S&W announces fiscal 2023 financial results: Revenue up 3% to $73.5 million

S&W Seed Company (Nasdaq: SANW) announced financial results for the fiscal year ended June 30, 2023.

Financial Highlights

• Revenue for fiscal 2023 was $73.5 million, a 3.0% increase compared to fiscal 2022. Double Team™ sorghum revenue was $6.5 million in fiscal 2023, compared to $2.4 million in fiscal 2022.

• GAAP gross profit margin for fiscal 2023 was 19.8%, a strong improvement from 8.9% in fiscal 2022, reflective of the Company’s execution on its gross margin expansion initiatives, including the revenue growth in its high margin Double Team sorghum solutions.

• Operating expenses decreased by $6.7 million for fiscal 2023 to $32.5 million compared to $39.2 million for fiscal 2022, as the Company worked to align its cost structure to support its key centers of value.

• GAAP net income was $14.4 million, or $0.34 per basic and diluted share, for fiscal 2023 compared to a GAAP net loss of $(36.4) million, or $(0.93) per basic and diluted share, for fiscal 2022. The Company experienced a gain on the sale of a business interest of $38.2 million related to the establishment of a partnership with Equilon Enterprises LLC (dba Shell Oil Products US, or Shell).

• Adjusted EBITDA (see Table B) improved by $14.3 million to $(9.3) million for fiscal 2023 compared to $(23.6) million for fiscal 2022, primarily driven by gross margin expansion and cost structure alignment in addition to the recognition of the U.S. Federal Employee Retention Credit.

Recent Highlights

• In February 2023, S&W entered into a partnership with Shell to develop and produce sustainable biofuel feedstocks. Refer to the Shell Partnership section below for further information.

• In May 2023, S&W announced that its Board of Directors, or Board, is evaluating potential avenues to unlock what the Company sees as unrecognized value in its international operations, which are headquartered within the Company’s Australian subsidiary.

• In July 2023, seed industry veteran Mark Herrmann was appointed as Chief Executive Officer, or CEO, following the planned retirement of its previous CEO, Mark Wong, who remains on the Board.

Management Discussion

″S&W successfully executed on a number of strategic initiatives in fiscal 2023 to unlock value and position the Company for success going forward, including the successful launch of the Company’s high value Double Team sorghum solutions, gross margin expansion, operating expense optimization and the establishment of a biofuels partnership with Shell,″ commented S&W’s recently appointed CEO, Mark Herrmann. ″The result was a $14.3 million improvement in Adjusted EBITDA and an improved balance sheet that we believe will help us to execute on our strategic plans going forward.″

″Since taking over as CEO in July, we have moved quickly to define our business strategies to optimize results centered around best-in-class operational effectiveness of our broader sorghum technology program and forage operations. Grower adoption of our Double Team grain sorghum solution continues to rapidly accelerate since we launched the product in fiscal 2022, having captured an estimated 6% of the total U.S. grain sorghum acres during fiscal 2023, and expectations of an estimated 10% acre share in fiscal 2024. With the continued expansion of Double Team  planned for forage sorghum products in addition to grain sorghum in fiscal 2024, and a growing sorghum technology pipeline that includes stackable traits for prussic acid-free and insect tolerance in the years to come, I believe S&W is in a highly unique position to potentially be the leading technology provider in this important global crop,″ Herrmann expanded.

″Further, we have implemented a new series of operational initiatives to drive the business towards profitability in the near-term. This includes improved life cycle management to reduce obsolescence costs, as well as having a positive impact on working capital management; the rationalization of certain low margin forage product lines and seed treatments; suspension of our stevia development program; and a seed manufacturing cost reduction plan to improve operational efficiencies and align with best-in-class standards. Every organizational decision we make is expected to be data driven to ensure it will have a positive impact on our customers and shareholders going forward,″ Herrmann concluded.

