S&W Seed Company (SANW) Q2 2023 Earnings Call Transcript

S&W Seed Company (NASDAQ:SANW) Q2 2023 Earnings Conference Call February 13, 2023 11:00 AM ET

Company Participants

Robert Blum – IR, Lytham Partners

Mark Wong – President and Chief Executive Officer

Betsy Horton – Chief Financial Officer

Conference Call Participants

Ben Klieve – Lake Street

Gerry Sweeney – Roth Capital

Operator

Good day, and welcome to the S&W Seed Company’s Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Robert Blum from Lytham Partners. Robert, please go ahead.

Robert Blum

All right. Thanks you so much and thank you all for joining us today to discuss S&W Seed Company’s second quarter fiscal year 2023 financial results for the quarter ended December 31, 2022. 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’ll open the call for a question-and-answer session.

Before we begin with prepared remarks, please note, that 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, anticipates, draft, eventually or projected. Such forward-looking statements on this call include but are not limited to our guidance on revenue and adjusted EBITDA for the fiscal year ending June 30, 2023, the expected timing of initial production by the JV, the anticipated impact of the JV on our business and future prospects including our positioning to be at the foremost of sustainable low carbon energy solutions as well as our financial outlook going forward, the ability of shell contribution to the JV to perform the JV’s operations for a few years, our focus during the second half of fiscal 2023 on the JV and our four key centres of value and our plans for the advancement of our business strategy.

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 risks 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, 2022 and other filings subsequently made by the Company with the Securities and Exchange Commission.

In addition to supplement S&W’s financial results reported in accordance with U.S. generally accounting principles or GAAP, S&W will be discussing adjusted EBITDA on this call. These non-GAAP financial measures are not meant to be considered in isolation or as a substitute for the comparable GAAP measure should be read in conjunction with S&W’s consolidated financial statements prepared in accordance with GAAP as no standardized meaning prescribed by GAAP and has not prepared under any comprehensive set of accounting rules or principles.

A description of these adjusted EBITDA and a reconciliations of historical adjusted EBITDA to net loss is included at the end of S&W’s earnings released issued earlier today, which has been posted on the Investor Relations page of S&W’s website. S&W has not reconciled its guidance for adjusted EBITDA for fiscal 2023 to net loss because the reconciling line items that impact net loss are uncertain or out of its control and cannot be reasonably predicted.

The actual amount of these items during fiscal 2023 will have a significant impact on net income or loss. Accordingly, a reconciliation of this non-GAAP measure is not available without unreasonable efforts. An audio recording and webcast replay for today’s conference call will also be made available online on the Company’s Investor Relations page.

With that said, let me turn the call over to Mark Wong, Chief Executive Officer for S&W Seed Company. Mark, please proceed.

Mark Wong

Thank you, Robert and good morning to all of you. This is really an exciting call for us on a number of topics. We continue to meet our 2023 goals on double team sales, margin improvement and cost savings. We had another strong quarter of operational execution with growth in revenue and significant improvements in our gross profit margins, which were up 820 basis points, a $1.6 million decrease in our operating expenses, which all translated into a $1.9 million improvement in our adjusted EBITDA. Betsy, of course, will go through all of these numbers.

One important item to remember is that Q2 is seasonally our lightest sales quarter of the year. So for this level of improvement on a low revenue quarter shows the leverage we are building through our operations, research, production and sales and marketing are all hitting their targets this year.

Now we would like to spend some time talking about the joint ventures we have closed this quarter. We finalized the joint venture with Trigall Genetics to develop and market high performing wheat varieties for the Australian market, leveraging S&W’s existing commercial breeding and footprint with Florimond Desprez’s wheat pleasant base and BIOS series crop solutions HB4G [indiscernible]. This is an exciting opportunity for all parties and we look forward to benefiting from the group’s collective capabilities going forward.

But the most exciting new partnership announced last week is our worldwide joint venture with Shell for the purpose of developing novel plant genetics, increasing oil seed crop — seed cover crop acres, and managing the crushing of these new acres for biofuels, green diesel and jet fuel production.

Importantly, we are partnering with a world leader in Shell that allows us to leverage our seed production, processing and genetics — advanced genetics capabilities to be at the forefront of evolution taking place to produce sustainable low carbon energy fuels from novel crop species like camelina.

I have talked at a high level for more than a year now about the formation of a partnership with Big Oil where S&W would be a significant player in this market, and last week’s announcements certainly validates the value that S&W brings to the development of more environmentally friendly green transportation fuels. The name of the new venture is Vision Bioenergy Oil Seeds LLC, or we call for short VBO. So let’s dive into this opportunity in a little bit more detail.

