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RiceBran Technologies (NASDAQ:RIBT)

Q2 2014 Results Earnings Conference Call

August 20, 2014, 4:30 p.m. ET


Fred Sommer - Ascendant Partners

John Short - President and Chief Executive Officer

Dale Belt - Chief Financial Officer

Robert Smith - SVP, Sales and Business Development

Mark McKnight - SVP, Contract Manufacturing


Bruce Galloway - Galloway Capital

Aaron Martin - AIGH Investment Partners


Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RiceBran Technologies second quarter financial results conference call. [Operator instructions.] I would now like to introduce our host, Mr. Fred Sommer, of Ascendant Partners. Please go ahead, sir.

Thomas Walsh

Thank you operator, and good afternoon, listeners. Welcome to RiceBran Technologies shareholder and investor update conference call. With us today are John Short, chief executive officer and president of RiceBran Technologies; Dale Belt, chief financial officer; and Mark McKnight, senior vice president of contract manufacturing. Also with us are Dr. Robert Smith, senior vice president of sales and business development.

Before I turn the call over to John, I want to remind listeners that during the call, management’s prepared remarks may contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today.

Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore we refer you to the detailed discussion of these risks and uncertainties in the company’s filings with the SEC.

In addition, any projections as to the company’s future performance represented by management include estimates today as of August 20, 2014, and the company assumes no obligation to update these projections in the future as market conditions change. This webcast and certain financial information provided in this call, including reconciliations of non-GAAP financial measures, are available at on the Investor Relations page.

At this time, I would like to turn the call over to John Short, CEO and president of RiceBran Technologies. John, please go ahead.

John Short

Thanks, Fred, and thanks, all of our listeners, for joining. I’m pleased to report that in the second quarter of 2014, consolidated revenues of RiceBran Technologies reached $11.3 million, a 21% increase from the $9.4 million recorded in the second quarter of 2013.

This growth was led by our USA segment, where second quarter revenue reached $6.7 million, a 115% increase compared to Q2 of 2013. While revenue at our Brazil segment declined compared to last year’s comparable quarter, this was a direct result of the completion of the plant upgrade at our Irgovel facility.

We began to ramp production in the second quarter, and it’s important to note that the revenue in Brazil was up 71% sequentially from Q1 2014. Additionally, this sequential revenue growth was achieved despite supply chain disruptions caused by Brazil hosting the 2014 World Cup.

As we move into the second half of 2014, we expect to achieve significant revenue growth as production in Brazil continues to ramp to at least our targeted level of monthly production and our USA segment achieves further penetration in the fast-growing nutritional and functional foods market.

When coupled with our capacity expands at our Healthy Natural plant in Irving, Texas and our stage two Dillon, Montana plant, we’ve set the stage for a prolonged period of business expansion for our company. We continue to implement our business plan as we work to achieve our current 2014 financial guidance for full year revenues of $59 million and full year adjusted EBITDA of $6 million.

In the beginning of the year, we highlighted three key operating deliverables we believe are necessary to produce these results. The first deliverable was ramping production at our Irgovel rice bran [by] refinery to our run rate of 9,000 metric tons per month of raw rice bran processing by the third quarter of 2014.

I’m pleased to report that while we experienced temporary supply chain disruptions in Brazil that somewhat limited our ability to ramp production in the quarter, after initial testing and optimization of equipment, we believe we can reach that run rate in the third quarter as the supply chain normalizes and even exceed that level of production in the fourth quarter and into 2015. We now believe the plant is capable of raw rice bran production at or greater than 10,500 metric tons per month, which leaves us significant room for growth in 2015.

The second deliverable was the completion of the expansion at our Healthy Natural plant in Irving, Texas to double capacity by the end of the third quarter of 2014. I am pleased to report that we completed the facilities buildout and the installation and startup of equipment for this plant project in early July, ahead of schedule and on budget. We expect the expansion of Healthy Natural to allow us to immediately ramp production and sales in that operation, and have a significant positive impact on our growth curve in the second half of 2014, and into 2015.

And third is the major product to double production capacity at our Dillon, Montana stage two plant. We’ve accelerated the original timetable for completion of this project from Q1 2015 to Q4 2014, to help us keep pace with rapidly growing demand for our products.

We shut down the Dillon facility for nearly three weeks in May for the first phase of the expansion, with the expected impact on production margins and sales in Q2. We will have three additional but much shorter shutdowns in the coming months, as we install additional machinery equipment and connect increased energy supplies to support operations at an increased level.

I’m pleased to report that the project is on budget, and barring any unforeseen surprises, we expect to meet the accelerated Q4 completion date and have the new capacity fully available as we move into 2015.

In summary, with the capital raised from the completion of our financings in the first half of 2014, we’ve invested in the significant expansion of our production engines in both Brazil and in the U.S. We expect those investments to begin to contribute to improved financial performance for the remainder of 2014 and beyond.

With added capacity at Irgovel and the supply chain problems in Brazil improving, we expect our Brazil segment to be a strong driver of growth moving forward. Coupled with the U.S. expansion projects coming online in the second half of 2014, we are poised to accelerate our growth.