Shell Partnership

On February 7, 2023, S&W announced the execution of an agreement to establish a partnership with Shell for the purpose of developing novel plant genetics for oilseed cover crops as feedstocks for biofuel production. The partnership company, named Vision Bioenergy Oilseeds LLC, or Vision Bioenergy, is 66% owned by Shell and 34% owned by S&W. The partnership intends to develop Camelina (″Camelina sativa″) and other oilseed species from which oil and meal can be extracted for future processing into animal feed, biofuels, and other bioproducts. The partnership expects to carry out initial grain production in late calendar year 2023.

S&W contributed its expertise in seed research, technology, production, and processing to the partnership, including its seed processing and research facilities in Nampa, Idaho, and certain key personnel.

At closing, Shell paid $7.0 million to S&W and also paid $6.9 million to retire in full the principal, accrued interest and related settlement costs of the promissory note with Rooster Capital, LLC, which was secured by a priority security interest in the property, plant and fixtures located at the Nampa facilities. In February 2024, Shell will be required to pay an additional $6.0 million to S&W, subject to adjustment in certain circumstances. Shell also contributed $13.2 million to Vision Bioenergy, and is required to make an additional $12.0 million cash contribution to the partnership in February 2024. These capital contributions are expected to fund Vision Bioenergy’s operations for a few years. S&W also received a one-time purchase option, exercisable at any time on or before the fifth anniversary of the closing of the partnership transaction to purchase an additional 6% membership interest from Shell for a purchase price ranging between $7.1 million and $12.0 million. Upon the achievement of certain specified milestones, S&W is eligible to receive up to an additional aggregate 10% interest in Vision Bioenergy from Shell.

International Operations Update

In May 2023, S&W announced that its Board is evaluating potential avenues to unlock what the Company sees as unrecognized value in its international operations, which are headquartered within the Company’s Australian subsidiary. S&W has retained Bell Potter Securities Limited as its financial advisor and to assist the Board in its evaluation. As part of the process, the Board expects to review a full range of potential alternatives, which may include an IPO/Australian public listing of S&W International, or a merger, reverse merger or other business combination or strategic transaction involving the Company’s international operations – any of which would be expected to help improve strategic focus, enhance financial transparency, and better enable stakeholders to value separate components of the Company’s businesses independently.

The Company cautions that there can be no assurance the Board’s evaluation will result in a completed transaction, or any assurance as to its outcome or timing. S&W expects that the Board’s evaluation will be completed in the second half of the 2023 calendar year. It does not intend to disclose any developments related to the process unless and until S&W executes a definitive agreement for a particular transaction, or the Board otherwise determines that further disclosure is appropriate or required.

Management Transition

Effective July 1, 2023, seed industry veteran Mark Herrmann was appointed as CEO following the planned retirement of its previous CEO, Mark Wong. Wong continues to serve as a member of S&W’s Board. Herrmann has more than 35 years of experience in the seed industry, including as the CEO of AgReliant Genetics LLC, the 3rd largest North American Seed Corn company and leader in Soybeans and other supporting crops, headquartered in Westfield, Indiana from January 2016 to July 2020. From 1999 to 2016, Herrmann held various positions at Monsanto Company and its subsidiaries, including as Vice President North America Vegetable Seed, Vice President US Technology Development and Licensing, President of Corn States LLC, Director Eastern US, and Director Monsanto US Seed and Trait Business. Herrmann joined the Monsanto Company through the acquisition of DEKALB Genetics Corporation in 1998, where he began his career in the seed business in 1984 with leadership roles in sales, sales management, marketing and product management.