As I said a moment ago, this is a worldwide joint venture focused on developing novel plant genetics, starting with camelina and moving to other oils, seed cover crops in the future. S&W will contribute our expertise in seed genetics, research, technology, production, and processing to VBO. Including our seed processing research facilities in Nampa, Idaho, S&W will also contribute its Camelina, Germplasm and key personnel in research and production have agreed to move from S&W to VBO. Don Panter, EVP of S&W America’s unit will become the new CEO of Vision Bioenergy Oil Seeds LLC.

With this joint venture S&W will receives $13 million, $7 million upfront plus another $6 million on the one year anniversary of the signing of this deal and we’ll have the remaining position of our mortgage on the NAPA facility paid off amounting to approximately $7 million, also together, altogether a $20 million payment.

Now for those not familiar, camelina is regarded as a scalable and commercially viable oil seed crop with the potential to be a sustainable feedstock source for the energy transition to greener transportation fuels. Camelina is also — is recognized as a low greenhouse gas cover crop around the world. Cover crops are planted between the main crop growing seasons with the aim of not influencing the price or availability of crops grown for food and feed.

Using effective controls in management, camelina has the potential to provide sustainable feedstocks and create social and environmental co-benefits by diversifying farmers’ income streams and reducing soil erosion. Biofuels such as those made from camelina oil can be an effective way to help decarbonize customers in hard to abate reap sectors where energy density in fuels is key, including the aviation, marine and heavy duty road transportation sectors.

The basic model is as follows, VBO will use its plant breeding expertise and molecular biology to improve camelina seed. VBO starts off by growing camelina seed, same as we do for our other seed crops and cleaning it in the Napa plant. We are currently in the second crop year of VBO camelina seed production. The seed is sold to farmers who grow large acres of camelina grain.

Next VBO will buy every bushel of camelina grain from the farmers. The grain will then be collected in a central grain storage elevator and sent for crushing. VBO will contract with industry partners to crush the camelina grain and separate it into its oil and meal fractions. The oil will be transported and converted into biofuels by Shell North American facilities. The Camelina meal byproducts will be sold for animal feed. In terms of VBO ownership, Shell will initially own 66% of the JV with S&W owning 34%.

Upon the achievement of certain specific milestones, we are eligible to receive up to an additional 10% interest in the JV. In addition, S&W will have the option to purchase a 6% membership interest from Shell anytime up to the fifth anniversary of the signing of this agreement. This could eventually put us at a 50-50 ownership percentage in VBO. S&W will be equal partners.

In addition to the $13 million in cash payments that Shell is making to S&W, plus the $7 million payoff of the Napa mortgage, Shell is also contributing an additional $25 million in funding to the operations of VBO.

One additional point is important to make is that under a production agreement, VBO will continue to utilize the NAPA facilities to process our alfalfa seed. In fact, we believe that the cost associated with processing our seed will actually decrease under this arrangement since the facility has largely been underutilized and the overhead cost, we’re creating a drag on our cost of goods in alfalfa.

So the big question of course is what does this look like in the future? We expect VBO to carry out initial grain production in late calendar 2023, which is the middle of our fiscal year 2024. The numbers still will be nominal to start, but we are expecting a ramp up quickly. The expectations we have are that VBO will be cash flow positive after the first few years and that shell funding of the $25 million to VBO will cover our expenses during that period. I though will not provide any ongoing guidance right now, but we’ll be talking about that, the VBO future projections in the coming quarters and years.

As we have talked about over the past year or so, we are all about creating centers of value. This announcement now creates a new high value opportunity for S&W with an agreement that was a long time incoming. I just couldn’t be more pleased to be working with a team at Shell on this exciting opportunity going forward.

Now let me cover some of the other key centers of value. Double team, obviously in the short run is a huge impact on our teams’ sorghum operations. As I have said before, we believe double team has the potential to revolutionize the sorghum market in the same way other weed control technologies have enhanced yields for crops such as corn, soybeans and cotton.

During the quarter, we recognize revenue of $1 million on double team. Remember, the fulfilment season normally starts in in about February. So for us to ship a million dollars in December ending quarter really highlights the demand for the product and the fact that farmers want to get their hands on it early in order to confirm their supplies.

As I have stated in the past, one of the big hindering factors we have is the availability of seed. This past season we maximized our seed production to ensure we have adequate supply for the projected demand of Double Team sorghums. Following a successful harvest of high quality Double Team seed, our finished seed supply is more than enough to hit our $12 million revenue target. These expected sales translate to over 750,000 acres of Double Team to be planted by farmers in 2023.

We talked about this some last quarter, but in addition to selling Double Team in the S&W Sorghum Partners brand, we currently have private label partners that are willing to sell Double Team also. At the moment we have an agreement with seven different label partners. It is our expectation that nearly a third of the $12 million we expect to sell in fiscal 2023 will come for private label customers.

