S&W Seed Co (SANW) 2022 Q2 法說會逐字稿

Good day, and welcome to the S&W Seed Company Reports Second Quarter Fiscal Year 2022 Financial Results Conference Call. (Operator Instructions) Please also note, this event is being recorded.

I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you very much, and thank all of you joining us today to discuss the financial results for S&W Seed Company for the second quarter of fiscal 2022 ended December 31, 2021. 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 will open the call for a question-and-answer session.

Before we begin with prepared remarks, please note that the 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 in 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, 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, 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.

Thank you. Thank you, and welcome, everyone, to the call today. First of all, it is my great, great pleasure to introduce everyone on the call today to our new CFO, Betsy Horton, who actually has been here now 3 months so not that new. She came right after the last call, so you all didn't get to hear her, but she is a wonderful addition to the S&W senior staff. She has a long history in agriculture, 20 years with Cargill, 3 years with a company called Miller Milling, which was in the wheat obviously, business, and she was CFO there, and that was a bigger company than S&W. So she comes just with huge credentials, a lot of energy and the right background for the new S&W as we move into the future. Remember that in our model with Stevia and our Ingredion deal, we are not just selling seed now. We are also buying the leaf of the dry leaf and from our farmers, and we're selling that to Ingredion in back-to-back contract. So as we move closer to the consumer, and we embed ourselves in the distribution chain of these products, we really feel very, very lucky to have Betsy with us, the person who has a long history with Cargill, where looking at supply chain and all of those kind of things for ag products was a big part of what Cargill does.

So welcome, Betsy, and thank you so much for joining S&W, your energy and your inquisitive questions, and your sort of making us all look at the industry that we've known basically for our lifetime is just a breath of fresh air, and we really do appreciate you joining the senior management of the company.

Okay. On to my next point, I just want to make a few comments since the USDA has just come out with some projection for net farm income. I want to put this crazy market that we're all in with inflation and supply chain issues and all of sort of ag scratching their heads as other industries are. Just a few sort of grounding facts that we should all remember when we're looking at the industry and companies like S&W that are part of that industry.

So the USDA is saying that net farm income for 2022 is projected to be $113 billion, $114 billion. That's actually down from $5.4 billion or about 4.5% from the 2021 number of $119 billion of net farm income. And remember, net farm income does include government programs and support from the government -- from the federal and state government. It is important, though, to put these sort of projections in context, the '21 was a big increase in net farm income for farmers in the U.S. Farm income -- net farm income in 2020 was only $94 billion. So '21 was about a 25% increase in net farm income for farmers. And as I said, '22 is about a 5% decrease.

So while farmers are very optimistic about the crop that's being planted this spring in the Northern Hemisphere, it's also good to look back on history, remember that there were in recent history both years of higher net farm income and years of lower net farm income. So in 2016, '17, '18, farm income was fairly low. And in 2011 and '13, farm income was higher than it actually is in '22. So it's a pretty profitable cycle for farmers in the U.S. in '22, but not as profitable as kind of the best years of 2011 and 2013. And farmers are optimistic, but they're a little bit nervous. I mean farm income is projected to be down, while expenditures, farm expenditures are projected to be up about 5%. So the farmer is spending more to generate very good farm income, but it's less farm income, at least projected, by the USDA than there was in 2021.

So in that context of that general market and I would say that Australia sort of -- while I don't have specific numbers in the ag business in Australia, it's much smaller than the U.S. I would say our opinion is that the markets in Australia also reflect these general conditions, higher costs, very good income, but not as high as maybe some other years, but farmers are optimistic, but they're a little bit worried that their input costs are increasing. And frankly, if you're in the animal protein business, it's feed that's higher. If you're in the row crop business, it's fertilizers really that have gone up in price because of cost increases. We all know what's happening to the price of oil and those kind of things. So that's the context in which we are operating S&W in which we make -- I make and Betsy make the report to you all today.

So in the second quarter, which is our smallest quarter, remember, and that's because in the third and fourth quarters, we're really selling seed for the spring planting in the Northern Hemisphere in the Americas. And because our business in Australia is really all planted pasture product, it tends to overlap on our spring planting in the U.S. in the Northern Hemisphere. And like all other companies who ship things long distances on water and by rail and by truck, COVID and supply chain issues have been a problem for us. It's pushed our sales back a quarter in general, and Betsy will go into some details about that. But net-net of all of those difficulties, which we're managing, I think, fairly efficiently, we're still holding our guidance for the year of $80 million to $85 million sales for the full procedure of 2022.

