S&W Seed's (SANW) CEO Mark Grewal on Q2 2016 Results - Earnings Call Transcript

| About: S&W Seed (SANW)

S&W Seed Company (NASDAQ:SANW)

Q2 2016 Results Earnings Conference Call

February 11, 2016 04:30 PM ET

Executives

Robert Blum - IR, Lytham Partners

Mark Grewal - President and CEO

Matthew Szot - CFO

Analysts

Tyler Etten - Piper Jaffray

Mike Malouf - Craig-Hallum Capital

Ian Gilson - Zacks Investment Research

Steve Postich - Steve Postich Builders

Operator

Good afternoon, and welcome to the S&W Seed Company Second Quarter Fiscal Year 2016 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

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

Robert Blum

Thanks Dan. And thank you all for joining us today to review the financial results for S&W Seed Company for the second quarter of fiscal year 2016 ended December 31, 2015.

With us on the call representing the company today are Mark Grewal, President and Chief Executive Officer; and Matthew Szot, 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, we submit for the record the following statement.

Statements made by the management team of S&W Seed Company during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, 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 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, 2015, and other filings made by the Company with the Securities and Exchange Commission.

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

Mark Grewal

Thank you, Robert, and good afternoon to all of you.

I am pleased with the results of the second quarter and first six months of fiscal year 2016. Revenue increased 75% to $24.1 million compared to the second quarter of the prior year, while adjusted EBITDA increased to $1.3 million compared to $400,000 in the second quarter of last year. And adjusted non-GAAP EPS was a penny compared to a loss of $0.02 last year.

The team continues to deliver against our plan as we remain on target to achieve revenue of approximately $95 million for the fiscal 2016. Specifically during the quarter, we accelerated shipment of product to DuPont Pioneer which was ahead of our original expectations and was a key driver of the revenue increase. We have a very good relationship with Pioneer and look forward to a great partnership for many years to come.

While I am pleased that the fiscal year continues to progress, I am even more pleased with the initiatives that the Company has taken over the last year and specifically the last few months, to bring to reality our goals of increasing and diversifying our distribution channels, our production base, and our product offerings.

So, let me start with some exciting news on the production front. As many of you that have followed S&W know, the lifeblood of our ability to increase revenue, margins and profitability starts with our available seed for sale, which is largely a reflection of our acres under contract production. Without production acres, we simply do not have product to sell. One of the main reasons we acquired the DuPont Pioneer assets was our belief that there was a strong market for their elite varieties outside of their historical distribution channels. Remember, Pioneer was largely focused on the U.S. Corn Belt and alfalfa seed was a complementary crop for them. They primarily sold alfalfa seed where corn was sold. However, this is a much larger market for alfalfa beyond the historic corn regions.

It's been our goal since acquiring the business to build up those channels from the distribution standpoint and then follow through on the production side, and we are accomplishing both. Given time that it takes to securing production contracts, we are really entering the first period where real progress can be measured. As a point of reference, we had approximately 11,000 acres of Pioneer dormant varieties under production during calendar year 2015, most of which is basically being sold to Pioneer.

I'm extremely pleased to report that based on preliminary expectations and production agreements that we already have in place, we currently expect about 16,000 acres of production specifically dedicated to the newly acquired dormant DuPont Pioneer varieties during calendar 2016. That means we have secured about 5,000 new acres of dedicated production for the Pioneer varieties, an increase of over 40%. This is all organically derived expansion that will have a beneficial impact on our operations in fiscal 2017 and beyond.

When we spoke last quarter, we were expecting an increase in production acres of approximately 13%. So, the team has done an excellent job in the last three months securing an additional 3,500 acres. This added acreage proves out our belief that we can grow the required operations well beyond the distribution contract that we have in place with DuPont Pioneer. Again, I'm extremely pleased with the progress that’s being made.

