S&W Seed's (SANW) CEO Mark Wong on Q3 2022 Results - Earnings Call Transcript

May 16, 2022 2:23 PM ETS&W Seed Company (SANW)2 Comments
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S&W Seed Company (NASDAQ:SANW) Q3 2022 Earnings Conference Call May 16, 2022 11:00 AM ET

Company Participants

Robert Blum – Investor Relations-Lytham Partners

Mark Wong – President and Chief Executive Officer

Betsy Horton – Chief Financial Officer

Conference Call Participants

Ben Klieve – Lake Street Capital Markets

Kurt Caramanidis – Carl M.Hennig, Inc

Jonathon Fite – KMF Investments.

Brett Reiss – Janney Montgomery Scott


Good morning, and welcome to the S&W Seed Company’s Third Quarter Fiscal Year 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [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.

Robert Blum

All right. Thank you very much and thank you all for joining us today to discuss the financial results for S&W Seed Company for the third quarter of fiscal 2022 ended March 31, 2022. With us on the call representing the company today are Mr. Mark Wong, President and Chief Executive Officer; and Betsy Horton, the company's Chief Financial Officer.

At the conclusion of today's prepared remarks, we'll open the call for a question-and-answer session. Please note that management will be referencing a slide presentation during this call that is available on the company's website. You can visit the website www.swseedco.com. Click on the Investor tab along the top green ribbon and you will see the slide presentation available on the front page, they are titled strategic review key centers of value.

Before we begin with prepared remarks, say a couple of comments here. First off, 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. It includes statements such as the company's revenue guidance for fiscal 2022 and statements regarding the achievement of the company's business objectives and recent strategic review.

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, 2021 and other filings made by the company with the Securities and Exchange Commission.

In addition to supplement S&W’s financial results reported in accordance with U.S. generally accepted accounting principles or GAAP. The company is reporting non-GAAP measures during this call, [Audio Dip] including adjusted margins [Audio Dip] and EBITDA. These non-GAAP financial measures are not meant to be considered in isolation [Audio Dip] should be read in conjunction with the company's consolidated financial statements prepared in accordance with GAAP, have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles.

A description of these non-GAAP measures and reconciliations of non-GAAP to the nearest comparable GAAP measures are included at the end of the company's earnings release issued earlier today, which has been posted on the Investor Relations page of the company's website.

So with all that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Mark Wong

Thank you so much, Robert, and welcome on this happy Monday morning to everyone, who's on the call today. It's that time of the year for S&W, when we book our sales in the third and fourth quarter. And that's because in the Northern Hemisphere, and remember that our offices are in Longmont, Colorado, where I'm calling you from. We are planting like crazy and then because our business in the Australian market, our other big market is winter planted forage crops. We're also planting forage crops with farmers.

And so that's why our third and fourth quarters are always the largest for us. So, as Robert said, we have a presentation for you today. You go on the website please and get that. And I’m going to be referencing slides as I go through the presentation today. It's a little bit or a lot, I hope a new way of looking at our business for those of you who are shareholders or follow the company. And we're very excited because we think it's a much cleaner way to match our opportunities and our expenditures for the future.

So I'll go first in the presentation to Slide 3. And you'll see in Slide 3 that we're trying to break our business down after undergoing strategic review with senior management here at S&W, we're going to sort of talk to you now this year and in the future about our four key centers of value. And on Slide 3 in our presentation again, if you go to the website and pull that down, you'll see that those centers of value are U.S. sorghum and sorghum technology. And then forage products, international forage products in Australia and the Middle East are specialty crops, which I'm going to talk a little bit more about, which are stevia and a crop, which I've mentioned before, I think, but not given much detail, which is camelina.

And then I'm going to talk about for U.S. forage and alfalfa. So if you all stay with me on that presentation and I will reference the slides as we go along. So on Slide 4, you'll see that in focusing on these four major places of opportunity, businesses of opportunity, we also think that we are going to be able to reduce our topics about $5 million. And you'll be hearing about – more about that in terms of details in the future. As a lot of you have seen, we've announced a partnering of our wheat program with a couple other companies that have formed a JV called Trigall Genetics.

And we're going to call that Trigall Australia. They are a worldwide wheat breeding company with operations in Europe and in South America. And they bring to the partnership also a gene for drought-tolerance called CB4 – excuse me, HB4. And that gene is included in our partnership and we will be developing that gene in Australia, in wheat.

We've also made a streamlining of our European sunflower operations. We've talked about – a little bit about that before, we've in the process of selling some of that germplasm in the form of germplasm licenses to various companies, but we have basically rationalized our Hungarian operations and saved about $700,000 a year in operating costs. And then because we are still losing a little bit of money, we've raised about $11.2 million through our ATM through the months of February and March, so a very busy time for S&W on lots of fronts.

