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Mark Herrmann

Thank you, Robert, and good morning to all of you. I appreciate the opportunity to speak with you today. To set the agenda for the call this morning, let me first remind one of the recent strategic actions taken by the company to reposition ourselves to exclusively focus on core America's-based operations led by our high margin double teams Sorghum Solutions.
I'll touch on the current state of the sorghum markets which, as we see it was really divided in some ways between pre and post-tariff environment. From a pre-tariff perspective, we reported our first positive adjusted IBEA quarter in many years. But as you saw from the press release, the post-tariff environment has impacted the US sorghum market and caused us to revise our outlook for the 4th quarter and fiscal year.
Despite these near term disruptions, I will highlight some of the longer term macro tailwinds that we believe are going to help drive sorghum growth in the future and how we are poised to be a leader in the marketplace. Vanessa will then provide detailed review of the financials, and we will then address any questions that you might have.
We spent quite a bit of time discussing last quarter, but I believe it is important to remind everyone about 3 key activities we have taken over the past 3 to 12 months that we believe will ultimately unlock value for S&W and its shareholders.
First, we successfully completed the VA process in Australia, which occurred in late November 2024.
The agreement allowed for the release from the inter-company obligations owed to S&W Australia and agreement with the National Australia Bank that released S&W from the $15 million Australian guarantee.
Ultimately this process exclusively focused us on our America's market with a particular emphasis on our high margin double team trades. We followed up the completion of the VA process by entering into a new $25 million working capital facility. Which included a letter of credit being provided by MFP, our largest shareholder, to be used as collateral. We also implemented a series of cost savings initiatives across the organization to align our cost structure of SMW while implementing best practices across the organization. The outcomes have been improved have improved.
Gross margins, reduced operating expenses, and lowered working capital needs through the improved inventory management.
This has been a quite heavy lift, and I commend the entire team at S&W for their efforts.
With us being as well positioned as we have in many years, we were optimistic as we entered the calendar 2025 year focused on driving and continued rapid adoption of our high margin, herbicide tolerant double team solution and simultaneously commercially launching our new Prussic acid free solution. As most of you are aware, the second half of our fiscal year, which runs January through June, is seasonally our largest and most important period of the year, where about 65 to 70% of our sales tend to occur.
He started the 3rd quarter strong with many of the initiatives we put in place playing out as we expected with revenue growth.
Strong gross margin improvements, reduction in operating expenses, and positive adjustment evened out during the 3rd quarter alone.
These positive results were achieved despite a shift in the market that occurred about halfway through the quarter, starting with the announcement of potential tariffs against China in late January and then the implementation of those tariffs in April. It really was a tale of two halves of the 3rd quarter.
As background, approximately 80% of the US sorghum grain is exported to with China historically being the largest buyer in recent years.
The data shows that US sorghum exports to China dropped dramatically starting in January and February. In April, when China further imposed retaliatory tariffs on US agricultural products, including sorghum, further declines occurred with minimal purchases being made in April.
The reduced China demand has led to increases in US sorghum inventories in the grain channels, driving them to sell sorghum domestically for ethanol production or cattle feed at lower prices. The oversupply has depressed farm gate prices, making sorghum less profitable compared to alternatives like corn, prompting some farmers to switch cropping plans. The bottom line has been a disruption to US sorghum market in the near term.
Clearly this has not been an ideal situation as we enter our most important selling part of our fiscal year. That said, we believe two things will occur one, we expect some type of resolution of the trade wars.