Overall we are now anticipating companywide acreage increase of approximately 15% which compares to our previous estimate of 6% when we spoke in November. We are expanding both our dormant and non-dormant variety production. And now as many of you know mother nature certainly has her hand in how many pounds of seed will come off those acres. And as we have discussed during the last couple of calls, the harvest this last year has been weaker than anticipated, both in Australia and in the United States, which has impacted our overall cost per unit, resulting in a drag on gross margins as well as the drag on revenue upside. We are working through these dynamics in fiscal 2016. And as we look to fiscal 2017, we believe the story will look much different. With the added increase that we have under contract for fiscal 2017 coupled with the termination of production contracts where we carried farming and yield risk and a return to more normalized harvest, we expect the overall inventories will be comprised of higher quality seed and lower overall prices.

Even with the harvest yields -- even when the harvest yields are weak like they were this last year, they’re still in a much better position due to the increased acres and decreased reliance on lower margin sourced seed to meet the demands of our customers. We are cautiously optimistic that fiscal 2017 will be a very good margin year for S&W.

Turning to R&D, we see a number of exciting advances on the new product development front. Our alfalfa seed products are already amongst the leaders in addressing the issues that farmers face on an ongoing basis including yield, salt, drought tolerance, quality and nematode resistance. However, as we look to the future, our collaborations with key biotech companies in the market including Calyxt and Bioceres to develop next generation traits are progressing nicely.

Additionally, we are working with Monsanto, FGI and Pioneer to develop and commercialize biotechnology varieties contain the soon to be introduced reduced lignin, carb-extra alfalfa with Roundup Ready technology trade. We will stay dedicated to bringing to market the very best alfalfa seed varieties that we can. As we talked about in the past, we are building this business for a long-term, sustainable growth and our initiatives with our R&D program will certainly help to lead us there.

From a distribution standpoint, we are seeing strong interest from a number of new distributors both from our newly acquired dormant varieties as well as our non-dormant varieties. Our strategy evolves both the push and pull production mentality. In certain areas we can secure the contract on the distribution side and then acquire the production acres to meet that demand we will; in other cases we are building up production and meet expectations in the market. This market is a bit different but we are definitely pleased with the progress made and feel we are in a strong position to be taking share of the overall market in the coming years.

With that said, let me turn the call over to Matt Szot for a review of the quarterly results. Matt?

Matthew Szot

Thank you, Mark, and thank you to everyone on the call today. Since most of you should have a copy of the financial results and the press release, let me spend some time going through some of the more pertinent details of the quarter and discuss some of the impacts of the financial model on a go forward basis.

For the second quarter, revenues increased 75% to $24.1 million, up from $13.8 million a year ago. As we indicated in our press release today, the $10.3 million increase in second quarter revenue was driven primarily by shipments to our customer DuPont Pioneer. While the growth during the second quarter came primarily from the acquired operations, please recall that we had strong growth in organic operations during the first quarter. As Mark mentioned, we continue to expect revenue of approximately $95 million for the fiscal year.

Please note that the accelerated shipments that occurred in the second quarter are not necessarily upside to our 2016 expectations.

Gross profit margins during the second quarter were 16.7% compared to gross profit margins of 14.2% in last year's second quarter and adjusted gross margins of 16.2% in last year's second quarter. The increase in gross profit margins is primarily due to sales of our dormant seed varieties to DuPont Pioneer which were not included in the comparable period of the prior year and generally carry a higher margin profile than our non-dormant business.

Now, while we benefited from sales and margin contributions from DuPont Pioneer agreement, these benefits were offset by higher seed costs within our non-dormant operations. This is driven by lower than expected yields on the recent alfalfa seed harvest. These lower yields and lower cleanout weights resulted in higher per unit production cost on contracts where we carry farming and yield risk. Now to limit the variability of future production costs due to farming yields, we have recently terminated production arrangements where our production costs are variable on a per unit basis. And we are increasing our contract to grow our acreage where our production costs are generally fixed on a per unit basis.

Additionally, the lower than anticipated harvest yields have impacted our overall seed inventory levels, requiring us to source higher levels of seed at lower margins to meet the demands of our customers. Overall, these factors will likely result in approximately 250 basis-point impact on gross margins from where they otherwise would have been. So, we are probably looking at gross margins in the high teens compared to the low 20s that we talked about at the beginning of the year.

