S&W Seed Company - Q4 2022

Transcript

Operator (participant)

Good morning, and welcome to the S&W Seed Company Q4 and fiscal year 2022 financial results conference call. All participants will be in a listen-only mode. Should you need any 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 telephone keypad. To withdraw a question, please press star then two. Please note that 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. Thanks so much, and thank you all for joining us today to discuss the financial results for S&W Seed Company for the Q4 and fiscal year 2022, ended June 30, 2022. With us on the call representing the company today are Mark Wong, President and Chief Executive Officer, and Betsy Horton, Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session.

Before we begin with prepared remarks, please note that statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act 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, intend, estimate, or projected.

Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those projected in the forward-looking statements, including the risk that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's 10-K for the fiscal year ended June 30, 2021 and other filings made by the company with the Securities and Exchange Commission. With that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Mark Wong (President and CEO)

Thank you, Robert, and welcome everyone to the call. As you probably can tell, I've got a bit of a cold, so I apologize for any raspiness or a cough or two during the presentation today. I wanted to basically make the presentation myself and be available for all of your questions. As I mentioned in the press release, we remain focused on developing key centers of value we outlined in the last quarter while moving to align our cost structure to support these key centers. As a reminder of what we talked about last quarter, the key centers of value are, first, our U.S. sorghum operations, which includes our lead value driver, Double Team, which is our next generation GMO herbicide tolerant resistant trait solution.

Next is our international forage business, which encompasses our historically profitable but lower-margin alfalfa business, where S&W has a strong customer base and market share. Third, our specialty crops. We are looking to leverage our unique R&D and production capabilities in stevia and camelina. Finally, our U.S. sorghum and alfalfa operations, where we have unique germplasm and valuable research and production facilities. In our opinion, each of these areas has value that must be extracted by the management of S&W to move to profitability. In addition to developing these key four, excuse me, these four key centers of value, we need to align our cost structure and execute on various restructuring steps to drive the business towards profitability.

On the cost alignment efforts, we have detailed a plan to remove $5 million from our operating expenses in fiscal 2023. We're implementing several of these steps to achieve our goals. We are closing a joint venture that would de-combine wheat efforts in Australia with the Trigall Genetics, which is a JV between Bioceres Crop Solutions and Florimond Desprez, which is a European wheat breeding company. We anticipate finalizing this deal during the Q2 of 2023. Similarly, as we focus our activities on our key centers of value, we have rationalized our European sunflower operations with approximately $700,000 cost savings from that operation. We fully recognize that losing tens of millions of dollars per year is not a sustainable business model.

We will discuss the actions that should drive the company significantly closer to break even in fiscal 2023. We are going to give, for the first time, our shareholders more detail on our EBITDA projections for 2023, our current fiscal year. Let me provide a quick update on our key centers of value. Excuse me while I take a drink of water here. U.S. sorghum. The first, obviously, and biggest driver in 2023 is our U.S. sorghum business, which is led by our Double Team trait. We believe Double Team has the potential to revolutionize the sorghum market in the same way other weed control technologies have enhanced yields for crops such as corn, soybeans, and cotton. As I have stated, the response from farmers has been tremendous to Double Team.

As we enter fiscal 2023, in addition to selling Double Team in the S&W Sorghum Partners brand, we are also looking at a number of private label opportunities, which we believe will expand distribution. We currently have nine potential private label partners selling Double Team. The ability to leverage key private label partners and utilize their expertise and distribution systems in other key geographic areas should be highly beneficial to our market share gains in grain sorghum with Double Team. Additionally, we are making a strong push into North Texas, Nebraska, and Kansas with both Double Team as well as our new conventional genetics, which all have top performance. While Double Team is clearly the key gem, our traditional sorghum genetics provide a number of advantages to farmers.

As a result, we have made some changes to our U.S. sales force in order to staff five key grain sorghum states, including the ones I mentioned, and focus on Kansas, which is home to 50% of the U.S. grain sorghum acres planted last year to drive sales within our sorghum portfolio product line. One other key point is that Double Team introductions seem to be pulling sales of our traditional sorghum products along with farmers. Ultimately, we believe the awareness of Double Team by farmers will lift the entire sorghum portfolio product line. From a numbers standpoint, during last year, we sold about $3 million of DT, but as we have stated, one of the biggest limiting factors we have is availability of seed.