We have seen this type of activity in the past and we eventually returned to some level of normalcy. 2, we believe this push towards healthier eating in the US will expand domestic demand for sorghum being used primarily as a crop to feed livestock to that of a superfood.
If you have not had a chance, I'd encourage you to read the recent Wall Street Journal article discussing sorghum as the new it crop with its high protein, non-GMO gluten-free characteristics.
Beyond the positive characteristics of sorghum as a whole, our differentiated solutions of double team and now Prussic acid-free continue to garner strong customer response and are continuing to gain market share.
Despite the macro fullback, we believe we will achieve our objectives for double team market share this year of approximately 10 to 12% market share of the US grain sorghum acres.
As the market normalized based on expected adoption rates, we believe double team sorghum can capture 25 to 30% of the US sorghum market share over the next 8 years, which would generate about 70%. To 78 million in traded sorghum sales. This translates into a CAGR in the mid to high 10s. At this scale, we continue to estimate that we would generate gross margins in excess of 70% on traded products.
With Double Team, we lead the way in this growth. We remain on track with our product development efforts with multiple new products set to be launched over the next 5 years. The commercial launch of our 2nd generation Double team, or DT2 grain sorghum, and Prussic acid-free in Ford Sorghum in fiscal 2025 and DT2 Ford sorghum launch in fiscal 2027 in the US.
The commercial launch of DT2 stacked with Prussic acid-free grain sorghum in fiscal 2028 in the US, which will then be expanded to international markets in fiscal 209 and 30, the commercial launch of Broad Spectrum herbicide sorghum in fiscal 2031 in the US and the commercial launch of insect tolerant sorghum in fiscal 2031 in the US.
Coming back to Prussic acid free for just a moment, as a reminder, Prussic acid free eliminates the production of during. It's a compound in sorghum plants that can break down into prussic acid. Prussic acid is toxic to livestock, causing cyanide poisoning that can lead to rapid death by interfering with oxygen transportation in the bloodstream.
We did successfully launch the new trade on an introductory commercial basis during the 1st quarter. We have completely sold out of the launch supplies with customers excited about the capabilities of the new trade.
One of the unique characteristics of Prussic acid-free is that it is used primarily for grazing cattle. We look forward to ramping seed production this summer and expanding sales as we look at next year as you can hear, our long term outlook for sorghum remains very optimistic.
That said, due to the macro impacts from the tariffs, we are being forced to revise our expectations for the fiscal year ending June 30th.
Our current expectation is for full year revenue of $29 to 31 million, and adjusted EBITDA of negative 8.5 to a negative $7 million.
The net effect is about a $5.5 to $7 million dollar revenue impact and a $3.5 to $4 million dollar adjusted EBITDA impact from our previous guidance.
The vast majority of the impact is occurring on our expected sales of our high margin products, which carry 60% plus margins. Vanessa will touch more on the financials in a moment.
Sure there is a level of frustration on the macro level. That said, we believe S&W high value sorghum traits are well positioned for long term and possess key traits and assets that are extremely valuable to the sorghum market and farmers.
Before I turn it over to Vanessa, as a reminder to all investors, in mid-January, the board announced the commencement to explore and evaluate various strategic alternatives that may be available to S&W in an effort to enhance shareholder value.
Similar to last quarter, there is not a lot I can share with you at this point other than the board is evaluating a full range of potential strategic alternatives to ensure S&W seed is best positioned for future success.
Operationally, we continue to focus on doing everything possible to drive growth, improve operational efficiencies, and continue bringing next generation traits to the market that will deliver long term value.
Let me turn the call over to Vanessa for a detailed review of the financials. I will then provide some brief closing comments and turn it over for any questions. Vanessa.

