S&W Seed Co (SANW) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the S&W Seed Company Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions)

Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Robert Blum. Please go ahead.

Thank you, Andrea, and thank you all for joining us today to discuss the financial results for S&W Seed Company fiscal year 2017, which ended June 30, 2017.

With us on the call representing the company today are Mark Wong, President and Chief Executive Officer; and Matthew Szot, 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, we submit for the record the following statement: 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, anticipate, draft, eventually 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, 2016, 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?

Thank you, Robert. Good afternoon to all of you on the call today. As most of you are aware, this is my first conference call as CEO of S&W Seed Company. This is an exciting time for me personally to lead a company that has such a rich history in agriculture and such a tremendous base of assets. The opportunity to leverage our germplasm, our distribution channels, our production base and our product development capabilities is, I believe, a unique middle market opportunity in today's agricultural markets.

For those of you who may not be familiar, I've spent the last 40 years of my career in agriculture. I have developed multiple seed companies, which have been sold to the likes of Monsanto and Syngenta. My first company was Agrigenetics, one of the first 3 founding companies to transform plants in the biotechnology industry with a focus on corn, sorghum and soybeans. Agrigenetics was sold to Lubrizol Corporation for $150 million in 1985. Agrigenetics later was sold to Mycogen Seeds and thereafter became part of Dow Chemical.

Next, I developed and commercialized key technologies for the integration of value-added genes into soybeans and other crops for Agracetus. Agracetus was purchased by Monsanto for $250 million in 1992. Then I saw a tremendous opportunity in the agricultural market -- international markets and created Emergent Genetics. At Emergent, we operated multiple international seed companies, integrating technology into the companies' seed lines. Emergent Genetics achieved to the world's second largest market share of cotton seed and was sold to Monsanto for $325 million in 2005 with a separate vegetable component of our business later sold for $50 million to Syngenta in 2016 -- excuse me, 2006. Also, I am currently Chairman of American Dairy Co., one of the 20 largest dairies in the United States.

My previous success in the seed industry has been based on leveraging core assets through the integration of technology and having a more customer-centric strategy, specifically creating more effective products using a lead germplasm in genes. I see a tremendous opportunity to leverage S&W's existing businesses through the introduction of new traits as well as robust customer support and marketing to enhance S&W's market share going forward.

Let me talk now about our technology and trait integration. Over the last few years, S&W has been -- has made, excuse me, efforts to develop certain traits within the alfalfa platform. Agreements like the one with Calyxt will be important as we look to move our company forward. In addition, I think there is a large opportunity for us to build an integrated seed biotechnology platform that can bring significant value to the marketplace. There are certain classes of genes that we will be evaluating with a high degree of interest including digestibility, seed -- insect resistance, disease resistance and herbicide resistance. I look forward to keeping you informed on these technology strategies in the coming quarters.

Trait development will be a key driver for S&W going forward in our alfalfa, sorghum and sunflower programs as well as other future crops we may look to enter or acquire. I believe the S&W -- I believe that S&W is uniquely positioned within the seed industry to capitalize on this strategy and look forward to leveraging my experience to drive enhanced value of these varieties going forward.

Next, let me discuss our customer-centric-focused strategy. Since coming into the role of CEO at the end of June, I have spent a tremendous amount of time with our team better understanding the operations of S&W, especially from a sales and marketing standpoint. The one theme that seems more prevalent than others is our disconnect from our end customer in the beef and dairy industries. As a partner in one of the largest dairies in the U.S., I have a unique understanding of this dynamic. One of the common operational themes across many of the companies I have run in the past was working with distributors who have an end customer-centric-focused strategy. We want to understand what drives their decision and find ways to communicate directly to them. Our distributors are in part -- important partners for us, and we must work together to achieve the goal of educating the end user dairy and beef customers on the benefits of our products. We need to work with our distributors who are true partners in expanding the S&W brand.

We are developing strategies to become a more customer-centric organization, working in conjunction with key distributors to highlight and communicate the attributes of our alfalfa as well as sorghum and sunflower and stevia varieties to customers. We will be hiring additional sales support and agronomy personnel to ensure our end customers, primarily the dairy and beef industry, understand the economic benefits of feeding livestock our varieties compared with our competitors.