I'm going to give you a little bit of a description of each of those four growth areas. So on Slide 5, the first one is a little bit of discussion about the U.S. sorghum technology and our Double Team trait. You've heard me talk about this trait before. It's basically a trait where that we have embedded ingrained sorghum, which allows the farmer to spray over the top and kill grass weeds. And that's important because sorghum is itself a grass, and you would kill the sorghum and all the grass weeds without the protection of our gene.

And so that has been a product that farmers have been really signing up to buy. We're basically sold at again in the 22 season as we were in the 21 season. And we're looking to the 23 season as our first really big year of sales. And that's because it takes just that long to grow the hybrids, the, the mom and dad seeds that you need to produce the hybrids that you're going to sell to a farmer.

So on that Slide 5, you'll see some numbers, our sorghum business about $10 million in sales in 2020, moving to $11 million, where we had a little bit of Double Team sales to $13 million this year, where we had a few million bucks of Double Team sales to $22 million, where we're going to have a significant amount of Double Team sales.

And obviously in future earnings calls, we'll be talking about our progress there. So we also think that we have additional genes coming. We've talked about that also before. So it's a robust R&D platform. Basically the second gene we've talked about is a dhurrin-free gene and that the usefulness of that gene, why the farmers want to buy that. Dhurrin-free is a precursor to hydrogen cyanide, obviously a compound that can either kill or make cows and sheep very sick and so our hybrids do not have any dhurrin in them, they’re dhurrin-free.

And so they don't make the cow sick because they don't have any – they don't have the precursors to hydrogen cyanide. So we're pretty excited about that crop. And that crop continues to be in development. It's still probably three or four years out from the first sales, but we like to have additional genes coming. We were sort of birthed in the cradle of Monsanto where stacked genes were really important. So we know the value of additional genes in each of our crops.

Going on to Slide 6, just a little bit about our international forage business. So really that's our business that we have in Australia. It's a lot of these crops are fall planted crops. So they're planting in the Southern Hemisphere now, as we planting the spring crops in the Northern Hemisphere, and we're talking about alfalfa and the clovers and vetch and forage cereals and grasses and other pasture species like that.

As you guys know who have followed the company were fairly dominant in that market in Australia, we have a relatively large business there with strong distribution. And then we also sell from Australia to 30 other countries including the Middle East, mainly to the dairy industry. And it's mainly alfalfa varieties that are used in the dairy industry there.

Moving on to Slide 7, if you're following me in the deck, this is a little bit of a new description for everybody. So I've talked about these crops before, but now we're grouping them in a category that we're calling specialty crops. So stevia is the first one on the left there, of that Slide number 7. And it is as you all know a non-caloric sweetener with a very fast growing market around the world. And we have an agreement with Ingredion to test our materials so that Ingredion can basically grow stevia leaf in the United States and then process that leaf and sell it to the U.S. stevia market, which is the largest market in the world.

It doesn't take much imagination to look at the 200 ships outside of Shanghai Harbor and understand that making supply closer to the market, building supply closer to the market is something that everybody is trying to do right now. And we think producing your stevia in America for the U.S. market is going to be the simplest, easiest and most profitable opportunity for stevia leaf in the next decade.

But the crop that I really want to spend a little time talking about, which I've mentioned before is camelina. So camelina is in the Brassica seed family. It's an oil seed crop. So it is in the same family as canola seed and mustard seed has a very yellow flower like mustard seed and canola. The crop itself is planted as a second crop. So our parents always told us, they weren't making any more acres of farmland.

Well, so farmers around the world are going to take that same acre, where they grow food as their major crop. And they're going to plant a second crop, a winter crop on that same acre after corn or wheat or soybeans or sorghum. And they're going to plant something like camelina and camelina is a cover crop that people have been reading about, but it's a harvestable cover crop. It's a useful cover crop, right. It produces oil that you can harvest and send to a biodiesel facility and make into a low CI, a low carbon fuel like diesel, or you can frack it to jet fuel. But it's a huge opportunity to basically provide vegetable oils as the source of transportation fuels rather than suck petroleum out of the ground, which is going to release a carbon to the air and make the problem of global warming more difficult.

So we basically use the sunlight to grow these oils in a second crop. So we don't compete with the food industry for that acre. The farmer gets the benefit of planting a second crop, which he can sell and he can make additional revenue on. And that’s going to be just a huge opportunity for the world and for U.S. farmers in particular.

It’s our calculations actually, because the diesel market is so large in the U.S. that if you planted camelina as a second crop on every acre, so you still have all the food acres about 360 million acres of food acres in the U.S. But if you planted camelina on every acre of crop land that’s farmed in America, you still could not produce enough oil to supply all of the diesel needs in a typical year of America. So it’s just a huge opportunity. And it’s catching a lot of interest from lots of companies.