Financial Results

Total revenue for fiscal 2023 was $73.5 million, compared to total revenue for fiscal 2022 of $71.4 million. The $2.1 million increase in revenue was primarily due to a $4.0 million increase in Double Team sorghum sales in the U.S. domestic market, a $4.0 million increase in non-dormant alfalfa sales in the Middle East/North Africa, or MENA, region as a tightening in the global supply of non-dormant alfalfa drove up market prices, and a $3.8 million increase in non-dormant alfalfa and grain sorghum sales in Latin America, or LATAM, which also benefited from the tightening in the global supply of non-dormant alfalfa as well as having an increase in grain sorghum acres being planted due to cropping rotations, partially offset by a $4.3 million decrease in Australian domestic pasture sales due to flooding in key planting regions that lowered sales in the first half of fiscal 2023, a $3.0 million decrease in revenue in the Asia region due to logistical delays in international shipping and COVID-related impacts in China during the prior year that affected distributor demand, a $1.7 million decrease in U.S. domestic alfalfa revenue due to a decline in demand, and a $1.0 million decrease in non-Double Team sorghum revenue.

GAAP gross margins for fiscal 2023 were 19.8%, compared to GAAP gross margins of 8.9% in fiscal 2022. The improvement in GAAP gross margins was primarily driven by the increased sales of the Company’s higher margin Double Team sorghum solution in North America in addition to improved (reduced) non-cash inventory write-downs due to better inventory life-cycle management. Inventory write-downs during fiscal 2023 were $2.8 million compared to $6.4 million in fiscal 2022, when we experienced a higher level of certain inventory lots that had deteriorated in quality and germination rates.

GAAP operating expenses for fiscal 2023 were $32.5 million, compared to $39.2 million in fiscal 2022. The $6.7 million decrease in operating expenses for fiscal 2023 was attributed to a $2.5 million decrease in research and development expenses, a $2.0 million decrease in selling, general and administrative expenses, largely from a decrease in payroll and other employee compensation related expenses as a result of management’s cost reduction efforts, a $1.5 million decrease from a goodwill impairment charge recognized in fiscal 2022, and a $0.7 million decrease in depreciation and amortization. The overall decrease is a result of the Company’s focus on aligning its cost structure to support its key centers of value.

Adjusted operating expenses (see Table A1) for fiscal 2023 were $26.4 million, compared to $32.0 million in fiscal 2022. The $5.6 million decrease in adjusted operating expenses for fiscal 2023 was attributed to a $2.5 million decrease in research and development expenses, a $2.0 million decrease in selling, general and administrative expenses, largely from a decrease in payroll and other employee compensation related expenses as a result of management’s cost reduction efforts, and a $1.1 million decrease from non-recurring transaction costs.

GAAP net income for fiscal 2023 was $14.4 million, or $0.34 per basic and diluted share, compared to GAAP net loss of $(36.4) million, or $(0.93) per basic and diluted share, for fiscal 2022.

Adjusted net loss (see Table A2) for fiscal 2023 was $(18.5) million, or $(0.43) per basic and diluted share, excluding interest expense – amortization of debt discount, other finance expenses, non-recurring transaction costs, dividends accrued for participating securities and accretion, gain on sale of business interest, and equity in loss of equity method investee (Vision Bioenergy), net of tax. Adjusted net loss for fiscal 2022, excluding goodwill impairment charges, interest expense – amortization of debt discount, the change in contingent consideration obligation, non-recurring transaction costs, and dividends accrued for participating securities and accretion was $(34.7) million, or $(0.89) per basic and diluted share.

Adjusted EBITDA (see Table B) for fiscal 2023 was $(9.3) million, compared to adjusted EBITDA of $(23.6) million for fiscal 2022.

Fiscal 2024 Guidance

S&W expects fiscal 2024 revenue to be within a range of $76 to $82 million, representing an expected increase of 3% to 12% compared to fiscal 2023 revenue of $73.5 million. Revenue from the Company’s Double Team sorghum solutions is expected to be $11.5 to $14.0 million, representing an increase of 77% to 115% compared to fiscal 2023. Adjusted EBITDA is expected to be in the range of $(7.5) million to $(4.0) million for fiscal 2024, compared to adjusted EBITDA of $(9.3) million in fiscal 2023.

As the partnership with Shell is accounted for as an equity method investment, it is not expected to have a material impact on S&W’s full-year financial results for fiscal 2024.