The ability to leverage private label partners and utilize their expertise and distribution systems in other key geographies should be beneficial to us. We are also beginning to formulate our Double Team strategy for South Africa, excuse me, South America, Asia and Africa. In addition, we are piloting Double Team Sorghum for sorghum this spring, similar to our Double Team grain sorghum pilot in 2021. We have the potential to sell about a 1,000 acres of forge sorghum with Double Team this spring.

To remind everyone, the reason we are so excited about Double Team is the significantly enhanced margin profile of the product. Based on our outlook for $12 million of Double Team sales in fiscal 2023, we expect about 50% or $6 million to drop to the EBITDA line, the majority of which will occur in the second half of this year.

Transitioning now to international and US forage, as I mentioned at the beginning, this is seasonally our lightest quarter of the year. So while it is a bit hard to extrapolate certain data points to what the year might be, let me just make a couple of comments on the international and domestic forage operations that I think are relevant to how we see the back half of the year possibly shaping up.

First, we are seeing an increase in demand in meina [ph] and alfalfa, but also increasing pricing. This increase in alfalfa pricing coupled with the tighter control — cost controls and inventory manager we would we put in place are resulting in a nice improvement in our margins.

Additionally, the international shipping challenges we encountered as recently as a few months ago are starting to ease, which we hope will assist in our ability to quickly turn around seed crops and get them out to the door prior to the end of June. But there still may be risks in the supply chain and we remain cautious here.

I mentioned this last quarter, but it bears repeating, the devastating flooding across Eastern Australia has severely impacted vast areas of cropping land and mixed farming enterprises. This has led to a slow start in our Australian domestic business.

Also, once the water recedes, we believe there will be opportunities for sustainable remediation required in replanting of crops and pastures. So on the heels of a very strong quarter, we feel the trends within our forage business remain good both internationally and domestically. I’ll let Betsy expand a bit more on the numbers.

As we talked about during our year end call in September and our Q1 call in November, for fiscal year 2023, we are focused on commercial execution as we begin to leverage all of the work that has been done over the past five years. Simply put, it’s about driving towards and beyond profitability in the near term.

We remain intensely focused on four key centers of value we have outlined previously including our sorghum technology operations led by Double Team, a next generation non GMO hybrid, excuse me, herbicide tolerant sorghum solution, our international forage operations, which primarily operate out of Australia and provide products around the world, our US forage operations and lastly, our specialty crops, which now include our JV with Shell for camelina biofuel applications as well as stevia,

We are reiterating our guidance for the year. As a reminder, on the high end of guidance, we are expecting $92 million in sales and a negative adjusted EBITDA of $2 million. On the low end, it is $80 million in sales and a negative $7 million in adjusted EBITDA. Betsy will once again expand on this momentarily and walk you through the bridges. With the progress made during the first half of the year, we see a path to achieving something closer to the high end of guidance and with it having a company that will soon be self-sustainable from a cash flow standpoint.

Let me now turn it over to Betsy who’ll walk you through the numbers in more detail and we’d be happy to answer questions at the end of her presentation. Betsy, please.

Betsy Horton

Thanks Mark and thanks to everyone joining us on the call this morning. Let’s start on the revenue line. Revenue was $12.9 million for the quarter, an increase of 2.4% compared to $12.6 million in the prior year’s second quarter. The increase is primarily attributed to a $1 million increase in North American sorghum sales associated with the company’s Double Team next generation non-GMO herbicide tolerant sorghum solution as well as an increase of $1.9 million in alfalfa sales to the Mina region.

This was offset by a decrease in sales of sorghum to Mina of $1.4 million, a $0.7 million decrease in alfalfa sales to the Americas and a $0.7 million decrease in service revenue. Mark hit on the revenue guidance, but to reiterate what we discussed last quarter, our fiscal year ’23 revenue guidance is currently in the range of $80 million to $92 million.

As we look to bridge from $71 million in fiscal 2022 to $80 million to $92 million in 2023, we are making the following growth assumptions. On the low end of the guidance, we are simply taking into account $9 million in incremental revenue growth attributable to Double Team and flat revenue in the rest of our operations.

At the higher end of the guidance, in addition to the $9 million of Double Team growth, we are assuming approximately $9 million in growth from international forage operations with about half coming from pricing improvements and half coming from volume, and then about $3 million in assumed growth from our traditional non-DT related sorghum operations.

Now turning to margins, growth margins were 21.3% in the second quarter of fiscal 2023 compared to 13.1% in the prior year’s second quarter. The key driver to the 820 basis point improvement in gross margins was the increased sales of the company’s higher margin Double Team sorghum solution, improved alfalfa margins in the Mena regions due to improved market pricing and the minimization of inventory right downs.

Now we’ll transition to operating expenses. Our GAAP operating expenses for Q2 of 2023 were $9 million compared to $10.6 million in the prior year’s second quarter, a decrease of $1.6 million. A little over half the re of the expense reduction came from SG&A, with the remainder coming from reductions in R&D spend.

