RiceBran Technologies (RIBT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NutraCea third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Wednesday, November 14, 2007. I would now like to turn the conference over to Marilyn Meek, Financial Relations Board.

Thank you. Welcome to NutraCea's conference to discuss fourth quarter and nine months for the period ended September 30, 2007. On the call with us today is Brad Edson, CEO of NutraCea, Leo Gingras, Chief Operating Officer, and Todd Crow, Chief Financial Officer. Before we begin, I would like to remind everyone of the cautionary language about forward-looking statements contained in today's press release. That language applies to any comments made during this call. With that said, I'd like to now turn the call over to Mr. Edson. Brad, please go ahead.

Thank you, Marilyn. Good afternoon. Thank you for joining us today for our third quarter conference call. I'll give you a brief introduction and then turn the call over to Lee zero who will provide an update on operations and Todd who will walk you through our financial results for the quarter and the nine-month period; following which I will give you some further insights on our short term and long-term goals. We will then be happy to take any questions that you might have.

First, to put it in perspective, let's talk about where we've been and where we are going. A little over two years ago, 2004, NutraCea was reporting about $1 million in sales, losing approximately $25 million, and had very little money in the bank. After the merger with RiceX the company had one stage-one facility, one stage-two facility and neither of which was able to adequately service its customers. Today, we have multiple plants, capacity has been increased and we have a clean balance sheet, no debt and approximately $50 million in cash. This year we have encountered some obstacles that we didn't anticipate and the year has not unfolded the way we expected. However, with the recent capacity that we brought on and the new additional capacity that we will bring on in early 2008 we are now in position to do take our company to its next level of growth. Over the next year we expect this growth will be primarily domestic. In 2009 we expect to see our international expansion begin to contribute in a more significant way to our growth. In the fourth quarter we expect to see increasing revenues over the third quarter that should continue into 2008. We have orders booked utilizing all of our supply of rice brain for the quarter. This should represent the usage of a significant portion of our capacity. The revenue will depend of course upon when we actually ship the products.

With all that said, we were not pleased with our financial results for the third quarter which reflect the challenges that we have faced this year. Our weaker financial results for the third quarter primarily resulted from our not having our additional capacity up as quickly as we had expected this year and from an unprecedented reduction in the amount of rice milling within the United States this past year, as well as the accounting treatment of NutraCea's purchasing its joint ventures partners interest back in an agreement related to infomercials which included inventory that had been previously sold to that partner. We've already begun to sell through on that particular product including placement this quarter into mass retail in the United States and Canada and we anticipate that we'll move all of it in early 2008. Entering 2007 we were optimistic that we would get our plants built faster than we have and that our production would be better utilized. Not having additional capacity up during the peak milling season hit us hard this past quarter.

To give you a better overview let's take a moment and step back and analyze the bigger picture. 2006 a lot of our business came from a direct marketing company and from one customer, I-TV. We were selling at a limited amount of capacity at the highest margin you can get in finished goods. When that channel ran its course we looked to broaden our customer base so as to not have a large concentration of our business with a single customer. In 2007, we slowly started expanding our business in a a wider range of bulk and breeding customers which is a more stable business. However, when our production didn't come on line as quickly as originally expected, we weren't able to make up the difference in price with volume. Now this year we have also made a strategic decision to move into the finished goods product space to better manage our flow of business involving our high margin products. This makes us less dependent on the sales efforts of our customers who we wholesale to in this category and better balances the ingredient business that accounts for the majority of our volume. One example of this, and to better control the high-end channel, we looked into selectively pursuing some direct sell channels with some specific products that would allow to us achieve a higher return on a limited supply of ingredients in the form of finished products. Our first launch was our pet product, Dr. Vet's Flex Boost,which we have already made sales into PetCo and a large retail channel in Canada, a chain that has over 450 stores and we are in discussion at the moment with other retailers throughout the United States.