On that front, we have done a tremendous job maximizing our seed production and have taken steps to limit the natural risks of farming, such as freezing and heat stress. Currently, we are not seeing any quality concerns in our ongoing production harvest, and we remain on track to hit our production targets that will support our sales projections. We are estimating revenue from Double Team in fiscal 2023 of approximately $12 million, an increase of $9 million from last year. Given the high profit profile, this should contribute to approximately $6 million of incremental EBITDA to the bottom line. Betsy will provide more details and specifics in her presentation. On traditional grain sorghum hybrids, there was a historic drought in West Texas and Oklahoma in the past season.

Also, the war in the Ukraine and the record high corn prices impacted farmers' planting decisions. More farmers chose corn over sorghum than we otherwise thought, as the season was coming to a close. These factors led to a decline in the U.S. sorghum acres at a drop of 1 million acres rather than the increase that we had anticipated, and therefore, softer demand based on the lower planted acres for our sorghum products. Without a repeat of the historic, extreme drought conditions, we expect some recovery of sorghum acres in 2023. Higher acres overall, combined with farmer interest in DT, leads us to expect year-over-year volume increases to our traditional non-DT sorghum hybrids.

We believe this will add up to a couple of million dollars in top line and about a million dollars in EBITDA. Let me now take another drink of water. Thank you. Talk a little bit about international forage. Our proprietary alfalfa seed and pasture products include such things as medic, sub clovers, annual clovers, vetch, forage cereals, grasses, which are addressing our non-U.S. global markets. The key component to the value within this segment is the strong and diversified production and distribution capabilities which our distributors in more than 30 countries provide in both the northern and southern hemisphere production.

However, this is also the area where we had the biggest revenue miss during the quarter, Q4 of 2022, and ultimately the year as we continue to encounter logistical and operational challenges which have resulted in the delay of shipments at the end of our fiscal year due to the lack of shipping containers. This is similar to what we encountered last year. However, we did ship about $5 million in revenue that was expected in Q4 in Q1 of 2023. We are fully anticipating a strong Q1 revenue number. We continue to take proactive actions to prevent these type of delays from repeating in 2023. However, macro forces remain outside our control given the tight timelines between harvest and shipment at the end of June. This is the negative side.

Let me talk about a few positive things. We believe the market for international forage products remains strong and expect to capture the vast majority of any sales and able to be shipped last fiscal year. Further, global non-dormant alfalfa demand remains strong, and we see average selling prices being 30% higher year-over-year. Additionally, a third consecutive La Niña has been declared for Australia, which will bring above average rainfall for the year and will improve demand for quick seed options such as cereals and grasses. The driver in international, however, is alfalfa pricing. As I mentioned, pricing is up, and we expect to benefit from this in the coming year.

We believe we are on a better position this year and should benefit from the global supply and demand dynamics. Clearly, the logistical issues remain a concern, but we remain optimistic for improved results within the area in fiscal 2023. Betsy will expand on the guidance assumptions, and we think there are upside potential in both the top line and the bottom lines in our international forage operations. Now a bit about the US sorghum forage markets, excuse me. In the US segment, we basically see kind of steady as it goes. We have a nice base of business within the segment as key customers desire our germplasm base with its emphasis on high yield and forage quality resistance to diseases and stress.

Operationally, between about $10 million-$11 million or so in annual revenue is what we continue to expect. However, beyond the germplasm base, the real assets here remain our breeding station and processing facilities in Nampa, Idaho, which we believe we can utilize in the biofuel space with crops such as camelina. In the specialty crop area, as I've said before, we do have interest from many potential oil company partners for biofuel production, which leverages our capabilities in breeding, production, processing of the seed, cleaning it, and packaging of camelina. As I stated, we are a fully capable integrated global seed company with specific expertise in breeding, production, sales, and distribution of small seeds and specialty crops, including camelina, which are highly desirable for biofuel production.

With that in mind, we are planting 300 acres of camelina this fall for seed harvest next year. It is our goal to enter the camelina market as a seed and technology provider. We are optimistic that there is a mutually beneficial partnership to be had in the future. I look forward to providing more information to you all in the next quarter. In stevia, our other specialty crop, we continue to work with Ingredion. We had a 30-acre plot pilot plot production in 2022 in North Carolina, which we harvested in the Q4 of 2022, followed by full-scale harvest in 2023. Remember that our model, we harvest the crop for about 3 years, where in China they only harvest the stevia for one year. We also had a 40-acre expansion planned in 2023.

