Good morning, and welcome to the S&W Seed Company Third Quarter Fiscal Year 2023 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 this event is being recorded.

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

All right. Thank you for joining us today to discuss S&W Seed Company's Third Quarter Fiscal Year 2023 Financial Results for the quarter ended March 31, 2023.

With us on the call representing the company today are Mark Wong, President and Chief Executive Officer, Betsy Horton, Chief Financial Officer and Vanessa Baughman, the company's Interim 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, please note that 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 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, 2022, and other filings subsequently made by the company with the Securities and Exchange Commission.

In addition, to supplement S&W's financial results reported in accordance with the U.S. generally accepted accounting principles or GAAP, S&W will be discussing adjusted operating expenses and adjusted EBITDA on this call.

These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measure and are not prepared under any comprehensive set of accounting rules or principles.

A description of adjusted operating expenses and adjusted EBITDA and reconciliations of historical adjusted operating expense and adjusted EBITDA to net loss are included at the end of S&W's earnings release issued earlier today, which has been posted on the Investor Relations page of S&W's website.

An audio recording and webcast replay for today's conference call will also be available online and on the company's Investor Relations page. With that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company.

Mark?.

Monsanto and AgReliant Genetics. I have asked Vanessa to join us on the call and introduce yourself.

Vanessa?.

Thank you, Mark, and hello to everyone on the call today. As Mark mentioned, my background is in agriculture, most recently serving as CFO of AgReliant Genetics, the largest North American company focused solely on seed. Before that, I held numerous finance roles supporting various business segments at Monsanto Company.

I share Mark's enthusiasm for the future of S&W and the progress that is being made. I'm keenly aware of the nuances of running an agricultural seed company and the need to focus on long-term value creation. I've spent the past few weeks side-by-side with Betsy and the finance team, both in the U.S. and Australia, having hit the ground running.

I look forward to more proactively speaking with all of you in the future. Mark, let me turn it back over to you..

Thank you, Vanessa. The financial operations of S&W are certainly in great hands. And with all of that being said, Betsy, can you please run through the numbers and then I will come back with some closing remarks.

Betsy, please?.

Thanks, Mark. Good morning to everyone on the call today. Let me also first add how appreciative I am of the Nominating and Governance Committee's recommendation to have me join the Board of S&W.

As Mark has discussed, we've made tremendous progress over the past year, and I look forward to working with the team to build upon the momentum into the future. Okay. Let's start on the revenue line. Revenue was $17.7 million for the quarter, a decrease of 23.8% compared to $23.2 million in the prior year's third quarter.

The $5.5 million decrease in revenue was primarily due to a $3.9 million decrease in product revenue from alfalfa sales to MENA and the U.S. as well as European, Asian and South African [indiscernible]. A $2 million decrease in pastures and forage sales to – in Australia and a $1.1 million decrease in traditional sorghum sales to the U.S.

This was offset by $1.5 million increase in Double Team sorghum sales in the U.S. Mark discussed the various items already, but to reiterate, the decreases almost all pertain to weather or geopolitical events, whether it be the heavy rains in Australia, the drought in the U.S. or the unrest in Sudan.

Due to these items, we believe it is prudent to revise our revenue expectations for the year. We currently expect revenue to be in the range of $65 million to $75 million for fiscal 2023, with about $10 million shifting from Q4 into the first half of the next fiscal year due to the items discussed in Sudan and in Saudi Arabia as we hold pricing.

Let me first bridge the change in our guidance, starting with our U.S. sorghum operations. Our original expectations for fiscal 2023 were revenue of $22 million to $25 million. Our revised guidance for U.S. sorghum is 17 to 21 with approximately $8 million to $10 million coming from Double team.

As Mark mentioned, we are completely sold out of one of the three Double Team varieties, but expect the other varieties to potentially be impacted by the delayed planting taking place in Kansas, Nebraska and Colorado. We are committed to maintaining our price and margin on this premium product.