We’re mindful of potential raw rice bran cost increases caused by the California drought, and we’re diligently working to avoid margin compression, and are confident that we can effectively manage costs for greater utilization.

I’ll stop here for now, and turn the call over to Dale Belt, our CFO, who will comment on our second quarter results.

Dale Belt

Thanks, John. For the second quarter of 2014, consolidated revenues were $11.3 million, a 21.8% increase compared to consolidated revenues of $9.4 million recorded in the second quarter of 2013. The increase in revenues was a direct result of the strong performance in our USA segment, where, as John stated, revenues climbed to $6.7 million.

That’s a 115% increase from revenues of $3.1 million recorded in last year’s first quarter. This is directly attributable to the January 2014 acquisition of Healthy Natural. Additionally, we achieved 35% sequential revenue growth in our USA segment due to building momentum in the NFS market.

While revenue in our Brazil segment increased by 71% sequentially, to $4.6 million, as we restarted production at our Brazil file refinery, it declined when you compare it to revenue of $6.3 million recorded in the second quarter of 2013, when the facility was operating more normally.

As we hit our stride in the second half of 2014, we expect our quarterly comparisons to be significantly more positive, with capacity increases of 50% or more. The challenge, of course, is to quickly fill that capacity.

Gross margin in our USA segment was 24.2% for Q2 2014, and remains similar to last year’s quarter, despite the operational disruptions caused by the Dillon facility upgrades. We expect improvements in efficiency from the capacity expansion, and that will bolster revenues and margins as we move through the remainder of the year.

We experienced negative gross margins from our Brazil segment, which was anticipated during the restarting process at Irgovel. This resulted in overall consolidated gross margin in the second quarter declining to 10.5% compared to 13.6%. With Irgovel operating at greater capacity, and the expansion coming online in the USA segment, we expect consolidated revenues to significantly improve in the second half of 2014 as compared to the first half.

Our operating revenues were $4.2 million in the second quarter of 2014 compared to $4.1 million in the first quarter of 2014. Operating expenses increased substantially when compared to Q2 2013, when operating expenses were only $2.6 million. The increase over last year’s second quarter was mainly due to a $441,000 increase in depreciation and amortization on an intangible asset related to the H&N acquisition, as well as a $610,000 increase in SG&A expenses.

When comparing our operations on an apples-to-apples basis during both periods, expenses were relatively flat in the second quarter of 2014, and we intend to work diligently to keep our costs aligned with our revenues in the future periods.

Our operating loss was $3 million in the second quarter of 2014, up slightly from the first quarter of 2014, largely due to the increase in negative gross margin in our Brazil segment. As we’ve previously stated, we expect operating results to improve substantially in the second half.

For the second quarter of 2014, we recorded a net loss attributable to common stockholders of $15 million, or a loss of $3.52 per share, on 4.3 million in weighted average shares outstanding. This compares to a loss of $1.9 million, or a loss of $1.83 per share on 1.1 weighted average shares outstanding in the second quarter of 2013.

The increase in net loss is mainly attributable to four things. Number one, we incurred a $6.2 million noncash charge for accreting debt that was converted to equity. Number two, we incurred noncash $3.8 million related to valuing derivatives. Number three, we recorded a $494,000 loss on extinguishment expense related to converting the H&N acquisition related notes to equity. And last, number four, we expensed $950,000 for financing charges related to the May convertible note and warrant equity raise. As you’ve hopefully noted, all of these charges are noncash in nature.

From a balance sheet perspective, we have deployed a significant percentage of the capital recently raised to launch our critical business growth initiatives. We ended the quarter with $6.2 million in cash, as compared to $5.1 million at December 31, 2013. Shareholder equity increased 248% to $16. 6 million, compared to $5.8 million at December 31, 2013.

We continue to believe we have sufficient resources available to us at this time to deliver on our business plan and achieve positive cash flow in 2014. As we move through the rest of the year, we intend to focus our attention on controlling cost and opportunistically growing our business and managing our capacity expansion projects.

And John, with that, I’ll turn it over to you.

John Short

Thanks, Dale. Now I’d like to ask Dr. Robert Smith, SVP of sales and business development, to provide a brief update on our rice bran protein projects.

Robert Smith

Thanks, John. As many of you may be aware, RiceBran Technologies and DSM spent over two years and $3 million on a joint project to develop technologies to extract and concentrate protein from rice bran. That project completed successfully in the second quarter of 2013, and provisional patents were filed on the resulting extraction process.

We announced the launch of our Proryza family of products at the IFT trade show in Chicago in July of 2013, and began sampling our Proryza products to target customers in the third quarter of last year. We then began the process of testing and acceptance at customer R&D facilities, followed by marketing department acceptance and shelf life testing. As with any new product, this results in a long lead time before achieving sales.

Currently, our rice bran product offering has gained significant interest and is in various stages of product development and testing at a number of companies. Additionally, I’m pleased to announce that we’ve received our first commercial orders for Proryza 235, and will be processing and shipping those initial orders in late September or early October.