For OpEx for the remainder of the year, we are still on track for our $5 million in OpEx savings. One thing to keep in mind is that with the creation of both of our JVs Trigall Australia for wheat and BBO for biofuels, we will be playing an administrative role for both new ventures handling things such as finance and accounting, HR and IT, under a service level agreement. Therefore, we will have some expenses that we will incur within our operating expense line, but then we’ll be reimbursed by the joint ventures and this service income will show up in the other income line.

So when we think about the way that this will flow through the income statement next quarter, we will talk about making some adjustments to account for these nuances to confirm that we are meeting our stated goals. For the year, we believe operating expenses, including stock-based comp of about $2 million, will be maintained at our previous guidance of about $27 million. Once you add back the adjustment, for the reimbursement that will likely flow through is other income. To be clear, this adjustment will come into play in Q3, but wanting to give you a heads up.

Now back to EBITDA, at the adjusted EBITDA line, we had a negative adjusted EBITDA of $4.6 million for the second quarter compared to a negative adjusted EBITDA of $6.6 million in the prior year’s second quarter, an improvement of $1.9 million. This $1.9 million improvement layers on to the $2.4 million improvement to adjusted EBITDA that we saw in the first quarter of this fiscal year.

Before I share our outlook for EBITDA for the remainder of the year, let me talk more about the joint venture with Shell Vision Bioenergy Oil Seeds or VBO. As Mark mentioned, s S&W has received — will receive $13 million, $7 million of which was received upfront plus another $6 million which we will receive in one year and Shell also paid off the remaining portion of our mortgage on the Nampa facility of about $7 million.

We filed a pro forma balance sheet effective September 30, 2022 in the 8-K that was issued in connection with the agreement and while we are now discussing the quarter ending December, the general guidelines remain the same.

As you may have seen in the pro forma adjustments, there was of course the $7 million increase to cash plus the present value of accounts receivable for the $6 million cash payment Shell will make to us in one year. There is a $5.5 million reduction to our property, plant and equipment, from transfer of the Nampa facility and a corresponding $7 million in reduction in the long-term debt which was paid off on the facility.

There was also a $22.8 million increase to other assets, which was the calculated fair market value of the company’s retention of our 34% ownership in VBO. In terms of the impact to S&W’s financial reports on an ongoing basis, Shell has funded the operations of VBO with a $13 million payment at close and will infuse an additional $12 million on the one year anniversary in 2024. Because we are a minority owner in the JV, all income and loss will flow through after operating income and will classify as an equity investment. The JV is of course expected to lose money in the first years. However, we expect this will be a non-cash impact to S&W since the JV has been adequately funded.

As Mark stated, the expectations we have are that the JV will be cashed positive after the first few years. At that time, any profits will likewise flow through its equity in net earnings of affiliates. Any distributions of cash from the JV to S&W will be at the option of the JVs board of directors. There’s a lot to discuss here. Details are in our various SEC filings and if you have any additional questions, please let me know.

Now let’s turn back to our EBITDA guidance. Similar to what I did last quarter, let me bridge out how we look to achieve our adjusted EBITDA guidance in fiscal 2023. Let’s start with the high end of our assumptions, which is a $2 million adjusted EBITDA loss for the year. Starting at a negative adjusted EBITDA of $24 million for a fiscal year ’22, we assumed the following for fiscal ’23, a $5 million improvement to our lower cost or market or LCM charges $7 million in incremental gross profit due to DT and traditional sorghum revenue growth, a $5 million improvement in international forage gross profit due to both the higher end of our expected growth as well as overall improvements in our production costs and a $5 million improvement from our cuts to our operating expenses. All of that gets us to an expected $2 million adjusted EBITDA loss for fiscal year ’23.

For the low end of our adjusted EBITDA guidance, I’ll remind you what we did for the low end of our revenue guidance. We simply took into account incremental revenue growth attributable to Double Team and assumed flat revenue in the rest of our operations. On the low end of our range for adjusted EBITDA, we did the same and assumed only growth in DT, which would be a $6 million adjusted EBITDA loss.

We made some additional assumptions; $2 million of the international forage benefit would be captured due to increase in margins and our lower cost or market charges and OpEx combined, we have $9 million of benefit versus 2022. This would end with an adjusted EBITDA loss of about $7 million.

You will notice that this bridge does not include S&W’s share of VBO loss for fiscal ’23. As we’ve noted, we anticipate the venture to incur losses the first few years and that 34% of that will flow to our income statement through an equity investment line.

However, given that the venture is adequately funded for these investment years before becoming cash flow generating, it is a non-cash impact to S&W and we plan to exclude it from adjusted EBITDA. Please note that for the Trigall Australia JV, we are not going to exclude it from adjusted EBITDA because we do anticipate capital calls, albeit minor amounts.