At the same time we are focused on growing our business in 2008 and beyond. As we start to bring on new capacity and the new milling season comes into play and we start rolling out finished products we expect to have more predictable flow of business since our business will be more diversified between ingredients and finished product customers. As announced last week, we are making good progress on our Lake Charles, Louisiana, facility and expect to have that operational by the ends of the first quarter in 2008; providing us with an additional 30,000 tons of annual capacity.

Leo, would you please now provide us with an update on operations?

Thank you, Brad. I sure will.

As Brad indicated, we are on track to have the Lake Charles plant mixed and operating by the ends of the first quarter of 2008. With this addition we expect to be at a total system capacity of 70,000 tons by the ends of the second quarter. Based on our expectations of bran supply from the rice mills we anticipate utilizing 85% of this capacity which should provide about 60,000 tons of stabilized rice bran. We are also progressing on our stage two-plan in Phoenix. Currently we are finalizing the details associated with the new facility and anticipate beginning to install our equipment, much of which has already been fabricated during the first quarter of 2008. Based on where we are today we remain on track to be operating by the ends of the third quarter of 2008. When completed, this facility will have approximately 5,000 tons of stage-two capacity, as stated previously this facility will include processing and packaging systems that will be utilized for unique customer requirements including those in the baby ceral business.

Concerning our European facility, we initially thought we would have this completed by the ends of the first quarter of 2008. While we have the equipment fabricated and ready to ship we've encountered some regulatory issues in the EU that have slowed progress. We are working through these issues and plan to have the plant completed as quickly as possible. In the meantime we will continue to supply our European customers which stabilize rice bran produced in our U.S. facilities. It is important to note that we will fully service all of our European customers pending completion of this European facility. Our primary reason for locating ago plant in the EU is simply to reduce freight expenses for our customers. Last June we announced the first phase of our international expansion into southeast Asia with the first series of SRB plants to be located in Indonesia. Since we last spoke to you we've been to Indonesia to conduct physical site inspection of several rice mills with which we are looking to integrate. We've identified multiple sites have and have signed agreements. We are now working through regulatory processes to obtain clearance for shipping our proprietary equipment. At this point expect to begin shipping equipment at the end of the first quarter or beginning of the second quarter next year. We feel comfortable with the initial timetable and expect to be operating in early 2009.

I'll wrap up buy saying that we've recently added several excellent technical and operations people to our staff that greatly improves our ability to execute on construction products production and logistics. Todd will now walk you through the financials for the quarter and nine months.

Thank you, Leo.

We consolidated net revenues of $1.5 million for the third quarter compared to total revenues of $4.9 million for the third quarter of 2006, a decrease of $3.4 million. Gross product sales were reported at $3 million, excluding product sales return of $1.5 million. This decrease is comprised of a 1.4 million increase in product sales offset by a $4.4 million decrease in infomercial sales including $1.5 million sales return, and a decrease of $490,000 in our royalty and licensing revenue. Consolidated revenues for the nine-month period ended December 30, 2007, were $16.5 million, an increase of $3.6 million compared to net revenues of $12.9 million, for the comparable period last year. The revenue increase is attributed to an $8.2 million or 186% increase in product sales offset by a decrease of $9 million in infomercial sales including $1.5 million sales return in the third quarter and a $4.5 million increase in royalty and licensing revenues.

We recorded a net loss of $4.8 million for the third quarter or $0.03 per share to a net income of $641,000, or $0.01 cents per share for the third quarter of 2006. This decrease for the quarter was primarily due to an approximate $1.4 million or 31% decrease in product sales; sales return of $1.5 million in order to complete a purchase of remaining 50% interest in Infomax, $500,000 decrease in royalty and licensing fees offset by a corresponding $900,000, or 35% decrease in our cost of goods sold, an increase of $3.5 million in our operating expense, a $36,000 charge for equity loss on our joint venture offset by an increase of $597,000 of interest income. Net loss for our first nine months of 2007 was $3 million, or $0.02 per share; compared to a net income of $807,000, or $0.01 per share for the first nine months of 2006. The net loss was primarily due to a $10.3 million increase in operating expense, $286,000 loss on an investment in a joint venture, a $309,000 expense for loss on retirement of assets when we moved our corporate offices to Phoenix, offset by $357,000 decline in cost of goods sold and an increase of $4.5 million in royalty revenues, $1.8 million increase in interest income, and a $1.3 million gain on the settlement of a lawsuit.

