Richard Galterio - Ascendant Partners Brent Rystrom - CEO Dennis Dykes - CFO.

Chris Krueger - Lake Street Capital Markets Josh Goltry - Maxim Group.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RiceBran Technologies Third Quarter 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host, Mr. Richard Galterio of Ascendant Partners. Please go ahead, sir..

Thank you, Operator. And good afternoon, listeners. Welcome to the RiceBran Technologies’ third quarter 2018 financial results conference call. With us today are Brent Rystrom, Chief Executive Officer and President of RiceBran Technologies and Dennis Dykes, Chief Financial Officer.

Before I turn the call over to Brent, I want to remind listeners that during the call, Management's prepared remarks may contain forward-looking statements that 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 a more 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 as of today, November 6, 2018, 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 to comparable GAAP financial measures are available at www.ricebrantech.com on the Investor Relations page. At this time, I would like to turn the call over to Brent Rystrom, CEO and President of RiceBran Technologies. Mr.

Rystrom, please go ahead..

Thank you, Rich and thank you to everyone joining us today for our 2018 third quarter conference call.

I'm going to start the call by giving some updates on some of the key things happening at RiceBran Technologies, then Dennis will provide an overview of our third quarter and I will close our formal comments with some thoughts on how we see our business operating in 2018 and 2019. Following that, we’ll host Q&A session.

Our third quarter performance reflected difficult supply issues. As we stated in the second quarter, one of our largest mill partners in Louisiana started to experience unusually heavy downtime and this extended well into the third quarter.

While that mill is now operating normally, this disruption forced us to supply our existing customers in the eastern two-thirds of the U.S. in an inefficient manner which negatively impacted margins and delayed our plans to add new customers from our sales pipeline for several months.

Despite this, a large warrant exercise helped us end the quarter with further improvements in our balance sheet. We've already taken steps to ensure better supplies in the future through a greater focus on inventory management and adding new production capabilities to enable us to grow more aggressively.

As we're now transitioning to growing our rice bran business, we have identified four key strategic initiatives that all of our employees are focused on achieving over the next few years. First, growing our sales base of stabilized rice bran products by 100% to 150%. Second, maximizing sales and margins of our derivative products.

Third, developing at least two to three new products per year. And fourth, attaining meaningful overall profitability. We believe our recent supply agreement with Golden Ridge Rice Mills is a critical component of ensuring that we have adequate stabilized rice bran supply to achieve our growth objectives.

We are also in the process of taking that one step further by completing the acquisition of the assets and operations of Golden Ridge’s milling facility in Wynne, Arkansas. Yesterday, we exercised our options pursuant to the supply agreement with Golden Ridge to purchase its assets and operations and we have also signed the asset purchase agreement.

We expect to complete the closing of this transaction in the next 30 days.

Total consideration for the Golden Ridge transaction is expected to be approximately $7 million to $8 million comprised of newly issued shares of RiceBran Technologies for slightly more than half of the transaction value and the assumption of debt for the remainder, most of which we plan to pay off at the time of closing subject to customary closing considerations and risks.

We believe we're paying a mid-single digit multiple of enterprise value to EBITDA based on our current expectations for Golden Ridge’s operation. We are excited to add Golden Ridge because it brings many benefits to RiceBran Technologies.

Golden Ridge provides us our first access to rice bran from Arkansas, the largest rice producing state with a near 50% share of total U.S. rice and rice bran production.

In addition to the large supply of rice and rice bran, Arkansas is also a favorable location because it sits on more active and efficient freight leans to many of our most important customers and prospective customers.

One benefit of sourcing some of our rice bran from a mill that we own is that we will be able to control the milling schedule and process to meet our production needs.

Our mill partners have many factors to consider in running their mills, things like export tenders, brown rice, milling, re-milling, brownouts in California, CapEx projects, and other things that often lower the amount of rice bran supplied to us.

Owning and operating Golden Ridge will provide us with production that we can coordinate to offset these issues as they occur at our partners mill. Golden Ridge will also help us scale our overall business more rapidly adding about 20 million in annual sales and meaningful EBITDA. We are also planning for capacity expansions at Golden Ridge.

In the near term, we have some minor de-bottlenecking projects that could lift EBITDA at Gold Ridge by 30%. Over a longer term, we are reviewing more substantial expansion plans to help support our planned growth over the next 3 to 5 years. Golden Ridge sits on nearly 32 acres with approximately 75% of its land open and available for expansion.

This expansion not only add stabilized rice bran capacity but also new and high margin product. The acquisition of Golden Ridge will also help us to broaden our product offering which I can best illustrate by discussing a bag of dog food as an example.

Our sales team and management were recently reviewing a high-end dog food sold by a leading US grocery store chain and looking at the top 10 ingredients in that bag. Key ingredients included chicken, brown rice, brewers rice, rice bran, brokens, and a number of other ingredients.