Now I realize this is a bit complicated, but wanted to share these factors ahead of the second half of our year. Next, let’s talk about our bank agreements. In December, CIBC extended the maturity of our $21 million credit facility on March 23, 2023. MFP, our largest shareholder continued to show their support for S&W by extending the maturity of the $12 million standby Letter of Credit to back our CIBC facility.

We continue to actively pursue long-term refinancing with replacement lender and appreciate the partnership from CIBC to allow us the extra time post our VBO transaction to close a new deal prior to this extended maturity. So definitely a great first half of fiscal year 2023. There remains a lot of work ahead of us, but we are extremely pleased with the progress and pathway we believe it provides us going forward.

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

Mark Wong

Thank you, Betsy. A few closing remarks. We feel really great about the progress made so far this year and we’re especially excited about the new bio field JV with Shell. Many people in our company have worked very hard to make all of this come true for us. With two consecutive quarters highlighting significant improvements in our operating results and now the execution of the critical JVs, I feel we are really beginning to benefit from the groundwork that has been laid over the last few.

As always, we thank you for your continued support of S&W and look forward to your questions in the call. And now I’ll turn it over to the operator and we’ll collect your questions. Thank you so much for attending the call today.

Question-and-Answer Session

Operator

[Operator instructions] We have first question coming from Ben Klieve with Lake Street Capital. Ben, please go ahead.

Ben Klieve

All right, thanks for taking my questions. First a couple questions on the Shell JV and I guess first of all, congratulations on getting the finish line here. First question is, given the complexity of this agreement coupled with the fact that you also signed the JV with Trigall, were there any kind of elevated costs in the second quarter or maybe the first half of the year, around like legal expenses or anything of that nature that arose as you guys are getting the finish line.

Mark Wong

Betsy, I’ll let you answer that.

Betsy Horton

Yeah. Thanks Ben for the question. Yes, we did have some one time transaction costs for getting both transactions across the line. You’ll see that in our queue that we have it as, let’s see, one time, $157,000 for Q2. You will see amount in Q3 as well. Probably a similar amount more related to the Shell JV come through, but we are excluding EBITDA given that they’re a one time — a onetime charge.

Ben Klieve

Okay, got it. If, sorry if that was outlined in the press release, I apologize, I missed that. Okay. Very helpful. And then a question Mark, you know, you referred to the kind of global implications of the Shell JV and starting with Camelina, but moving into other oil feed, that’s a vast universe. Can you provide a bit of context around kind of crops you’re looking at if the extent to which S&W has been working with these crops already, any kind of — any kind of help on that would be would great.

Mark Wong

Yeah, thanks, Ben. I think it’s really important to have kind of a measured view of these markets. These markets are just gigantic. You could grow a 100 million acres of these oil seeds that are cover crops in the US and you wouldn’t have enough to supply the US diesel market. So, you’re talking about the acres that are now planted in more than the acres planted in corn.

They’re huge markets. It says something about how our society requires energy to support their standard of living and we are trying to with Shell basically focus in on what we both do well, right? And what we do well is we apply science and we improve seeds, and then we produce the seeds and we clean them, and then we sell them to farmers to increase acres.

What Shell does well is they refine liquid fuels and then they distribute and sell these fuels to their customer base. And so, it’s really a joint venture and this is why we’re so excited about it, where both companies are doing what’s down the sweet spot of their experience and that’s why we’re so excited about these.

To answer your question specifically, we’re concerned about the US, but we’re also focused on the opportunity in the sense that as Betsy said, we’ll probably have losses at DBO for the first couple of years as we ramp up but, we’ve also been in seed production with Shell for two years now. We grew a crop last year, which we’ll be planting in grain to get the production that Betsy mentioned this year and we have a current seed crop in the ground, which will allow a big expansion for next year.

So, this whole time where we’ve been talking about our potential joint venture, and obviously we couldn’t name names until the deal was done, but we — that doesn’t mean we weren’t focused on it and that we weren’t laying the groundwork because time is so important in agriculture and that and Shell was not working with us even before the agreement was signed.

So we’re really focused on camelina in the US other oil seeds that people have talked about, or Coronada [ph] which is a cousin to Camelina and a few others. Right now, soybeans are being used a lot for oils, for diesel production, but we’re not probably going to get into the soybean business. We like these cover crops that are planted after food crops because they give us a second, they give the farmer and us a second source of oil production and they don’t affect the price of food.

In 2024, so the geographic implication of your question, we will start looking at camelina in Australia. So Shell has a conversion plant for biodiesel Green Diesel in Asia, in Singapore and wants us to supply DBO to supply oil to that plant next and we’ll be working on other facilities and other geographic regions over the next decade that Shell also has other production facilities.