We're also obviously still have EBITDA smaller and smaller every year, but EBITDA losses. So gross profit margins in addition to sales are a real priority for S&W. We believe that we have implemented price increases fairly across the whole product line that reflects our rising costs. We are also trying to control our cost at sort of all levels that include the cost of producing our seed, the cost of running our own plants, our research and sales and marketing costs, we are trying to hold tight on. And on freight costs, which gets a lot of public press, we've managed to try to control that in a couple of different ways, more efficient and more people sort of looking at getting shipments out to customers, passing on those freight costs to some of our customers where that's appropriate and just making sure that we are on top of, on a daily basis, the freight situation, both availability and price as we move our products to the market.

If there is a big mover though in the next year or 2 for S&W, it is our largest opportunity, the sale of Double Team sorghum. And as you all know, because we've talked about it in past calls, having a trait that is a herbicide trait is very, very valuable. There are a handful of traits in all of agriculture, and it is very unusual for a small company like S&W to have the wherewithal to spend the development time and have the management capability to basically bring a product like Double Team through the whole process and produce the seed and introduce it to our farmer customers. And that's the process that we're in right now. We're in a bit of a rising market. So the wind is at our backs in sorghum this year. The USDA has announced that the sorghum crop that was planted was about 7.3 million acres last year, which is up 24% from the 5.9 million acres that were planted the previous years. So farmers are kind of boating with their feet. Sorghum is a good alternative to corn and the input costs are less, the water required to make a crop are less and the economics of the grain price give farmers an excellent profit. So more acres of sorghum went into production in 2021. And we hope that that continues in 2022 spring planting, which obviously for the U.S. will be sort of in the April, May, June time depending on where you are in the -- latitude-wise in the U.S.

So as I said, having a trait like this is very unusual for a small company. I can say in my career of 45 years doing this, I've been CEO of 3 other companies, and none of them owned their own trait. We did sell traits at my last company, which Monsanto purchased, and they purchased it because most of the traits we were selling were Monsanto traits, and they wanted to basically keep that margin sort of in our product. So they bought the company that I built there. So we -- at that company, which was called Emergent Genetics, we sold basically Monsanto and Syngenta trait. We did not have a trait of our own. So the fact that S&W has Double Team is the thing that every morning I wake up with a smile on my face, and I thank all of our dedicated employees and research, marketing and production, who have helped us get through this 6- to 8-year product development cycle and bring this product to the hands of our farmers. And you'll be hearing more about Double Team as we make and take market share in sorghum. So that's going to be a recurring theme to give all of you an update on the progress that we're making in our most exciting crop.

On the alfalfa side, we're seeing strong demand. Alfalfa is really first and best uses to the dairy industry. Dairy prices are up for milk and cheese and farmers want to buy good, high-performing alfalfa varieties because they can get milk yield on the -- from their cows by feeding the best high-protein feed. We are also seeing some rising prices, mainly because the last couple of years where we had more inventory in the industry than really there was demand has finally sort of fixed itself. It's cargo like to say, high prices fixed supply. And so the prices in alfalfa are rising because supply is limited. And you'll hear from Betsy a little bit that there are some positives and negatives about this. For sure, we're shipping more crop out of our existing production for this year. So that's alfalfa seed production that's in the ground right now yet to be harvested. So the positive there is that we have more efficient use of our balance sheet, more inventory turn in alfalfa. The negatives are that we have, timing is very important. We have to harvest a seed, clean the seed, coast the seed, bag the seed and ship it to our customers all before their spring planting season, which are mainly the Middle East and North African countries are the main markets that we're selling into with our nondormant alfalfa product.

On stevia, we continue to move forward with that. As I mentioned in my opening comments, we're very excited to have Betsy's expertise in the company. We think that by basically selling seed to our farmers and then buying their output, which is the dry leaf that contains the stevia sweetener and then selling that to our partner Ingredion is a business that we want to do more of. And so as I've also said, we're looking at other things -- other than stevia to produce that we can take a position in the output that our farmers have. Some of those might be fuel, biofuel, green biofuels or green degradable plastics. Those themes are discovered already and we're taking a look at those.

So it's a great situation with Ingredion. We have a belief in our product line that says we can produce dry leaf in the U.S. on a cost per pound basis that's competitive with China. That's something that no one ever believed would be possible given the cost of Chinese labor. But as I've talked on other calls, we have developed with our proprietary germplasm, a production system that basically farms stevia as a perennial for a number of years, and then we're able to take multiple harvests off to spread the costs over more production and produce at a price that's competitive on a per pound basis with China. We also think that it's pretty clear from all the logistics issues that if you have similar costs on a per pound basis, it's a pretty easy decision to sort of match local production to local markets and that avoiding these supply chain issues, which are frankly not controllable by most small companies like S&W, we can get efficient there. We can control our costs as best we can. We can work with our customers on all of that. But we're not big enough to rent our own ships or have our own containers or have a fleet of trucks, and so we're dependent on third party in all that. So having stevia produced in the U.S. for a stevia market that is the world's biggest. So in the U.S., stevia is about a $900 million value crop at the consumer level. Those are really, we believe, valuable things for the future of S&W.

