased our investment in hybrid sorghum and sunflower R&D programs. And we expect our research and development spend for 2020 to increase as we continue to invest in these growth programs.

Now, given these recent events, I’d like to provide some more specific guidance for 2020 related to operating expenses. In summary, we expect SG&A to be approximately $19 million in fiscal 2020, which includes stock-based compensation of approximately $million.

We expect research and development to be approximately $8.2 million in 2020, and we expect depreciation and amortization to be approximately $5 million in 2020. Again, this excludes any potential acquisitions that we may enter into.

Now, as we anticipated as a result of the changes in our agreement with Pioneer, we did record an $11.9 million goodwill impairment charge and a $6 million intangible asset impairment charge during the fourth quarter. As of June 30, 2019, and as of today, we do not have any remaining goodwill record on the balance sheet.

Now adjusted EBITDA for fiscal 2019 was $19.2 million, compared to $1 million in fiscal 2018. Again, the key driver here was the Pioneer lesson – licensing agreement.

As we talked about in some length, the new – well, the – yes, the new license agreement with Pioneer essentially accelerated the cash flow of our next five years minimal contractual obligations and further compensates S&A for the upfront licensing of certain varieties.

The acceleration of this cash flow significantly improved our financial position, including fully paying down our U.S. revolving line of credit, giving us significant flexibility.

Now the recent transaction does create a near-term disconnect between our operating infrastructure and our revenue base, which we expect to result in negative EBITDA as we move into fiscal 2020.

Without going into too many details, we are expecting a return to positive EBITDA in 2021, simply from our organic operations and that should give you a sense of the opportunities we believe are present in our core organic operations.

If we complete the strategic of acquisitions available to us and leverage off of our existing platforms, we believe there’s significant opportunity in the coming periods. Now a couple of quick items before I turn the call back over to Mark.

As you can see from the balance sheet and in line with what we communicated on our May 23 call, we utilized the initial proceeds from the Pioneer agreement towards the pay down of our lines of credit. As of today, we had zero drawn on the U.S. line and $9 million drawn on our Australian line.

These lines of credit remain in place with a significant amount of unused borrowing capacity, which will help fund our future growth initiatives. Now I know I went through a lot of details here. So please feel free to ask any questions if there’s a need to clarify anything discussed. With that being said, let me turn it back over to Mark..

Thank you, Matt. So let me just summarize the call today. We’re looking for 2020 to be another spectacular year for S&W. We think that, as Matt has described, we’ve strengthened our balance sheet significantly and we removed some of the inventory risk in the sense that all of the dormant inventory has been sold as part of the transaction with Corteva.

We think that integration is going well. We are expecting, like I said, 10% – double-digit growth in alfalfa and sorghum for 2020. We think that our new organization, which focuses on local markets, so in the Americas, sorghum and alfalfa are the two most important crops.

But internationally, David’s team is selling not only alfalfa and sorghum, but also sunflower and wheat. And so are – we have one sales force selling all of those different species in each of the appropriate markets. It’s – we don’t have two sales forces out there. We have one sales force, one S&W sales force selling all of our products now.

And we’re reaching out to our farmer and distribution customers to tell them that that’s what we’re doing and to show them what our breeding programs have produced in terms of performance in the farmers’ field of new hybrids and varieties for all of those crops. We expect that there will be continued acquisition opportunity.

The market – the ag markets are difficult and many companies are struggling. We are one of the few that are in acquisition mode. And we have more deal flow than we can deal that we could ever close.

And we have a pretty good process to go through the companies who call us and throw out the ones that are obvious not matches, and then put in the time with the ones that may be potential matches to see if there’s deals to there. If there’s value for S&W that can be had at the price that the seller wants to sell at.

Again, most of our acquisitions, when we model them, we’re looking at mid-teens with kind of returns, internal rate of returns for our investment. And we think that, that kind of opportunity continues to be available given the difficulties in the ag markets. So we’re looking for 2020 to be another very good year for S&W.