Unfortunately, this focus on the end customer has largely been ignored by S&W in the past but will be a key focus of our moving forward. Clearly, there are headwinds for us in the Saudi Arabian market, which significantly impacted the company's results in fiscal 2017. As we reported, revenues directed to Saudi Arabian markets were down nearly 16.5 million from the prior year. The change in water regulations in Saudi Arabia have created a onetime event of uncertainty and disruption to the normal flow of seed inventory into the country. We are in unprecedented times, and I don't believe we will be able to have a full grasp on the magnitude of the disruption for a couple of years. Our distributors in the region are cautiously optimistic that we will not see an additional sales decrease for fiscal 2018.

Again, one of the issues that we are -- as an organization, have is our inability to have better intelligence with end markets, particularly the dairies as well as alfalfa hay farmers. We have been reliant on the intelligence of distributors. If we had a better understanding of the dynamics taking place within the country, perhaps we could have gotten ahead of the curve much sooner.

Now let me discuss our U.S. market strategy for alfalfa. The acquisition of DuPont Pioneer alfalfa seed operations gave us a platform for which to expand our domestic operations. Not only do we have an exclusive supply agreement in place with Pioneer, but we also have the opportunity to leverage Pioneer's germplasm, which is now S&W germplasm, into new sales channels.

At the end of May, we announced an agreement with a leading marketer and distributor of agricultural products, Wilbur-Ellis. Wilbur-Ellis will distribute S&W alfalfa seed varieties through its retail sales channels throughout North America, providing Wilbur-Ellis customers with access to S&W's full portfolio of premium alfalfa seed genetics. Wilbur-Ellis will look to expand S&W's varieties through its more than 160 branch locations, primarily in the Western and Central United States, providing their customers access to S&W's dormant and nondormant alfalfa seed traits. This agreement is an important step in building our domestic sales channels beyond Pioneer's distribution.

In addition to the Pioneer and Wilbur-Ellis agreements, we acquired additional sales representatives to sell to channel partners in the U.S. where gaps in the market coverage remain. Again, we want to become more customer centric in our better intelligence of what is taking place in our end-user markets. We believe there are a continuous great -- there is a continuous great opportunity to expand our domestic efforts in the near future.

As most of you are aware, in connection with the DuPont Pioneer acquisition, we only acquired conventional alfalfa varieties. However, the parties agreed to the terms of a second asset purchase agreement relating to the purchase of DuPont Pioneer's GMO alfalfa assets to be entered into, under certain circumstances, assuming SGI provides its required consent to this transaction prior to November 30, 2017, and subject to the satisfaction of certain other specified conditions. Either we or DuPont Pioneer have the right to enter into and require the other party to enter into the second asset purchase agreement on or before December 29, 2017, pursuant to which we would acquire DuPont Pioneer's GMO germplasm variety and other related assets to the purchase price -- for the purchase price of $7 million.

There is no assurance that we will purchase the DuPont Pioneer GMO assets. However, we are actively working to satisfy the requisite conditions, and we are hopeful that the purchase will be consummated.

Turning to sorghum and sunflower. I believe sorghum and sunflower have a tremendous potential, and we will be ramping up our efforts within these programs. As some of you may or may not be aware, it takes approximately 10 years to convert germplasm to seed production and sales. While we require -- when we acquired, excuse me, SVG, we acquired programs that were approximately in the 7- to 8-year time period in this cycle. We are now in the final stages of seed testing and production and the first sales -- the first years of sales.

To give you a few examples. Looking around the world, in Australia, on the production side, our first seed production of sorghum hybrids was very successful, and the seed has been cleaned and is now being sold. In South Africa, our production of sorghum Sudan hybrid was also successful with excellent yields, and the seed is being cleaned and ready for shipment. In Bolivia, we have several small-scale parent seed increased [platform]. And in the U.S., we have our first pilot production of grain sorghum hybrids in Nampa, Idaho, where -- which are also looking great.

From the sales and marketing side, our first Australian commercial harvest of sunflower hybrids that would be Sun -- SuperSun 66, resulted in excellent yields and has provided platform for our Aussie sales.

Australian sales of sunflower and sorghum hybrids have commenced. And while it is early in the season, initial sales inquiries have been encouraging.

I am pleased with the progress being made by the sorghum and sunflower team. My goal is to ramp up our seed production, continue to establish early market sales gains and look at ways to incorporate technology. There may also be strategic acquisitions available in these crops that would make -- help us to accelerate our efforts over the next couple of years.