As we see these kind of opportunities, so stevia, better pricing, which may not be a long-term thing in alfalfa, but for sure, in the next few years, we believe we'll see that. And then the Double Team opportunity in sorghum, it leads us to always raise the question that good companies have to ask, which is, should we be restructuring, refocusing the business. And I'll tell you right now, we're going through a process of taking a look at those 3 main crops that I've talked about, sorghum, alfalfa and stevia, and making sure that we're doing everything we can to harvest the value that we're creating in those crops. And if that means we have to pay a bit of less attention to some other things, we're going to do that, and you will hear about that story in the next couple of calls.

So with that, those are my general remarks, and again, it is my great pleasure to welcome Betsy to the senior management team of S&W. And Betsy, I will give the podium over to you to make your comments on the financial specifics for S&W for this quarter. Thanks so much.

Thank you so much, Mark, and thanks to everyone joining us on the call this morning.

With this being my first quarter as the Chief Financial Officer of S&W, let me express how delighted I am to join this team with all the opportunities we have in front of us. I believe S&W is uniquely positioned to benefit from some significant macro trends with our next-generation products and a global infrastructure that allows us to become a leader in a number of key middle-market crops.

As Mark mentioned, my background is solidly in agriculture, first with 20 years at Cargill in various financial roles and then the past 3 years as the CFO of a flower milling company called Miller Milling. I'm excited to bring that experience from a great risk management company like Cargill to help drive S&W into our next phase. I thank Mark and the board for this opportunity, and I look forward to some fun things ahead.

With that, let's run through some key financial items. Core revenue, which excludes revenue to Pioneer, was $12.6 million for the second quarter, an increase of 15% compared to the $11 million in second quarter of the prior year. The increase in core revenue for the second quarter came primarily from sales to the Middle East, Argentina and South Africa. As we mentioned in the press release, the second quarter is seasonally a quarter which is characterized by lower margin international alfalfa seed sales and very little from our higher-margin sorghum sales which tend to occur in the third and fourth fiscal quarters. An important note that was made last quarter that I want to reiterate, core revenue and total revenue will be the same number in fiscal 2022. We will continue to reference core revenue as long as we are comparing against fiscal 2021 numbers. Our prior year Q2 results include revenue from Pioneer of $4.1 million, which brought year-ago total revenue to $15.1 million.

As was discussed during the last 2 calls and Mark shared again today, we, like many other companies, are experiencing certain supply chain and logistical challenges, which is resulting in a shift of revenue to the right. We previously had about $5 million of revenue slated for Q4 of '21, which shifted into last quarter, and this quarter, we had about $3 million in sales, which shifted to the third quarter. The limited availability of overseas containers and ongoing congestion at the port continues to delay shipments and complicate our operations. At this point, we are expecting these dynamics to persist throughout the year.

The annual revenue guidance we have put forth of $80 million to $85 million takes into account these dynamics to the extent we can forecast. Therefore, we have already accounted for certain shipments we would have historically made in June that will likely shift into fiscal 2023. We do see a risk of being able to process and ship the upcoming Australian harvest, which is coming out of the ground around April, and therefore, the timeline to harvest the seed, clean, package and ship is likely going to be more difficult this year than in years past when we had higher levels of carryover crop. We are all optimistic that this global issue will be resolved, and we will see a bit of catch-up, but the situation is fluid and impossible for us to control or forecast precisely.

Now turning to margins. GAAP gross margins were 13.1% compared to 13.5% in the prior year second quarter. Adjusted gross margin, which excludes the impact of inventory write-downs, were 16.6% in the second quarter compared to adjusted gross margins of 13.8% in the second quarter of the prior year. Further, if we were to exclude the contributions from Pioneer from last year's results, which again were not repeated this quarter, adjusted gross margin last year would have been only 9.8%. So when you look at the improvements made during the quarter on a relative apples-to-apples basis, margins improved by 680 basis points. Considering the seasonality of the business, looking at the second quarter isn't always a full indication of the gross margin on an annualized basis. However, I believe this 680 basis point increase is a strong indicator of the progress being made to drive overall gross margin improvement.

As a reminder, the key initiatives we are implementing to impact gross margins include price increases on the majority of our products to address overall rising costs and to more properly reflect the value of our proprietary products. We are also modifying the terms and conditions of standard customer contracts to address the volatility and increased cost of freight and transportation. As we look at the rest of the fiscal year, we continue to expect strong gross margin improvement compared to the levels achieved in fiscal 2021.