So we’re not — so we’re now focused on really improving camelina and geographically expanding our production out of the US to other worldwide markets. We’ll start breeding programs on other seeds, but we haven’t done more than collect germplasm and do the normal things that a seed company does on the other crops, but it’s a big — it’s a big opportunity and we’re sort of so thankful that we have this joint venture with Shell and we’re all excited about what that means in the future.

Ben Klieve

Got you. No, it’s certainly is exciting, those helpful context. One more question for me and then I’ll get back in line, the million dollars of Double Team revenue that was realized in the second quarter, certainly appears to be more sooner than you would’ve expected. Can you — is there anything to read into that that — were there farmers, distributors that were just so eager to get this in hand that they bought this earlier than was expected? Or was this, kind of a random occurrence? Really, what drove the premature realization of that initial piece of revenue for this year?

Mark Wong

Yeah, the market’s very, very excited about Double Team and they saw it last year in small amounts, and our philosophy if we haven’t talked about it is we, we basically go to farmers and we say show us the acre of your, that’s your readiest and buy Double Team for that. And if we can solve your grass weed problem on that weedy acre, then maybe you should consider planning Double Team on the rest of your farm.

And so, the small number of farmers we had last year, we’re very impressed with the performance of the product in herbicide resistance as I’ve seen over the over the decades since I’ve been doing this, once a farmer converts to one herbicide, he usually only wants that one herbicide on his own farm. So he won’t keep a couple of different kind of herbicides because he’s concerned that maybe someone who works for him might spray the wrong herbicide.

So he converts everything to one herbicide and hopefully that’s what we’re going to start seeing in the next couple of years. So this current year that we’re in where we’re estimating our 750,000 acres, it’s more than acres we want to get out with a lot of farmers because we want next year to also be another big year and it’s really just people excited about the product and willing to, if you’re a distributor, take it and put it on your — in your flat storage so farmers can come and get it if they need it.

And then if you’re a farmer, it’s sort of lining up your supply because everyone, as we said before, knows that we’re still short on seed for this year. And so they’re trying to make sure they have a supply.

Ben Klieve

Got it, got it. Very good one. A great start to the year on that then. Alright, well plenty more to talk about. That’s probably a good place to leave it. I’ll get back in line. Thanks for taking my questions here.

Operator

[Operator instructions] Our next question is coming from Gerry Sweeney from Roth Capital. Gerry, please go ahead. I’m sorry, Gerry. Pardon me. Gerry, are you there?

Gerry Sweeney

I am, yes. Can you hear me now? No worries, no worries. Mark, Betsy, thanks for taking my call. Just one more question or two on the Shell JV, is there any type of exclusivity in terms of regions or crop type or anything with Shell, anything that we should be aware of?

Mark Wong

We actually — VBO actually has the right to sell camelina grain to other companies, other international oil companies if they see an opportunity there. So it’s sort of the reverse of exclusivity, but it’s our belief that these markets are so vast and Shell, if such a huge footprint in the diesel market that will be producing four Shell for the next decade and there won’t be any extra grain left over to sell to anybody else.

So practically it’s an all Shell deal and we’re more than pleased with that because as I said before, we basically develop seeds and then sell grain to farmers and now we’re going to accumulate that grain and buy it back from the farmers and then get it crushed and then sell the oil to Shell and has just this vast network of conversion plants, the diesel and jet fuel, and so we’ll be hard pressed to VBO will be hard pressed to supply that demand that shell’s creating.

Gerry Sweeney

Got it. Switching gears to DT sorghum. In the past, we’ve talked about, I think number of acres planet on — sorghum planted in the United States, could you go over where that is? And we also talked about the economics of corn versus sorghum and how that also plays into some of those acres and what farmers are planted?

Mark Wong

So I think last year, USDA said, we had around these, around number six million acres of grain sorghum. There are additional also acres of sorghum, and we mentioned that DT will also we believe provide a big financial improvement for farmers in Ford sorghum. So we think that’s our next DT market in the US is to introduce the gene into forge sorghum lines.

But the big forge, the big grain sorghum states are the drier states. So sorghum requires about 25% less water than corn to make a crop. So the states like Kansas, Nebraska, Texas, Eastern Colorado, those are the big sorghum states. Sorghum is used for both animal feed and ethanol feed stock in in those states. I think the USDA is projecting that acres are going to go up maybe to $7 million this year in sorghum just because of water issues.

And so we think, that bids well for our sorghum product line. To your question of how does sorghum compete with corn I think we’re just starting to learn that, and the farmer community is starting to learn that they just didn’t have an option before to control grass weeds. And so, they planted corn because at least they can couldn’t control grass, weeds and corn, but now we’re giving them an option for sorghum.

So we’re just tickling sort of that demand and farmer thinking piece on corn versus sorghum, and we think sorghums going to win. But it also depends on the price of corn relative to sorghum, and that depends on the Chinese market and lots of other things but in general, the water problem is a benefit to sorghum, and we think that we’re going to start seeing that in in your future here as water issues and the production states are tougher and tougher in the US.

