S&W Seed Company - Q3 2022

Transcript

Operator (participant)

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 listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. 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 (Managing Partner)

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 there 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. 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, intend, 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 in a 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 30th, 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, including adjusted margins and EBITDA.

These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, 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. 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 (President and CEO)

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 year for S&W, when we book our sales in the third and fourth quarter. 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. Because our business in the Australian market, our other big market, is winter-planted forage crops, we're also planting forage crops with farmers. That's why our third and fourth quarters are always the largest for us. As Robert said, we have a presentation for you today. Go on the website, please, and get that. I am 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. We're very excited because we think it's a much cleaner way to match our opportunities and our expenditures for the future. I'll go first in the presentation to slide three. You'll see in slide three that we're trying to break our business down after undergoing a strategic review with senior management here at S&W. We're gonna sort of talk to you now, this year and in the future about our four key centers of value.

On slide three, 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. Our specialty crops, which I'm gonna 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. Then I'm gonna talk about our U.S. forage and alfalfa. If you all stay with me on that presentation, and I will reference the slides as we go along.

On slide four, you'll see that in focusing on these four major places of opportunity, businesses of opportunity, we also think that we're going to be able to reduce our OpEx about $5 million, and you'll be hearing 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 as a JV called Trigall Genetics, and we're gonna call that Trigall Australia. They are a worldwide wheat breeding company with operations in Europe and in South America. They bring to the partnership also a gene for drought tolerance called HB4.

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're 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. You know, 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. A very busy time for S&W on lots of fronts.

I'm gonna give you a little bit of a description of each of those four growth areas. On slide five, 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 that we have embedded in grain sorghum, which allows the farmer to spray over the top and kill grass weeds. 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. That has been a product that farmers have been really signing up to buy. We're basically sold out again in the 2022 season as we were in the 2021 season.

We're looking to the 2023 season as our first really big year of sales. That's because it takes just that long to grow the hybrids, the mom and dad seeds that you need to produce the hybrids that you're gonna sell to a farmer. On that slide five, 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 gonna have a significant amount of Double Team sales. Obviously, in future earnings calls, we'll be talking about our progress there. We also think that we have additional genes coming. We've talked about that also before.

It's a robust R&D platform. Basically, the second gene we've talked about is a dhurrin-free gene. That, the usefulness of that gene, why the farmers wanna buy that, dhurrin is a precursor to hydrogen cyanide. Obviously, a compound that can either kill or make cows and sheep very sick. Our hybrids do not have any dhurrin in them. They're dhurrin-free, and so they don't make the cows sick because they don't have any. They don't have the precursors to hydrogen cyanide. We're pretty excited about that crop. 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 six, just a little bit about our international forage business. 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 plant 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, we're fairly dominant in that market in Australia.

We have a relatively large business there. With a strong distribution. Then we also sell from Australia to 30 other countries, including the Middle East, mainly to the dairy industry. It's mainly alfalfa varieties that are used in the dairy industry there. Moving on to slide seven, if you're following me in the deck, this is a little bit of a new description for everybody. I've talked about these crops before, but now we're grouping them in a category that we're calling specialty crops. Stevia is the first one on the left there of that slide number seven. It is, as you all know, a non-caloric sweetener with a very fast-growing market around the world.

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. We think producing our 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. The crop that I really want to spend a little time talking about, which I've mentioned before, is Camelina.

Camelina is in the Brassica seed family. It's an oilseed 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. Our parents always told us, you know, they weren't making any more acres of farmland. Well, farmers around the world are gonna take that same acre where they grow food as their major crop, and they're gonna plant a second crop, a winter crop, on that same acre after corn or wheat or soybeans or sorghum. They're gonna plant something like camelina. 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 crack it to jet fuel. 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 gonna release carbon to the air and make the problem of global warming more difficult. 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.

That's gonna 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. If you planted Camelina on every acre of cropland 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. It's just a huge opportunity, and it's catching a lot of interest from lots of companies.

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

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. 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 wanna choose the right partner. That will be news hopefully coming here reasonably soon about who that partner might be. Going on to slide nine.

Now I'm on the fourth of our four key businesses, growth areas, the U.S. forage and alfalfa business. This one is kinda 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. Those cows, those dairies are moving south.