Now I'll transition to operating expenses. Our GAAP operating expenses for the second quarter of fiscal 2022 were $10.6 million compared to $9.4 million in the second quarter of the prior year. The increase in operating expenses is attributed to a nonrecurring $1.2 million increase in employee and severance-related expenses. R&D and other SG&A expenses remained flat compared to prior year quarter and up just slightly from the most recent first quarter. I know in the past we have provided a general outlook for our operating expenses on a full year basis and want to do so going forward. So as we look at fiscal 2022 on a whole, we expect SG&A to be approximately $26.1 million, which includes noncash stock-based compensation of approximately $2.2 million. Note that the increase from last quarter is due to the employee and severance-related expenses I mentioned a moment ago. We expect R&D to be approximately $8 million in fiscal 2022 and depreciation and amortization to be approximately $6 million.

At the adjusted EBITDA line, we had negative EBITDA of $6.5 million for the current quarter compared to negative EBITDA of $5.5 million in the prior year. Now recall what I said a moment ago about the nonrecurring $1.2 million increase in employee and severance-related expenses. $700,000 of that is not excluded from adjusted EBITDA. If we were to exclude it, since it is a onetime expense, the current quarter adjusted EBITDA would have been very close to the prior year. And once again, if we were to exclude contributions from Pioneer, and look at this on an apples-to-apples basis, adjusted EBITDA last year would have been a negative $6.4 million. Therefore, the improvement would have been more than $0.5 million. I recognize there's a lot of moving parts there, but I believe this helps to highlight the operating improvement that may not be visible on the surface.

As you can hear from the general guidelines we have provided regarding revenue guidance, gross margin improvement, and operating expense expectations, the second half of the fiscal year will show significant improvement on the adjusted EBITDA line.

Now a few general comments on our future outlook. We continue to be focused on driving improved bottom line financial results. There are 3 key levers to this. We will increase sales and improve gross margins while maintaining or reducing operating expenses. We are gaining enthusiasm for our Double Team outlook, which we believe will be a key driver to both revenue growth and gross margins as this product has margins far higher than the other products in our portfolio.

Despite the logistical challenges, we are driving towards core revenue growth in fiscal 2022 and believe that number will ramp further in fiscal '23 as we are able to increase our Double Team seed production. Simultaneously, we are focused on holding and reducing operating expenses where possible to ensure those margin improvements drop to the bottom line.

I just want to reiterate my excitement in joining S&W and how much opportunity I see for this company. I look forward to speaking with and meeting many of you in the near future.

With that, I will turn the call back over to Mark.

Thank you, Betsy. And I just want to conclude the call before we take questions with a couple of most important points, the sort of take-home message of this call. So as Betsy said, we're going to drive sales, but we're going to drive them to more profitable sales mix so more proprietary product with traits if possible and fewer commodities, we think that has implications for our margin and it has implementation issues for our whole business going forward. We believe that this kind of drive will improve margins and help us also focus on our costs and allow us to spend our money where we're going to get the most return. And for the near future, a big, big opportunity for us is pushing proprietary Double Team into the market, selling alfalfa in a rising price environment and moving forward with our production in partnership with Ingredion and Stevia.

So with that, I will -- we've concluded our remarks today, and I'll turn it back over to the operator so we can take some questions. Thank you so much for everyone attending the call today. Thanks again.

(Operator Instructions) And the first question today will come from Sarkis Sherbetchyan with B. Riley Securities.

I just wanted to first talk a little bit about the statement I saw in the press release, it states that restructuring some key elements to improve financial results. Just wanted to see if you can dive into this in a little bit more detail?

Great, Sarkis. So look, as we gain market share in introducing Double Team and we're -- and we see, as I said, even a rising acre market in sorghum, it's pretty clear based on I mean we sell forage oats for gross profit margins of 17%, 18%, and we sell Double Team in grain sorghum for margins of 70%, and it's pretty clear that we need to maximize those high-margin crops, and we need to focus our efforts on those, and we need to apply our balance sheet because it's -- we're in a big growth phase for those products, and we're spending money to produce inventory. And we really -- it's more and more obvious to see great opportunities in sorghum are clear to us and we're gaining share that we should be refocusing the company on those higher-margin crops. And we should be selling out every year of the low margin cost and carrying no inventory and not spending huge amounts of marketing dollars or production dollars to do those crops.

Got it. And this maybe ties back to my next question. Reading through the 10-Q that was filed, found a line that says that you're actively evaluating financing and strategic alternatives. Can you maybe give more color on that disclosure?

Yes, I mean, we're always looking at better opportunities as we're growing. The question always comes up for smaller companies. How do you do that? You clearly, in this kind of market, you want to maximize the debt that you have available to the company. So being able to use your receivables and inventory as a borrowing base for your evolving credit, which in the ag seed business is always a significant number. That's one thing that we're looking at. We probably will need to raise a bit of equity just because that revolving credit line will not cover all of the additions that we want to make in Double Team.