Vanessa Baughman

Thanks, Mark. Good morning to everyone on the call today.
Before I begin, let me remind everyone that the completion of the divestiture of the Australian subsidiary has resulted in moving all Australian-related operations to discontinued operations on a look back basis for FY24.
Therefore, when you look at the period over period comparisons, the Australian domestic and Australian international businesses have been moved to disk ops for both of the financial years within our reporting periods.
With that, let's dive right on the revenue line for Q3, we reported revenue of $9.5 million compared to $9.4 million in Q3 of last year. Again, the $9.4 million excludes Australia. Overall, America's sorghum revenue, including double team and conventional sorghum, was $7.1 million compared to $7 million last year. Double team was $3.3 million this year. And $3.4 million last year.
America's forages was $1.5 million, which compares to $1.2 million last year there is still a bit of international sales that ship from the US to Mexico in Q3 of fiscal 2025, totaling 700,000 this year, which compares to approximately $1 million last year.
And finally there was a small amount of other pertaining to our service agreement with BBO. As Mark mentioned, due to due to the tariff-related impacts on US sorghum exports to China, we are revising our expectations for fiscal year 2025.
We now currently expect revenue to be between $29 and $31 million this is a change from $34.5 million to $38 million previously, and is largely resulting in a decline of expected acres planted and sorghum seed purchases in the US.
Also, we are projecting approximately $1 million in lower sales of conventional sorghum in Mexico, due to drought conditions in western Mexico and credit restrictions for key customers.
So breaking down the impact by product, we are expecting Double team to be $4 million lower than the low end of our original expectations and conventional sorghum sales to be $1 million lower because of Mexico.
We expect to have another 500,000 impact to America's forage and finally a 250,000 impact on our other line where VBO service revenue is recognized.
Unfortunately, as I mentioned, we see the most impact within our highest margin double team system solution which will flow directly through the income statement now turning to margins.
As Mark said, we had a strong 3rd quarter on the gross margin side as operational efficiencies and the benefit of double team drove those margins.
However, the sales pace expected in Q3 of fiscal 2025 did not materialize as tariff discussions began this past quarter. In total, gross profit margin for Q3 was 37.7% compared to 24.6% in last year's Q3 again, last year's gross margin excludes Australia's operations.
The improvement here is primarily driven by better life cycle management an improvement in international margins due to the shift from non-dormant alfalfa mix to sorghum.
An increase in margins for North America alfalfa sales and a slight increase in margin due to a shift from conventional sorghum to a higher margin Prussic acid free sorghum offering.
Due to the change in revenue expectations to hit in Q4, we are expecting total gross margins for fiscal 2025 to be approximately 30%.
Now let's transition to operating expenses Q3 fiscal 2025 operating expenses inclusive of depreciation and amortization for the ongoing business in total was $4.3 million compared to $5.5 million last year.
Excluding depreciation and amortization, adjusted operating expenses during Q3 were $3.5 million compared to $4.7 million in the year ago third quarter you see the improvements we have made to cutting operational expenses on a go forward basis. However, there is a timing of the accruals adjusted in Q3 of fiscal year 2025 versus Q3 of fiscal year 2024.
Looking at it on an annualized basis, our expectation is for total operating expenses, exclusive of depreciation and amortization, stock based comp, and any one-time charges that may be included as part of the VA process to be approximately $16.5 million. Including depreciation and amortization and stock based comp, that number will be approximately $21.1 million.
While we saw expenses for Q3 in fiscal 2025 come in favorable compared to last year, this favorability was mostly attributable to the timing of expenses and accruals. As an example, given the lower sales guidance, we made accrual adjustments to incentives in Q3 of fiscal 2025 versus Q4 in fiscal 2024.
Thus, savings from incentives accrued will offset higher audit fees, higher legal fees, and higher insurance costs, which we see coming in at anywhere from 7% to 10% higher than expectations.
We have made a number of significant reductions in operating and manufacturing expenses through last fiscal year and leading up to Q1 of fiscal 2025. We have managed working capital tightly, but there is still an expectation of reduced spending within Q4 of fiscal 2025 through fiscal 2026.
As I mentioned last quarter, we carry about $3 million of costs related to being a publicly traded company, and this is part of our strategic review with our board of directors and advisor Rabobank.
Beyond that, we've made significant efforts to align our go Forward business plan with our expenses to TRY and drive sales growth and the overall business towards profitability.
Now to EBITDA
Adjusted EBITDA for Q3 was a positive 244,000 compared to adjusted EBITDA of $2.2 million in last year's Q3 as usual, a full reconciliation will be available in the press release once published after our quarterly review is completed.
Based on the various inputs I provided and reflecting on the tariff impacts, we are expecting adjusted IEDA for the year to be between a negative $8.5 million on the low end to a negative $7 million on the high end compared to negative $5.6 million.
Excluding the Australian business in fiscal year 2024, a few other items I think that are important to mention is our working capital position, inventory management, and the health of our overall balance sheet.
On the working capital side, we have made concerted efforts to transition inventory into cash, and this work continues into Q4.
As you can see on the balance sheet from Q3, our inventory balance of $16.9 million is down from $22.6 million at the end of June of last year when you exclude all of the Australian operations.
We expect to see further decreases in our inventory balance when we report our year-end results. This is a significant improvement to this point, which will only improve as we report our year-end financial results.
An offset to some of the cash savings and controlling general spending and managing working capital was approximately $1 million in cash spent to support the VA process in Q1 and Q2 of fiscal 2025.
As Mark mentioned, we successfully secured a $25 million working capital facility with Mountain Ridge in December of 2024.
As reported, we maintained $1.6 million in availability within our borrowing based calculation, which, as a reminder, is an asset-based lending agreement.
The summer is typically our highest borrowing period, and we have curtailed general spending significantly in the near term and monitor working capital fluctuations as we work through the strategic assessment with our advisor Rabobank alongside Mountain Ridge and their support.
Again, I'm happy to follow up with any details of anything that we went through if you should have any additional questions. With that, let me turn the call back over to Mark.