SG&A for the second quarter totaled $2.3 million compared to $3 million for the second quarter of the prior year or $1.8 million when excluding nonrecurring transaction expenses associated with the acquisition of DuPont Pioneer.

Please recall that our SG&A during the first quarter of fiscal ‘16 was $2.5 million, so we are experiencing consistent SG&A spend with even a modest decrease from Q1, despite a meaningful increase in revenues. This really demonstrates the relatively fixed nature of our SG&A spend and a leverage available as we increase revenues.

During the quarter, R&D was approximately $733,000 compared to $217,000 in the second quarter of the prior year. To remind you, we'll continue to invest in our robust R&D program that we acquired from Pioneer. This will enable us to drive growth on a go forward basis.

Now, I wanted to spend a moment to talking about our tax benefit. In conjunction with the implementation of our international tax planning strategy, we recorded a tax benefit during the second quarter of fiscal 2016 and this related to an unrealized foreign currency exchange loss incurred on an intercompany loan to our wholly owned subsidiary in Australia Seed Genetics International. We previously treated the intercompany loan as long term and investment nature and during the second quarter we determined that the intercompany note would be settled in the foreseeable future as part of our tax planning strategy. This change in the termination resulted in us reporting the tax benefit.

As we previously discussed we issued 27 million of secured convertible debentures. Through today we made principal repayments of 14.5 million on the notes. So the remaining balance is approximately 12.5 million. We are focused on continued debt reduction and we expect to have the remaining convertible debt balance retired within the next 12 months.

We incurred approximately $538,000 in cash interest expense during the quarter. As we continue to pay down the convertible notes, we expect that the cash interest number to steadily decrease over the remaining term. Now on the last few calls we have also talked about noncash interest expenses related to the accretion of debt discount associated with derivative warrant liabilities and amortization of debt issuance costs. During the second quarter that number was 1.1 million. For the remainder of the year these noncash charges should total approximately 1.9 million and 1 million in 2017. Again, this will steadily decrease over the remaining term and amount.

We also had noncash gain in the quarter of $943,000 related to the change in fair value of our derivative warrant liability and a $48,000 gain from the change in the fair value of our contingent consideration obligation. These changes are strictly a function of GAAP requirement from mark to market estimated fair value. Going forward, we will continue to record gains or losses to the P&L on a quarterly basis, driven by changes in the estimated fair value of these items.

Adjusted EBITDA during the quarter was $1.3 million, an improvement from adjusted EBITDA of $396,000 during the second quarter of last year. Non-GAAP net income was $164,000 or $0.01 per basic and diluted share compared to a loss of $247,000 or $0.02 per basic and diluted share in the second quarter of last year. Again, this backs out certain nonrecurring expenses as well as noncash gains and losses.

On a GAAP basis, net income was $1.4 million or $0.10 per basic and diluted share, compared to a GAAP net loss of $1.5 million or $0.13 per basic and diluted share in the second quarter of last year.

Before I turn the call over to Mark, let me remind everyone on the call that we are currently in the process of conducting a rights offering. A copy of the prospectus may be obtained at the SEC website and we have information on our website as well. And I know, we went through a lot of data here, so if you have any questions, please feel free to ask.

Let me turn the call back over to Mark.

Mark Grewal

Thank you, Matt. As I said at the beginning of the call, fiscal 2016 is tracking well. The demand for seed remains strong as global supply is down. While the recent weaker than expected harvests are impacting margins, I feel we have done a great job to address these items in fiscal 2017 where we are now expecting overall production increases of approximately 15%, up from 6% during the last call with the 40% increase in our dormant acres. In addition, we have terminated our contracts where we carry a farming and yield risk, eliminating some of the cost variability. We have built the great foundation with strong pillars and look forward to capitalizing on it in the coming years.

As always, we thank you for your support. And now, let’s open up the call for your questions. Dan?

Question-and-Answer Session

Operator

Thank you. [Operator Instruction] And our first question today comes from Tyler Etten of Piper Jaffray. Please go ahead.

Tyler Etten

I was wondering if you could talk a little about the reasoning for pulling the sales ahead or if there is any way that we can forecast a little bit better on the lumpiness of sales would occur?