So we are choosing lower revenue versus resorting to deep discounts to drive sales for fiscal year 2023.

For our international forage and all sulfa operations, our original expectations were for revenue of $47 million to $56 million due to the rains in Australia, the unrest in Sudan and the dumping of unregistered and lower-priced seed in Saudi Arabia, we are now expecting revenue of $40 million to $45 million.

We anticipate the seed to Saudi Arabia to ship instead in fiscal 2024 when we also expect to sell the seed originally planned for Sudan. Combined, this amounts to about $10 million shifting to the first half of next fiscal year. Finally, in our U.S. forage and alfalfa operations, we originally expected revenue of $11 million.

We are now expecting revenue of $8 million to $9 million as the dormant alfalfa market continues to be soft. Now turning to margins. GAAP gross margins were 25.1% in the third quarter of fiscal 2023 compared to 11.7% in the prior year's third quarter.

This significant improvement was primarily driven by the increased sales of the company's higher-margin Double Teen sorghum solution in North America, reduced sales of lower-margin dormant alfalfa sales in the U.S. and lower inventory write-downs in fiscal 2023.

Inventory write-downs during the three months ended March 31 decreased to $0.4 million from $1.1 million in the previous year quarter when we first established our inventory reserve policy.

As Mark mentioned, we have made tremendous progress controlling our costs and putting in place processes and procedures to more accurately align our production cost with sales pricing. That strategic decision in Saudi Arabia to not compete on price, while it may have short-term impact is definitely expected to benefit us in the long run.

Now we'll transition to operating expenses. Our GAAP operating expenses for Q3 2023 were $8.3 million compared to the $8.9 million in the prior year's third quarter, a decrease of $0.6 million. The decrease in OpEx is entirely due to decreased R&D as we focus on aligning our cost structure to support our key centers of value.

And importantly, we remain on track to hit our $5 million stated goal in reducing our annual adjusted operating expenses.

Last quarter, I mentioned that with the creation of Trigall and VBO partnerships, we would be playing in an administrative role for both new ventures, handling things such as finance and accounting, HR and IT under service level agreement.

We expected we would have expenses that we would incur within our operating expense line, but then be reimbursed by the partnership's other income line.

After consultation with our auditors, it was determined that these items would be service revenue and an offsetting cost of goods sold, which makes the visibility into our operating expense reduction initiatives more easily visible. During the third quarter, we had approximately $130,000 of service revenue pertaining to our partnerships.

We are introducing the concept of adjusted operating expenses to allow us to effectively compare on a year-over-year basis by removing the onetime expenses related to our two partnership transactions.

As noted in the earnings release, we define adjusted operating expenses as GAAP operating expenses adjusted to exclude depreciation and amortization, disposal of property plans and equipment loss or gain and onetime expenses related to our two partnership transactions.

With the clarification for the year, we are maintaining our guidance that adjusted operating expenses, including stock-based comp of about $2 million will be maintained at our previous guidance of $27 million. Again, this is a $5 million reduction from fiscal 2022 and a key step to rightsizing our spend on our journey toward profitability.

Now to EBITDA. At the adjusted EBITDA line, we had a negative adjusted EBITDA of $0.4 million for the third quarter compared to negative adjusted EBITDA of $4.5 million in the prior year's third quarter, an improvement of $4.1 million.

This improvement layers on to the $4.4 million improvement to the adjusted EBITDA that we saw in the first half of the fiscal year for a cumulative year-to-date improvement of $8.4 million.

Given the change in our revenue guidance, we do expect adjusted EBITDA to be below guidance, but a smaller impact than you see with revenues due to our effective strategies on both pricing and costs. Our original expectations for adjusted EBITDA was a negative $2 million to a negative $7 million for fiscal 2023.

Our revised guidance is negative $8 million to negative $12 million. This all compares to a negative adjusted EBITDA of $24 million for fiscal 2022. So all in all, we still believe we are on track to have a tremendous year of progress. Let's walk through the various buckets we had for improvements.