We are similarly working through transportation logistics here. The goal is to get the leaf from the U.S. production and have it converted by Ingredion to consumer-grade stevia in 2023. I'll have more to report on this partnership in the next, in the third and Q4s of 2023. Let's talk a little bit on a high level, looking forward to fiscal 2023. I believe there will be a pickup in our sorghum operations led by high margin Double Team trait products. We think that a $12 million uptick in this business is very reasonable, which $9 million is DT related and a few million from our traditional products, our sorghum products. All this could drop around $7 million to the bottom line.

We think there is upside potential in our international forage operations driving both by pricing and volume. The high end of our assumptions calls for about $10 million in growth. The low end calls for continued difficulty due to macro logistics issues that I mentioned before. The $10 million growth here could drop significantly to the EBITDA line, and Betsy will give you some details on that also. Within U.S. Forage, we believe the current $11 million is a reasonable base of sales. Further, with the cost reductions we have made in OpEx, coupled with the elimination of LCM charges, and I think that we'll give you some more detail on that too. What we will have a good shot at reducing our losses and profitability for the 2024 fiscal year.

We believe our goals and assumptions are highly attainable. We are working hard to execute to make them a reality. I want to point out that we have made zero assumptions for any biofuel or stevia-related agreements in fiscal year 2023, assumptions which may provide additional upside to S&W. Let me now turn the presentation over to Betsy, and she'll go through some of the numbers, and then we'll be happy to conclude and answer some of your questions. Betsy, please take over the presentation. Thank you.

Betsy Horton (EVP and CFO)

Thanks, 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 $71.4 million for the year, an increase of 2.1% compared to $69.9 million in the prior year. The increase in core revenue for fiscal 2022 can be primarily attributed to increased sales of alfalfa into the Middle East region, partially offset by lower pasture product sales in Australia and a slight decline in service revenue for treating and packaging services. In the Q4, core revenue was $20 million compared to $22.8 million a year ago. The decrease here was the result of shipments within our international forage business that were unable to be made due to the logistical challenges that Mark discussed.

We referenced this risk during our Q3 call, and unfortunately it came to fruition. However, we did see about $5 million of revenue ship in July, so we are seeing a strong revenue number of $18 million-plus for Q1 of FY 2023. For your reference, we only had about $15.5 million of core revenue in Q1 of 2022 and $12.2 million core revenue in Q1 of 2021. An important note we've made in the past that I want to reiterate one last time. Core revenue and total revenue was the same number in fiscal 2022. The Pioneer agreement was completed in the Q3 of fiscal 2021, so the Q4 of both periods were not affected by Pioneer.

However, fiscal 2021 as a whole had revenue of $14.2 million, bringing total revenue for fiscal 2021 to $84 million. Going forward, there will not be a reference in our financials to core revenue on a comparable basis. Next, I want to discuss our FY 2023 revenue guidance, which is currently a range of $80 million-$92 million. As we look to bridge from $71 million in fiscal 2022 to $80 million-$92 million in 2023, we are making the following growth assumptions. On the low end of the guidance, we are simply taking into account $9 million in incremental revenue growth attributable to Double Team and a flat revenue in the rest of our operations.

At the higher end of the guidance, we are taking into account approximately $9 million in growth from international forage operations, with about half coming in from pricing improvements and half coming from volume. About $3 million in growth from our traditional non-DT related sorghum operations. Now turning to margins. GAAP gross margins were 8.9% in fiscal 2022 compared to 16.3% in the prior year. Adjusted gross margins, which excludes the impact of inventory write-downs, were 17.8% in fiscal 2022 compared to adjusted gross margins of 18% in the prior year. However, if we were to exclude the contributions from Pioneer from last year's results, which again were not repeated this year, adjusted gross margins last year would have only been 16%.

Without Pioneer and excluding inventory write-down, our gross margins improved from 16%-17.8%. I do want to take a moment to address the inventory write-down in Q4 of $4.5 million. As we discussed in Q3, we have been very focused on inventory management and really digging into our inventory valuation. In Q3, we established a reserve process whereby we matched the timing of the reserve with the revenue generation period of the life cycle of each hybrid. At that time, we believed the plan to build that reserve over the coming year was sufficient to cover future write-downs. However, the severe drought in Texas and Oklahoma, as well as the global commodity disruption resulting from the war in Ukraine, drove softer demand for our traditional sorghum hybrids in Q4.