Let's talk a little bit about stevia. While we have spent considerable efforts over the last number of years within our stevia program to develop varieties, which are better tasting and have ease of processing attributes, our commercialization efforts have gone without success. In my opinion, stevia is one of the top -- is one of -- excuse me, the type of crop that potentially is a significant growth catalyst in the coming years, and I will personally be involved in commercialization efforts going forward.

Before I turn it over to Matt to review the financial results, let me recap. First, our focus going forward will be to drive trait improvement within our current crops including alfalfa, sorghum and sunflower and stevia. This is where my background lays and where I believe additional value can be generated. Based on independent analysis, more value per pound of seed is garnered from the technology and from the seed itself. We can no longer ignore the technology side, and I intend to build S&W into one of the integrated seed biotech platforms in the coming years.

Second, we are developing strategies to become a more customer-centric organization, working in conjunction with our key distributors to highlight and communicate the attributes of our alfalfa, sorghum and sunflower and stevia varieties to our customers.

Third, sorghum and sunflower will become increasingly larger components of our business going forward. We will look to establish market share through organic and possibly acquisition growth while developing traits that will allow us to become significant players in these crops going forward.

Lastly, I believe stevia is a growth opportunity for S&W. I will personally be overseeing commercialization initiatives to ensure that resources are allocated to drive the adoption and success in the years to come.

With that said, let me turn the call over to Matt Szot who will review the quarterly results. Matt, please?

Thank you, Mark, and thank you to everyone on the call today. Please note that we preannounced our revenue and adjusted EBITDA numbers back in July when we announced the closing of our private placement with our 2 largest shareholders and a new investor. The results announced today were in line with those preannounced expectations.

So heading further into the numbers. For the fourth quarter, revenue was $17.9 million compared to $34.6 million in the fourth quarter of the prior year. For the year, revenue was $75.4 million compared to $96 million during 2016. Of the $20 million decline in revenues for the year, nearly $16.5 million was attributed to sales directed to the Saudi Arabia market.

Elsewhere, we saw a $2.4 million decrease in sales to Pioneer, and we also experienced a $1.5 million decrease in sales to Sudan. I want to point out that Sudan is an area where we expect to see growth in the future as alfalfa hay production is likely to shift out of Saudi and into the surrounding regions.

It is important to note that we still sold nearly 14 million of seeds directed to the Saudi Arabian markets during '17. The majority of the decrease we experienced in Saudi came from our Australian-based varieties, which typically carry a lower price point. As Mark mentioned, we expect to see continued headwinds and uncertainty in Saudi Arabia. But at this point, we are expecting that if we experience further compression in Saudi, it should be offset with growth in other surrounding countries over time.

Now moving to gross margins. Gross margins in fiscal 2017 were 21.4%, an improvement of 200 basis points compared to adjusted gross margins of 19.4% in the prior year. This improvement was consistent with our expectations and our previously discussed initiatives to drive improvements in gross margins.

Now as we look to fiscal '18, we expect gross margins to continue to expand in the second, third and fourth quarters as we increase our sales concentration of higher margin dormant varieties.

Operating expenses for the fourth quarter were $5.8 million and included nearly $675,000 of cost pertaining to the separation agreement with our previous CEO as well as $223,000 pertaining to the reserve for uncollectible sublease receivable. Excluding these items, SG&A expenses would have been $3.2 million, up slightly from the prior year. Total operating expenses would have been $4.9 million, up from $4.5 million in the fourth quarter of the prior year.

For the full year, excluding the previously mentioned items and impairment expenses as well as transaction expenses in last year's fourth quarter, operating expenses were $17.3 million in 2017 compared to $16.1 million in 2016. The increase is attributed to additional investment in research and development program, primarily associated with the company's new product lines and our SG&A expenses were up to support the company's strategic initiatives.

Adjusted EBITDA for the fourth quarter was a $329,000 loss compared to positive EBITDA of $3.5 million in the fourth quarter of the prior year. For the full year, adjusted EBITDA was $3.5 million compared to $6.9 million in fiscal '16. This is consistent with our previously announced results back in July. The decrease in adjusted EBITDA is primarily attributed to the declines in revenue in Saudi Arabia, partially offset by improvements in gross margin and which accounts for $2.5 million of the $3.4 million decrease in adjusted EBITDA over the prior year with the remaining decrease attributed to additional investment in research and development programs and SG&A expenses.