Originally, we expected a $4 to $5 million improvement to our lower of cost or market or LCM charges. We now expect a $3 million to $4 million improvement. We continue to monitor our potential carryover of inventory through the fiscal year-end when we will make the appropriate adjustments to LCM at that time.

Next, we believed we would see a $5 million improvement from our cuts to annual operating expenses. We remain on track to achieve this goal. Next, we believed that we would see a $6 million to $7 million improvement in incremental gross profit due to our U.S. sorghum operations. We now believe we'll see an improvement of $4 million to $7 million.

And finally, we estimated we would see $2 million to $5 million in incremental gross profit from our international forage operations. Due to the combined impact from Australia, Sudan and Saudi Arabia, our forecast shows we will be flat to up $1 million in this area.

So while not what we originally expected, we still see gross margin improvement in each of the key areas of focus. And if we ship the $10 million shift in the first half of fiscal year 2024 as we plan, we would be well on our way to achieving our goals. A couple of other trick items before I turn it back to Mark.

As Mark mentioned, we've made tremendous progress improving our balance sheet and expanding our banking relationships.

The execution of our agreement with Shell, coupled with the support from our lead shareholder, MFP, and our banking partners in the U.S., CIBC and in Australia with NAV puts S&W in a much stronger position today than we were a year-ago.

I am proud of the progress that's been made and while various factors that are largely outside of our control are having some impact, I feel that factors that we have within our control were successfully executed on this year-to-date, including our expense reduction plans, inventory management initiatives, gross margin expansion, execution of the two partnerships, new bank facilities and the launch of Double Team.

On a personal note, I have thoroughly enjoyed my interactions with those of you on this call, and I look forward to continuing to support S&W as a member of the Board. With that, I will turn the call back over to Mark..

Thank you, Betsy. As you just mentioned, great progress has been made with the outlook remains positive. On a whole, I want investors to understand that we are keenly focused on creating value for shareholders through our key centers of value.

The execution of our Double Team launch and creation of our partnership with Shell for Camelina are two significant developments this year. Our announcement this morning surrounding our international forage highlights our commitment to reviewing all potential value-enhancing opportunities.

As always, we thank you for your continued support of S&W and look forward to taking your questions.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ben Klieve of Lake Street. Please go ahead..

All right. Thanks for taking my questions. Plenty to discuss here. I'd like to focus first on the kind of strategic announcement around your international operations. A couple of questions. But first, I want to ask a clarifying question.

When you discuss this operation, is this entirely represented by, Betsy, the business that you described as international forage that is $40 million to $45 million this fiscal year? Or does that include business elsewhere?.

So yes, it is completely international forage. So that includes our business in Australia as well as all of our international forage to the Middle East and other areas across the globe..

Okay. Very helpful. So then a couple of questions on kind of the strategy.

In assessing the potential value here to another party, can you help us understand as a stand-alone entity, any kind of profitability metrics around this business?.

Betsy, you want me to take that or you?.

If you want, otherwise, I can chime in..

Yes, go ahead..

Okay. So for that business, I would say that, that is a – if you remember, our centers of value presentation that we gave last year at this time. It's the one that is less volatile, more slower growing, but moving toward profitability very quickly. So it has a lower margin business, but less volatility in the ups and downs.

That's where we have all of our shipments to the Middle East for alfalfa and the Australia domestic pasture business is within that..

Got it. Thank you. And then one last question on this initiative. Mark, you talked about the kind of level of inbounds that you've had on this business for some time and how kind of robust the potential pipeline is.

Can you dig into that a little bit more? I mean what gives you confidence that the Australian market either from M&A or the public market would be willing to give you guys a more fair value for this business than you're seeing today? Is there any kind of metrics you can provide or any kind of benchmarks that can really point to the magnitude of the value potential from this business in the Australian market?.