Mark Grewal

Well, Tyler these sales are originating anticipated the ship in January and based on Pioneer's request -- they've requested the product to get our earlier and our production team did a nice job of accommodating that request, so we got the product out earlier. It's really just the short term timing difference and again we are not changing our overall annual numbers. But if the customer is asking for product earlier and we can do that we’re certainly going to do everything possible to make that happen.

Tyler Etten

Now do you think that this is going to be something that happens on an annual basis now that you will start to see these DuPont orders coming in January versus where we were looking out before.

Mark Grewal

I think one of the reasons why we want to just the yearly number is we’re pretty good at the total, it’s just the timing of when each shipment would go out and some witness one quarter or go into another quarter and we wanted to go away from that. So, I would tend to ask our shareholders to jus focus on the total and then not to worry about the lumpiness as much. To say that it's going to change, it just depends on the market and the place where people want to grow. So, if we took a product that normally, say ship to the Middle East, well that Middle East company may have moved down to Argentina to produce and also moved into Arizona. So, the timing for when they want that seed; it’s one of that same company but the timing shift. We maybe going into another country where required registration and the registration approval isn’t ready for one quarter when they really wanted it, but they start taking seed the next quarter and it’s just a function of getting those registrations in place. So, it's really hard [indiscernible] go on strike or this or that. What we’re saying is we are going to get the product out, the product is needed, it's in very high demand and it’s just very hard at times to say that we are going to ship on January 1st to January 15th or even February 1st because of something that happens, bottom line is seed’s going to get shipped.

Tyler Etten

So, looking to growing your acre, last call you guys were at 6% growth in production acres and now you are at 15%. Is that directly from the yield impact this year trying to get more acres under production as a way to minimize risk here or what's the logic behind getting more aggressive…

Mark Grewal

We are always trying to increase our acreage numbers. We do definitely need more production. And of course, if we can we want to decrease the amount of spot purchase that we have to do and have a more reliable product line that is at the higher end versus maybe a lower end market to offset what we didn’t produce. And we want to factor in a buffer because right now, we are only supplying seed for specific markets that we already have and there is markets out there that want our seeds. So, we have to ramp up and ramp up quickly to be able to supply those additional markets that we currently don’t supply.

Tyler Etten

And I guess not relating so much to this year but do you think that there is more demand pent up just not able to supply enough seed to get there at this point?

Mark Grewal

It's not just supplying seed it's the right seed and the right varieties that somebody wants. Sometimes we’re substituting that but it’s not specifically what an agronomic -- agronomist would actually like to have but he is accepting it because there is no inventory. So, we have to write the ship and at the same time we have to expand it. And what's happening right now for example is we're filling the Pioneer demand for their contracts and Matt's working with the team on that, but we're not -- we don't have the product line in place to actually take that to other areas that we already noted in today's talk, in areas that are not necessarily in the Midwest Corn Belt.

Tyler Etten

Got it, one more from me and then I'll pass it along. Do you have any read through on what the customers in the Middle East are doing in terms of how they're doing on inventories, just any information would be helpful? Thanks.

Mark Grewal

So, the Middle East inventories in general are low. There is a strong demand for buying. It's working through what products do you offer specific distributors and what is your contractual obligation to different distributors. So, the product demand is there now. Recognize that -- don't concentrate on the region, concentrate on the animal units. It doesn't matter if a company is physically farming in that area, in the Middle East, North Africa or they're farming in Argentina or they're farming in Arizona. That product is still being shipped back to their dairies in the Middle East. So, at times you'll see a shift in actual pounds sold in different areas but it's still going back to those areas for forage feed to the animal units. Do you understand that, was I clear enough?

Tyler Etten

Yes.

Operator

And our next question comes from Mike Malouf of Craig-Hallum Capital. Please go ahead.

Mike Malouf

Hey guys. First off I think I want to talk about the acreage, that's a big number that you guys put out, pretty impressive. Can you give us a little bit of color on how you were so successful getting an additional 5,000 acres under contract for Pioneer? And then just give us a little insight into your ability to sell that seed or increase the distribution of that seed.