We thank all of our employees for the efforts that they made in 2019. It was a really big effort on everyone’s part. And we are looking forward to everyone working hard and smart again in 2020, and the rewards that will generate for us. So with that, I’ll complete the call, and we will be happy to answer questions.

And I will turn it over to the operator. Thank you so much..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Sarkis Sherbetchyan of B. Riley FBR. Please go ahead..

Good morning, and thanks for taking my question here..

Hey, Sarkis, good morning..

So first just wanted to kind of understand for the current year for Chromatin, I think, the press release said $12.4 million of sales was realized.

And I wanted to kind of understand how that compared to the previous guidance, the management team provided for $14 million to $15 million Was there some sales that are may be slipping into next year? Any kind of missed opportunity, just kind of help us understand the delta there?.

Matt, do you want to take that?.

Yes. Sure. Mark. Sarkis, yes, so – we – the top line at Chromatin did come in a bit lower than we had expected. But that was really related to timing of sales, some of those sales actually shifted to July of 2019. And I do want to point out that although the top line was a bit softer, gross margins did come in better than expected.

So we were still able to generate positive EBITDA on that $12 million of revenue for Chromatin, which we think is something to be proud of considering the historical losses that the business generated.

And it really just sort of, I think, demonstrates how powerful this business can be as we start driving top line revenue growth, particularly with the margin profile that these hybrid sorghums are delivering..

Thanks for that. And then with regards to that, I think, in the past you mentioned, call it, 30% gross margin maybe a little bit better.

Can you give us a flavor on what you did generate?.

Yes, Sarkis. The margins for the – our sorghum business came in around low-40% range, and we’re expecting that margin profile to continue into 2020. And as we look to the outer years, it probably increasing and improving from there..

Great. That’s good to learn. And then I think in prior calls, you mentioned for fiscal 2020, you’d expect the business for Chromatin and the sorghum assets to do $17 million to $20 million in annual sales.

Is that still the expectation, or would there be a range that’s a little bit lower?.

Yes, Sarkis, based on the revenue guidance we gave of $64 million to $67 million, we’re assuming that the Chromatin business would generate roughly $15 million of that. So certainly, if we get back to that $15 million or $20 million range, that would be upside to the revenue guidance we provided to date..

Got it. Good.

And then with regards to the guidance given for the Pioneer licensing sales, can you maybe give us kind of the cadence we should expect for fiscal 2020? And then also how would that impact gross margin, right? Would it be kind of calling in below 30% range, or would it be 100% gross margin? Just kind of help us understand how we should think about the license as it flows through the P&L?.

Yes. So, Sarkis, the license revenue was all recorded in 2019. The – we will be generating revenues to – for sale of seed to Pioneer in the 2020 and 2021 range. Were thinking that revenue will be roughly $22 million in 2020, with high sort of, say, 27% to 28% gross margins.

So as we deliver seed to them basically from now through February of 2021, we’ll be generating revenues pretty much consistent with our historical margin profile to Pioneer..

Okay..

Does that address your question?.

Yes.

So the balance would be treated more like a product sale, and what we just saw was a license sale, is that correct?.

That’s correct. That’s correct..

Okay.

And that’s going to kind of be in line with the inventory to cash schedule that was previously disclosed in an 8-K?.

That’s right, Sarkis..

Good. And then just finally, here, I know in the prepared remarks, you mentioned that some of the transactions kind of create a disconnect between the businesses operating expenses and revenues, right? And so even with kind of the the product sales that flow in for fiscal 2020 to Pioneer, you’re kind of guiding to negative EBITDA here.

What’s the magnitude of the EBITDA loss? Is it a low single-digit EBITDA loss, like just kind of help us understand what we should be thinking?.

Yes. Without any acquisitions, Sarkis, and this certainly is a short-term term [ph] but we’re thinking that our EBITDA loss will probably be in the $6 million to $8 million range based on the revenue guidance we’ve given. And obviously, we’re working hard to close that gap quickly, acquisitions will help.