Gross margins in the quarter ended September 30, 2007, were negative $115,000, or 8 %, compared to $2.4 million or 49% during the same time period last year. Gross margins on various product lines very widely and gross margins are impacted from period to period by sales mix and utilization of our production capacity. The $2.5 million decrease for the three months ended September 30, 2007, is comprised of $803,000 decline corresponding to the decline in sales in our third quarter of 2007; a $1.3 million decline associated with the return of product and a $490,000 decline in royalty and licensing fees. Gross margins in the nine months ended September 30, 2007, were $9.9 million or 60% compared to $5.9 million or 46% during the same time period last year. The $4 million increase for the nine months ended September 30, 2007, is comprised of $755,000 increase, correspondence to the sales growth in the nine months ended September 30, 2007, offset by the $1.3 million decline associated with the return of product and a $4.5 million increase in royalty and licensing fees.

Operating expense for the quarter increased $3.5 million to $5.5 million compared to an operating expense of $2 million for the same quarter last year. The first nine months of this year we reported operating expense of $15.7 million compared to an operating expense of $5.4 million for the first nine months of 2007, a $10.3 million increase. The increase for each of the periods were primarily due to increased R&D activities, sales, general and administrative expenses, and professional fees to support our growth in line with growing business opportunities. Research and development expenses increased from $74,000 for quarter ended September 30, 2006, to $154,000 for the quarter ended September 30, 2007, or an increase of $80,000. Research and development expenses increased from $259,000 for nine months earned September 30, 2006, to $446,000 for 9 months ended September 30, 2007, for an increase of $187,000. These increases for the three and nine months ended September 30, 2007, were attributed to higher product development costs and employee related expenses due to increased R&D activities and expanded scientific staff compared to the same time periods last year. The Company expects to continue to R&D expenditures to establish scientific basis for health claims and existing products and services and to develop a new products and application. Sales, general and administrative expenses were $4.6 million and $1.6 million in the quarter, quarterly ended September 30, 2007, and 2006 respectively, an increase of $3 million or 193%. SG&A expenses were $12.6 million and $4.4 million in the nine months ended September 30, 2007, and 2006 respectively, an increase of $8.1 million or 184%. These increases for the three and nine months ended September 30, 2007, compared to the same time period last year were predominantly due to expanded investment in personnel, infrastructure, sales and marketing activities to meet anticipated future demands. It should be noted that while SG&A expenses for the third quarter were $4.6 million compared to $1.6 million for 2006, the sequential SG&A decreased by approximately $1.1 million compared to $5.7 million for our second quarter of this year. Additionally, overall operating expense for the third quarter were $5.5 million, which was a decrease of $1.9 million compared to $7.4 million for the second quarter of this year.

Professional fees increased $433,000 from $314,000 for the quarter ended September 30, 2006 to $747,000 for quarter ended September 30, 2007. Professional fees increased $2 million from $764,000 for the nine months ended September 30, 2006, to $2.7 million for nine months ended September 30, 2007. The higher professional fees in 2007 primarily relate to consulting fees incurred in connection with marketing and business development activities, a charge of $750,000 for costs associated with developing our joint venture with Grain Enhancements LLC, and Sarbanes-Oxley, Section 404 activities. Professional fees include costs related to accounting, legal and consulting services. Our consolidated financial statements as of, and for the nine months ended September 30, 2007, and 2006, reflect the impact of adopting FAS 123 R., stock-based compensation expense totaled $1.7 million, and $404,000 for nine months, and three months ended September 30, 2007 respectively, and $655,000, and $114,000 for nine months and three months, ended September 30, 2006.