Now I also want to point out that during the fourth quarter of '17, we recorded a valuation allowance of $9.6 million against our deferred tax assets. This resulted in GAAP income tax expense of $8.2 million for the fourth quarter of '17. I want to stress that these assets still exist, and we still have the future benefit of our federal and state net operating loss carryforwards, while we have simply taken a reserve against the balance due to uncertainty surrounding the Saudi market. This will result in the company being able to release portions of the deferred tax asset reserve as we generate taxable income in future periods. Accordingly, this company will have no or very minimal tax expense for several future periods.

Now I'd like to give you a quick update on our banking developments. I am very pleased to report that we closed on a new 2-year $35 million working capital facility with KeyBank yesterday. This new facility provides us with a significant amount of flexibility to support our production and growth plans. We are also working on securing a long-term loan to refinance our promissory note due to Pioneer, which comes due in December of '17.

To recap our guidance based on information currently available to management, the company currently expects revenue for fiscal '18 to be approximately $75 million to $80 million and adjusted EBITDA to range between $4 million and $5.5 million. And for the first quarter of '18, we expect revenue to range from $9.5 million to $10 million.

I know we went through a lot of data here, so if you have any questions, please feel free to ask.

Let me turn it back over to Mark.

Thank you, Matt. As I said at the beginning of this call, I am excited about the opportunity S&W has before it. We have a tremendous team of individuals. These are industry veterans who have high levels of expertise within their respective verticals. I'm confident in our ability to build a great agricultural platform going forward by leveraging our existing assets, which also -- while also incorporating new technologies in focused areas. This is an exciting time to be in agriculture, and S&W has a tremendous platform to build from.

I am committed to making S&W successful and appreciate the support of our shareholders and look forward to driving value for our customers, our partners and our shareholders over the years to come.

Now we'd be happy to take some questions and open up the discussion. Operator?

(Operator Instructions) Our first question comes from Mike Malouf of Craig-Hallum Capital Group.

Mark, I was just kind of -- as I look at gross margins over the next couple years, I'm wondering if you could comment a little bit on where you see S&W's gross margins trending. And how does sunflower and sorghum and, I guess, stevia play into that? Where should you really be, 20%, 21%, that does drag you with sort of commodity-like prices, so how do we get those into more attractive ranges?

Yes, that's a great question, Mike. I mean, the industry gross profit margin percentages for sorghum and sunflower are probably more in the mid-30s, 35-ish kind of range. So I think by focusing on those hybrid crops, and again, those are annual crops, not a perennial crop where it's hard -- it's much harder with alfalfa to prove yield, and so it's harder to maybe get farmers to pay based on a yield criteria. But on sunflower and sorghum, for sure, yield is measurable. You weigh the seed or you can measure the seed over a combine. And the industry, I think, has done a good job at providing improved varieties, hybrid varieties for their farmer customers. And we are looking forward to competing in that industry. So these other crops that we're moving into have a much higher gross profit margin than alfalfa and should be part of our efforts in the next few years to raise our gross profit margins.

And how about with alfalfa?

Alfalfa, we'd love to get our prices up if we could prove to our farmer customers that there's value there to be shared between they and we, so that's always a focus of ours. So this whole customer -- more customer-focused strategy is to really understand and help our customers -- for us to understand our customers' needs. But it's for our customers to understand what we're providing in our germplasm and in the trait packets that we'll be offering to them. So we're planning on doing more in-country demonstration trials. We always try -- or a little bit OUS centric. You know S&W's sales -- product's all around the world. And we have to make an effort to put out information and demonstration trials in other countries around the world, so our customers can see how our products perform. Traditionally, we've, at S&W, tried to also save on our seed cost, and so getting higher margins for this past year. I think our margins were up a couple hundred bps. That was our effort to really reduce the seed growing cost. But it's always a two-pronged effort. In the seed industry, as you know, trying to reduce your own cost but trying to prove to your customers that you're providing more value.

Okay, great. And then moving to stevia, can you just add a little bit more color on the specific plans over the next few years?