And as I mentioned in our prepared remarks, the 2021 period, just from an organic base is a period of time where we think that these operations will flip back to positive EBITDA..

Great. That’s all for me. I’ll hop back in the queue..

Yes, Sarkis, let me add something to what Matt said about the relatives, really, I think your question is, the relative weight of expenses versus sales. I mean, we moved all of those sales to Pioneer basically into 2019 with them, as Matt described, the remaining inventory sales in 2021.

As seed company, you always are looking to cut expenses when you lose sales like that. But breeding programs are very difficult to start, stop and then restart. And so, there is – to maintain consistency and to have a product pipeline, that is going to generate really competitive products in the marketplace that we can win share with.

You’ve got to grit your teeth and buckle it up and keep spending that money in the short-term to have products in the intermediate term. And we understand that can be a bit distressing to some investors if they’re not looking far enough ahead. But that’s how the seed business works. And I’ve had 40 years of experience.

I’ve tried cutting expenses too deep and suffered the consequences. So, we’re cognizant of the fact that for 2020, we have negative EBITDA and we’re doing everything we can from integration standpoint through 2020 and 2021 to get back to a positive territory, and obviously, an acquisition will help.

But we’re trying to inform the market about what our legacy business will do, because that’s really important that people understand what our performance looks like without an acquisition. But we are looking at a couple of significant acquisitions.

They will go add earnings to the company, they are accretive and they have IRRs that look incredibly attractive in this market. So, more on that when we close something. But we – these transactions take a long time, some of these things we’ve been working on for quite a while. So, stay tuned for more input on the acquisition story.

But really, 2020 is the year of integration, right? We’ve got to take the businesses that we’ve already purchased and integrate those into the traditional S&W platform and we’ve got to move the whole company forward. Without an acquisition, we’ve got to show the market that we can make money in the businesses that we have..

[Operator Instructions] Our next question comes from Ben Klieve of National Securities Corporation. Please go ahead..

Hey, Ben..

All right. Thanks for taking my questions. Good morning, guys. A few questions here. First of all, building off of Sarkis’ questions on Chromatin.

Can you just kind of elaborate a bit on really where the business stands today versus where you’ve kind of thought it would be on prior earnings calls? It sounds like it certainly is still very much a positive acquisition for you, but that – it’s – just that the numbers are shifting around a bit.

So can you just elaborate on where you think that delta is coming from? And why that delta is coming to be here?.

Yes, sure. I mean, Ben, a couple of million dollars is obviously important. We’re saying $15 million versus $17 million that we thought before. The acreage has changed, the market has changed, the sort of competitiveness of sorghum versus corn changes.

I think, when every quarter that goes by, we have better information from our sales force, as to what’s really happening out there in the market. So I wouldn’t read too much into being sort of on the low-end of that estimate that we made previously. Like Matt said, the margins are much better.

We’re basically asking the market to pay for our improved varieties. We’re not trying to give them away. We’re not trying to buy share by cutting price.

And it’s important to teach the market that we believe we deserve the margin that we make, because our hybrids produce seed in the field that – compared with our competitors and they’re the best thing for them to buy. So we’re trying to set that mark in the market.

And if sales are up and down a million or two, frankly, I don’t get too concerned about that..

Okay, fair enough. Thank you. Also here, so looking at the kind of outlook for 2020 and 2021, if I look at the organic catalyst that could take you from the EBITDA loss you described next year, all the way in a positive territory in 2021.

The – my assumption here is that you believe that the lead products in your development pipeline may be able to transition to commercialization in 2021.

Is that a fair timeline, or do you think those – do you think those kind of lead varieties are going to potentially be further out than that?.

No. I mean, we – with the Chromatin acquisition and with our own alfalfa breeding program that was originally the Pioneer program. I mean, it’s a continuous program, right? As is the wheat program in Australia, as is the sort of five years that we’ve got into sunflower, six years we’ve got into sunflower breeding.