As you recall from our previous conference call and quarterly filings we acquired certain securities of Vital Living Inc. a publicly traded company in April of 2007. Vital Living distributes traditional supplements using similar manufacturing and distribution processes. We paid $1 million for 1 million shares of outstanding preferred stock and $4.2 million for outstanding senior secured notes. The notes will be convertible to Vital Living common stock and bear interest at 12% per annum, payable June 15 and September 15 and mature December, 2008. On September 28, 2007, NutraCea entered into an asset purchase agreement with Vital Living the details of which have been publicly filed. Completion of the transaction is subject to a variety of customer and closing conditions. NutraCea expects the transaction will close in the fourth quarter of 2007. Although the actual timing of the closing will depend upon many factors including preparation and completion of proxy statements and the SEC review of the proxy statements and the closing may occur later than the fourth quarter of 2007. Our accounting for purposes of certain securities of Vital Living qualifies as a variable interest entity in accordance with FASB interpretation Number 46 R, consolidation of variable interest entities. As a primary beneficiary, we have consolidated Vital Living into financial statements in conjunction with our certain securities of Vital Living we have consolidated Vital Living's financial results for the period April 30, 2007, through September 30, 2007, in to our financial results for the nine months and three months ending September 30, 2007. The effects on our consolidated income statement for the nine-month period was an increase in revenues of $781,000, an increased cost of goods sold, of $385,000, an increase in operating expense of $761,000, an increase of other expenses of $275,000, and an increase of net loss of $640,000. The effects of our consolidated income statement in the three months ended September 30, 2006, was an increase in revenues of $184,000, and an increase in cost of goods sold, of $120,000, an increase in operating expense of $317,000, an increase in other expenses of $134,000, and an increase in net loss of $387,000. It should also be noted that once the acquisition of Vital Living assets is completed, consolidation affects of Vital Living will come off of our books.

NutraCea balance sheet continues to remain strong. We ended the quarter with $49.5 million cash and cash equivalents. Our working capital position as of September 30, 2007, was $56.7 million, compared to $23.3 million, as of December 31, 2006; an increase of $33.4 million since the ends of the full year. Included in our consolidated balance sheet at September 30, 2007 is Vital Living. The Vital Living effects on our consolidated balance sheet as of September 30, 2007, was an increase in total assets of $799,000, an increase in total liabilities of $1.4 million, and a decrease in shareholder equity of $640,000.

That concludes my summary of the financial report. Brad?

Thank you, Todd.

At the end of the third quarter, although our results were not what we wanted to be we ended the quarter completely sold with the only products in inventory basically products awaiting packaging and shipping with the exception of the finished pet products that I described earlier. In the fourth quarter that we are now, in we will fully utilize the capacity of our stage-one facilities and will utilize for about two-thirds of the quarter our full capacity of our stage-two facility in Montana. We expect to report revenues of between $5 million and $7 million for the quarter with the actual amount primarily depending on timing of shipments. For next year we expect to have adequate supply of raw bran to more fully utilize our stage-one and stage-two facilities which should result in a moderately higher revenue number. At the end of the first quarter when our Lake Charles, Louisiana facility, comes on line, we will have additional capacity which should result in additional revenue boost for the second quarter. Today we are dealing with limited supply and we are trying to maximize revenue from it in various ways. The longer term solution to our problems is international expansion and strategic relationships and we are working diligent to the make these things happen.

I'd like to close by saying that we are confident about our future. We thank you for your continued support and at this time I'm going to open it up for questions. I would like to limit the questions to one per person with one follow up. Operator?

Thank you. (OPERATOR INSTRUCTIONS) One moment please for our first question.

Our first question comes from the line of Trey Anton Tamery Group. Hi, Brad, can you expands a little bit more on the regulatory issues you're having with the EU, getting that plant constructed?

You want to take that.

This is Leo. Regulatory issues, this are related to do bringing equipment into the European Union. It's nothing extraordinary, it's a lot of tedious paperwork, translations, of course, depending on what country you are going into, duty, shipping, logistics, things of that nature. It's just working through those issues and we are confident we will get that done.