Gerry Sweeney

Got it. And then on that side, I believe your forage product helps with digestibility and just curious if sort of the next steps the roadmap, is it similar to the DT sorghum right the herbicide resistant version? You had to grow seed to get more seed bring it out to the

Mark Wong

So, when I I sat on Monsanto’s board we were at the point in time at Monsanto where we were developing these trait stacks and trait stacks are incredibly valuable. The farmer gets to, to access these new technologies that basically they all make a money in one way or the other, right? And so with DT it’s this grass control with the new digestibility genes that we’re looking at.

And one in particular it’s to be able to feed a storage, excuse me, a forage crop to his cattle in the US it would be mainly cattle in Australia where we’re also looking at its cattle and sheep, but the cows don’t get sick and they just — there’s to make the cow sick.

We, find in our trials that we have a real problem with other animals, rabbits and other things, because during, I guess must take taste so good that they just come and eat it. So we’re going to have to figure out how to keep these wild animals out of our seed fields because we did have some places where the animals basically ate our crop because the tastes so good and they didn’t get sick.

So it’s a fascinating opportunity to put basically a digestibility gene on top of a herbicide gene. They’ll be — the two genes will be stacked in some markets. The two genes will be separate in other markets, depends on whether there’s a grass problem or not and we’ve been through this before at other companies, so it’s not new to us the thinking that we have to do, but it’s a great opportunity and we’re super excited that this new digestibility gene will sort of be where next year it’ll sort of be where DT was two or three years ago. So it’s got it, it’s very exciting times in the near term for sorghum for us.

Gerry Sweeney

On the herbicide, you alluded or mentioned, at least I should say not alluded to, but going international, how do you do that? I don’t want to get the cart before the horse. It sounds like sales are pretty good here in the US, but what should we be thinking or what’s the market opportunity? How do you attack that market if you go international?

Mark Wong

Yeah, I want to remind people on the call that there are long development times in Ag and it took us five years of investment to bring Double Team to the place where it is making significant contributions to our EBITDA. And those giant losses that we incurred now are getting smaller and smaller and we expect profitability here hopefully next year and cash sustainability also. And that’s obviously really important in this market where funding is difficult to raise.

So, we’re trying to focus on the near term opportunities and what is going to really make us money and control our costs as we do that and control our inventory obsolescence and stuff like that. As you might imagine though we have a very strong position in Australia. We’re probably in the top three seed companies in Australia. We actually have more Australian sales, if you count the sales to the Middle East, which we manage out of Australia than we have in the US. But our US margins with Double Team are a bit higher.

So, we’re putting trial amounts of Double Team hybrids into the Australian market. We think that it’s going to take some work to make sure that they perform well in Australia. There’ll be some selection needed. So it’s not going to be as quickly as a new gene like during free that we’re introducing in the US where we understand the germplasm really well. We’re just going through that process in Australia.

So the bad thing is it takes a little bit of time. The good thing is the markets, once they respect your trait you can look forward to a long, long harvest of the value. Monsanto harvested their trade stacks for more than 20 years before the competitors had a stack to put into the market. So we think that the stack trade business is a real improvement over just a single gene trade like Double Team.

Gerry Sweeney

Got it. One last question and then I’ll jump back in line. Sure. We talked about licensing herbicide resistant Double Team. And like everything else in Ag, it’s a little bit of a process. I was curious if you could give us an update on if that’s still part of the strategy.

Mark Wong

Sure. Yeah. So it’s still definitely a strategy. It was the Monsanto strategy to both include the traits in your own bags of seed plus license the traits to your competitors, because the profit margins are so big on these traits that there’s enough margin to basically allow your competitors to make a profit and the farmer obviously to make money on the acres that he buys and still have margin left for the originator of the gene.

Again, I’ll state it’s very, very unusual for a small company like S&W to originate genes. The fact that we have Double Team and then we have another gene coming in grain sorghum, and we’re looking at forward sorghums and a worldwide strategy, all of that is something that big companies do not small companies, but, we’ve been doing this a long time, the management staff at S&W and we’re comfortable with what you need to do technically to sort of get performance in the farmer’s field and that regulatory approval and then increase the amount of seed.

These are all things that give you protection against other people trying to come up with similar genes. And like I said, the industry is basically, this is such a difficult process that the industry basically licenses the genes from the gene leader rather than tries to develop their own. That’s been the model for the last 25 years, and we think that that’s going to continue.

And we think that right now we’re in discussions with a couple of our competitors and hopefully in the next year or two, we’ll have some announcements there on people who believe that the Double Team is something that they should license and put in their own product lines.

Gerry Sweeney

Okay. Got it. I appreciate it. Thanks for the update.

Mark Wong

You’re welcome.