When our Dillon expansion is fully online, we look forward to the additional growth opportunities presented by our rice bran protein products family, and we believe it will enhance the utility of our processing and drive further margin expansion.

Consumers are demanding non-allergenic, non-GMO, minimally processed, natural, and in some cases vegetarian or vegan protein sources. Our products meet all of these important criteria, which put us in the right place at the right time to drive sales well into the future.

Let me stop here and hand the call back to John.

John Short

Thanks, Robert. Now, I’d like to ask Mark McKnight, as VP of contract manufacturing, and president of Healthy & Natural, to give us a brief update on some of the opportunities we see at Healthy & Natural.

Mark McKnight

Thanks, John. Since joining RiceBran Technologies on January 2, we have been in full action mode at Healthy & Natural to increase sales at the same time we work to double capacity at the plant. Our plant manager in Texas has been in the natural products manufacturing business for 25 years, and described these past six months as the most productive time of his career.

We have been successful in leasing adjacent space, completing the necessary buildout, including the installation of new machinery and equipment that more than doubles our production capacity. At the same time, we are able to deliver increase sales, including the largest shipping month in the history of Healthy & Natural in June.

In addition to completing the expansion, we have been working to develop new turnkey products for existing customers. Also, we have several new functional food customers that have included RiceBran Technologies’ proprietary and process patented ingredients in their formulas.

Healthy & Natural has added a significant number of new customers since becoming a part of RBT. We have already produced and shipped two new families of products, and we are in the process of producing three additional families of products before the end of this year.

This will be a milestone for us in that 2014 should result in the largest increase in new customers and new products developed in the history of our company. I believe this demonstrates the power of our business combination, and I feel we are only getting started as we move into 2015.

Not only will the creation of turnkey products drive sales growth in the future, it will also make us a more integral part of our customers’ supply chain, which makes us much more valuable to our customers and less replaceable. That makes customer addition stick for the long haul, which is one of our key objectives. I’ll stop here and hand the call back to John.

John Short

Thanks, Mark. In summary, our second quarter results continue to evidence that positive growth trajectory in sales at our USA segment, now that we’ve vertically integrated our business with our Healthy & Natural subsidiary. Our sequential revenue growth is beginning to show the potential of our business plan as we move through the remainder of 2014 and into 2015.

Consolidated revenue for the first six months of 2014 exceeded consolidated revenue for the same period in 2013, despite two quarters of limited revenue from Irgovel and shutdowns in construction projects at both Healthy & Natural and Dillon.

We continue to expect to see results at Irgovel turn significantly positive in the second half of 2014, and are excited by the fact that our production testing has demonstrated that the potential capacity at the plant can be significantly higher than the 9,000 metric tons per month of raw rice bran processing capacity that we had originally estimated.

When we couple that with the growth in capacity in the USA segment, we remain extremely excited about the future projects of RiceBran Technology.

Before opening the call to questions, I want to remind listeners that we’ve made significant progress on the three key initiatives that support our 2014, 2015, and 2016 plans: expansion completion and ramp up at Irgovel, doubling capacity at H&N, and doubling capacity at Dillon by Q4 of 2014.

With all of these projects online by year-end, we expect to enter 2015 with production capacity to generate more than $100 million in sales without additional capital expenditure funding. We still face short term challenges, including the potential for a higher input cost due to the California drought and our rice bran availability at Irgovel resulting from the industry milling slowdown.

Nevertheless, demand for our products has never been stronger. We’re excited that Healthy & Natural delivered record shipments in June during the facility upgrade, and we expect further record performance in the coming months, which we believe should largely offset any potential margin pressure.

Our significant investment in Proryza is poised to begin to pay dividends. Our Dillon expansion is on budget, meeting our accelerated startup schedule and poised to add further revenue growth upon completion. Our recent equity infusions place us on solid financial ground to reach our goals, and we look forward to delivering solid growth in the quarters and years to come.

That concludes our prepared comments. I want to remind listeners that Dr. Robert Smith and Mark McKnight are also with us to answer any questions you may have. Operator, at this time please open the call for questions. Note that we’ll limit callers to one initial question and one follow up.

Question-and-Answer Session


[Operator instructions.] And the first question comes from the line of Bruce Galloway with Galloway Capital.

Bruce Galloway - Galloway Capital

First question is on Irgovel. Irgovel looks like it’s producing about 70,000 pounds of raw rice bran production a day. What does that mean in revenues, and what does that mean in margins? And what are the optimal margins in both Brazil and in the United States? Is it about 40% gross margins we could assume?

And the second question is, what’s going on with your foreign partners? You know, BENEO in Europe and Africa, and Wilmar in Asia?

John Short

You know, we don’t share the revenue margin numbers. You’re pretty far off in terms of numbers. Down in Brazil, on Saturday, we produced 326 tons of raw rice bran. Not 70,000 pounds. And that’s raw rice bran process, just to clarify.

The interesting part of that number is, as we mentioned earlier in the call, we used to have a maximum production capacity of right around 200 metric tons per day of raw rice bran. So 200 metric tons per day, times 30 days of processing, 6,000 tons per month, and shutdown for three weeks at the end of the year for annual maintenance, that sort of thing.