Yes. So I'm incredibly excited about stevia. I mean, just what you read about the problems that we're having with obesity in this country and everything. These sweeteners as a class that are not based on sugar, I think, are real opportunity. We certainly have had a mixed record in our ability to enter and earn money out of that market. So that's going to -- that proving that we can actually achieve some things in stevia. You're just going to have to watch our progress and we're going to have to show you and other people in our industry that we can be effective in stevia. But we have 3 patents. I think the third one is being issued here maybe almost as we speak. The patents are focused on the taste issues in mainly Reb-A, which is the main sweetening component of stevia. It has a bitter taste, and that's why it's used as maybe not as -- achieved as much market penetration as it could. So we're doing breeding and we select for better-tasting varieties. And we also select for varieties that have better processing characteristics, so that it's easier to get the Reb-A and other steviosides out of the actual plant. And so we're working on all those things. And I have -- I'm a chemical engineer by education, even though I ended up in the seed industry and in the dairy industry. So I have some experience in extraction and in large facilities doing extraction. I was in the ethanol industry that wasn't sort of said in my bio. And so I'm very excited from a professional standpoint, too, and think that I have some applicable background that would sort of allow me maybe to help S&W get to a place in stevia that it couldn't get to before I became the CEO.

(Operator Instructions) And our next question comes from Sarkis Sherbetchyan of B. Riley & Co.

Mark, can you maybe give us a few key milestones that your team plans to achieve and also perhaps what time frames maybe we can kind of think about achieving those key milestones?

Sure, Sarkis, I'd be happy to. So I'm not going to plead longevity here because I'm kind of an older guy, and that's where my experience comes from. But I'm here -- this is my 12th week. And I think what I've said to people who have asked me your excellent question before is that our team, our senior management team really is taking the next kind of 5, 6 months to evaluate what the real opportunities are and what the time lines for those opportunities are and how to rank them against each other, what are short term, what are long term, what are maybe big profit opportunities, what are smaller profit opportunities but have a lower risk. So we'll be generating that sort of analysis and discussion. Part of it is internal, part of it is reaching out to other experts in the industry in different markets that we're interested in. So you can really expect a definitive answer to your question kind of in the February time frame of 2018. That's what internally we've targeted. So if I could just ask your patience and remind you to ask me that question again in a future call. Hopefully, I'll have a much better answer for you. I'm not trying to dodge the question. But frankly, we're doing the work right now, Sarkis.

Yes, appreciate that. And I think in the prepared remarks, you had mentioned after the closing of the KeyBank facility that there's opportunity to refi the Pioneer promissory notes that are due in December. Can you maybe talk a little bit about what you plan to do with the recent private placement money, which, obviously, doesn't show up on your June balance sheet? As well as I think in conjunction with that release, you had mentioned a potential September, October time frame rights offering. Any thoughts or updated thoughts on that process?

Sure. Maybe I should let Matt give you a better answer than I could give you to that. Matt, please?

Sure. Well, Sarkis, one of the use of proceeds will be short-term working capital needs. We're really pleased to have the KeyBank facility, and that's going to provide us quite a bit of a flexibility. But as we talked about probably 12 months ago, we did increase production for the crop that's being harvested now. Yields are coming in around average. But year-over-year, we'll be carrying higher inventory balances with that increase in production coupled with the declined sales in Q4. So short term, some of those proceeds will be used to help supplement the working capital facility. We are also working on the refinance of the Pioneer term loan. We're targeting a 15-year loan, and we're in the final stages of that. We're just wrapping up our appraisals to conclude what the exact amount will be. So once that's done, we'll know the exact allocations of those use of proceeds. And then, of course, we're really excited to have Mark on board. And we want to have flexibility with the balance sheet that as we see opportunities that present themselves in the coming periods, we can be flexible to jump on those.

Got it. And just kind of expanding on this thought process. Any initial target on how you'd like this -- EBITA balance sheet or leverage ratio is going to play out?

Well, I mean, I would think that from a -- we typically would want to keep our cash flows from operations to long-term debt probably will be around the 3x level, in any given period that we might have a departure from that. But I would say from a longer-term perspective, I wouldn't think we want to -- we wouldn't want to leverage more than -- from a long-term debt standpoint more than 3x cash flows.

Got it. And then circling to the annual '18 guidance. I think the revenue range was $75 million to $80 million. EBITDA range was $4 million to $5.5 million. It seems fairly in line with the year we just kind of produced. Can you maybe talk about the cadence of either sales, expectations or the kind of distribution of EBITDA generation? Would it be similar to this past year? Or would it be different?