And we don't give guidance to earnings, but I'll tell you that it's a significant number. I mean the Double Team sales that we're expecting, and we pointed this out in our December 2020 seed and trait development report, we said that revenue from tech products, seed and licenses, et cetera, in the 3-year sort of short vision were going to be $12 million. We think Double Team will be all of that easily. Easily in the sense that if we execute and based on the reception we've had from farmers in the field, we think that Double Team will make those kind of numbers. And so we're in a phase where we have a great opportunity in a high-margin product to really change our sales mix and to really increase our percent gross profit margin because this product is a high performer in the farmers' field and farmers want to buy it. And at these kind of margins, we want to sell every bag that we can.

And that's a great segue in to my next question, where I just wanted to kind of get a better understanding or a bridge, if you will, on what specifically needs to happen between now and fiscal '24 for the company to achieve that $130 million in top line, boost the gross margin profile to 35% and generate those 10% EBITDA margins? I mean those were the metrics you communicated in the December 2020 tech deck. So just want to see if there's anything that you can give us from a gliding past perspective?

Yes. I mean the basic business has been growing 10% or so a year, that in our expectation will continue, but it's Double Team that is going to make a big change. Companies are willing to invest for 6 to 8 years to create these products and test them in the market and produce the seed because they're profitable. And as I said, in the whole of seed biotech agriculture, which is dominated by the big 4, you can count the number of genes that those companies offer on your hands and your feet after 20 years of doing R&D. So these genes are incredibly valuable. And they're valuable because the farmer will pay for them because the farmer gets higher yields and makes more money per acre, even though he pays more for that bag of seeds, he makes multiples of that from each acre that he plants. And so it's -- if you look back historically at the Monsanto example and how they put multiple traits in the different crops, and what that resulted in terms of earnings and eventually stock share price and their buy out the buyer, we're not going to have a pipeline of products because we don't have a bigger R&D budget. But in this case, for Double Team, it's a huge opportunity, and we're going to maximize the benefit to S&W.

Herbicide resistant traits are the easiest to sell to farmers. Easier than insect traits because insects don't show up every year and easier than some of the other traits for disease resistance and things like that because diseases also don't show up every year, they sort of depend more on weather. Weeds are pretty -- always there. And so especially in sorghum, which is a grass. We have grass weed problems and Double Team controls those grass weeds, and that's what farmers want.

The next question will be from Ben Klieve with Lake Street Capital.

Sorry, I had to hop out for a minute so if I'm asking you something that you've already addressed, I apologize for that. A few questions for me. First of all, on the supply chain issues and the degree to which it's affecting Double Team, if at all. Are you expecting any issues whatsoever around the scaling of inventory for the seed side? And then on the chemical side, do you foresee any issues with the supply chain preventing farmers from getting the corresponding herbicide for this upcoming growing season?

Yes. Great question, Ben. We don't. At this point, what's limiting us is the biology of seed multiplication, right? So sorghum is a hybrid. So you have to have -- it's a 3-line hybrid, they call it. So you have to have a male line and a female line that you put in the field to produce the hybrid that we sell to the farmers and then you need a third line because the female has no pollen to basically multiply the number of female bags of seeds that you have. So that's why they call it a 3-line system. And that's what's limiting our ability to produce bags in the market. We're basically producing at full capacity, all availability of our 3 parent seed lines. And so -- and we're making some improvements each year, right?

So the product that we're selling today will be improved by the third year that we're selling it and farmers understand kind of what improvements are coming because we talk about that in our trial that the farmers come to. And when they see the crop, they're -- they know our plan for the next few years. So we're really optimistic because of the share we're gaining now and the farmer response that we're getting. We have 4 or 5 hybrids in the market this year. And we're getting good response to all of them. So I don't expect that there's going to be any problems on the seed side and ADAMA our ag chem partner who's providing the herbicide says that on their side, things are fine too.

Okay. All right. Good to hear. Mark, you mentioned potential coming from the biofuel -- from biofuel angle or potentially integrating traits for bioplastics in the seed. I'm assuming, especially in the biofuel you're looking to leverage your sorghum portfolio, but I'm wondering if you can talk kind of on a high level, how you view your current product line with -- across those 2 opportunities versus having to potentially bring in additional crops beyond the sorghum, alfalfa, stevia?