Prior to owning Golden Ridge, stabilized rice bran is the only ingredient we make that is in that bag of dog food. Once we own Golden Ridge, we will also be able to supply brown rice, brewers, and brokens too. Hence, we go from the opportunity to supply one of 10 ingredients to 4 of 10 in that bag once we complete the acquisition.

Expanding our product offerings will help to leverage our sales efforts. Kevin Moseley, our Chief Revenue Officer, continues to build a strong sales team and I am impressed with the access and activity the team is generating.

During the quarter, we have added significant expertise in the companion animal market through the hiring of Denny Lacy and in the starch and fiber areas, with the addition of Amy Gilliland.

The entire sales team is gaining critical access to customers and we are seeing major customer wins across our segments that will start to impact our growth starting in the current fourth quarter.

As we build this team, it is apparent that they can support many additional products to leverage these customer relationships and we plan to build our product portfolio to take advantage of these capabilities.

Our sales team has the capacity to sell many more products and our dominance in producing and selling stabilized rice bran gives us a unique platform to sell other ingredients to our customers.

Think of the dog food example, we would like to go from one ingredient in that bag now to four with Golden Ridge and eventually to 6 to 8 of the top plant-based ingredients in that bag. We are also excited by the progress we're making in our certification efforts, a critically important accomplishment for all of our customer segments.

Our operation in West Sacramento California successfully passed certification in early October and our operations in Louisiana had a successful audit last week and passed. Our facility in Dillion, Montana is up for certification audit in December of this year.

We recently hired Sherry Rhoads to lead our QA and other regulatory in government efforts and we are pleased with her progress and leadership and taking this team on. Dennis Dykes will now provide more detail on our financial performance and condition in the third quarter..

Thank you, Brent. I would like to begin by providing an overview of our financial results for the third quarter. We had modest revenue growth of 0.5% with total net revenues of $3.5 million.

This marginal growth in comparison to the same period in 2017 was primarily driven by an increase in animal feed product orders related to our existing customer base. As Brent mentioned previously, revenue growth during the quarter and new customer rollouts were impeded by the brand supply issues in Louisiana.

We are taking several steps to position our inventory management to help avoid these types of supply issues in the future. First, we are improving our inventory levels for the delta region to be better prepared for a potential no partner shutdown. Second, we are taking steps to increase our production volume from our existing mill partners.

Third, we are moving away from producing to customer orders but rather producing to an in-stock inventory level. And finally, with the addition of Golden Ridge, we will have the ability to control the milling schedule and production volume.

When we look at the progress of our sales teams’ funnel, we continue to believe the level of growth in this quarter is not indicative of the progress in strength we see in future revenue opportunity.

Additionally, with the expanded product portfolio Golden Ridge will provide, we are well positioned to leverage the sales teams’ ability to manage a broader product portfolio while creating additional customer opportunities with our existing rice brand products.

With the supply issues for the Louisiana plant largely behind us and improvement in in-stock inventory levels and an increase in existing partner mill production volumes, we are now in a position to capitalize on our strong sales pipeline.

Our growth profit results for the third quarter of 2018 decreased 1,130 basis points to 21.8% when compared to the same period in 2017. The primary drivers for the decrease in gross profit include the idling of our Louisiana pant were part of the third quarter due to the rice bran supply shortage previously discussed.

This supply shortage negatively impacted our gross profit in two ways.

One, we incurred additional freight costs related to supplying our animal nutrition customers located east of the Rockies with shipments out of our California production facilities instead of Louisiana; two, the cost of rice bran supplied from California when compared to Louisiana is higher for both the purchase of raw rice bran and for production.

While these costs were substantial, we determine them as necessary to maintain our customer relationship and to prevent a stock supply disruption for our customers and product.

Additionally, the decrease in production at our specialty ingredients plan in Dillon, Montana related to the efforts to obtain plant SQF certification resulted in a lower plant utilization. We expect to return to the higher production volumes in the early 2019. And finally, the increase in the cost of raw rice bran of approximately 18%.

Including depreciation and amortization, our selling, general, and administrative expenses decreased 3% to $2.4 million when compared to the same period in 2017.

As we continue to position our business for growth, we have focused on growing your sales team by adding well prepared industry experts and adding additional headcount in the quality assurance and operation to support our SQF certification process, while focusing on decreasing non-strategic expenses such as corporate overhead.

This will allow us to leverage our existing sales team as we increase our product portfolio. Our loss from operation increased 23% to $1.7 million when compared to the same period in 2017. For the third quarter of 2018, our adjusted EBITDA was a negative $1.3 million compared to a negative $0.9 million in the same period of 2017.

Consistent with our guidance, adjusted EBITDA improved modestly on the sequential basis. As a reminder, we use adjusted EBITDA which is a non-GAAP measure as a means to measure the company's performance. We include a full reconciliation of adjusted EBITDA to our net loss within our press release and on the Investor Relations portion of the website.

Now to our balance sheet, while we continue to generate operational losses during the quarter, our cash and cash equivalents balance increased by $2.6 million at the end of the third quarter to $10.3 million compared to $7.7 million at the end of the second quarter of 2018.