This, combined with lower germination rates for our inventory at year-end, led us to proactively reduce our inventory values. We know that inventory management is so incredibly critical for our industry, and we are very focused on improving our life cycle management so we can avoid these big write-downs in the future.

We have a multi-point strategy to address this issue, which includes, among other things, number one, streamlining our portfolio with fewer hybrids but larger volumes. Two, aligning our U.S. and Mexico portfolios to extend the opportunity to sell hybrids for an additional two planting seasons in Mexico. Three, pricing strategically to sell products earlier in their life cycle. Four, improving our forecasting. And five, enhancing our seed production quality and storage procedures. Like I mentioned last quarter, having some inventory write-downs is part of participating in the seed industry.

However, through this reserve methodology and our lifecycle management efforts, we should avoid these large one-time impacts. We do have a solid reserve in place that we think reflects an appropriate amount for the lifecycle of our inventory on hand. I assure you this will continue to be an area of focus to drive meaningful improvements so this one-time sizable amount does not repeat. With that, part of the EBITDA improvement expectations we have is the reduction of our lower of cost or market charges of approximately $5 million in fiscal 2023. I will provide a full EBITDA bridge shortly. Now we'll transition to operating expenses. Our GAAP operating expenses for fiscal 2022 were $39.2 million, compared to $33.9 million in the prior year.

Of the $39.2 million, SG&A and R&D comprised $32.2 million, with $5.5 million of depreciation and amortization and $1.5 million from a goodwill impairment charge. This compared to $30.4 million in SG&A and R&D operating expenses in fiscal 2021. The $1.8 million increase year-over-year is largely attributable to approximately $2.5 million in expenses related to change in executive leadership and other severance, offset by reduced R&D spend in our now shuttered sunflower program. When adjusting for all those non-recurring items, we were nearly flat on a year-over-year basis.

The $1.5 million impairment charge related to the full impairment of the company's goodwill was a result of the sustained decline in the market capitalization of our common stock during the Q4 of the fiscal year ended June 30, 2022. Looking back at the R&D and SG&A-related expenses, as we communicated last quarter and Mark touched on again today, it is our goal to decrease those expenses by $5 million. We have already implemented some changes to make this a reality, including a reduction in force back in June. We believe operating expenses, excluding stock-based comp, will be about $25 million. This $5 million decrease is another significant contributor to our improvement in adjusted EBITDA expected in fiscal 2023.

At the adjusted EBITDA line, we had a negative EBITDA of $23.8 million for fiscal 2022, compared to negative EBITDA of $13.1 million in the prior year. A full reconciliation of adjusted EBITDA is in the press release.

Let's bridge this out to see how we look to achieve our adjusted EBITDA guidance in fiscal 2023. Let's start with the high end of our assumptions, which is a $2 million adjusted EBITDA loss for the year. Starting at a negative EBITDA of $24 million for 2023, we believe we will see the following. A $5 million improvement to our LCM charges, $7 million in incremental gross profit due to DT and traditional sorghum revenue growth. A $5 million improvement in international forage gross profit due to both the higher end of our expected growth as well as overall improvements in our production costs.

$5 million in improvements from our cuts to operating expenses. All of that gets us to a $2 million adjusted EBITDA loss for FY23. For the low end of our EBITDA guidance, I'll remind you what we did for the low end of our revenue guidance. We simply took into account incremental revenue growth attributable to Double Team and assumed flat revenue in the rest of our operations.

On the low end of our range for EBITDA, we did the same and assumed only growth in DT, which would be $6 million EBITDA. We made some additional assumptions. $2 million of the international forage benefit would be captured due to increase in margins. Between our lower of cost or market charges and OpEx combined, we have $9 million of benefit versus 2022. This would end with an adjusted EBITDA loss of about $7 million.

We know these are only assumptions and that there are a tremendous number of variables, but we believe it is important for our investors to understand the methodology behind the numbers we provided. Now let's talk about our financing. As you would have seen from the 8-K we filed earlier this week, we have amended a couple of our financing agreements. MFP, our largest shareholder, continues to show their belief in S&W by issuing a $9 million standby letter of credit to back our CIBC facility. We felt this was a relatively non-dilutive way to improve our balance sheet, and we thoroughly appreciate the ongoing support from MFP. CIBC partnered with us to adjust our facility to meet our needs as we continue to actively pursue refinancing with a new lender.