So I’m going to go on to the next slide where I’ve just given you a couple of recent industry deal activities. And these are all from the month of February of this year, so sort of 60 day old kind of stuff. Chevron purchased a company – public company called Renewable Energy Group for about $3.1 billion, $3.2 billion in February. BP signed a deal with Nuseeds to produce these kind of renewable fuels and jet fuel from a company that is a cousin of camelina called caranata in Australia where we also obviously have a big footprint on the farming industry and hope to move our biofuels business not just in America, but to Australia eventually. And that deal was also done in February.

And the third deal I’ve listed there is Exxon invested $125 million in Global Clean Energy, a company that they had an offtake agreement with previously, but that’s to use camelina to produce biodiesel in their Bakersfield, California plant. So lots of deals being done, lots of oil companies looking around for partners, there’s probably fewer partners in the ag space than there are oil companies looking for partners. We’ve actually been talking to partners for about a year, but we haven’t come to an agreement with anybody because we want to choose the right partner. So that will be news, hopefully coming here reasonably soon about who that partner might be.

Going on to Slide 9. Now I’m on the fourth of our four key businesses, growth areas, the U.S. forage and alfalfa business. This one is kind of got a mixed report card. We’re trying to figure out what to sort of do there. Basically the problem is that the dairy industry, which used to be a Northern U.S. industry, sort of Michigan, Wisconsin, New York State, think about those places. It’s a dormant alfalfa market. That means that the alfalfa can survive the winter because it goes into dormancy.

As you guys on the call might remember, I was in the dairy industry previously, milking about 10,000 cows down in Florida. Love the dairy industry, but the dairy industry has changed over the last few decades and those cows, those dairies are moving south. And so the states of Colorado, New Mexico, Arizona, Texas have been the growth areas for the dairy industry and those traditional states of Michigan, Wisconsin and New York State have been losing dairy cow headcount.

And the problem for us is the dormant alfalfa people, when you go to those warm states, you don’t need dormant alfalfa anymore, you need non-dormant alfalfa. And so we’re trying to figure out and deal with that. I’ll just give you a little bit of a feel based on my dairy experience. So those Northern dairies, if you can get 60 to 75 pounds of milk per cow per day, that’s the sort of metric for measurement about your efficiency of feed conversion. That’s a pretty good yield on cows, but in the warmer states, because the cows like it, it’s like going on vacation to Florida the cows are happier. They yield 100 pounds of milk per cow per day, instead of that 65 to 75 and that’s why the industry has migrated south because of the higher feed efficiencies and the higher milk yields per cow. So the dairy industry is more profitable in those warmer states than it is in the cooler states and the dairies are bigger.

So that slide shows our sales being kind of flat around that $11 million revenue range. And we will be sort of trying to figure out what to do with those assets there. We have the assets include a big germplasm base that we purchased from Pioneer. So there’s many, many decades of Pioneer plant breeding embedded in that germplasm base. And the germplasm has the reputation of being the most disease resistant germplasm around in the country. So we’re looking at options for that. And we also have a state of the art breeding station that’s two, three years old up in Nampa, Idaho. And then we have a production plant that can be used to clean seed both alfalfa and then this camelina that I mentioned as the oil seed second crop that we’re looking for biofuels, so all those are very exciting things.

And I just like to summarize kind of where we are and just say that you’re going to be hearing more from us about these four areas, these four key centers of value. And that would be again, the U.S. sorghum with genes business, the number two, the international forage business that is basically our Australian business and our Australian export business, these specialty, these two specialty crops that we’re so excited about stevia and camelina. And then the forage – U.S. forage alfalfa business that has seen cow migration and is challenging us to decide on what opportunity really we should make of that.

And so we are realigning our cost structure to support these four businesses and to reflect what we think is the opportunity in each of those. And in the short-run, as you saw from the Double Team slide, we’re expecting a big growth in Double Team sales, next year will be our third year in the market. Finally, our seed production is catching up to the demand and we can supply more bags of hybrid seed to our customers. And we expect a significant amount of market share gain there. And if you go to Slide 5, you can sort of see our sales numbers there.

So with that, I’m just going to end my part of the conversation here and turn the whole presentation over to Betsy, who our CFO will go through the numbers and some details with you. Betsy, please.

Betsy Horton

Yes. Great. Thank you, Mark and thanks to everyone joining us on the call this morning. Let’s start on the revenue line. Core revenue, which excludes revenue to Pioneer was $23.2 million for the third quarter, a decrease of 2.9% compared to $23.9 million in the third quarter of the prior year. The decrease in core revenue for the quarter was due to a few factors. First, a decrease in Australian domestic revenue of approximately $2.5 million due to non-recurring discounted stock sales that occurred in Q3 of 2021, second, timing pushback of Australian domestic sales due to the unseasonable heavy rainfall, and $0.5 million lower services revenue quarter-over-quarter. These three factors were offset by higher U.S. sales this quarter compared to last year, both from ET sorghum sales and alfalfa sales into the Middle East.