So the fact that we were able to produce, this last Saturday, 326 tons, is indicative of the ability of the plant now completed to produce beyond the initial targets that we’d set. If you’ll recall, we had said we would invest to increase capacity from 6,000 tons per month to 9,000 tons per month. 300 times a day, 30 days, 9,000 tons. So we have been able to run the plant in different phases and at different times at capacities well in excess of what we did on Saturday. So we’re excited about what that means.

Now, one of the challenges we’ve had, as we mentioned in the prepared remarks, is I don’t know if you guys have ever been to World Cup from Brazil, but the country shuts down. And the rice milling produced, in June and July, about 40% of what they normally run, because nobody went to work.

And we actually put televisions in different parts of the plant, to try to get people to come to work. And we got most of our people to come to work, but it didn’t matter that much, because the mills weren’t running.

So we’ve had a less than planned kind of June/July. The mills are now starting to ramp back up in a significant way. As I said, we’re able to get to 5,300 tons in the last several days, and we’re working through those at that ramp up. But just to be clear, we’re still in the ramp up phase. The industry isn’t back to normal processing levels yet, but very close.

However, our capacity, based on roughly 350 tons a day, takes us to 10,500 tons a month of target capacity that we can clearly operate at now. And as we do the catch up over the next couple of months, it sets a real platform for 2015 and beyond.

Bruce Galloway - Galloway Capital

So anyway, that Irgovel plant is mostly rice bran oil, right? Or a big part of it’s rice bran oil, and that should be pretty high margins.

John Short

Bruce, remember, the process is to take our rice bran, extract the oil, which is about 20% by weight, and then further process the defatted bran. So the defatted bran, which is the coproduct of oil extraction - let me first talk about oil. Oil is high margin. Doctor Oz did us a huge favor extolling the health virtues of rice bran oil, and we literally have a lineup of people waiting to buy our rice bran oil. So we have no problem selling the rice bran oil at very attractive prices.

On the defatted bran side, Robert mentioned in his prepared remarks that we spent more than two years and more than $3 million in a joint project with DSM to develop technology to extract and concentrate protein from rice bran. And specifically, that project was developed, and the patents were filed, using the coproduct from Irgovel, which is defatted bran.

So stick with me here, because if we get too complicated, tell me, and I’ll stop. Robert can spend weeks on this. Today, we take the defatted bran, we add stuff to it, and we have three vets on staff, so we produce compounded animal feeds under our own brands. We’re starting to produce a small amount of human ingredient. And whatever we can’t move into that process quickly today moves out as bulk animal feed.

So the 80% by weight of the process stream represents about 50% of the revenues today. Our objective, of course, in the future, is to apply the technology that we’ve developed and patented to convert a large portion of that defatted bran stream into protein.

If we’re successful doing that, we’ll produce protein on one side, dietary fiber on the other. We have some extremely high value products that are many multiples of value of the current defatted bran stream. So we still have a progression to go through in terms of our description of converting feed to food, but as we continue to do that, that will bring incremental value to the business over time. Does that make sense, or did I get too far into the weeds?

Bruce Galloway - Galloway Capital

No, that’s good.

John Short

You asked about BENEO, you asked about Wilmar. Wilmar, we have machinery equipment that is installed in one of their plants, run some initial product. They’re running tests on it in their R&D center in Shanghai. Initial testing is very positive. Robert and I are trying to figure a time in the next few weeks to get on the plane and get over to Asia.

Like all startup development projects, especially those related to food grade, same thing happens in China. You first stabilize, develop, test the product with our partner Wilmar. That’s gone well. We now have to start the process of testing with customers. So there’s a development time to get into that market as well. But we’re moving forward, and we like what’s going on there.

In the case of BENEO, I think you know, Bruce, that BENEO has a multiyear minimum purchase contract with us to buy and distribute SRB into Europe, the Middle East, and Africa, and they are running ahead of the minimums. Sales are building there, and the relationship is positive and constructive. And I think I’ll just leave it at that for now.

Bruce Galloway - Galloway Capital

And the margin, you don’t want to go there, but obviously the U.S. was 24.2. I mean, as you ramp up capacity, it should be enhanced dramatically, right?

John Short

You understand what happens in a manufacturing facility. Just take Dillon for example. Dillon produces the key raw material that goes to H&N for one of our major products. In the month of May, we were shut down for three weeks, because that was the first phase of the expansion. So for three of the 12 weeks of the quarter, 25% of the quarter, we’re carrying the overhead of the plant and eating it before putting it into other products.

So those things are happening. They’re planned. We understand them. We have the same kinds of challenges at H&N as we were asking the guys to run the plant, get the highest level of revenues ever, pull machinery, equipment out of one part of the plant, put it in a new part of the plant.

There’s been a huge amount of juggling going on, which we know is totally inefficient, but it’s keeping us operating and building the business while we put the platform in place. And the interesting part of that is we’re in place in Brazil, now the key is to get the industry ramp back up, and the production that we know the plant can do.