The states of Colorado, New Mexico, Arizona, Texas have been the growth areas for the dairy industry. Those traditional states of Michigan, Wisconsin, and New York State have been losing dairy cow headcount. 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. 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. Those northern dairies, if you can get 60-75 pounds of milk per cow per day, that's the sort of metric for measurement of your efficiency of feed conversion. You know, that's a pretty good yield on cows.

In the warmer states, 'cause the cows like it, you know, 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 65-75 pounds, and that's why the industry has migrated south because of the higher feed efficiencies and the higher milk yields per cow. The dairy industry is more profitable in those warmer states than it is in the cooler states, and the dairies are bigger. 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.

There's many, many decades of Pioneer plant breeding embedded in that germplasm base. The germplasm has the reputation of being the most disease-resistant germplasm around in the country. We're looking at options for that. We also have a state-of-the-art breeding station that's 2-3 years old up in Nampa, Idaho. 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. All those very exciting things. I'd just like to summarize kind of where we are and just say that, you know, you're gonna be hearing more from us about these four areas, these four key centers of value.

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 two specialty crops that we're so excited about, Stevia and Camelina. The 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. We are realigning our cost structure to support these four businesses and to reflect what we think is the opportunity in each of those. You know, in the short run, as you saw from the Double Team slide, you know, we're expecting a big growth in Double Team sales next year. It 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. If you go to slide five, you can sort of see our sales numbers there. With that, I'm just gonna end my part of the conversation here and turn the whole presentation over to Betsy, our CFO, will go through the numbers and some details with you. Betsy, please.

Betsy Horton (CFO)

Yeah, great. Thank you, Mark. 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 two and a half 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. Third, half a 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 was 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. 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 ports 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-$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 have been only 15%. 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 500-500 basis points. Unexpected higher production costs impact our margins due to lower than anticipated volumes, 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 a reserve each quarter with the goal of better matching the timing of the costs with the benefits. 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 and 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 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 31st, 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 are also trying to provide some insight into what FY 2023 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 crops area in this 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 FY 2023. 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.

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, in 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 five, 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 gross profits. It is this driver that will largely help us achieve our goals in driving toward 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 opportunities. 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 (President and CEO)

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. You know, 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 peace. 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. 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.

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 kinds 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. 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 costs or reduce our cost commitments and support our four focused centers of value. 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.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Once again, that was star, then one to ask a question. At this time, we will pause momentarily to assemble our roster. Our first question will come from Ben Klieve of Lake Street Capital Markets. Please go ahead.

Ben Klieve (Senior Equity Research Analyst)

All right. Thanks for taking my questions. Plenty to talk about here, but I'd like to start with one on the quarter itself. Betsy, the comments you made around the inventory write-down issues. You know this has been a line item that has kind of come up quarter after quarter here for some time, and I appreciate 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 (CFO)

Hi, Ben. Yeah, thank you for the question. In the past we've always followed the lower of 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 recognized in the industry is that best practice is to not only do that practice, but also to look at, you know, an estimate of what we think a certain portion of inventory will be subject to that by the time you know through the life cycle of that seed.

Rather than waiting until that germ, you know, hits that point in time, you know, with crops especially like sorghum that, you have a life cycle of the product wanting to put in a reserve to match the cost of that inventory, you know, 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 on board for the end of the life cycle, if that makes sense.

I think what it's 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 write-offs, and you know, wanting to kind of recognize those throughout the life rather than having them hit all at once those germ tests happen.

Ben Klieve (Senior Equity Research Analyst)

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

Betsy Horton (CFO)

I think probably our historical ones is a good place to start. We are also doing a lot of efforts around our lifecycle management to try and reduce that amount over time. I would say in history is probably what we're using. History is what we're using for our estimates for the reserve going forward. It's a good place to start.

Ben Klieve (Senior Equity Research Analyst)

Okay. All right. Fair enough. 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 comments around the opportunity provided by this crop. I'm curious, one, if you guys have done any work with this crop historically, you know, maybe baked into the kind of broad kind of forage category that you've discussed that I know contains, you know, a number of different species. Curious if you've done any work on this crop historically. Two, around your thoughts on kind of penetrating this market, you know, from a greenfield perspective versus partnering with, you know, one of the couple of players that are, you know, that have been working on developing this crop, here over the last, you know, few years.

Mark Wong (President and CEO)

Sure, Ben. So we have a long history in Camelina with Don Panter, who actually ran a Camelina company about a dozen years ago. 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 gonna have a partner, right? I mean, it's a big market and you know, we're full of opportunity, but we're a relatively small company. 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. Those are kind of the discussions that we're in right now.