As I mentioned last quarter, we feel that a non-bank lender is a better fit for us at this point in time and expect to close a new deal prior to the maturity of the CIBC facility at the end of the calendar year. We know there is a lot of work ahead of us, but I continue to believe that we are making the right changes and improvements that over time will play out in our results. With that, I will turn the call back over to Mark.

Mark Wong (President and CEO)

Thank you, Betsy. Let me just conclude with a few remarks. We remain first focused on developing the key centers of value that I have outlined in the last quarter, which I've gone through here in today's presentation. Double Team, for sure, is everything we expected it to be and will be a significant driver for our business in fiscal 2023 and beyond. We believe there is tremendous value in our other key operating centers, both from an operating perspective as well as asset perspective. Finally, we see some potential upside with our specialty crops that may be the real driver for our business in the years to come. As I have said to you in past calls, both stevia and camelina, I think, are going to be big, big opportunities for S&W.

In kind of looking back, I've spent kind of the five years with your management team, looking for long-term value in the seed industry. We believe our four key centers for value will bring S&W to long-term profitability. I'd just like to leave you with a thought today. A good friend of mine just recently told me, and I quote, "Judge each day not by the harvest you reap, but by the seeds you plant." I think that's a valuable lesson to remember about S&W. The harvest is yet to come, and all of the seeds of value have been planted and are now in the ground and will produce a bountiful harvest in the future. Thank you all for joining us today, and I apologize again for my cold.

you know, I hope that you had a good view. You could understand what I was saying and I wasn't too hoarse, and I would look forward to questions. I turn the presentation back over to the operator, who will organize the questions. Thanks so much, everybody.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press Star, then One on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then Two. At this time, we will pause momentarily to assemble our roster. Our first question here will come from Ben Klieve with Lake Street. Please go ahead.

Ben Klieve (Senior Research Analyst)

All right. Thanks for taking my questions. First, have a question on the Q4 performance, particularly in the revenue line. You both commented about a $5 million revenue contribution here getting pushed from Q4 into Q1. There still is a bit of a delta relative to what I think we were looking for in reality. My question is, did you have kind of material sales that you were expecting in the kind of towards the end of the fiscal year that didn't come to fruition? Did you have material sales that you were expecting that you know, were unable to be shipped and ultimately lost?

You know, what other headwinds did you face at the end of the quarter that weren't just simply pushed into the Q1?

Mark Wong (President and CEO)

Betsy, you want to try to take that one from Ben?

Betsy Horton (EVP and CFO)

Yeah. Thanks for the question, Ben. I would say it was in addition to the international shipping issues that we had on the alfalfa side, the softness that we talked about in the traditional sorghum and just sorghum overall in the sorghum market also hurt our revenue in Q4. I would say too, the international shipping delays, the 5 came right away in July, and we've seen additional amounts kind of trickle through. The combination of the shipping delays and the sorghum softness in demand were the two things that had us missing our guidance for last year.

Ben Klieve (Senior Research Analyst)

Okay. Then on the kind of various cost rationalization estimates, can you talk a bit about kind of how flatlined your expectations are for those for that kind of $5 million number? Is that something that we should look for kind of right away, or is that going to be kind of back-end loaded towards the end of the year? how what's kind of the timing on that, Betsy?

Betsy Horton (EVP and CFO)

Yeah, it kind of comes out throughout the year. Like I mentioned, we took some action right at the end of last year, beginning of this year both with the reduction in force that we did. We also have the Hungary shutdown of sunflower that will be part of that number. And then there's some other actions that we're continuing to take throughout the year. I would say you'll start to see it right away, but not the full amount all at once.

Ben Klieve (Senior Research Analyst)

Okay. Very good. Then on kind of revenue expectations for 2023 great to hear the trajectory of Double Team sorghum. Wondering what, if any, contributions you have baked into those numbers for other kind of next-generation products in the pipeline, namely IQ Alfalfa and the dhurrin-free sorghum. Are those in there at all, or is that not expected until 2024 or beyond?

Betsy Horton (EVP and CFO)

That is unexpected in a material way. Go ahead.

Mark Wong (President and CEO)

Yeah, no, go ahead, Betsy.

Betsy Horton (EVP and CFO)

Oh, okay.

Mark Wong (President and CEO)

That's exactly what I was gonna say. Yeah, go ahead.