And in the case of H&N, we need to get Dillon done to feed H&N more, so that we can take advantage of that double capacity, though we can indeed take significant advantage of a lot of that new capacity based on what we have coming out of Dillon today.

But I think we tried to be very clear with everybody. The first half of this year was remodeling at Brazil, at H&N, at Dillon. The Dillon restructuring continues out through the end of the year. We will see significant improvement in Q3 and Q4, so we like where we are in terms of the business.

But there’s still a ton of work to do. We still need to complete the Dillon expansion on time. We need to stay within budgets, as we’re currently doing. And I feel like we’re made great progress in all of the aspects of the business that we’ve deployed capital against.

As Mark mentioned, we really have a lot of interest and a lot of opportunity in the business. In fact, we have a lot of orders right now that we’re not able to service on a timely basis. So we will service them, but if we had all this stuff in place, we’d be moving a lot faster.


The next question comes from the line of George Johnson, who is a private investor.

George Johnson

I’ve got a couple of topics I’d like to try to tie to something else that is larger. We have possibly this Bill Gates funded study with CSU university could come out this fall, about gut health for children in Asia, as well as, I believe you had in the year end that you had, that we may be again selling products to consumers again, which I guess would be our rice solubles and rice bran oil possibly.

Now, are either of these, or whatever, maybe you can explain a little bit about what Teak Media and Marketplace are going to be doing? Could they be tied to taking advantage of the Bill Gates study, etc.? Could you fill in the blanks there?

John Short

Let me take them in reverse order and try to address them. One of the things that I think everybody’s aware of is we’ve been restructuring and repositioning this company over the course of the last 18 months or so. We’ve been relaunching the business, and we’re just in takeoff mode now.

The company during that restructuring repositioning period obviously wasn’t spending any money on advertising or marketing. And it’s important. I ran a very large global retail business. I understand the importance of marketing and advertising. It’s now the time for us to move back into that mode.

In the press release that we issued related to marketing, we noted three things. We continue to work closely with Ascendant, with Rich [unintelligible] and Fred Sommer from Ascendant, our investor relations stuff, and we will continue to do that.

You mentioned Teak Media. Teak is a Boston-based public relations marketing firm, and they focus on environmentally, social responsible companies. That is their kind of bailiwick. And quite honestly, I was very excited that we were able to make the cut to be accepted by, and to be able to work with Teak.

The third party that we mentioned in a press release that went out recently is a food industry specialist marketing firm based in St. Louis, Illinois called Marketplace. And if you think across the range of our needs and the number of constituents, and the range of constituents, that we want to communicate with, think about Ascendants investor relations, you think about Teak from a traditional media communications perspective, and then think about Marketplace from an industry specialist perspective.

We’ve started, as we mentioned, that press release, we started a process with all three of those firms involved to essentially rebrand and recraft the communications platform for the company. We went through a name change, we’ve done zero marketing since that name change. Some people know we made a name change, some people think we’re a new company.

But it’s really time for us to pull all of that together, so what we announced is the beginning of a project with those three firms that we will not see the results of until sometime later in the fourth quarter. We’re not going to be out with marketing and ad campaigns and things like that until we complete the rebranding portion of the exercise here.

But we want people to know, especially our investors to know, that we are focused on communicating the benefits of our business, and we’re getting some help to do that. So the first piece of your question was, what’s that Teak stuff? Well, it’s really more than Teak. It’s Ascendant, Teak, and Marketplace. And it’s a combined marketing, communications, rebranding strategy, and to the whole variety of constituents.

The second thing you asked about was consumer products, and I’ve tried to be clear with everybody. We are not in the consumer products business. It’s a very expensive business to be in. If you decide you want to own your own brands and go get shelf space at, you name it, Walmart, Walgreens, whatever it happens to be, if you’re a company our size, and you don’t have a product that’s already a screaming success, you have slotting fees at warehouses, slotting fees on the shelves, advertising and marketing coop fees, and on down.

And we used to gauge, when we’re going to launch a product, about a $10 million to $15 million spend to get a product to the market. Well, that’s not something that RiceBran Technologies is in a position to do, and we don’t intend to today. At some point down in the future, if we’re screaming, we’re making a boatload of money, we have the right positioning, that may be an opportunity for us.

But for now, we’ve described our positioning as converting feed to food. So, we do some animal nutrition still, and we will. We’ll continue to do that. We’re focusing on human ingredients, functional food ingredient, and packaged functional foods through H&N are really the focus of the business in the human sector, that has higher revenues, higher margins.

But it’s a more Intel Inside approach, rather than being the IBM computer that’s being marketed. So just want to be clear, we are not planning to launch consumer products. Somebody called me recently and said, hey, I hear you’re launching a product in GNC next week. And I said, nope, not yet. Absolutely untrue. I don’t know who you heard that from, but it’s somebody who’s shucking and jiving, and they made it up.

So George, we’ll be clear, we’re not going to be a consumer products company. You talked about the Bill Gates Foundation, and there are a series of studies, actually, that have been developed by the woman at Colorado State. Very, very interesting stuff. Interestingly, we have paid for similar studies over the last five, six, seven, eight years, that touch on all those issues. I think it’s very important that she’s focusing on those opportunities and that it really brings interest to our opportunity.