Mark Grewal

Well, the number one thing is we have a stronger management team through the acquisition of Pioneer. So, we have some great production guys that are now able to go out in the fields and relate to people. And when you combine that with a product portfolio that's second to none on quality and yield and that the farmers want to farm those varieties, it’s adding an excitement in the field that we really only had in the non-dormant West Texas area that people knew of S&W; now it's expanded across the whole west and it's expanding as we increase our R&D into Australia and other areas of the globe; Argentina. And so think this is going to continue in a very positive manner. And we look forward to updating those numbers after our trip to Australia. I’ll take off this afternoon right after this call. And as those guys get ready to harvest this crop and then start planning for the next one, so we'll be working on ramping that up and we'll be able to report back in the next quarter we hope with even more optimism.

Mike Malouf

Do you have any early read from Australia on how that's shaping up this spring?

Mark Grewal

You mean their crop?

Mike Malouf

Yes, the harvest.

Mark Grewal

The rumors are basically that it's a kind of a flat crop. I was definitely hoping for more with such a low crop that we had last year, but right now I would just say that from the rumors it's average. But I need to physically get out there to the fields and I'll be visiting all of our growers and our team will be there. We've got the production team coming in also. So we'll be out in the fields, in the bush checking the yields. And they will just be starting some harvesting Mike, at the beginning and then it'll go heavy in the March and April. And after we start -- can start getting those numbers, then we'll a good time and then I'll be able to update you on what that means.

Mike Malouf

Did you mean that it would be flat with last year's petty tough…

Mark Grewal

No. It would be above last year but it would be below where we want to see it long term.

Mike Malouf

Because last year was down pretty significantly on sort of a 30-year average, right?

Mark Grewal

Yes, that's correct. So, in general, I mean, we don't need to get in all these kind of details but I'd like to see -- I think the team I would like to see us be able to pull out 10 million pounds of seed out of that area a year. The average would be 8. When we did the acquisition of FGI, we built our model on 8, last year was like 5.9 Mike. So, we were way down and we had to go out try to source that seed. And that's why in the first quarter we said it is going to impact the margins because we don't have that quality of seed at a lower price base to blend in our optimization program.

Mike Malouf

Okay great, and then one more question. With regards the low lignin that you talked about, I know there's been a lot of chatter in the industry about that. And I think your other two biggest competitors already have product that are into that field. Can you talk a little bit about the trends of that particular product and how you guys are going to address it?

Mark Grewal

So the low lignin is only being used and looked at in the Midwest; it's not even out on the West strip right now, it's not approved out here. They haven't gone through the ETS programs which mean excellent through stewardship, how they're going to police it, monitor it. So we don't have it right here in California right now. We're working on our own product lines. We're working in conjunction with FGI and Monsanto on those. So, if you are asking me, what's the excitement, I think the people that sell it are anticipating approximately a 30% market share is what I've been told or have gone to in meetings overall. They've opted at some point that ramps up to at least the 50% market share. So, GMO, it's a political question that some people really like it, some people don’t. So, it’s definite really domestic tool but again it's not in our overall global sales plan at this point because it's not accepted anywhere else in the world.

Mike Malouf

And will be Roundup Ready or not?

Mark Grewal

We will have -- okay we’re selling Roundup Ready right now on Pioneer product. So, we are already selling Roundup Ready. The question is the timing Mike of when we sell and start to sell our two license varieties upon approval from FGI and Monsanto, the S&W non-dormant Roundup Readys. So we are very excited about getting them out in the field but we’re still waiting on the final approval of the first one and then one might behind it. So, I'm anticipating that that will get done; there is some research, the data that’s got to be double checked and some agronomic stuff. But we’re close to getting that growing on the S&W side. And I think that's going to have a big impact on market share, once we did that approved.

Mike Malouf

Great, and then I'm sorry one more question. On the 2017 comment, you said very good year with regards to gross margins; why would you consider? I mean now you have a lot of cross currents to say the least in the past 12 to 18 months. What is a very good year in gross margins in your opinion?