Operator

[Operator instructions] Our next question comes from Brad [ph] from Jennie Montgomery Scott. Brad, please go ahead.

UnidentifiedAnalyst

Hi Mark and hi Ms. Horton. How are you? I’m doing my due diligence on the seed opportunity with biofuels. I run into this castor bean. Is that something you’re looking at, or have you just decided that the camelina is just the better go-to seed for the opportunity with biofuels?

Mark Wong

Yeah, camelina is our first choice right now, for lots of different reasons. So again, we look for areas to produce camelina that we can do it as a second crop, right as our fathers told us, they’re not making any more farm makers. So we need to — my belief is we need to farm every acre twice, basically, once a year for food crop and once a year for an oil crop. And those areas up in Idaho as an example, Montana the eastern part of Oregon and Washington that are pretty dry.

Those areas are pretty key opportunities for camelina. We could obviously look at — we will look at other crops, but it’s a little too early to say whether castor bean is going to fit into what we think is a product line that has broad appeal and it, but yet concentrates on the geographic areas where we have strength, where we have relationships with farmers.

That’s always important. We have to have a reputation, hopefully a good reputation with farmers. So when we are trying to get them to try a new crop that they’re willing to do that. And so we have to be a little bit careful how wide we spread our net geographically because we do want to concentrate on the areas that grow best for Camelina to start with and we’ll be looking at potentially castor bean others in the future, but it’s a little too early for us to sort of talk too much about what other oil seed crops might be in our portfolio.

UnidentifiedAnalyst

Okay. With the infusion of capital to S&W with the Shell venture will that really improve your negotiating clout that I assume is ongoing with CIBC?

Mark Wong

I’ll let Betsy answer that question, Betsy?

Betsy Horton

Yeah, no, thanks for the question, Brett. It certainly improves our situation overall, right? It takes out the mortgage that we had on the Napa facility and allows us to take a facility that was underutilized for just using for alfalfa and to get the processing services that we need from VBO at a more market rate.

So it improves cash flow and improves our debt situation as well by taking out that mortgage. In addition, the cash that’s coming in that has come in and will come in one year also improves our situation from a banking standpoint. So with all of that you know, continuing to discuss with lenders and make sure that we get a good refinance in place ahead of the CIBC maturity that’s coming up here this spring.

UnidentifiedAnalyst

Great. And one last one, just a brief update on the Stevia initiative.

Mark Wong

Yes. We’re still talking to Ingredion about the Stevia opportunity. There are real opportunities there and the situation with China politically seems to get beginning no better with the balloons and other things flying over North America and the Air Force being forced to shoot them down.

You just can’t afford to have your full supply of Stevia leaf being in — being grown in China. And that’s the situation that Ingredion finds themselves in. So these — but these things take a while. Our agreement with Shell, we negotiated over a year to accomplish that and that’s why I gave my thanks in the call at the end of my statement to all of our S&W people who helped us get there. We had over 50 meetings with Shell and because it was a complicated deal because it involved a worldwide relationship with Shell, not just the North American relationship.

They had to be make sure that we were the right partner, and we had to make sure that they were the right partner in the sense that, obviously as I stated we’re both doing what are in kind of the sweet spot of our execution, right? We’re a seed company that then sells to farmers, and they’re basically a liquid fuels company that refines and sells to their customer base. And, this isn’t about companies trying to do something where they ha not have maybe not much experience. This is both of the companies in the sweet spot of what they’ve been doing for decades.

And so we’re just more than pleased that Shell came about and we take those lessons as we talk to Ingredion about Stevia. So I have nothing new to announce on Stevia, to your question, but we’re still working on that. We still think it’s a great opportunity. We’ve been breeding that crop for 12 years, and we think there’s a lot of value there. And we’ll continue to work with Ingredion on who we remember, who is the market leader in the US market’s about $600 million to $800 million in Stevia sales finished product sales. And we think it’s a big market and we think Ingredion is the right partner. We just haven’t come to an understanding of what each of the company’s contributions is going to be yet.

UnidentifiedAnalyst

Thank you for taking my questions and good show on the Shell deal.

Mark Wong

You’re more than welcome. Thanks again. We appreciate that.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Thank you.

Mark Wong

So thanks everyone for being on the call. It’s one of those calls that hopefully we’ll all look back and it’s a point in history that is a change maker for S&W Seeds. We remain focused on the near term, on our traits in sorghum on DT this year and the new traits coming and we’re focused on cost control and building sales and making sure that we can get the profitability as quickly as possible.

In addition, though, the Shell thing is just a huge opportunity. The markets are gigantic, and you’ll be hearing more about that opportunity from us over the next earnings calls as we work with Shell and define the details of our plan in real time. So thanks again everyone for being on the call, and we look forward to speaking with you in the next couple of quarters. Thanks again.

Operator

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