Betsy Horton (EVP and CFO)

Yeah. Yeah, exactly. We expect a test launch of DhurrinFree in the coming year, but nothing is baked into those numbers, and we expect that more in fiscal year 2024.

Ben Klieve (Senior Research Analyst)

Okay. IQ Alfalfa, is that on the table at this point for a commercial launch in the next couple of years? Or is that something that you know, given market conditions with the alfalfa space is kind of a kind of lower priority item at this point?

Mark Wong (President and CEO)

Yeah, I think it's a lower priority, Ben, at this point. I mean, the alfalfa business is pretty rough in the U.S. You know, it varies obviously where you are in the world, but the international business is very strong with rising prices, and the U.S. business is continuing to shrink in acres. It's really a competition with distillers' grains feeding. Most of the dairy farms are using distillers' grains because they're a little bit cheaper than alfalfa. Alfalfa seeded acres continue to go down. The U.S. alfalfa market is frankly kind of weak on an overall basis and while the international markets remain strong.

Ben Klieve (Senior Research Analyst)

Okay. Very good. One more for me, and then I'll jump back in queue.

Mark Wong (President and CEO)

Sure.

Ben Klieve (Senior Research Analyst)

Regarding the camelina initiative 300 acres being planted here in you know coming weeks or months is more than I expected. You know, do you have some kind of a scale expectation for what that will to plant at you know this time next year? You know kind of expectations then around you know would a commercial launch potentially come this time next year or maybe the following year or beyond?

Mark Wong (President and CEO)

Yeah. I mean, as you know, the biofuels market, and that market is now defined not just as ethanol, right? Corn starch being converted to alcohol, but growing of these crops, which are oilseed crops like camelina as a second crop after a food crop. That's a really big market right now, and there's a lot of capacity going in to produce diesel fuel from these kind of vegetable oils. You know, we think that that's gonna be a very lucrative market certainly for the next five years. You know, we're ramping up production. I mean, 300 acres, camelina has a fairly high multiplication rate, and 300 acres is a lot of acres. We'll be able to grow some grain, camelina grain acres.

That would be what farmers will be producing to be crushed for camelina oil. That would be taken to one of these biodiesel plants for conversion to diesel fuel. We'll also be able to trial some new varieties just keep and continue to build the program, as we think that demand's gonna be super strong.

Ben Klieve (Senior Research Analyst)

Okay. Very good. Well, Mark, feel better soon. Betsy-

Mark Wong (President and CEO)

Thank you.

Ben Klieve (Senior Research Analyst)

With all these ongoing initiatives. Thanks for taking my questions. I'll get back in queue.

Mark Wong (President and CEO)

Thanks so much.

Operator (participant)

Again, if you have a question, please press star then one to join the question queue. Our next question here will come from Arvind Malik with KMS Investments. Please go ahead.

Arvind Malik (Portfolio Manager)

Yes, thank you for taking my question. Mark and Betsy, thank you for all of your efforts amid these challenging circumstances, and to your team as well. As long-term shareholders, we're definitely are glad to see the non-dilutive financing agreement, so great to see that with MFP support and others. I had a related question between these financing agreements and the prospect of improved sales during the current fiscal year. Are you expecting to be able to avoid further dilution at the stock level, or at least minimize it in the next few quarters from cash generation?

Betsy Horton (EVP and CFO)

Oh, hi, Arvind.

Mark Wong (President and CEO)

Yeah.

Betsy Horton (EVP and CFO)

Yeah.

Mark Wong (President and CEO)

No, go ahead.

Betsy Horton (EVP and CFO)

Thanks for the question. Yes. I mean, we definitely looked for a way to do the financing agreement in a way that was certainly less dilutive than issuing equity. Moving to a non-bank lender, which is what we're working on right now, before the refinance of the CIBC facility at the end of December, is a way to really maximize our borrowing capacity under our balance sheet. We have quite a bit of inventory that we are not borrowing against today, that I think would allow us to have a financing agreement that would carry us through. Certainly the goal is to not issue more equity. I can't say.

You know, we have an active ATM program, and we use it as a tool in our toolkit. The plan is we take very seriously the decisions to use that and are trying to avoid it, and look for other ways to take care of the financing needs as we move toward EBITDA positive and then cash flow positive after that.