Mark Grewal

I'll give you my opinion, Matt can give you his separate. We're looking at mid-25, mid-20s, mid-25 I think that's where we got to be.

Matthew Szot

I think there is a clear path for how the Company gets through those mid-20 margins. I don’t want to go out and commit to that sort of margin for 2017. I do think there is a clear path for how we show meaningful improvement over the current year. And I think we've got plenty of initiatives in place that will continue to drive improvements in margins year-over-year.

Operator

[Operator Instructions] Our next question comes from Ian Gilson of Zacks Investment Research. Please go ahead.

Ian Gilson

Good afternoon, gentlemen. I've got a few add-ons on some of the questions. Are you capable of producing every year the amount of seed on in earlier basis as you did this year to DuPont Pioneer?

Mark Grewal

In a general statement, Ian, the revenue side, the equation on the DuPont product line is we anticipate 40 million a year, year in, year out. So they are taking approximately $40 million worth of our total revenue in the seed every year. So it could be a combination of Roundup Ready and other varieties. So every different product line is a little bit different or pricing component. But in general, we’re here looking at about a 25% margin on $40 million with that deal.

Ian Gilson

And they wanted that in the second quarter, you could deliver?

Mark Grewal

Okay. If whatever Pioneer wants and they want it in a certain way, we are going to deliver.

Ian Gilson

Understand.

Mark Grewal

In the current year, we are production constraint though. I mean I can tell you that and Matt will tell you, right now we have about $37 million of seeds in inventory. That's all we could deliver right now until new crop comes out.

Ian Gilson

$37 million now or $37 million at the end of the quarter or what?

Matthew Szot

End of the quarter.

Ian Gilson

Okay.

Matthew Szot

What that doesn’t include is obviously the upcoming Australian harvest that happens in the spring and it certainly doesn’t include the North American profits in the ground right now.

Mark Grewal

Ian, we're still spot combining with some product. The supply to other guys. So, it doesn’t include that -- those purchases either but whatever our customers need we’re trying to supply that.

Ian Gilson

Are there any restrictions on repatriation of cash flow out of Australia back into the U.S.?

Matthew Szot

Ian, there would be tax implications, both -- at this point because we are selling this long-term intercompany note that does not get a trigger any sort of repaid creation of cash. And we plan on continuing to capitalized the Australian business as it grows and it pursues its own growth opportunities. So, I just don’t see that being an issue in the foreseeable future.

Ian Gilson

So, you without incurring a penalty, you could not bring the cash flow from Australia back to the U.S. and pay down debt?

Matthew Szot

We could, I mean there is, the statutory rates in the US are at 35%; they're at 30% in Australia, so we could absolutely do that without a big impact. I just don't think we have the need to do that at the current time.

Ian Gilson

Overall, the seed prices, are they up versus a year ago, flat; and what would you expect looking forward?

Mark Grewal

Seed pricing in general is slightly up. If we just look at for example, the last three years of Siriver which is the basic public variety in Australia, say three years ago was around $4.50 a kilo, the following year, this past year $5.50 a kilo now it’s gone to $6.50 a kilo. So, you can price is slowly going upward. And that's a price that's contracted to the grower to grow the seed. And so pricing normally for other high end varieties will be above that. That's just a general basis to show you that yes, seed price on the lower end has crept up because inventories are down and so the gap between high quality seed and lower public varieties are narrowing but they are moving slightly upward in a small upward trend.

Ian Gilson

So, you are getting higher prices for your product being sold to your customers?

Mark Grewal

Do we get higher pricing, we're getting about the same pricing on the high end, we're getting a little bit better pricing on the low end.

Ian Gilson

And that's across the board including what you expect to get out of the current harvest on Australia versus what you're going to get later kind of year from various sources in California, and then the DuPont Pioneer has I believe a automatic price escalation clause?

Mark Grewal

We have up to 4% increase escalators, so we're doing fine there. We're just trying to -- I think it's a lot easier if we just talk basically of margin and margin only because we have so many different product lines that have a different price component. Is it dormant, is it non-dormant, what region it's coming out off; is it coming out of Australia, are we optimizing it, is it a blended product. So, there's just a lot of ifs, there's a lot of skews out there. And so in general you're going to see the trend and you will see the trend as upward margin enhancement.