So she’s out championing it. Bill Gates got behind her. All of that is great. The things that we see in her research are very consistent with things we’ve done in clinical trials. And I think we all understand the health benefits and the potential for stabilized rice bran and derivatives. So we’re excited about the market, as the Bill Gates Foundation is, by backing these studies.

And all of that is good, but I don’t think we can necessarily tie those things together at this point in time. We’ll certainly look at that as we work through our rebranding exercise with Teak and with Marketplace and with Ascendant. And it’s a fair comment, and a fair point, George, so I appreciate your raising it.

But consumer products is not part of the game plan. We need to stick to our knitting, get these expansions done on time, stay within the budgets, and then take advantage of that increased capacity. Further down the road, is that a possibility? Sure, anything is possible.

George Johnson

Could you sell some of our product, let’s say oil for example, I don’t want to have a two ton bladder in my kitchen, like we talked about last time.

John Short

They’re actually much bigger than that. They’re 21 tons. It’s likely bigger than your kitchen. It would take up your garage, let’s put it that way.

George Johnson

Could you possibly sell oil to somebody else, and could they package it and sell it under a label of their own, that we could indirectly buy something? Or rice solubles, is that a possibility, that somebody else would be selling our stuff with their label, a private label, or whatever?

John Short

Yeah, you know, there’s a whole bunch of interesting stuff going on. There are a lot of folks who are taking our ingredients, the solubles, blending them in with other things. This is where Mark is expert, is really formulations, where you can put together the health benefits of a whole variety of different ingredients and produce a product that, number one, tastes good, and is easy for people to get.

But you guys know that [Sure Vida] sells that [Zeal] product. Get online on that product. It’s got a ton of [unintelligible] solubles. It’s fabulous. So it’s a great source. And if you need some direction as to how to get there, ask me, and I’ll have Mark send you something.

But just to be clear, we’re not going to be in the consumer products business.


And the next question comes from the line of Matthew James, who is a private investor.

Matthew James

Based on the numbers that are already out in Q1 and Q2, and we’re already halfway through Q3, I’m looking at you guys estimating or discussing doing about $20 million or more in the next quarter. $20 million Q3, and maybe even more Q4. Am I getting that right?

John Short

We’re not providing those forecasts, but you can do the math. If you look at what we’ve looked at for the year, we knew we’re going to be shut down at Irgo in the first quarter, we knew we would be ramping, even though we’re expanding capacity at Dillon. So yeah, we have to hit the numbers to get to the guidance, and I think Q4 will be our heaviest quarter by a mile, as all of the facilities will be on and running, and we will have completed the many shutdowns that we go through to get the capacity expanded, but we’re not providing that guidance. My apologies.

Matthew James

From what Dale had said a little bit earlier in the call, if I heard him correctly, it sounds like you guys will not need to raise any more funds in the foreseeable future, that you’re going to have enough cash to continue this growth without any more issuing of stock?

John Short

The answer is generally yes, but never say never. We’ve mentioned previously that we took some of the funds from the raises earlier in the year, and we paid off a very, very high cost lender. We also mentioned that we’re in discussions with commercial banks to put commercial bank facilities in place, and we think that’s a great thing to do for the company. And we think as we continue to improve, we’ll be able to do that, in a very attractive way that provides some additional financing.

At this point in time, we do not foresee going out and raising any additional equity and convertible debt or anything like that. Now, you guys know, as we do, that if an opportunity walked along and somebody said, here’s a screaming deal to, I’m going to invent this, everybody listen very carefully, this is an invention, to acquire H&N two, because there was a wonderful business opportunity, we’d probably go back to the market and say, here’s a wonderful business opportunity, and if it requires additional capital, we would consider that.

But at this point in time, to be clear, we are very focused on executing the programs we have underway. We have the funds in hand to be able to do that. We’ll continue to work on our commercial banking pieces, and we think that’s prudent, because that can give some additional AR inventory kind of financing to build the business, and that’s important. But we don’t see going out to the market at this point in time.

Matthew James

It sounds like Healthy & Natural is just hitting it out of the park. Hopefully you guys will start sharing some of that good news with the public. I’ve had many conversations with Fred, just saying, it seems you guys are very tight lipped. This is all great news, new customers, new products. Hopefully you can some way, somehow, share that with the public, because I think that only a fraction of investors or potential investors know about rice bran. And it seems to me this is a no brainer, especially at these levels. I’m thinking you guys should be in the double digits right now. And hopefully with the ramp up we’ll start seeing the stock appreciate.

John Short

I absolutely appreciate that. I share your sentiments. The process we’re going through with the marketing firms and with Ascendant, we’ll pull that together, and a little later in the year we’ll start to get out, and I think we’ll be able to tell the story in a very thoughtful, hopefully very clear way.