Arvind Malik (Portfolio Manager)

That's great to hear. Just kind of bridging between kind of the short-term to the long-term picture I appreciate the commentary about the inventory write-down explanation and the EBITDA bridge that you walked us through. I wanted to kind of bridge that over to about a year ago, you had a great presentation talking about the long-term vision for the company and the financial aspects of that. You know, you had a three-year, five-year, ten-year type of picture. I know that the near term has been clouded by logistical challenges in particular. Do you have any thoughts on what the longer term earning power?

I'm looking back at your slides from November of 2021 around getting to 35% gross margins and 10% EBITDA margins and of course a significant revenue uplift. Do you see the longer-term trajectory as still sound or do you feel some sort of big course correction to that is likely?

Mark Wong (President and CEO)

Yeah, let me try to answer that for you, Arvind Malik. Because that was pre-Betsy joining the company, and I was the one who sort of put that together with the management team in 2021. The original idea of that projection was to look forward 3 and 5 years and to give our investors an idea of what really the opportunity and capability of our proprietary research program was gonna be. When we did that projection we knew that Double Team at least we had hoped that Double Team was gonna take off like we think it is going to now. That was baked into the projections. You know, we've done a lot of work since that projection was put in place.

Some of the new work on some of the other traits, like dhurrin-free, was kind of not named as a line item in there. Certainly we didn't expect that camelina was going to take off, right? I mean, all of the work that the big oil companies have been doing in camelina has been just in this past year. You know, there's always new information, some of it good, some of it bad. Most of it's good in terms of that projection and where we find ourselves. I would say that projection is probably pretty spot on still in terms of the sales that are coming from proprietary products that we develop ourselves.

The margins and sales numbers are pretty good on that sector. We also had built in a faster growth rate on some of our businesses internationally in forages and even in the U.S., we did not expect the alfalfa situation to turn so negative. We had more aggressive numbers on sort of sales of traditional product lines, and so those probably are not gonna be as high. I think that the camelina opportunity is gonna make up for those. We're thinking about issuing a new 3-5-year view of what investors should think when they think about S&W. We may do that sort of towards the end of 2023 when we see a little bit more better picture of where camelina and where stevia are gonna land.

We think that's gonna be an important part of those projections. The projections in general they're pretty close to where we think we're gonna be. The makeup's a bit different. You know, more sales on things like camelina, lower sales on things like forages. In general, the numbers, especially the profit numbers, are probably still pretty close.

Arvind Malik (Portfolio Manager)

Thanks, Mark. That's really helpful. given those projections, the stock clearly is extremely undervalued. We're eager to hear about how the plans for the company to unlock that value and for shareholders. We'll definitely appreciate hearing more from you and Betsy on that in coming quarters and then perhaps the end of this fiscal year. Thank you very much.

Mark Wong (President and CEO)

Yeah. I mean, thank you for that comment. You know, we certainly believe that the stock is undervalued. You know, the programs that we've outlined in the last couple of years take a long time to get a foothold and then to get a running start. We think now we are in the phase of the company where a lot of those programs are in a running start in the sense that DT is taking off, that margins are improving in our forage business internationally, and that camelina is gonna be a big mover and shaker for us in future years.

We're all part of this whole financial markets with a changeover from cheap interest to rates by the Fed to high interest rates by the Fed and what that's doing to bond and stock markets. You know, we all understand that. We appreciate that. But it, I have to admit that it makes things difficult. You know, and that's hence my comment at the end of our presentation in the summary is we've worked hard to create these opportunities. Now we need to harvest them, and we need to show people that we can make money on an EBITDA and, as Betsy said, a cash flow basis, that we can be a self-sustaining company without taking a huge amount more of dilution.

We think we can do that, and we think that our stock is horribly undervalued. I'm sure a lot of other companies also think that their stock is horribly undervalued in this market. We don't really think that we're alone there. We would hope that investors would give us a chance. I know it's been a long road, especially for people like yourself who have held our stock for a while, but you know, please don't give up on us. The best is yet to come for sure.

Arvind Malik (Portfolio Manager)

Well, thank you very much. Appreciate it.

Operator (participant)

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

Mark Wong (President and CEO)

Thanks very much, operator, and I'd just like to thank everyone for being on the call today. We presented our first guidance to not only sales but EBITDA because we felt that it was really important for investors to understand how we were going from these large losses to near profitability and then profitability in the next couple of years. We hope that story got across, and we look forward to having future discussions with any of our shareholders or potential shareholders. It is, I think, a wonderful story, but a complicated story. Thanks everybody for being on the call today. Bye bye now.