So, when you are able to maintain kind of stable funding of these programs, I think, we’re generating something like 15 – across all of those species 15 new products that are coming into the market on a worldwide basis. So we’re optimistic that we’ve had trials of those.

They look pretty good in the farmer’s field and we’re optimistic that they’re going to take some share. So this is hopefully the beginning of a steady market penetration gain on our part in these crops, that won’t be true in all markets. But in the important markets that we’re focused on, hopefully, that’s true.

So, the product development, life cycle is very long. I mean, you sort through, you make your crosses in the breeding blocks. You sort through the best material there. A lot of times, it’s fairly complicated genetics. And so having a marker, so that you can look for what you want in performance is important.

And we use marker-assisted breeding in all of our crops, and then you’ve got to test in the field. You’ve got to increase seed amounts, so that you have something to sell, all that takes some time.

And so, from probably the time you make the first cross, even with the improvements in speed and breeding programs, it’s probably a seven-year timeline to get new products, bread trials and then seed increase.

So when you see the 15 new product coming out from our operations, this is the culmination of lots and lots of years of work, and the beginning of our field pipeline. And so, I think people should be optimistic about what our future results are going to be for the next intermediate term..

Okay, perfect. Thanks, Mark. And last one for me.

Regarding kind of the potential scale of future acquisitions, with the company as it is today, can you comment at all kind of the level of debt you guys feel comfortable with, any potential restrictions that you have from your debt facilities that would limit the size of any acquisitions? You’ve kind of averaged kind of roughly $40 million in debt over the last couple of years.

Would you feel comfortable getting back to that, or we’re looking at a bit lower? Kind of help us kind of understand what you’re thinking about now in light of all the changes that have taken place in your company over the last couple of quarters?.

Matt, you want to do that, or you want me to try that?.

Yes. No, Mark, I’ll take that and then maybe you can….

Okay, sure..

…chime in. So, Ben, each acquisition is going to have its own unique characteristics. And depending on the asset profile that comes along with each of those acquisitions is going to be a driving factor to how much balance sheet leverage we have. I mean, I will say at this point in time, we don’t have anything drawn on our U.S. lines of credit.

We have roughly $30 million of unused availability on our lines. So how much we use? We certainly want to use our balance sheet to the extent possible to pursue these future acquisitions. But again, it’s going to really be dependent on each individual acquisition that we target..

Got it..

Does that answer your question?.

Yes, absolutely. I think that does it for me. Thank to you both. I’ll get back in queue..

Thank you, Ben..

[Operator Instructions] Our next question comes from Roger Miller of Frontier Investments. Please go ahead..

Hey, Roger..

Good morning. I’m glad to be here. I’m a longtime investor in the company. And obviously, I’ve seen it change quite rapidly. What are the possibilities for hemp? [Multiple Speakers].

alfalfa, sorghum, wheat and sunflower and then our stevia operations..

Okay. Well, I appreciate you answering my question..

Yep. You’re welcome..

This concludes our question-and-answer session. I would like to turn the conference back over to Mark Wong for any closing remarks..

Thank you very much, operator, and thank you, everyone, for being on the call today. I think it’s come across that we’re pretty darn excited about S&W’s prospects, what we’ve achieved in 2019, where the company is going in 2020. We’re calling 2020, the year of integration. I mean, we’ve got to show that we can take market share in our crops.

We’ve got to show that the investments we’re making in breeding and in sales and marketing can get us the additional bags of seed to the top line and to the bottom line. So, stay tuned. We’re going to probably do one big acquisition in the year. We’ve got a couple of candidates for that. So it’s busy time.

It’s a wonderfully interesting time for S&W and for U.S. agriculture and worldwide agriculture in general. And we’re very, very excited about the opportunities that we have. So thanks, everyone, on the call, and we’ll look forward to talking to you in the quarter again. Thanks so much..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..