One of the things we’ve been criticized in the past for, roundly, is holy cow, your story is so complicated. You know, I start to described defatted bran and people’s eyes roll up in their head, and they kind of go, jeez, next. And so one of the things were trying to do is simplify the messaging with help from professionals, that can help us communicate with a whole variety of constituencies.

So we share your frustration. We personally believe the company is totally undervalued, that we have a tremendous opportunity, but we have to prove that. We actually have to prove that, delivering results. So step by step, we’re excited about where we are, and we’re excited about the opportunity.

The other thing I’d just comment on is, you know, we recently brought another person into the senior management team, Janet Balson, who joined us as our head of compliance, regulatory, and external affairs. And she’s an expert in things like FDA, USDA regs, [unintelligible], all that kind of stuff. Great addition to our team, thrilled to have her on board. And as we continue to build the business, we’re going to have to continue to bring professionals like Janet into the group.

The good news is, when we get a chance to sit with them and tell them where we are in the business, what we’re doing, etc., they get very excited, and we’re able to attract people of that caliber. So we’re excited about the business, kind of the share we are. We’re very focused on executing our projects this year, and putting ourselves in a position to really move the business. And we think that’s the right thing to do right now.


And the next question comes from the line of Aaron Martin with AIGH Investment Partners.

Aaron Martin - AIGH Investment Partners

Down in Brazil, have the rice [fields] started up again? Are we getting rice there post-World Cup?

John Short

Let me share a little bit of what’s going on there. I don’t know if you guys have ever been to Brazil World Cup time, but the joint shuts down. Travel’s a pain, people don’t go to work. And if Brazil loses, it’s even worse. They have a week of mourning. And it turns out that the rice milling industry in Rio Grande through the months of June and July actually milled rice at about 40% of last year’s rate.

And of course the availability of rice bran is a function of how much rice is being milled. And as I said, we put TVs all over the plant and that sort of thing, to try to keep our folks showing up, and most of them did. But so we had that issue. Things are coming back now. Bran is starting to flow. The milling industry is ramping up. That industry, just like the industry in the United States, is subject to lots of stuff. You know, they’re down there, it’s government price controls, and that causes stuff to be exported or imported, that sort of thing.

But just in general, June and July were much, much slower than we had anticipated, because of lack of bran availability, but that’s coming back, and we feel real good about where that will be through the end of the year.

Aaron Martin - AIGH Investment Partners

And I know we have to crawl before we walk and walk before we run, but [unintelligible] progress [unintelligible] throughout North America. How should we start thinking about, in 2015, [unintelligible]?

John Short

Aaron, you’re breaking up a little bit, because I think you’re on a cell, but I think I understood your question. It was how should you guys start to think about 2015 from a top line growth perspective? Was that the question?

Aaron Martin - AIGH Investment Partners


John Short

We’re just in our budgeting process, just starting now. It actually runs for us now between now and the middle of October, late October. We then present to the board a first round, and we get approved in December. You know that drill, right. But as we look at the business, I think you can look at our targets for this year, and based a little bit on Matthew’s comment earlier, you can kind of guesstimate what Q4 is going to look like. And if you do that, as we move into 2015, I expect that we’ll have very nice growth on top of Q4, as we move through 2015.

Aaron Martin - AIGH Investment Partners

And I was going to ask you, can we use Q4 as a basic run rate and then assume growth off of that?

John Short

If I were modeling, that’s what I would do.

Aaron Martin - AIGH Investment Partners

And as we go into 2015, the first half/second half, do you think the top line is going to be dependent upon demand, or going to still be a capacity issue?

John Short

No, I don’t think it’s going to be a capacity issue. I think it’s going to be based on demand, and I’m actually pretty happy about the way the demand pictures are developing for our human ingredient, for the H&N, packaged functional foods, and very excited about Brazil.

I should also mention that we’ve recently taken on a distributor down in Mexico, a market that we hadn’t tapped previously. Robert and I, and Mark, went down, made the rounds with a few target companies. I think that’s a big opportunity for us that we’ll start to show a little bit in 2015.

We’ve also increased the focus and the effort on Korea, and there are a number of things cooking in that market that can be interesting. So I think there’s room both domestically and internationally across really all of our segments. So I’m quite excited about it.

I just wish we could get these expansions done faster. You guys understand, we have H&N in place today, but we have to finish the expansion at Dillon to be able to feed H&N more, and to be able to feed Robert more protein to sell. Because these things are really kind of sold out based on the capacity and the limitations that we have as we complete these expansions.

So we’re excited about 2015. We’re excited about the last half of this year. Everybody’s real focused on performance. And completing those projects, making sure that they come up properly, the product quality and the equipment, is right, and then we get that out into the marketplace.


And the next question comes from the line of Al [Muniz], who is also a private investor.

Al [Muniz]

I was getting a haircut on Monday, and I was sitting in the barber shop, and picked up a magazine. It was Men’s Fitness, September 2014. And arsenic contained in rice husk. This is Andy Meharg. Is that still an issue with the Louisiana and Arkansas rice? Or all the rice that we’re using is coming out of California, I assume, looking at Proryza?