It's an opportunity that we've been talking to people about for a year. You know, like I said, in my presentation in February, a bunch of deals were announced. It's pretty clear that everybody's lining up under this whole idea of second crop, four fuels that is not in competition with food production. That's where the petroleum industry wants to go. They wanna use vegetable oils as much as possible because of the low carbon footprint.

Ben Klieve (Senior Equity Research Analyst)

Yeah.

Mark Wong (President and CEO)

We're trying to figure that out, where the best opportunity for S&W is.

Ben Klieve (Senior Equity Research Analyst)

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 in 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, on kind of the immediate term, cash flows, either inflows, or you know, potential outflows here as this initiative takes off. 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, you know, with its endpoint royalty system. The degree to which you think that HB4 is something that can be, you know, effectively commercialized in that market or that'll, you know, represent a challenge.

Mark Wong (President and CEO)

Yeah. We did receive some cash up front for selling the 60% of our assets in the JV to our partners. 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. You know, we received cash and we reduced our expenses, and we strengthened the germplasm base of the company because, you know, our partners are wheat guys in Europe and South America, and they've already and they've been working in those markets for many, many decades.

On HB4, you know, the issue, the challenge of all genes in food crops is, you know, what will the regulatory environment be like and what will be allowed. You know, HB4, for sure is a GMO. You know, how Australia and consuming countries will look at that gene is, you know, in strong debate around the world. You know, 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. HB4 is a water stress gene, so it's really a good gene for current global warming situations where you have parts of the world too, that are getting drier and drier.

We're pretty excited that, you know, we didn't have to do the work developing the gene. Everybody on the call knows how much work it is to develop a gene. We have our Double Team gene in sorghum. You know, this is between us and our partners. You know, these are really the only two genes that are being developed by the smaller middle market companies that aren't a big four. You know, 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 trait, but we have the ability to help market the trait and get some of the value from the trait. We're pretty excited about that.

Ben Klieve (Senior Equity Research Analyst)

Very good. Well, thanks for that. I'll appreciate your comments, and I'll jump back in queue.

Mark Wong (President and CEO)

Sure. Thanks, Ben.

Operator (participant)

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

Kurt Caramanidis (VP)

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, and 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, and am I thinking about this right, really getting to next year where Double Team really helps bring the whole boat up and, you know, gives you a lot more stability?

Mark Wong (President and CEO)

Yeah. Thanks for the question. I mean, yes, we are confident, and as Betsy said, you know, 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. Yes, we are confident that next year is gonna 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, you know, are really Double Team.

We're very excited about that, and we think it's gonna make a significant difference in our EBITDA. Combined with the, you know, our efforts now to reduce some of our costs and to do it through some of these kind of JV deals like wheat, where we basically get some cash up front and we save some of the money because we have a partner also paying some of the costs. You know, if there's a long time to product sales 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.

You know, the problem with that is you can get sort of too many things to do. We're in the process of cutting some of those back or JVing those 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, you know, concentrate on these businesses that we really have the most opportunity.

Kurt Caramanidis (VP)

Great. Would the Camelina be a calendar year 2023, possibly, as far as what you're working on?

Mark Wong (President and CEO)

Yeah. We've grown Camelina as a service for other companies which we're not permitted to disclose, but we have provided some of the Camelina seed to the Camelina biodiesel industry already. It's because, you know, 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. You know, all those things are cost advantages that we think will continue to be part of our plans in Camelina.

Kurt Caramanidis (VP)

Great. Thank you very much.

Mark Wong (President and CEO)

You're welcome.

Operator (participant)

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

Jonathon Fite (Managing Partner)

Hey, good morning, Mark. Good morning, Betsy. Appreciate your time. I have a couple questions.

Mark Wong (President and CEO)

Morning.

Jonathon Fite (Managing Partner)

Just on the savings opportunities and kind of the value drivers in these non-core areas. When you all talk about potentially capturing $5 million in savings, are those essentially cash savings? Is it, you know, divesting of some assets, you're just capturing some depreciation savings? I was wondering if you could just kind of characterize, you know, the $5 million savings opportunity.