Mark Herrmann

Thank you, Vanessa.
Despite the near term market disruptions driven by tariffs, we believe S&W possesses high value traits that long term economic value for farmers.
The moves we have made during the past year to reposition S&W's focus on our high value, high margin sorghum trade technology are clearly beginning to be highlighted during the most recent 3rd quarter, culminating in our first positive quarter of adjusted EBITDA many years.
We believe we are well on our way to achieve our stated guidance until the tariff disruptions impacted our business.
That said, our belief in the long term opportunity remains strong, and once we return to a more normalized operating environment, I believe we are poised to deliver on our mission to revitalize and revolutionize the sorghum industry.
I want to sincerely thank all the shareholders for their continued support.
With that said, I look forward to taking your questions.
Operator.

Question and Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions)
Benjamin Klieve, Lake Street Capital Markets.

Benjamin Klieve

All right, thanks to my questions. First, I have a couple of questions on the kind of ongoing state of disorder market, given the, very understandable dynamic going on here with the Chinese tariff situation. My first question is, this is such a kind of fluid process and, given that the tariff battle with China was seemingly ratcheted down, to a degree, over the weekend, how has that Impacted your view of the 4th quarter outlook.
I guess I'm curious like if you guys announced a week ago, would your guidance have been worse than it is today, or have things really not changed from your perspective here over the course of the last Week?

Mark Herrmann

Yeah, Ben, I'll I'll go ahead and take that, and you are correct. It's such a fluid activity both from when the tariffs came up in January as well as going through the process, right? It shows right now that it's positioned as a 90 day pause to work out the details with China. The challenge is China, as they stopped importing US grain sorghum. Supplies back up through the grain system.
So, therefore, as farmers are checking on local cash prices, the basis between what's listed as the futures price and the cash price got very large in some cases over $1 has been published in different markets such as South Dakota.
So, the elevators are sitting full to rectify the situation. China has to place their orders for their export. The grain has to be positioned to move and likely grain elevators would make a change once orders come through and they see they've got a market for the grain sorghum that's in stocks, and then the basis would reduce and farmers would be in a different place.
So, it would be interesting to see here over the next two weeks. Do those orders start coming through? Do the corrections in local pricing happen? In time for farmers to switch a decision in their planting, the entire event couldn't happen at a worse time, right, as farmers are finalizing their cropping decisions, taking production loans, ordering input supplies for planting.
Texas right now is central and southern Texas is completing planning in northern Texas is well on its way. Kansas is well into the start, so. It's all going to depend on how fast things can be signaled that could potentially take the pressure off the marketplace at the local area at the farm base, but it's got to happen very quickly because planting obviously will be finished in the next Four to Six weeks.
So we'll continue to monitor it as we go.
I do think though the long term it will return to normalcy. I do believe China will return as a key customer and actually it has the possibility. Under the last time this happened in the previous presidency, there were support systems put in place for farmers to hold profitability.
But unfortunately that doesn't flow down through industry, but then it did return with China making a commitment for a larger consumption of many egg commodities, and I would say there's a pretty good probability that the same comes out of this, or at least there's a reasonable forecast that it would come out of this and potentially even provide an upswing to the demand for sorghum and sorghum production in the US

Benjamin Klieve

okay., Yeah, no, it's all makes sense and yeah, the timings, I think you said it exactly right, so, certainly sympathetic to all these dynamics. The other question I have regarding this the climate today is the impact of this on the, status of the ongoing strategic review, has this. Kind of uncertainty within the market today, changed how SMW is thinking about this, or is there any kind of, reduced interest in this pursuit, potential parties, had, that you're engaging with, stepped away because of this uncertainty, or is the process really going on as expected, with maybe some, around the edges changes, but nothing, terribly notable otherwise.

Mark Herrmann

Yeah, the process is still moving forward as we evaluate it. Obviously there's not a lot I can give as update and nothing is completed to date. But yeah, the process is moving forward. Those that have a high interest in Sorghum and in Sorghum's future have clearly been part of the target participation, but we're moving forward, evaluating all the options as earlier positioned.