Yes. I mean our basic premise philosophy on the question that you asked, and is we think that you have to plant a second crop after the primary crop. So if a farmer is raising wheat or sorghum, our focus is producing a second crop with that farmer that is not a food crop that will, therefore, never make it into the food chain so we can sort of use all the tools in our science toolbox including GMO technology, CRISPR whatever, and that we can create products because they're not going into the food chain. The benefit of that is clearly manyfold, right? Number one, the farmer gets additional incremental revenue. Number two, that acre is producing a second crop that's really a cover crop that can be harvested for value, right? And so you're sequestering carbon, but at the same time, you're making another commercial profit, just not making something you're going to plow under into the field to increase the carbon content of your soil. You're actually producing something that can be sold for a profit.

And so that's the philosophy we're going on. You'll hear more about that in the coming quarters, but we're pushing hard to understand what the industrial benefits are of producing things in plants. I've mentioned, I think, as you said, bioplastics or biofuels. And when we started thinking through this, it was not a popular thing. But frankly, I think it's becoming more and more popular, and you're seeing some of the big oil companies sign deals along the same lines that we're talking about.

Got it. Interesting. I'm firmly with you on the benefits of a cover crop system. So very interesting, we'll stay tuned for more news down the road there. Betsy, I got one for you, and then I'll jump back in queue. You mentioned a couple of times in your prepared remarks about looking to maintain or lower OpEx. Do you mean -- by that, do you mean on a percentage of revenue basis or on a raw dollar basis? And then what do you see within OpEx having some -- kind of some flexibility to look to maintain or reduce here in coming quarters or years?

Yes. Ben, nice to talk to you. I think we definitely see maintaining or reducing operating expenses as 1 of our key levers. I would say we're looking both at percentages as well as raw dollars. I mean I think we have to reduce it as an amount of revenue. We've -- with some of the growth initiatives we've had and things like [BP], we've had to build SG&A ahead of time to prepare for that and to make sure we've got the right R&D investments and the right sales and marketing team to support that. So as we see it launch and we see revenues come up from that, I definitely expect that we should be able to create more of that leverage over those costs and see the percentage of those costs as a percentage of the revenue come down. At the same time, looking at them as whole numbers as well and taking a look across the portfolio of things we're spending on and making sure that, in some cases, we'll be investing more in some areas and at the expense of others. So that's definitely one of my key areas of focus coming in and taking a look at the company kind of with fresh eyes and so something that you can expect to hear more from us in the coming quarters.

And the next question is from Gerry Sweeney with ROTH Capital.

Mark, back to sorghum, one big question for me on that front. You talked about that. Yes. Go ahead.

Yes. So as I've said in previous calls, I was on Monsanto's Board and Monsanto -- first consultant and then employee during those times in the 1990s when all of the strategy for licensing traits and keeping traits for -- in your own product line were being sort of worked out. And I mentioned that all of the traits in the whole ag seed industry can be counted kind of on your hands and your feet. And so that makes every trait super valuable. And Monsanto came to the conclusion that because they're so hard to find scientifically that getting maximum market share was the right way to maximize EBITDA contribution to the company. And so they licensed their competitors. The competitors at the beginning were very hesitant. They thought there was some like trick to the whole thing. Why would you license your competitors a gene that they didn't have and wouldn't have for maybe a decade. You were giving up all that advantage in time and time, as you all know, who are on this call, is everything in agriculture.

And -- but getting that share and that's how their traits in -- their focus crops of corn, soybeans and cotton have 97% market share penetration. So on every bag of seed that every farmer plants in America, 97% of those have traits that generates revenue for Monsanto now Bayer. And that lesson proved to be the lesson of maximizing EBITDA contribution. So Syngenta tried not to do that and they tried to keep the traits for themselves because their market shares were a lot lower than Monsanto's. And so they wanted to drive their share up -- and while that -- it did increase their share, it did not improve their bottom line, the way Monsanto's strategy did.

So we're focused on licensing others. We have a small company that we are pretty much finished with our first license, and we're speaking to one of the big competitors about a license with them. Double Team is a super valuable gene, and people want -- farmers definitely want it, but our competitors are asking the question whether they want to sell it and some of them are coming to the conclusion that yes, they do want to sell it and the best place to get it is from us because they're not going to spend 8 years that it's going to take to develop a trait themselves.

What are the gates to maybe concluding those discussions?

Yes. So what normally happens is as we gain more share, our competitors come to our trial. Usually, we have a separate trial for each competitor so they don't see who each of them is, but everybody knows who's got the share in the market, right? It's not really a secret. It's kind of a smiley kind of thing. Everybody knows who our targets are. We know they know. And there's been historically in the market because I've been there so long, and I've sold so many traits, sold my 3 companies, Monsanto, 2 of them and Dow the third. Everybody knows the order, right? And so in previous companies, I didn't have a trait of my own as I was saying. So I maximized the number of traits I sold that were Monsanto traits because I knew that Monsanto would buy my company eventually because they had to control the marketing at the farmer level that I had created with their trait. And so we're following that same path with Bayer. It's not totally clear that the Monsanto -- sort of the old Monsanto team has obviously gone now, retired. They made individually quite a lot of money, and so they're not working anymore.