Mark Wong (President and CEO)

Yeah. I mean, 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. You know, we think that in realigning for the best opportunities, you know, which all companies should be doing, and we also for certain should always be doing, that there's an opportunity to save some costs. There's the opportunity, like in the wheat deal, to improve your strategic position and save some costs and get some cash upfront. You know, we look for deals like that too. We're not against, you know, closing something down to save money if we think that money is better spent in one of the other core areas.

You know, our view of some of these things continues to change as a couple of questioners have asked on this call. You know, 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. You know, there's just not enough oil. There'll never be enough oil from ag.

It's gonna 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, you know, and yet still satisfy food demands. It's gonna be an interesting next 10 years for sure.

Jonathon Fite (Managing Partner)

Yeah. It seems like a very interesting opportunity if we can get there. Can we talk about the value drivers on the non-core area? You know, is you know, if someone else were looking at those assets, is it the revenue opportunity? Is there a pretty significant asset base that comes with that has maybe kind of some balance sheet value that is maybe, you know, kind of hidden behind accumulated depreciation? I was just wondering what kind of the asset base that comes along with that $2 million of revenues that are in that other non-core sales arena?

Mark Wong (President and CEO)

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 seed through our plants and do their research in our research facility and get some synergies from a combination. That's the type of partner that we look for first. Then, you know, 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. Some people, you know, that will be more of interest.

Clearly, on 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 (Managing Partner)

Do you foresee potential JVs or sales in that space offsetting the cash burn over the next couple of quarters? Or, you know, until we kind of reach this break-even 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 cost?

Mark Wong (President and CEO)

There's potential that the asset sales could cover the majority of those costs. You know, 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. You know, 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 the high margins and, you know, going in our sorghum business from, you know, $13 million-$22 million. That's a lot of EBITDA. You know, all of those things together, we think, are gonna contribute to cutting that EBITDA loss and getting much closer to break even or profitability here in the next couple of years.

Jonathon Fite (Managing Partner)

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 (President and CEO)

It's really kind of not portable. 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 East, selling those kind of seeds to the Middle East. It's very interesting. We account for about half of the production of dormant alfalfa seed in Australia. So we're a huge market share controller in Australia. You know, there really isn't the capacity, even if the costs were okay. You know, with transportation costs being what they are, it really doesn't make much sense to send Australian non-dormant to the U.S. for sale. With supply limited, frankly, in Australia, all the seed we can grow is going to the Middle East.

Jonathon Fite (Managing Partner)

Okay.

Mark Wong (President and CEO)

We have no more capacity.

Jonathon Fite (Managing Partner)

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

Mark Wong (President and CEO)

Thank you. Appreciate that.

Operator (participant)

Once again, if you would like to ask a question, please press star then one. Our next question comes from Brett Rice of Janney Montgomery Scott. Please go ahead.

Brett Rice (Analyst)

Hi, Mark. Hi, Betsy.

Mark Wong (President and CEO)

Morning.

Brett Rice (Analyst)

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

Mark Wong (President and CEO)

Sure. So right now, I think it's good to focus on the near term, next you know sort of couple of years. The real benefit in the next couple of years is having a source of biodiesel that basically has high CI, or low carbon intensity, sorry, is beneficial in terms of carbon that's released in the atmosphere. 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. There are government programs in some of those crops. There's a blending credit.

There's a D4 credit that is given based on what kind of production you have converting the oils to biodiesel. 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. 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 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. Potentially we could also participate in that market in some way which, frankly, we have not decided yet.

Yes, the farmer for sure will generate a carbon credit, and he will get benefit from that. In addition to having, he will have on every acre a food crop, a second crop like Camelina or carinata that is an oilseed crop, and he will get a carbon credit. That is the future of agriculture.

Brett Rice (Analyst)

Interesting things happening.

Mark Wong (President and CEO)

Yes.

Brett Rice (Analyst)

Carry on, sir.

Mark Wong (President and CEO)

Well, you're very generous. 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, you know, 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. We have so many opportunities. It's just a fascinating time to be in agriculture. I've been in agriculture, as everyone knows, many years, many decades, but this is really fantastic and a lot of fun.

Brett Rice (Analyst)

Thanks for taking my question.

Mark Wong (President and CEO)

Certainly.

Operator (participant)

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 (President and CEO)

I just wanna 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. 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 position, so we're more competitive around the world. Those are win-win-win situations for S&W. Thanks everyone for being on the call, and we look forward to talking to you all next quarter. Thanks again.

Operator (participant)

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