Yes. I mean we don't have a sort of final number target in mind. We're just going through a process to ask the market to tell us what the value is.

We think, as Betsy said, that it's a business that is going to be profitable here next year and especially with the $10 million in sales that would normally have been in this year, except for the war in Sudan and these problems in Saudi. We just want to see what the value looks like, right? I mean we have a problem.

We've made huge progress on lots of fronts. In our forage margins in our international business. Again, Betsy has given detail on Australia and how the weather patterns there basically precluded farmers from planting our high-value large mixes and instead, they planted cheaper materials, basically because it rained, and they didn't need to replant.

The passers grew back without new reseating. And so this general theme of sort of the markets under valuation of our assets, including our fast-growing, high-margin trade business in sorghum. We have two traits there.

We're going to be stacking them and also selling them singly in grain sorghum and forage sorghums and then obviously, our deal with Shell, where we're pointing out that we're moving towards millions of acres of Camelina.

And we just feel like the market doesn't really want to look at our individual pieces of our business that we're building and gives us really a very, very low value for those. I mean $54 million market cap, I believe, is low.

So we're going through the process just to see if we can unlock things that maybe we've missed that the market would value in each of our three businesses. But first, we're going to look at Australia and sort of see what the opportunities are there..

Got it. And as the last question and I will go back in the line. To kind of build off of what you're talking about here on the – from a valuation perspective. But I appreciated that on the VBO side that you pointed out, the potential range between $7 million and $12 million for your follow-on 6% stake.

Can you talk about the conditions within those ranges that would determine a payment of seven versus 12, I mean how – what needs to happen to hit one side of that range versus the other?.

Yes. So the original deal that Shell and we negotiated had us eventually, if our targets for performance were achieved being 50/50% partners. And so our 50% is the current 34% that we own currently plus two additional pieces. One is the right just to buy at a predetermined price, about 6% or 7% back.

That relates to the mortgage that was paid by Shell, paid off by Shell, on our plant that we contributed to the JV. And the others are just performance metrics. So we don't have to buy back the equity, we are granted the equity based on performance. And that performance is directly related to the number of acres that we put in the market.

And so we're doing very well, as I said, in our first year with acres significantly above our target.

And we would expect that over the next three or four years, where those incentives are available to us that we would increase our ownership back up sort of to the low 40s, mid-40s percentage-wise and that the JV would be very successful in terms of planting acres and then this very simple process where all of those acres, all of the grain that comes off those acres because the diesel and jet fuel markets are so big, Shell will purchase that.

And so it's a much simpler business model than our seed businesses where we have to have branding, have field demonstrations for farmers, show the performance of our traits and our hybrids in terms of yield per acre and the herbicide resistance.

All of those steps are simplified in that Shell is our customer, and Shell buys the grain at a predetermined price based on the soybean users’ price. And it's a very simple model for us and for Shell and it gets Shell a source of vegetable oils that then they convert to green diesel and jet fuel..

Very good. Yes. That was very helpful. Thank you, Mark. Appreciate you guys taking my questions, and I will get back in line..

Thanks, Ben..

[Operator Instructions] And our next question will come from Gerry Sweeney of ROTH Capital. Please go ahead..

Good morning, Mark and Betsy. Thanks for taking the call..

Good morning..

I apologize, I was jumping on and off. So if any of this was already asked or mentioned, I apologize. But I just wanted to talk a little bit about the DT sorghum or on a couple of different fronts. It sounds like plantings are going slow in certain regions.

So as you said, one of the varieties has sold out the other two looks like it could be a little bit tight. But I just want to get some clarity.

This could be pushed into 2024 or meaning – or will they actually get pushed to next season if they don't get – if the seed does not get planted?.

So I think there's a couple of questions embedded there, Gerry. So, most of the seed is going to be sold in this year. And so the season might have some rollover into July, but the majority of our seed sales for DT that we currently are projecting and are coming out of inventory that we're holding, those will be in this fiscal year.