As a follow up on the Indonesia venture, I noticed that there was a contribution that was delayed on both parties. The capital was not needed, was that any delay in any construction or can you expand on that as well?

The delay of the capital contribution just basically was where we were going through the same issues of getting the paperwork done to be able to import our equipment and there was no reason to simply transfer the money into the bank account and let it wait there while we are awaiting the importation of the equipment. So it was just a timing issue to accommodate both sides until it was ready to ship.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question come from the line of John pebbles with people's management LLC. Please go ahead.

Hi, Brad, I was wondering if you could expand on the earnings per share that you estimate for quarter four?

I don't think we can expand on it because the accounting treatment that we now have and I think Todd can ascribe to this, is somewhat complicated, and it would be difficult for us to be able to determine the bottom line based on the top line because of the number of different issues affected also having to do with consolidation, the variable interest entities. There's just a number of things that could go into play. So I don't think we could be in a position to give you guidance on that.

Will there be any further impact from buybacks of inventory?

We don't expect. That buy back of inventory issue which involved our purchasing out the interest in that joint venture was a unique thing that has never occurred before and was something that we took advantage of to maximize the sales channel, and we don't expect to see that repeat itself. It never has happened in the past and we don't expect it to happen again.

Okay. Thank you.

Thank you. Our next question comes from the line of Richard Gonda with Ignite Capital. Please go ahead.

Good afternoon, Brad.

Good afternoon, Richard.

Can you comment on your, what was a proposed reverse split and or buy back, where are you with that?

The opportunity or possibility of doing a reverse was something that we entertained and was an option for us to be able to secure NASDAQ listing, because we were going through the process of getting listed on the national exchange. Although that is still an opportunity that we can pursue we felt the timing of it at this point was not appropriate and we didn't think that that was something that we will do at this time. Although it was one of the options that we would have to obtain a NASDAQ listing. At the moment it's something that we are not seriously considering timing wise. As far as the share buy-back, basically the Company looks for opportunities to enhance value and that is one thing that the Company considers but I'm not going to comment on it on this call at this time.

As a follow up does that mean, then, on your NASDAQ application that you'd have to then reapply should you wish to go down that route in January because the 12 months would expire? And the second part of the follow up is your status with the Indonesia joint venture.

Okay. So we have two different points, the first is the NASDAQ listing. At this point our NASDAQ listing is still active and at some point we'll have to make the determination if we will take it off the active status based on the price if that was the issue that was primarily out on the table which required us to be at a higher price than we are right now. At some point we take it off the table we'll have to reapply when it's more opportunistic for us and appropriate. The question as to Indonesia, what was that, Richard?

The status of the joint venture and what's going on with that as of now and when you see that as coming full term as to what you see down the pike there in terms of the consummation of that joint venture.

We think the joint venture stands as has publicly been stated in our press releases and our filings. We are proceeding forward and there's been no change from what we publicly stated previously. We think it's a great opportunity and we've got a partner and we are looking to take advantage of that as quickly as we can and as we state in our filings it looks like it will be operational as we have stated in early 2009.

Thank you.

Thank you. Our next question comes from the line of Michelle Stein with Neuberger Berman.

Hi, Brad. Two questions; one is the Vital Living. It sounded from what I understand like you've consolidated results and yet I thought you had just bought the debt as opposed to buying the operations. But then you say when it closes in the fourth quarter that that will be taken out. So why didn't that become something separate as opposed to imbedded in the numbers and I'm confused. Can you clarify for me?

Since it's an accounting question so I will turn it to Todd, so he can give you better clarity on it.

Essentially, we are following FIN 46 regulations and that is we have a variable interest in Vital Living and although our intentions from the initial agreement of the acquisition of the debt and the preferred stock was not to convert to common stock but to eventually get into a definitive asset purchase agreement, which we have. But because of the regulations of FIN 46 with requiring us to consolidate Vital Living financial statements into ours because of our majority interest in Vital Living. Now once we complete the asset acquisition then what will appear on our financial statements will be just the assets required and we won't have to consolidate the other accounts that are not being acquired in the transaction.