The Bayer team, they're a little -- there are different people that are in charge now. They're a little more conservative than Monsanto was. And so Corteva is really probably now a more important potential partner for us because they're, frankly, with their Pioneer brand a bit more innovative in the market. So -- but we're talking to everybody, and we'll see what happens. The timeline for that, Gerry, to your question, once they actually get the genes, so we give them the gene in a donor line, and then they cross that donor line into their 3 parent lines. I said that in the call, the male, the female and the restore line, and that takes about 3 or 4 years. So they're going to be 3 or 4 years behind us, even if we sign an agreement in 2022 fiscal year for us, they're going to be 3 or 4 years behind us. So in those 3 or 4 years, we have the opportunity to gain share because we have no competition. And then they'll be in the market. And so we expect to take significant share in those first 3 years and then have a big smile on our faces when they start paying us their royalties on the gene and their sorghum bags of seeds.

Got you. So yes, sorry, go ahead.

Yes, they're 3 or 4 years behind us.

Got it. But the key here would be them signing.

Yes. Exactly. Yes.

And then suffice to say, the targets for like fiscal '24, that 10% EBITDA margin would not -- you certainly don't need licensing agreements really to be kicking in [this December]?

We think we're going to hit the targets with our own share gain. We don't need licenses to hit those targets. This is going to be a big opportunity for us. It's as that December deck says, it's an 8-figure EBITDA opportunity for S&W in its own bags of seeds.

Got it. And then obviously, we're in fiscal '22, we're looking at '23, '24 is right around the corner. So how do we look at the production of seeds this year versus next year in terms of, I guess, the change in production and how does that sort of roll through?

Yes. I mean our multiplication rates will allow us to produce 4x or 5x more bags of seeds than we have this year. So it's a 4x or 5x what our sales projections are for this year.

Does your farmer dealer network help you in this -- you getting it out there? We haven't heard about this.

Yes. So we're doing a lot of work on our farmer dealer network. It takes a lot of work to have a good one like Pioneer does or like DeKalb does. They are the dominant farmer-dealer networks. Most of our sales still are through deals and distributors, not our farmer dealers. So they're really the chain that's going to be most of our sales of Double Team, frankly, it's not going to be our farmer dealers.

Got it. It was curiosity -- occupation hazard...

Yes. No, it's a great question. No, it's a great question.

Occupational hazard of being an analyst curiosity. Betsy, maybe a question for you. We talked a little about, I guess, in the prepared market terms and conditions and just watch on costs. I think on the last call prior to your arrival, there was one area that we talked about was freight and transitioning maybe some of the freight that sort of FOB S&W's facility was opposed to S&W paying for freight. I assume that might be part of the terms and conditions that we discussed or were mentioned then. Curious as to if that is when do we start to see that kick in? Is that a '22 issue? Or is this some of these terms and conditions really start to flow through into 2023?

Yes, Gerry, that's a good question. It's kind of a couple of different mechanisms that we've used depending on the market and how we're selling previously. For example, in the U.S., we used to give free shipping on things based on a weight basis, and we've now shifted that to be based on a dollar basis. So that those small shipments used to when freight costs went up by a lot, really had a huge impact on us. In other places, we're just simply passing the freight cost on to the customer. The customer pays it instead of S&W. So it really does vary. We went through that contract review kind of, I believe, starting last August, September, October time frame. And so a lot of the contracts for this year do have it in effect already. And then there's some that we have had contracted already that are still coming through. But we think looking forward, the majority of it have used those different mechanisms, mechanisms to make sure that we are not solely carrying the risk of increased freight costs.

The next question is from Jonathon Fite with KMF Investments.

I had 2 questions for you. One, more balance sheet related. The other is more forward-looking. So you made some comments about maybe some strategic raising of both debt capacity and equity capacity to fund growth, which makes sense. Over the last quarter, you all sold some equity -- raised some equity to kind of cover the cash burn in the quarter. We're sitting at about $2 million of cash on the balance sheet as far as quarterly in look. As we look -- as we kind of roll forward to the back half of the year, with the deferral of some revenues into the back half, does that improve the cash burn rate? Or are we -- while growth is wonderful, we got the current operations that we have. How do we think about the cash burn in the balance sheet over the next quarter or 2?

Betsy, I'll let you answer that, if you can, please.