Ian Gilson

Okay. I believe the year before you acquired the Australian facilities that the production was in the order of a 12 kilos, or million pounds of it?

Mark Grewal

They had a high year, the first year out we bottomed. So I can't specifically, maybe Matt remembers. I would say -- I was think it's 10 but whatever it is, it was a very good year.

Ian Gilson

If have you had similar year, could you sell all that seed?

Mark Grewal

Right now if we have it, we can sell it.

Operator

And our next question comes from Darcy Gardener of Kelsa Management. [Ph] Please go ahead.

UnidentifiedAnalyst

Could you fill me in on the artificial sweetener, the development of the product and are we shooting at elephants here, is this largely expected to be a big product or a big area or just a small add-on 10 or 20% of the business?

Mark Grewal

At some point in the world we'll be I believe agronomically a very large product. It's in about 250 plus products now. Are we shooting in the dark? No. Have we changed directions? Yes. We're focusing our program now instead of maybe being a producer and working on the lead components side, we went into the breeding side for seed production and high end quality patented varieties that we can use and a royalty exchange by contracting with outside companies and growers that they grow and we clip the two coupons on royalty. So currently today we have three patent pending varieties and we're getting ready within probably another quarter to file the fourth.

I would encourage you if you want to come out for a visit in the summer and you can go to some of our research blocks and see for yourself, many investors have seen those trials. We've enhanced and moved our Ontario operation where they were breeding to Napa to our center, we've have greenhouses there now. Our breeder, our main breeder will be working right there with our other breeding teams and our production teams, so we can try to accelerate the traits that we're looking at like increased robotocize A, B and C and the taste components. But the real critical part is that we come up with varieties that can go out directly as seed, not necessarily having to grow them in a greenhouse in the plugs and transplants and then transplant those. So I think at some point, it is going to be finally revenue generator, it is in our specialty product line division and we are looking at other products to help accelerate the growth in that area as we slowly diversify.

Unidentified Analyst

Can you give us some idea of how much you are spending on development in that area?

Mark Grewal

In the past, we were doing about 0.5 million maybe 600,000 and we’re trying to keep that down in that range or lower with the breeding team at this point until we really have a product we can launch and get out into a mass market.

Unidentified Analyst

And do you have any revenues now or it is anticipated revenues or royalties...

Mark Grewal

We have no revenues at this time. I think there is some opportunities where you contract out with companies to run a specific patented variety especially if they control it exclusively for a specific product.

Operator

And our next question comes from Steve Postich of Steve Postich Builders. Please go ahead.

Steve Postich

You just answered my question. And I was wondering too on the offering that's up now the cash coming in are you going to use that to pay the debt off then or what do you have plans for that in some other area.

Mark Grewal

Everything is focused on debt reduction.

Matthew Szot

Debt reduction and general working capital purposes.

Operator

And ladies and gentlemen that concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Mark Grewal

Hey, Dan, thank you. Thanks everybody and our shareholders, investors. We appreciate your support. We are very pleased with the progress made over the quarter with an eye towards building this business over the long-term. Our markets are strong as we are seeing increased demand, especially within our key non-dormant markets. Our demand plan from DuPont Pioneer remains strong. And we are processing and shipping product in advance of the outlined expectations which DuPont is pleased about. We have made very good strides in expanding our production base, with another 3,500 acres of dormant production at it in the last three months, which should be a key driver to continuing, growing our operations organically. Overall, we expect to see a 40% increase in our dormant acres from last year and 15% increase in overall acres from the year ago period.

And with the number of R&D initiatives in place, we believe we will stay at the leading edge of product development. We are better positioned to take advantage of the long-term trends of increasing protein demands across the globe. And again, my thanks to everyone for participating on today’s call. We look forward to talking to you again at the conclusion of the current quarter. I hope you have a good evening.

Operator

Thank you, ladies and gentlemen. This concludes our conference. Thank you for attending today’s presentation. You may now disconnect.

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