An important note we’ve made in the past that I want to reiterate today. Core revenue and total revenue will be the same number in fiscal 2022. We will continue to reference core revenue as long as we are comparing against fiscal 2021 numbers. Our prior year Q3 results include revenues from Pioneer of $8.5 million, which brought year ago total revenues to $32.4 million.

As we’ve discussed during the last few calls, we like many other companies are experiencing certain supply chain and logistical challenges, which is resulting in a shift of the revenues to the right. You may recall, we had about $5 million of revenue slated for Q4 2021, which shifted into Q1. Then in Q1, the amount shifting forward reduced to $3 million. We’re now seeing that $3 million still being delayed into Q4. The limited availability of overseas containers and ongoing congestion at the courts continues to delay shipments and complicate our operations. We have tried to be as transparent about these shifts as we can and expect these dynamics to persist. The annual revenue guidance we have put forth of $80 million to $85 million takes into account these dynamics, to the extent we can forecast. Therefore, we have already accounted for certain shipments, we would have historically made in June that will likely shift into fiscal 2023.

Now turning to margins. GAAP gross margins were 11.7% compared to 19.1% in the prior year’s third quarter. Adjusted gross margins, which excludes the impact of inventory write-downs were 16.6% in the third quarter compared to adjusted gross margins of 20% in the third quarter of the prior year. However, if we were to exclude the contributions from Pioneer from last year’s results, which again were not repeated this quarter adjusted gross margins last year would’ve been only 15%.

So when you look at the improvements made during the quarter on a relative apples-to-apples basis, margins improved by 160 basis points. Unfortunately, this margin improvement is disappointing and would have been better by 500 basis points. However, unexpected higher production costs impact our margins due to lower than anticipated volume, inflation and logistical costs. We have also implemented a new inventory reserve process in Q3 that added to our inventory write-down.

Historically the company has taken write-downs at the point at which the requirements for the lower of cost or market adjustment have been met. Going forward in consultation with our auditors, we are going to accrue for reserve each quarter with the goal of better matching the timing of the costs with the benefit. We believe this will minimize the large one-time inventory write-downs that have been prevalent in our business.

Now we’ll transition to operating expenses. Our GAAP operating expenses for the third quarter of fiscal 2022 were $8.9 million compared to $8.2 million in the third quarter of the prior year. Please remember that last year we had a $1.3 million gain on disposal of property plant and equipment that was reflected as a reversal of operating expenses. When you exclude that gain, we showed a decrease in OpEx by about $600,000 for the quarter. This is from lower R&D and G&A expenses across the company. At the beginning of the work that Mark mentioned, we are aligning our cost structure to support our key centers of value. As such, we have a plan to operate – to reduce operating expenses by about $5 million annually as Mark mentioned. I’ll go into a bit more detail on this momentarily.

At the adjusted EBITDA line, we had a negative EBITDA of $4.5 million for the current quarter compared to negative EBITDA of $0.2 million in the prior year. Excluding Pioneer margins, the prior year quarter was negative EBITDA of $2.6 million. The biggest impact to EBITDA was the decrease in gross profits discussed a moment ago. Given the impact of revenues and gross margins, I’ve walked you through, we fell short of our adjusted EBITDA and cash flow targets this quarter. As a result, we have worked with our U.S. lender and have entered into amendments and waivers with them to address the non-compliance with certain financial covenants as of March 31, 2022. I can tell you as well, that we are actively pursuing refinancing of the CIBC debt facility at this time.

I want to bring us back to the slide presentation posted on our website and that Mark went through a moment ago. In the deck, we have begun to break out our revenue by our key crops or regions. This consists of U.S. sorghum, international forage, our U.S. alfalfa and then our specialty crops area, which at this point is still in development stage. This is the first time we’ve done this and we believe it provides important insight into the business.

We’re also trying to provide some insight into what FY2023 revenue could look like from these three areas. I want to make a very important note here that we have not included revenue from our specialty crop area in the slide presentation or any potential licensing transactions we may enter for various crops, such as Double Team and therefore, this is not formal guidance for FY2023. We will introduce guidance in September in connection with our year end conference call.

But this is a bit of a view into how we see the various businesses. So as I’m sure most of you have done in adding up the three areas we’ve provided, today we’re estimating around $90 million in total revenue, but it may not include other revenue that could be generated from specialty crops.

Additionally, I want to point out that when you look at fiscal year 2022 expectations and adding up the three sections, you’ll get to $77 million. The delta between the $77 million and our guidance is sales in some non-core key centers of value, such as revenue we’ve recognized so far this year from sunflower, wheat and others that contributed a few million dollars.