The increase in cash was primarily the result of cash exercises of warrants for the purchase of $2.7 million shares of common stock at $2.00 per share during the third quarter, which brought in $5.3 million in additional cash more than offsetting our cash burn.

Our shareholders' equity balance at the end of the third quarter was $20.7 million, up from $16.8 million for the second quarter of 2018. The increase in equity is primarily related to the exercise of the warrants previously mentioned.

Considering our cash position, shareholders' equity, and negligible debt level, we continue to believe we have a strong balance sheet and we are well positioned to successfully execute our strategy to build value for our shareholders.

I will now turn the call back to Bret to provide some additional thoughts on how we see our business operating in 2018 and 2019..

Thanks, Dennis. First, some general comments. As we built our sales team and pursue opportunities in markets like CPGs, companion animal, equine, healthy lifestyle, protein, starch, and fiber, we are seeing a sales funnel that is expanding significantly.

This team is getting access to the right people at potential customers and we are starting to see important and critical wins. The same trends are driving our rice bran business including clean label, non-GMO, gluten free. These things haven’t changed.

We are simply getting better traction with the sales team that has more defined expertise and better relationships. And we're already starting to see substantial interest from existing and potential customers in the new products that we will add with the acquisition of the assets in operations of Golden Ridge rice mill.

We now believe that our 2018 revenue will total $14.5 million to $15.5 million, up from our previous guidance of $14 million to $15 million with the increase driven by the addition of a few weeks of results from Golden Ridge. We expect fourth quarter EBITDA to improve modestly from third quarter levels.

We believe the growth in our existing rice bran business and the addition of Golden Ridge’s present production volume plus the benefits of de-bottlenecking at Golden Ridge will help us generate 2019 revenue near $40 million to $45 million.

We also continue to expect to reach a breakeven adjusted EBITDA by the second quarter of 2019 and positive adjusted EBITDA after that. Operator, we are now ready for our question-and-answer session..

[Operator Instructions] Our first question is from the line of Chris Krueger with Lake Street Capital Markets. Please proceed with your question..

If you look at the third quarter sales of 3.5 million, any particular product segments driving that or is it spread across Equine and Pet, or how should we look at that.

Chris, it's actually generally driven by the animal segment, which would be your -- equine contained in the animal..

When you look at your pipeline, I know last quarter you guys stated $10 million pipeline up from $2 million the prior year. I don’t know if you guys can still provide an update on that..

I believe the comment we made was related to what we call the funnel, Chris.

And so, what we have is a process that Kevin and his team used to measure various customer opportunities and it goes through a grading process where certain steps happen with anybody in that funnel, they progress through the funnel to the point where they become a customer or for whatever reason they drop out.

I believe the commentary we made was something the fact that about a year ago that funnel was about $3 million and that that funnel now was over 10 million and I would tell you now that the funnel is considerably higher than that..

Then looking at Golden Ridge, now that you are acquiring that.

Is there any seasonality in that business?.

There's a little bit of seasonal -- yeah, there's a little bit the seasonality, so when you think about milling business, there's always the old crop new crop. And so typically what you have is you have a -- a crop year is usually defined as starting on September 1st, the new crop typically gets harvested after September 1st.

And as you use that crop over the next year until the next September, you generally have fairly consistent milling. In a year were the crop was a little bit tight like it was in 2017, then in the summer of ‘18 rice mills had a little less milling than they did the rest of the year. There just wasn't an excess supply of rice.

And that's part of frankly what happened to us in Louisiana.

So, I would expect to see probably the strongest revenue contribution in the given year absent any expansion would probably be over the course of that season, your fourth quarter, your first, and your second would be the strongest and your third has an opportunity to be the weakest, particularly in years where we're short on grain supply..

On that note, the outlook for the current rice crop still much improved year over year?.

It's really big, it's going to be a good year for milling rice..

Then just two more questions on next year's guidance.

I really don't know how to model gross margin or SG&A expenses adding in the new business because there -- any insight you can give us on that?.

Yeah. The gross margins of the business will be overall lower than what we've had traditionally. So, when you think about the just reported third quarter that's quite a bit lower than normal. But the gross margins will be lower, they are obviously profitable. So, there is a different EBITDA impact.

I would view it as a lower gross margin, considerably lower SG&A run rate..

Next question comes from the line of Josh Goltry from Maxim Group. Please procced with your question..

Just a couple of questions, so I wanted to know how the revenue contribution was divided up between the animal and the food segments? Could you provide some more color on that, please?.

It's similar to what we've seen in the past. Our animal sales or equine driven animal sales continue to be the primary source of revenue for us. And that's consistent with what we had in the quarter..

And how much did rice bran prices increase by in this quarter?.

Approximately 18%..

[Operator Instructions] Thank you. There are no additional questions at this time. I would like to turn the floor back to management for further comments..

Well, thank you everyone for your time today, we look forward to reporting our fourth quarter results which tentatively right now we're looking at sometime in mid-March, we'll have a date out shortly, but thank you for your time and we look forward to updating in the future..

Thank you. This will conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..