Benjamin Klieve

Okay, Fair enough. And the last one for me, and I'll jump back in you is regarding you talked a bit about this, about expanding your traded or portfolio internationally in coming years, wondering, you know. Any updates or any acceleration potentially of this process here in this current environment, is there anything you guys can do to kind of ratchet that up to expand into other international markets that maybe are, less susceptible to the ongoing tariff situation, and if so, if you could elaborate on any of those initiatives, that'd be great.

Mark Herrmann

Yes, as we've positioned before, is our approach is targeting other international markets, which basically doubles likely the key target of the US sorghum market, but doing it through a low capital, low cost intensive model of having partnerships and licensing relationships.
Which actually can deliver very high margins as we're working with other partners, but we'd be working with established companies in markets that have solid share customer base service mechanisms in place. They can operate within the local environmental system and turn around and make payment in US dollars, right?
So, working with people that are already well established, they already have high performing germplasm. And then S&W providing the service of trade integration into their germplasm and allowing them to take those values to their customer base and really as we look at every international geography, values for controlling grass and grain sorghum is pretty similar in all the key markets as it's the most difficult weed control effort to be able to ensure you're not losing yield and moisture to competition.
But that model is moving forward. We've got a fantastic partner with ADAMA, and they continue to move forward in the key geographies. So as far as accelerating, it's just a matter of the time position of it takes it takes about 2 years to get the trait in grassed into germplasm. And then the germplasm ramped up and sold in the market, and we've got we've got relationships with key seed companies where we're working on the integration into their germplasm right now. And then the other piece is you have to have the herbicide registration for spraying.
Over the top of grain sorghum with a grass herbicide because obviously under other circumstances it would kill the sorghum crops. So doing the local tests to get those registrations takes about 18 months to 2 years as well, and ADAMA is moving that forward, very aggressively and has been a tremendous partner in this whole process. A double team solutions.
So, it's hard to accelerate both the registration process or the trait integration process, but once launched, we should see a similar reaction from the market because it provides the same value to farmers in protecting the yield and then the economic return of that protected yield. It has a similar value to farmers, so we're excited as the ramps move, but it's probably going to stay on scale, and it's typically going to be about 1 to 2.5 years post the US launch as we look at moving forward.
But we've been working solid with the relationship partners of both the seed company side in these international markets as well as the chemistry side with our partner with ADAMA and how we move forward. So all those things are progressing and we're making great progress with building those two relationships to address those needs.
Very good, so we feel very we feel very good about it, yeah.
Good, good to hear.

Benjamin Klieve

All right well I appreciate you taking my questions. Best of luck here in coming weeks. I'll jump back and he.

Mark Herrmann

Hey, thanks for joining, Ben. Good to hear from you.

Operator

Again, if you have a question, please press star then one.

Robert Blum

Megan, this is Robert here. Mark and Vanessa, we have just at least one question here on the webcast. I'll remind anyone on the webcast here if you'd like to ask a question. There's a feature on there to submit your question. Mark, a question here pertaining to sort of the SAF market Camolina here, SAF subsidies remained in the House tax bill yesterday.
It says here a big positive. Also Camolina seems to be picking up steam as an ingredient for sustainable aviation fuel.
Just sort of any updates in general that you can share there and sort of the evaluation. As it relates to the vision biofuels and S&W here.

Mark Herrmann

Yeah, and this is probably more of a review, Robert, and I know we've covered in the previous quarterly calls, so we didn't really recover it today, but things are moving forward inside of the EBO very positively, as you know from previous calls, BBO successfully secured an exclusive position for a broad spectrum herbicide over the top of Camolia production.
So, we feel like we've got a very good position on being on the ultra-low carbon footprint as you look at the different subsidy support systems, Camolina and particularly with a very efficient, cost effective herbicide control system as well, is a great platform to move forward. So we're excited about the fact that the supports are still in place and move forward.
And VBO is demonstrating that technology to growers as we speak. They've got broad-based efforts for visibility and trials for growers to see and understand the system. So all their efforts right now are ramping up the herbicide resistant inventories. So as they look forward in the future sales, it's going to be heavily focused as a traded.
Platform to move forward supporting growers in this effort.

Robert Blum

All right, very good. Mark, Vanessa, I am showing no further questions to the teleconference line or the webcast, so with that, I will turn it back over to you for any closing remarks.
All right, operator.

Operator

Alright, the conference is now concluded.
Thank you for attending today's presentation. You may now disconnect.