Let’s go into each section a bit more in detail from a numbers standpoint. As you can see on Slide 5, which highlights U.S. sorghum, we’ve seen steady growth in the last few years, but anticipate a significant uptick in revenue next year of more than $9 million or 69%. Due to the high margin nature of Double Team, which is the clear driver in this area. We’d like to note that we are also anticipating a significant increase in growth process. It is this driver that will largely help us achieve our goals in driving towards profitability. We believe Double Team will continue to grow in the years to come and be a continued growth and profit driver for us.

Transitioning to Slide 6, we see stable growth in our international forage business. We believe we will see 8% revenue growth in this division in fiscal year 2023. As Mark mentioned, we benefit from some significant competitive advantage, including a 40-year operating history and it provides significant value to this area.

I will skip over specialty crops and move to our U.S. alfalfa division. As you may recall, this is largely our dormant alfalfa seed business, which we originally purchased from DuPont in 2014 for about $42 million inclusive of a supply agreement, breeding facilities, processing facilities, and germplasm. There was a 10-year supply agreement from which we profited over the first five years of the agreement and then subsequently exited that agreement in May of 2019 receiving $45 million and the sale of remaining inventory of $25 million. We continue to own all of the germplasm, breeding stations, processing facilities, and a business that is doing about $11 million per year in revenue. Since that facility is not running in its normal optimal capacity margins in this business are not where they could be.

That said, this is a high asset value business with a strong operating history. Our goal is to leverage the assets going forward, which may include our camelina biofuel opportunity. As Mark mentioned, we also plan to monetize assets that don’t fall within our key centers of value, such as our wheat program. We know that there’s a lot of work ahead of us, but I believe we have a clear focus and a strong set of assets that have significant operational as well as inherent value.

With that, I will turn the call back over to Mark.

Mark Wong

Thanks so much, Betsy. I just want to make a couple of concluding comments. One is just that we absolutely believe that we can concentrate on the first three of our four areas of interest. And that would be the sorghum technology in the U.S., the international forages, the specialty crops, and then try to work hard to figure out as Betsy suggested what we do with that asset base in the U.S. forage alfalfa business that we have.

We’d like people to remember and use our wheat JV as a real example of the kind of things that we believe our technology and our years of experience in the industry allow us to achieve in that case, we partnered with people that we’ve known for many years. We sold part of our wheat business in the form of a JV and kept the piece. We reduced our investment. And we were able to harvest some cash out of that deal and strengthen our germplasm position on a worldwide basis. And also have our partners contribute their HB4 gene, which we believe is going to be valuable as we see more climate change in each of the decades going forward. And it’s in a crop that obviously has gotten a lot of press in wheat, which because of the war in Ukraine is selling at $11, $12 a bushel sort of almost double of what it was last year before the war.

And it just points out that supply chain issues as well as weather conditions can really affect the amount of grains available on the world market. We just think that, these kind of strengthening moves on our part where we enter into really a smaller share of a bigger business of a better business is the kind of thing that we’re looking to do. So thanks for joining the call today. We’re really excited about the opportunities to increase the profitability in S&W, and at the same time, control our cost or reduce our cost commitments and support our four focused centers of value.

So thank you so much for being on the call. And we’ll be happy to take questions, and I’ll turn the call over to the operator. Thanks so much.

Question-and-Answer Session


[Operator Instructions] And our first question will come from Ben Klieve of Lake Street Capital Markets. Please go ahead.

Ben Klieve

All right. Thanks for taking my questions. Plenty to talk about here, but I’d like to start with one on the quarter itself and Betsy the comments you made around the inventory write-down issues. This has been one-item that has kind of come up quarter-after-quarter here for some time, and I appreciated your comments here. I’m wondering if you can address kind of how the changes in calculating this are going to be really affecting the financials going forward here?

Betsy Horton

Hi, Ben. Yes, thank you for the question. So in the past, we’ve always followed the lower cost or market rules, and work with our auditors to measure germ and to look at the value of the inventory each quarter, and then reflect any write-downs that are needed along the way. I think what we recognize in the industry is that best practice is to not only do that practice, but also to look at an estimate of what you – what we think a certain portion of inventory will be subject to that by through the life cycle of that seed. So rather than waiting until that germ hits that – hit that point in time with crops, especially like sort on that you have a life cycle of the product wanting to want, put in a reserve to match the cost of that inventory degradation, I guess, at the end of the life cycle throughout the entire time that we are selling the product and kind of matching that, while we’re taking the revenues and the margins from the product at the beginning of the life cycle, we’re also building a reserve to have onboard for the end of the life cycle, if that makes sense.

So, I think what is intended to do is, like I said, match the cost with the benefits, but also to smooth things over a little bit. I know in the past, we’ve had some pretty chunky, chunky write offs and wanting to kind of recognize those throughout the life rather than having them hit all at once those germ tests happen.