Yes. Yes, definitely. Mark had mentioned earlier that -- we continue to work with our banks and lending partners to ensure that we're optimizing our balance sheet and have efficient structures for our credit facilities. I think there's some opportunity to better leverage the assets that we have from a collateral basis and matching ourselves up with a partner that can reflect the value of that collateral when it comes to lending facilities. I think that's part of the picture when it comes into this back half of the year, where we are shipping to customers, but increasing our receivables and waiting for that cash to come in. And we -- as a new CFO, I'm looking across the entire toolkit of products available to us, -- we have -- the raise that you mentioned was in October. We did a $5 million pipe, and we were really pleased with the participation from our management team and Board. And we will continue to look at all the available tools in the toolkit to fund this period of cash burn and also the growth of the company that we see going forward, which eventually then turns to a cash flow positive situation.

So you would -- I appreciate that kind of general commentary. There are some other portfolio companies that we've looked at that in addition, just to leveraging receivables and inventory from a collateralization perspective to kind of get an RBL or something in place, whether it's production facilities, transportation loopholes, other assets that the company has. Do you see that as kind of an untapped resource to collateralize as part of a debt package? Or are you primarily looking at inventory and receivables as the main mechanism?

No, we're absolutely looking at fixed assets as well and taking a look at some of the real estate that we hold and using that as federal as well. Certainly something over the -- in the coming year that I'm evaluating and just seeing what options are available to us for that.

Okay. Great. And then Mark, as we look ahead, I think in the past, you've provided some frameworks for how kind of what the appropriate revenue multiples are for trait-driven businesses. And as kind of post-COVID world you still think that framework hangs together as you have seen it in the last couple of decades? Has it changed at all? Or is that still the model to think about kind of what the value of these rates are going forward?

Yes. I think that's still the model, Jonathon. It's hard to know sort of on a snapshot basis kind of what the industry is sort of doing. We're in a big 4, obviously, are in a consolidation stage in the last couple 3 years, and just going from 6 to 4 companies. They're doing what normally happens with big companies when they consolidate, they first look to hold revenue and margin and to save on expenses because they may have 2 sales forces where the duplicate research program or a production plant that has the capacity to do all of the production and they can get rid of one. So that's what they're all doing, and I don't see the multiples on the traits going up or down much. But I see more profits coming from the big 4 because of cost savings, frankly.

So it usually comes -- there's usually a cycle that changes and all those cost savings are done and then everybody is going, well, what can we do to increase revenue and margin now that we've taken advantage of cost saving cut, and that's probably what the big guys are thinking of now, and they're doing it in a context of carbon credits and greener agriculture and what else can be made in plant just like we're talking about on our calls, these are not the S&W secrets or sole insights. I think the industry is going to be going the way that maybe the smaller companies go first because they're a little bit more flexible. And -- but the big companies will come around as such.

All right. And just kind of going back to the first question, is there any framing that you can provide on kind of the magnitude of the cash burn over the next couple of quarters until we see some of the step change of production that we see next fiscal year?

I think we're still working through those calculations, with ag, as you all know on the call, we're still selling into the spring North American market. We're still booking sales. That seed is going to be put in the ground April, May for the most part. We have to put our seed crop in the ground April, May. So we'll have a better view of that and be able to answer your question probably with more accuracy, maybe in the next quarter or quarter after that, after we sort of see how many acres of the Double Team did we really plant, how many hybrids did we plant? How does the crop look? We have a crop release but Mother Nature in terms of number of bags, that's our target production but Mother Nature has something to do with that, right? I mean if the weather is bad, we get less, the weather is favorable we get a bit more than that. So that's a question, I think, that we'll have more insight on in the next couple of quarters.

The next question will be from Richard Dearnley with Long Partners (sic) [Longport Partners].

I am relatively new to your company. Is it plausible that in the fiscal '23 year, you can get $12 million, which is the bogey for new products in sales and Double Team?

Yes. Simple answer.

I was going to follow with what would the investment and working capital be needed to do that, but you kind of just answered that with the previous question, so we'll skip that one.

Yes. And you guys kind of -- you're all smart people on the call. You kind of know what our margins are, right? Therefore, you know what our cost of goods are. You can -- if you're following sorghum at all, you kind of know what a bag of seed is worth to trade and so you can sort of back into how many -- what the working capital need is going to be.

We don't give guidance, right? It's not a secret. But look, we're a public company. We don't give guidance to EBITDA. So we have to presume that the smart people on the call are understanding what we're saying or following the company and appreciate our message.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Yes. So thank you, everyone, for being on the call, and thank you for listening to Betsy's first call. It's -- we're going to go have a little cocktail tonight to celebrate that. She, as you can tell, has already a great view of the company, and it's going to be a huge contributor to progress here at S&W. You know the take-home message is, it's really Double Team and sorghum, improved margins in alfalfa and continuing with our program with Ingredion and stevia. And we're focusing the company on those opportunities and maximizing the sales and the EBITDA that we can generate from those opportunities. So thanks, everybody for being on the call today, and we look forward to the next quarter's report. Thanks again.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.