Yes. I would say the sales cadence, we're probably expecting to be more similar to the '16 year as opposed to '17. And as we mentioned, Q1 is a very light quarter for us as the harvest is preparing. But certainly, revenues are back ended into second, third and fourth quarters. But Sarkis, I think if you look to the '16 year, that will give you a much better idea of revenue cadence. And the also, I'd just mention, in Q1, our gross margins -- just based on sales mix, gross margins in Q1 are a bit thinner. And then we really sort of started seeing that more dramatic gross margin expansion in the second, third and fourth quarters as we have higher concentration in sales of our dormant varieties, which carry higher margins.

Got it. And then just kind of moving on to stevia. Is the thought process here to become a commercial producer? Or is it to eventually license out or kind of collect a royalty to those commercial producers that exist today?

I presume, Sarkis, you're referring to stevia?

Yes, that's correct.

Yes. I think, again, we're sort of in an evaluation process, but we're thinking through our previous position that licensing these varieties to other parties is the way to go. We're concerned about our intellectual property, especially since most of the production is done in China. And these plants can be cloned and your germplasm can be copied. So we're trying to figure out what those issues have on our strategy, and we'll, frankly, be redefining that. I have some ideas of where I'd like to go, but I'm not going to say much about that until I have some more meetings with other people from the industry because there might not be partners or others that want to cooperate and are willing to sort of co-develop or co-invest with us. And so I'm going to hold off on giving you any specifics. But we're concerned about the IP issues in stevia and maintaining our very valuable IP, and we're adjusting our strategy to take that into consideration.

Our next letter comes from Jonathon Fite of KMF Investments.

I think most of my questions were answered, but I just want to clarify something on the rights issue. I thought I heard Matt say that even with the securing of the $35 million line, you guys are still actively considering a right issue just for working capital liquidity purposes. Is that right?

We are -- our intentions are to launch a rights offer in this fall. We anticipate on filing a document with the SEC here in the very near future, and that will give us further details around the mechanics of that rights offering and use of proceeds.

Have you -- do you have an initial sizing on kind of what you're looking to raise through that?

Yes. I'd rather wait until we file that S-1 with the SEC to give all the details on the rights offering.

Our next question comes from Al Shams of American Capital Partners.

Correct me if I'm wrong, but one of the things that I surmise from Mark's comments is that over the next 2 to 3 years, we've got a chance for substantial revenue growth and that there are various projects that have been incubating over the last 2 to 3, 4 years that are now coming to fruition from a revenue point of view. Is that essentially correct?

I would say so. Yes.

Okay. Okay. Okay. Good. Good. Secondly, with respect to the severance package in paying about $650,000, can you talk about that? And I mean, I'm sure there was a contract there and you have to honor the contract. But was there any other way around that? Just talk about the circumstances of that, please.

That package is something -- that separation agreement was something decided at the board level. We filed our SEC disclosures around the details of that. And it's really -- it has nothing to do with the go-forward operations of the business, so we'd rather focus on our strategic initiatives that we're working on.

Okay. Okay. And then for Matt Szot, you were talking about the -- was it a write-off of the tax deferral asset? But that's just for book purposes. We still have that asset from a tax paying point of view?

Absolutely. Those net operating losses are still there. The assets still exist and the future benefits of those assets are by no means gone. We simply have taken a reserve against our balance sheet. So as we generate future taxable income and we -- where we otherwise would have GAAP income tax expense, we will have -- we'll be releasing the reserves off of our balance sheet. So that will trigger not only minimal to 0 GAAP income tax expense, but probably just as important from a cash flow perspective, we'll be utilizing those NOLs, resulting in no cash income tax expense as well.

Okay. Okay. And let me compliment you on that very nice transaction, the raising of capital in an unbrokered fashion. So that was a real value transaction to shareholders, so thanks on that. That's it for me.

Well, thank you, everyone, and thank you, Andrea, for helping keep people in communication and helping us field the Q&A. I'd just like to finish up and just thank those of all of you who are on the call today. There's a lot of work still to be done, as you've all heard. There's inevitable challenges that will come up. But we think there's great opportunities in front of us, and we're going to drive value for shareholders at S&W.

Again, we thank all of you today for taking your time and listening to our discussion. We look forward to speaking with you again in mid-November. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.