John Short

Let me start off with a comment, and then let me ask Robert Smith to comment a little bit. Andrew Meharg is a guy at the University of Glasgow, and he has, I think if you go back and you Google him, you’ll see that for the last 10 or 15 years, he has managed to generate all of his grant money on arsenic-related stuff.

And academics have to survive too. [laughter] But it’s a little bit like some of the other things you see in popular science these days. If I create a controversy, I can get some funding for it. And I don’t mean to disparage him. He’s a serious guy. He’s a serious scientist, and he does serious work. So I appreciate what he does.

I think what happens in some of this stuff, and Robert, I’d like you to comment on this, is people get a piece of data, and they don’t know what to do with it, and it gets kind of put out of perspective, and then everybody says, oh my god, don’t eat rice, it has arsenic in it. And you only have to eat about 150 pounds a day to get enough arsenic to create an issue. And I’m exaggerating and all of those things.

So Andrew Meharg has made his living for the last 15 years running studies, getting grant, things like that, and bless his heart. I haven’t seen that study, but I will get Men’s Health September 2014, read it. And Al, thanks for the head’s up. Robert, do you want to comment a little bit?

Robert Smith

To answer your question, all of our ingredients that go into food ingredients, does come from rice that is grown and processed in California. We do have a facility in Louisiana and the stabilized bran that comes out of that facility goes into animal feed. So I just want to answer your initial question as to where this is coming from.

The second thing you need to understand is that exposure to arsenic, and in the case of arsenic in rice, we’re talking about arsenic that occurs naturally in the environment, is taken up by rice as a natural process. And it’s true of many other crops that are grown worldwide, including California. It’s not just rice. It’s a lot of crops, carrots included, and so forth, that naturally accumulate a lot of minerals from the soil, arsenic being one of those minerals that accumulates.

So this is a naturally occurring process. Arsenic has always been part of rice, both the white rice, the bran layers, as well as in husks. So that’s something that occurs naturally, and it’s been in the human diet for as long as humans have been eating rice.

Having said that, what’s important here is one has to look at daily exposure to, in this case, I think most people are concerned with inorganic arsenic. And if you look at daily exposure to inorganic arsenic, and the level of the ingredients that RBT cells, and are incorporated into foods, we really don’t reach any kind of levels that are of concern for health purposes.

So we’re very comfortable with the benefits of our food ingredients as they’re being applied and used in food applications, and so we don’t see this as a short term or long term concern for us.

Al [Muniz]

So it’s not a constraint as far as your supply chain of rice bran going into Dillon?

Robert Smith

No, no. As far as feed stock going into Dillon to do derivatives, all of that material comes out of California. We do have an issue with that. And the product we make there, they go out into a lot of different food products, and we haven’t had any issues coming back.

Dale Belt

I’m not a scientist, and my view of it is, because I heard somebody say this one time, and I thought it made perfect sense, was human beings have been eating rice now for 5,000 years, and I’m not personally aware of anyone who’s ever gotten arsenic poisoning from eating rice.

Al [Muniz]

Their contention was this was a leftover from pesticides, who were using it for the boll weevil and cotton fields, where they had planted rice in fields that had previously been cotton crop. This is where the source of it was.

John Short

That’s a very interesting topic. You want to talk about Asia a little bit, Robert?

Robert Smith

I think it’s true that historically, certain fields here in the U.S., and it’s certainly true on a global basis, that the types of pesticides and herbicides and so forth use a number of different chemicals that incorporate different metals. And arsenicals have been used historically in pest control in different regions of this country, and on a global basis.

So it’s not unrealistic to imagine situations where certain fields that may have been orchards, where those arsenicals have been used in the past, have now been converted to rice-growing fields. And so they may be in a situation where those original arsenical compounds have been transformed into a form that can be taken up, accumulated in rice. So is that a possibility? Absolutely it is a possibility.

In California, rice growing, it’s my understanding that arsenical compounds are not used in the rice-growing process in California. So what does occur in rice in California is naturally present in soils in different arsenic forms.

So you know, you have to understand too, that as part of our normal quality assurance and quality testing and so forth, we test the whole range of heavy metals, for every batch. So we’re constantly monitoring not just arsenic, but we monitor lead and mercury, and all types of heavy metals and other things that are potential hazards to humans. So we keep tabs on that.

Mark McKnight

If I could just add, one of the value propositions that we offer in the marketplace is that we do start with USA rice. And especially in the functional food category, people around the world are interested in U.S. made products, because of the better control we have in comparison to other countries. And so the very subject that you bring up is why we have success with international customers, especially on the finished goods side. And so we see that as a good opportunity in the future, promoting our USA rice as the base for many of our functional food formulas.

Al [Muniz]

And Janet Balson will be the compliance and regulatory?

John Short

She is the cop. [laughter] And a good cop she is. Let’s go ahead and end the call here. I want to thank everybody who listened in, and I want to thank everybody who had questions. We really appreciate your support. We are committed to making this thing work in a very significant way for all of our shareholders. And I want to say I’m very proud of our management team. Everybody has their sleeves rolled up and is doing the work that is necessary for us to be successful. So thanks again to everybody. We’re signing off.

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