Ben Klieve

Okay. And then I guess a quick follow up question. So that all, that all makes good sense. I mean, should we consider this then something that the kind of $2 million to $3 million a year of inventory right, sounds that you’ve had historically that we’re – that some level like that we’re going to see, but just kind of on a smoother run rate basis, or do you think that the level is going to be meaningfully above or below that?

Betsy Horton

I think probably our historical ones is a good place to start. We are also doing a lot of efforts around our life cycle management to try and reduce that amount over time. But I would say a history is probably, is what we’re using – history is what we’re using for our estimates for the reserve going forward. So it’s a good place to start.

Ben Klieve

Okay. All right. Fair enough. So a lot of developments here to discuss, I’ll try to limit my questions here, but first one on camelina, I mean, Mark, I wholeheartedly agree with your with your comments around the opportunity provided by this crop. I’m curious one, if you guys have done any work with this crop, historically, maybe baked into the kind of broad kind of forage category that you’ve discussed; that I know contains a number of different species. So curious, if you’ve done any work on this crop historically. And then two, around your thoughts on kind of penetrating this market from a Greenfield perspective versus partnering with one of the couple of players that are – that have been working on developing this crop here over the last few years?

Mark Wong

Sure, Ben. So, we have a long history in camelina with Don Panter who actually ran a camelina company about a dozen years ago. And we have been breeding the crop for a few years now, and we have our own germplasm base to begin work on. I would say that for sure though, we’re going to have a partner, right? I mean, there it’s a big market, and we’re full of opportunity, but we’re a relatively small company. So, we’re trying to figure out whether it makes more sense to work with a big national oil and gas petroleum company or a regional one in the U.S. And so those are kind of the discussions that we’re in right now.

And it’s an opportunity that we’ve been talking to people about for a year. And like I said, in my presentation February, a bunch of deals were announced. So it’s pretty clear that everybody’s lining up under this whole idea of the second crop, for fuels that is not in competition with food production that that’s where the petroleum industry wants to go. They want to use vegetable oils as much as possible, because of the low carbon footprint. So, we’re trying to figure that out. We’re the best opportunity for S&W.

Ben Klieve

Right, right. No, I think you’re right. That’s become increasingly clear here over the last few quarters. One more for me, and then I’ll get back and queue on HB4. Sounds like you guys are expecting potentially a little bit of near term cash inflow here for your contributions to the JV. I’m wondering if you can outline a couple of things, one and kind of the immediate term cash flows either inflows or potential outflows here as this initiative takes off.

And then longer term, I’m wondering Mark, if you can talk about the challenges or maybe not challenges, but the different business model that Australian wheat has with its endpoint royalty system, and the degree to which you think that HB4 is something that can be effectively commercialized in that market, or if it’ll be – that’ll represent a challenge?

Mark Wong

Yes. So, we did receive some cash upfront for selling the 60% of the – of our assets in the JV to our partners. And of course, we’ll be receiving some cost savings over the current and future years, just because we’re only a 40% shareholder, and we’re only paying 40% of the ongoing costs. So, we received cash and we reduced our expenses and we strengthened the germplasm base of the company because our partners are weak guys in Europe and South America. And they’ve already – and they’ve been working in those markets for many, many decades.

On HB4, the issue, the challenge of all genes in food crops is, what will the regulatory environment be like? And what will be allowed? And HB4 for sure is the GMO. And so how Australia and consuming countries will look at that gene is, is in strong debate around the world. Clearly as supplies of wheat go down and the price goes up, there’s more incentive to allow genes that would either reduce cost of production or increase yield. And HB4 is water stress gene. So it’s really a good gene for current global warming situations where you have parts of the world, who that are getting dryer and dryer.

So, we’re pretty excited that, and we didn’t have to do the work, developing the gene and everybody on the call knows how much work it is to develop a gene. We have our Double Team gene in sorghum. And this is between us and our partners. These are really the only two genes that are being developed by the smaller, middle market companies that aren’t a Big Four. And so we’re pretty excited that our partners are pretty innovative and that wheat is a crop that we didn’t have to spend the money and the time to develop the trade, but we have the ability to help market the trade and get the – some of the value from the trade. So, we’re pretty excited about that.

Ben Klieve

Very good. Thanks for that. I’ll appreciate your comments. And I’ll jump back and queue.

Mark Wong

Sure. Thanks, Ben.


The next question comes from Kurt Caramanidis of Carl M. Hennig, Inc. Please go ahead.

Kurt Caramanidis

Hi, thanks for taking my call. Good to see you getting in the camelina business. I’ve been following that through another company I’ve got in the renewable diesel market seems to be in high growth mode. Biodiesel is probably a bigger market right now, but that seems to be a long runway. So a great opportunity for you. My question is, with your financial plan, are you confident basically am I thinking about this right? Really getting to next year where Double Team really helps the whole, bring the whole boat up and, gives you a lot more stability?

