S&W Seed Company announces second quarter fiscal 2023 financial results

S&W Seed Company (Nasdaq: SANW) announced financial results for the three months ended December 31, 2022.

Q2 2023 Financial and Recent Highlights

• Revenue for the second quarter of fiscal 2023 was $12.9 million, an increase of 2% compared to the second quarter of fiscal 2022, driven primarily by the Company’s U.S. sorghum and international alfalfa sales.

• GAAP gross profit margin for the second quarter of fiscal 2023 was 21.3%, an improvement of 820 basis points compared to 13.1% in the second quarter of 2022, reflective of the Company’s execution on its gross margin expansion initiatives.

• Operating expenses decreased by $1.6 million for the second quarter of fiscal 2023 to $9.0 million for the second quarter of fiscal 2022, as the Company worked to align its cost structure to support its key centers of value.

• GAAP net loss was $(6.0) million, or $(0.14) per basic and diluted share, for the second quarter of fiscal 2023, compared to GAAP net loss of $(9.8) million, or $(0.25) per basic and diluted share, for the second quarter of fiscal 2022.

• Adjusted EBITDA (see Table B) improved by $1.9 million to $(4.6) million for the second quarter of fiscal 2023, compared to the second quarter of fiscal 2022, primarily driven by gross margin expansion and cost structure alignment.

• S&W is reiterating its fiscal year 2023 revenue and adjusted EBITDA guidance.

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

Shell Joint Venture

On February 7, 2023, S&W announced the execution of an agreement to establish a joint venture (the ″JV″) for the purpose of developing novel plant genetics for oil seed cover crops as feedstocks for biofuel production. The JV company, named Vision Bioenergy Oilseeds LLC, is 66% owned by Shell and 34% owned by S&W.

The JV 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 JV 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 JV, including its seed processing and research facilities in Nampa, Idaho, and certain key personnel.

At closing, Shell contributed $13 million to the JV company, and is required to make an additional $12 million cash contribution to the JV company in February 2024. These capital contributions are expected to fund the JV company’s operations for a few years. Shell also paid $7 million to S&W and paid off S&W’s $7 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.

Management Discussion

″During the second quarter of fiscal 2023, we maintained our diligent focus on commercial execution to achieve our goals of driving growth, improving gross margins and reducing operating expenses. We saw strong growth in Double Team sorghum revenue due to early season sales in the U.S. as well as growth in international alfalfa sales due to improved conditions in MENA, an improvement to gross margins of 820 basis points due in part to Double Team as well as improved international alfalfa margins, and a $1.9 million year-over-year improvement in adjusted EBITDA.″

″We believe our agreement with Shell to establish the JV is transformational for S&W. By partnering with a world leader like Shell and leveraging our seed, processing and technological capabilities within Camelina, we believe we have an opportunity to be at the forefront of the evolution taking place to produce sustainable low carbon energy solutions. This JV adds a new center of value for S&W and has the ability to enhance the financial outlook for the company going forward.″

″As we enter the back half of our fiscal year, we are focused on advancing our biofuel JV, with initial grain production expected in late calendar 2023, and developing the key centers of value we outlined previously. Further, we and Trigall Genetics entered into the wheat breeding joint venture for Australia, and continue to assess further potential value-generating transactions. With two consecutive quarters highlighting significant improvement in our operational results and the execution of critical joint ventures, I look forward to the second half of fiscal 2023.″

Financial Results

Total revenue for the second quarter of fiscal 2023 was $12.9 million, compared to total revenue for the second quarter of fiscal 2022 of $12.6 million. The $0.3 million increase in revenue was primarily due to a $1.0 million increase in North America sorghum sales associated with the Company’s Double Team next generation non-GMO herbicide tolerant sorghum solution, an increase of $1.9 million in alfalfa sales to MENA, and a $0.2 million increase in pastures sales in Australia. This was offset by a decrease in sales of sorghum to the MENA region of $1.4 million, a $0.7 million decrease in alfalfa sales to the North America, and a $0.7 million decrease in North America service revenue.

GAAP gross margins for the second quarter of fiscal 2023 were 21.3% compared to GAAP gross margins of 13.1% in the second 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, improved alfalfa margins in the MENA region due to improved market pricing, decreased sales of lower margin sorghum products in the MENA region and dormant alfalfa in North America, and the minimization of inventory write-downs. Adjusted gross margins, excluding the impact of inventory write-downs (see Table A1), were 22.4% in the second quarter of fiscal 2023 compared to 16.6% in the second quarter of fiscal 2022.

GAAP operating expenses for the second quarter of fiscal 2023 were $9.0 million, compared to $10.6 million in the second quarter of fiscal 2022. The $1.6 million decrease in operating expenses for the second quarter of fiscal 2023 was primarily attributed to a $0.9 million decrease in selling, general and administrative expenses and a $0.6 million decrease in research and development. The decrease is a result of the Company’s focus on aligning its cost structure to support its key centers of value.

GAAP net loss for the second quarter of fiscal 2023 was $(6.0) million, or $(0.14) per basic and diluted share, compared to GAAP net loss of $(9.8) million, or $(0.25) per basic and diluted share, in the second quarter of fiscal 2022.

Adjusted net loss (see Table A2) for the second quarter of fiscal 2023 was $(5.3) million, or $(0.13) per basic and diluted share, excluding interest expense – amortization of debt discount, non-recurring transaction costs, and dividends accrued for participating securities and accretion. Adjusted net loss (see Table A2) for the second quarter of fiscal 2022, excluding change in contingent consideration obligation, and interest expense – amortization of debt discount, was $(10.1) million, or $(0.26) per basic and diluted share.

Adjusted EBITDA (see Table B) for the second quarter of fiscal 2023 was $(4.6) million, compared to adjusted EBITDA of $(6.6) million in the second quarter of fiscal 2022.

Fiscal 2023 Guidance

S&W is reiterating its previously issued guidance for fiscal 2023 revenue and adjusted EBITDA. The Company expects fiscal 2023 revenue to be within a range of $80 to $92 million, representing an expected increase of 12% to 29% compared to fiscal 2022 revenue of $71.4 million. Adjusted EBITDA is expected to be in the range of $(7.0) million to $(2.0) million for fiscal 2023, compared to adjusted EBITDA of $(23.8) million in fiscal 2022.

As the JV with Shell is expected to be accounted for as an equity method investment, the JV with Shell is not expected to have a material impact on S&W’s full-year financial results for fiscal 2023.