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SANW: S&W Seed announces R&D collaboration deal on stevia with major consumer products company.

By Ian Gilson, PHD, CFA


SANW: 2Q17 revenue in line despite decline in largest market. Deal with major Stevia partner announced.

S&W Seed (NASDAQ:SANW) announced its second fiscal quarter financials on February 09, 2017 followed by a conference call. Revenue was $24.23 million (our estimate was $22.0 million); cost of revenue $19.01 million (est.: $19.2); SG&A $2.59 (est.: $2.4); R&D $0.75 (est.: $0.75). Overall the operating financials were in line with our numbers.

Gross margins improved, as expected, from 16.7% to 21.6% due to improved cost control and a better product mix.

Other expense included the Change in derivative warrant liabilities. The warrants are "in the money" and under current accounting rules when the EPS is calculated using fully diluted shares the share equivalent calculation includes the converted warrants so the gain has to be excluded. This drops the EPS from $0.065 to $0.01.

S&W Seed announced it had signed a stevia R&D collaboration deal with a major consumer products company. Details are still confidential.

In Saudi Arabia, a major alfalfa seed buyer, buyers and distributors have cut back orders due to uncertainty about discussions on water use regulations. Last year Saudi purchased $31.5 million in seed,  $17.5 in the 4Q16 alone. So far this year Saudi sales have been about $5.2 million with the second quarter about $2 as compared to $4.3 million last year. There is no certainty that the discussions will allow over $20 million of seed to be sold in the second half of the year. However, the cows still need to eat and other areas such as Libya, North Africa and the Sudan could take up the slack.

Management discussed the sorghum and sunflower business. They have targeted sales of about $30 million a year, ramping up from $7 million in fiscal 2019 and $15 million in 2020.

We have projected sales of $2 million in fiscal 2017.

S&W Seed has started commercial production of one of its varieties of hybrid sunflower seeds  developed by SV Genetics. Production will be in the Murrumbidgee Irrigation Area of New South Wales.

The projected customer base will be through distribution partners in Australia, South Africa, Brazil and Pakistan.

In our opinion the sunflower and sorghum business could generate significant revenue in fiscal 2019. Potential margins could be much higher than those currently reported.


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