Mark Wong

Yes. Thanks for the question. I mean, yes, we are confident. And as Betsy said, we’re in the process of renegotiating some of our bank agreements and stuff, and we’ve been raising money in the market equity money in the market to fund our losses. So yes, we are confident that next year’s going to be a really good year for us. And that Double Team is going to, as Betsy also said, lead the way to profitability it’s – as we’ve said before, it’s a 70% margin kind of product. And for the majority of those sales gains that we showed on slide, I think it is five, a really Double Team.

So, we’re very excited about that. And we think it’s going to make a significant difference in our EBITDA and combined with the – our efforts now to reduce some of our costs and to do it through some of these kind of JV deals like we, where we basically get some cash upfront and we save some of the money, because we have a partner also paying some of the cost. And, if there’s a long time to product fails, like in sunflower, we’re not against frankly closing something down and reassessing, where our best opportunities look like. We always have a lot of irons in the fire. That’s kind of what I’ve been used to doing over the 40 years.

And you know, the problem with that is you can get sort of too many things to do. And so we’re in the process of cutting some of those back or JV those with some people, with different people so that we can improve the strategic fit that we have in a market improve the germplasm base, which is always the most important thing in the seed industry. And yet, concentrate on these businesses that we really have the most opportunity.

Kurt Caramanidis

Great. And then would the camelina be calendar year 2023, possibly as far as what you’re working on?

Mark Wong

Yes. We’ve grown camelina as a service for other companies, which were not permitted to disclose, but we have provided some of the camelina seed to the camelina sort of/biodiesel industry already. And it’s because, we’re in the perfect place to grow it up in Idaho. And our plant is kind of in the perfect location to process it. And all those things are cost advantages that that we think will continue to be part of our plan in camelina.

Kurt Caramanidis

Great. Thank you very much.

Mark Wong

You’re welcome.


The next question comes from Jonathon Fite of KMF Investments. Please go ahead.

Jonathon Fite

Hey, good morning, Mark. Good morning, Betsy. Appreciate your time. I have a couple questions morning just on, the savings opportunities and kind of the value drivers in these noncore areas. So, when you all talk about potentially capturing $5 million in savings, are those potentially cash savings? Is it, divesting of some assets, you’re just capturing some depreciation savings. I was wondering if you could just kind of characterize, the $5 million savings opportunity.

Mark Wong

Yes. I mean, we’re, we have that target as a real cash reduction of our overheads. And so it’s real cash. It’s not depreciation or a non-cash item. We think that in realigning for the best opportunities, which all companies should be doing and we also for certain should always be doing, but there’s an opportunity to save some cost. There’s the opportunity like in the week deals to improve your strategic position and save some cost and get some cash upfront. And so, we look for deals like that too. But we’re not against, closing something down to save money, if we think, that money is better spent in one of the other core areas. And, our view of some of these things continues to change as a couple of question, question errors have asked on this call, the camelina thing is just a fascinating opportunity.

I mean, as you look at global warming and you see the commitment of oil companies, big oil and regional oil companies to look at these vegetable-based fuels and, you see the deals that are being done, there’s just not enough oil. There’ll never be enough oil from ag. And it’s going to be real interesting to sort of see how clever the ag industry is about increasing oil yields as a second crop in some of these crops like camelina, and how clever the industry is also about making corn oil and soybean oil available and yet still satisfied food demands. It’s, going to be an interesting next 10 years for sure.

Jonathon Fite

Yes. It seems like a very interesting opportunity if we can get there. Can we talk about the value drivers on the noncore area, is if someone else we’ looking at those assets, is it the revenue opportunity? Is there a pretty significant asset base that comes with that, that has maybe kind of some balance sheet value that is maybe, kind of hidden behind accumulated depreciation? I was just wondering, what kind of the asset base that comes along with that couple million dollars of revenues that are in that other noncore sales arena?

Mark Wong

Sure. I mean, the best opportunity for us as a joint venture or seller and an acquirer is to find somebody who has incremental value in assuming the whole business, right. And they would be a company that’s in that business already and would be able to overlay our sales on top of their current sales force and produce their seeds through our plants and do their research in our research facility and get some synergies from a combination. So that’s the type of partner that we look for first.

But then, as you said, the asset base is pretty strong. So there’s germplasm in these different areas of business that we have. There can be production plants. And so some people, that will be more of interest, but clearly an overall value basis. It’s always better to find someone who wants the business as an ongoing business and sees synergy profits in acquiring it.

Jonathon Fite

And do you foresee potential JVs or sales in that space offsetting the cash burn over the next couple of quarters? Or until we kind of reach this breakeven point, maybe sometime in 2023 or later, what’s the strategy for alleviating the cash burn? Is it continued private placements or do you think these asset sales cover that that cost?