The problem is in the big states for us, which are Kansas is the biggest grain sorghum state actually in the U.S. Some people think it's Texas, but I think Kansas is a little bit bigger. But Texas is also a big state. Texas is pretty far in its planting of sorghum and corn. Kansas is not, Colorado is not, and Nebraska is none.

And that's really two reasons. Farmers haven't seen a lot of moisture in the Western Corn Belt states that I just mentioned. Most of that moisture, if people are following, has fallen in the Sierras.

So those huge rains and floods in Florida, excuse me, in California, are the rain that the Western Corn Belt would have been a more normal weather pattern gotten. And it's been very cold. I don't think people realize how cold it's been. So soil temperatures are very cold.

You can't really plant sorghum yet because it won't germinate and you're afraid if you leave it in the ground too long, it will be attacked by diseases and insects and things in the ground and – so farmers just aren't willing to plant yet. But that's coming.

There's 10 weeks left in the year or something like that, and we're optimistic that sales are starting to build again, and we're just pushing as hard as we can, trying to make every bag of sales because we want farmers to get the benefit of having this herbicide resistance especially sorghum that's not irrigated.

So we're pushing hard, and we're optimistic that the DT number will still be a strong number this year, even though it's been a bit slower seasonally than we expected..

Got it. And then what were – have you communicated your projections for next year? And that all taken into what you just said, taking into consideration..

Yes. I mean we haven't yet..

Extra capacity has been an issue, right? So this is carryover and next year could just be a stronger year?.

Yes, we haven't yet. I mean, there are – we believe that there will be continued strong growth, right? So right now, you have DT in grain sorghum. That's about six million to seven million acres in the U.S., grain sorghum is. Then we'll be introducing DT and forage sorghum. That's another six million to eight million potential market acres.

Then we have DF, which is our Dhurrin-free second trait that we licensed from Purdue on a worldwide basis, we have exclusive worldwide license. And that will be going into grain sorghum and forage sorghum in the next couple of years. That product is going to be important in Australia because it is a forage market.

So we're working hard to get the grain into Australia, true-up our hybrids there so that we can begin sales. And worldwide, we're now starting our licensing effort now that people have seen how the product performs.

And so we're talking to seed companies in Australia, in other – in Asia and in South America about being licensees of a trade package that we'll be offering. So the sorghum business is only at the beginning of its growth.

We just are in the process of looking at five-year projections for the growth, and we see a big growth pattern in the next five years for those two traits in both grain sorghum and forage sorghum..

Got it. Then switching gears. Sorry, go ahead..

Yes, so this is just – this year and next year will be another strong year for DT, and then we'll start to see some DT and forage sorghums, strong year for DT and grains sorghums, and we'll start to see our first sales in foraged sorghum. So we're only at the beginning of a big market push. And the trade is still performing really well.

There are some technical issues with how you put a trade in a hybrid, but I won't get into that. All seed companies have gone through it. Monsanto went through it when I was on their board in the 2000-ish sort of years when Roundup Ready was first being put into corn.

So the farmers and distribution understand these issues because they've seen them before in other crops. And it's not a straight line in agriculture, but our trade is definitely building strongly, and we're going to have significant sales of DT, like I say, in both grain and foraged sorghum and then DF in both grain and foraged sorghum also..

Got it. I have a couple more, but I'll follow-up offline. So I appreciate it. Thank you..

Yes, sure. Yes, our pleasure..

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

So thank you, everyone, for being on the call today, and thank you to our employees for the great progress this year. We continue to build our main three centers of value as we have discussed our forage business in Australia and internationally, our traded sorghum business in the U.S. right now, but spreading to Australia and South America.

And of course, our big opportunity deal with Shell. We just think that growing Camelina as a second crop harvesting those oils and then having Shell convert them to green diesel and jet fuel is going to be a marvelous market for us. So we're very, very excited about that. So thanks, everyone, for the call today. Bye-bye now..

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect..