S&W announces third quarter fiscal 2023 financial results

Date:05-12-2023

S&W Seed Company (Nasdaq: SANW) announced financial results for the three months ended March 31, 2023.

Q3 2023 Financial and Recent Highlights

• Revenue for the third quarter of fiscal 2023 was $17.7 million, a 23.8% decrease compared to the third quarter of fiscal 2022.

  
  

• GAAP gross profit margin for the third quarter of fiscal 2023 was 25.1%, a strong improvement from 11.7% in the third quarter of 2022, reflective of the Company's execution on its gross margin expansion initiatives.

  
  

• Operating expenses decreased by $0.6 million for the third quarter of fiscal 2023 to $8.3 million compared to $8.9 million for the third quarter of fiscal 2022, as the Company worked to align its cost structure to support its key centers of value.

  
  

• GAAP net income was $32.1 million, or $0.75 per basic share and $0.74 per diluted share, for the third quarter of fiscal 2023, compared to GAAP net loss of $(7.3) million, or $(0.19) per basic and diluted share, for the third quarter of fiscal 2022. The Company experienced a gain on the sale of business interest of $38.3 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 $4.1 million to $(0.4) million for the third quarter of fiscal 2023, compared to the third quarter of fiscal 2022, primarily driven by gross margin expansion and cost structure alignment in addition to the recognition of the Employee Retention Credit.

  
  

• S&W entered into a partnership with Shell to develop and produce sustainable biofuel feedstocks.

Shell Partnership

S&W announced the execution of an agreement to establish a partnership with Shell for the purpose of developing novel plant genetics for oil seed 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 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. Shell also paid $7.0 million to S&W and paid off S&W's $6.8 million 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. 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.

Management Discussion

"We continue to execute against our goals to drive operational improvements across our organization, with gross margins improving to 25.1% during the third quarter of fiscal 2023 compared to 11.7% in the year ago quarter, driven by revenue growth in our high margin Double Team sorghum solutions. Further, we saw continued alignment of our cost structure, with Adjusted Operating Expenses (see Table A1) down $1.0 million during the quarter, and $3.7 million through the third quarter of fiscal 2023. Overall, Adjusted EBITDA improved by $4.1 million for the quarter, and $8.4 million so far this fiscal year. That said, revenue was impacted during the quarter by weather related issues in our alfalfa, pasture and sorghum products both in the U.S. and Australia, as well as geopolitical unrest in Sudan, which we also expect will have an impact on the fourth quarter with approximately $10.0 million of revenue expected to shift to the first half of fiscal 2024.

"We also executed on a critical partnership with Shell to advance our capabilities within biofuels which was finalized in the third quarter. This partnership not only partners us with a world leader, but significantly improved our balance sheet with the infusion of cash, relief of debt, and equity interest in the go forward venture. All told, our stockholders' equity increased by $33.7 million, or $0.79 per share, compared to the most recent sequential quarter. We believe this new key center of value significantly enhances the outlook for S&W going forward."

"While the various factors that are largely outside our control are having some impact on top line results, significant progress was made this quarter and fiscal year to date, including gross margin expansion, operating expense reduction, the launch of our high value Double Team sorghum business, and execution of a strategic partnership with Shell to advance our biofuel capabilities. I look forward to continuing our efforts aimed toward these positive trends as we finish the fiscal year," Wong concluded.

Financial Results

Total revenue for the third quarter of fiscal 2023 was $17.7 million, compared to total revenue for the third quarter of fiscal 2022 of $23.2 million. The $5.5 million decrease in revenue was primarily due to a $3.9 million decrease in product revenue from alfalfa sales to the MENA, United States, European, Asian, and South African regions, a $2.0 million decrease in pastures and forages sales in Australia, and a $1.1 million decrease in conventional sorghum sales to the United States. The decreases were largely caused by a wet La Nina spring in Australia and overall flooding in Eastern Australia and cold temperatures which are slowing plantings in the western corn belt in the United States. This was partially offset by a $1.5 million increase in Double Team sorghum sales in the United States.

GAAP gross margins for the third quarter of fiscal 2023 were 25.1% compared to GAAP gross margins of 11.7% in the third quarter of 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, reduced sales of lower margin dormant alfalfa sales in the United States, and lower inventory write-downs in fiscal 2023. Inventory write-downs during the three months ended March 31, 2023, decreased to $0.4 million from $1.1 million in the previous year quarter when we experienced a higher level of certain inventory lots that had deteriorated in quality and germination rates.

GAAP operating expenses for the third quarter of fiscal 2023 were $8.3 million, compared to $8.9 million in the third quarter of fiscal 2022. The $0.6 million decrease in operating expenses for the third quarter of fiscal 2023 was primarily attributed to a $0.7 million decrease in research and development expenses. The decrease is a result of the Company's focus on aligning its cost structure to support its key centers of value.

Adjusted operating expenses for the third quarter of fiscal 2023 were $6.5 million, compared to $7.5 million in the third quarter of fiscal 2023. The $1.0 million decrease in adjusted operating expenses for the third quarter of fiscal 2023 was primarily attributed to the $0.7 million decrease in research and development expenses.

GAAP net income for the third quarter of fiscal 2023 was $32.1 million, or $0.75 per basic share and $0.74 per diluted share, compared to GAAP net loss of $(7.3) million, or $(0.19) per basic and diluted share in the third quarter of fiscal 2022.

Adjusted net loss (see Table A2) for the third quarter of fiscal 2023 was $(3.1) million, or $(0.07) 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 the third quarter of fiscal 2022, excluding interest expense - amortization of debt discount, the change in contingent consideration obligation, and dividends accrued for participating securities and accretion was $(7.3) million, or $(0.19) per basic and diluted share.

Adjusted EBITDA for the third quarter of fiscal 2023 was $(0.4) million, compared to adjusted EBITDA of $(4.5) million in the third quarter of fiscal 2022.

Fiscal 2023 Guidance

S&W is updating its previously issued guidance for fiscal 2023 revenue and adjusted EBITDA. The Company expects fiscal 2023 revenue to be within a range of $65.0 million to $75.0 million, compared to fiscal 2022 revenue of $71.4 million. The Company currently expects about $10.0 million of revenue to shift from the fourth quarter of fiscal 2023 to the first half of fiscal 2024 due to delayed plantings as a result of weather in Australia and the U.S., as well as geopolitical issues in MENA. Adjusted EBITDA is now expected to be in the range of $(12.0) million to $(8.0) million for fiscal 2023, compared to adjusted EBITDA of $(23.8) million in fiscal 2022.

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 2023.