Mark Wong

There’s potential that the asset sales could cover the majority of those costs? The timing is the question, right? Because these kind of deals have a little bit of a life of their own. You can’t sort of always get them done on a timeline that that sort of meets all of your own requirements. And it’s also the cash burn is pretty well understood by us. So that’s why we’re trying to cut real expenses to cut into that cash burn. That’s why we’re pointing towards Double Team with its high margins and going in our sorghum business from $13 million to $22 million, that’s a lot of EBITDA. So all of those things together we think are going to contribute to cutting that EBITDA loss and getting much closer to breakeven, or profitability here in the next couple of years.

Jonathon Fite

And then I just, one final question, I guess, are the assets on the Australian forage crop business portable to the U.S.? I mean, if our U.S. business is probably dormant, I’m assuming that the Australian forage crop business is largely non-dormant, is that portable into this market, so that we can take advantage of the dairy shift to the south or not really?

Mark Wong

It’s really kind of not portable. And but you’re right in asking the question. It’s an excellent question. I mean, we are in the non-dormant alfalfa business in Australia selling it to the middle – selling those kind of seeds to the Middle East. It’s very interesting, we account for about half of the production of dormant alfalfa in, dormant alfalfa seed in Australia. So, we’re a huge market share controller in Australia. And there really isn’t the capacity even if the costs were okay, and with transportation costs being what they are, it really doesn’t make much sense to send Australia non-dormant to the U.S. for sale. And we have, and we’re supply limited frankly in Australia, all the seed we can grow is going to the Middle East. Okay. So, we have no more capacity.

Jonathon Fite

Well, good luck. And I think the transition to at least eliminating the cash burn is pretty critical to then, make it to the other side and benefit from these opportunities that are in the pipeline. Appreciate your efforts.

Mark Wong

Thank you. Appreciate that


[Operator Instructions] And our next question comes from Brett Reiss of Janney Montgomery Scott. Please go ahead.

Brett Reiss

Hi Mark. Hi, Betsy.

Mark Wong

Good morning.

Brett Reiss

I’m just curious with the camelina initiative. Is that going to produce carbon credits that could possibly be sold on these nascent, carbon credit exchanges and is that a potential incremental source of revenue to the company?

Mark Wong

Sure. So right now, I think it’s good to focus on the near term next, sort of couple of years. And the real benefit of in the next couple of years is having a source of biodiesel that basically has high CI have has high carbon intensity. So that, or low carbon intensity, sorry, is beneficial in terms of carbon that’s released in the atmosphere. But the biodiesel market is pretty on fire right now, just because everyone’s looking for these kind of fuels that really are environmentally more friendly than regular diesel that’s made from petroleum extraction.

In the longer term, maybe after three, and so there are, government programs and some of those crops, there’s a blending credit, there’s a C4 a credit that is given based on how, what kind of production you have converting the oils to biodiesel? And eventually there will be carbon credits, but the industry is trying to figure out how to measure the carbon. That actually is sequestered in the soil each year.

And as those technologies get better, those carbon credits will become available, and they’ll become more robust in the sense that people will really believe that amount of carbon has actually been sequestered. And those carbon credits will sell on a carbon exchange and the farmer will get the benefit of that. And potentially we could also participate in that market in some way, which frankly we have not decided yet. But yes, the farmer for sure will generate a carbon credit and he will get benefit from that in addition to having a, so he will have on every acre, a food crop, a second crop, like camelina or corn [ph] that is an oil seed crop, and he will get a carbon credit. That is the future of agriculture.

Brett Reiss

Interesting things happening.

Mark Wong


Brett Reiss

Carry on, sir.

Mark Wong

Well, you’re very generous, but yes, we’re very excited. i mean, some of the callers have pointed out our losses and we take those seriously and we’re trying to, figure out now that we’ve spent all the money in developing all these new products, like Double Team. We definitely need to cut our cash burn and our EBITDA loss, but we have so many opportunities. It’s just the fascinating time to be in agriculture. I’ve been in agriculture as everyone knows many, many years, many decades, but this is really fantastic and a lot of fun.

Brett Reiss

Thanks for taking my question.

Mark Wong



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

Mark Wong

So I just want to thank everyone for attending the call today. Hopefully we presented some information with a little bit more detail that gives everyone all our investors and all our prospective investors, a bigger insight into what’s happening in our traded U.S. sorghum business and our international forage business and our specialty crop business, which as you’ve heard, we’re very, very excited about.

And we’re trying to do kind of deals like in our U.S. forage and alfalfa business that mimic what we did in wheat, where we basically get some cash up front. We minimize our burn because we have partner participation and we strengthen our germplasm positions. So we’re more competitive around the world. Those are win-win situations for S&W and so thanks everyone for being on the call. And we look forward to talking to you all next quarter. Thanks again.


The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.

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