And also where was the $800,000 provision for doubtful accounts come from?

That was, we have a customer that essentially is a slow paying customer and keeping in compliance with our collection policy, if it's a slow pay and it's not meeting the terms of agreed to payment schedules then we establish a 50% reserve.

What was the reason for the slow pay, was everything delivered or was it simply?

Everything was delivered. Several inquiries were made but it was a lack of response from that particular customer at our reporting time as to when we'll start to receive payments on that trade receivable.

Just one last question. Your revenue estimates for the fourth quarter seems rather low relative to prior expectations, $5 to $7 million. Can you discuss why the number has come down so much?

Michele, two things I just want to mention on the last question as to the reserve. I did want to mention that particular customer had paid a substantial deposit with their order and so we are only talking about the balance of their order, not their entire order.

Okay.

It was a seven figure deposit that came with it. On the issue for the fourth quarter, it had to do with the supply situation. Again, we entered into the fourth quarter substantially behind on making deliveries to customers on orders that we had. So we had orders in place but we did not have the supply to be able to service them and it took a good portion of our fourth quarter to be able to deliver that to our customers. Many that were in the equine business which is in the lower end of our pricing. As we now ramp up the usage of our capacity of our equipment as we are getting more bran as I mentioned earlier we will be able to, which we actually caught up at the moment on those contracted orders but we won't be able to fully realize the higher value inventory and the full utilization of our stage-two facility until pretty close to the last two-thirds of the quarter. So you have that number being a little bit lower for us because we are just now catching up on the previous orders and also getting to use the capacity that we have.

Thank you.

Thank you. Our next question comes from Tyson Bauer with Wealth Monitors, Incorporated.

Good late afternoon, gentlemen. A couple quick questions, on the supply issue, was the supply issue of the the rice harvest or was it an issue that your facilities weren't ready or capable of taking the bran that was being processed by the LRMs or the other people that were harvesting rice? Because it appears in the USDA data that there was, A; a rise harvest and, two; it was no delays as far as getting that harvest out of those fields. So what is exactly the supply issue that you keep on referencing?

Tyson, this is Leo. First of all our plants were fully functional during that whole summertime period and fully capable of taking all the bran that could be supplied by the rice mills. The problem comes in the rice mills themselves were going through an unprecedented slow period of rice milling and obviously if they don't produced middle rice we don't have any rice bran to work with. In fact our utilization of capacity was below 50% during that time frame. And as Brad just mentioned, that put us behind on a lot of shipments. Yes, there was a rice harvest and there always is every year but rice that's harvested in each cycle isn't always milled on a timely orderly basis. The industry tends to hold back rough rice waiting for sales to develop.

Does that imply that there's a great deal of storage of raw rice that is yet to be milled?

Yes, that's always the case. Like there is in any grain, there's a significant amount of storage for rough rice.

That eventually is going to have to pass through at some point in time. Any indications when that may be?

It's happening right now. In fact we really saw the mills really start up in earnest in October. So we are seeing that movement right now. And historically from now through springtime of next year would be the highest amount of milling that you'll see. And I just would mention again that all of our facilities are fully functioning and in place to take advantage of every ton of bran that we can get.

Do you have, I haven't seen in the Q. as of yet, do you have your actual volumes that was processed in Q3 and where you expect that in Q4?

That's not in there.

Do you have that information?

Obviously we do but we don't, that's a little bit sensitive in terms of the locations we receive product from and customers. We really prefer not to get into the exact numbers.

Okay. Thank you.

Again, the summer is a slow period with less than 50% utilization.

Thank you. Our next question comes from the line of David Wilson with Smith Barney. Please go ahead.

A little follow up from what the last couple of questions were. On your supply, for the coming year do you anticipate that you'll have enough supply coming in so that Dillon and Phoenix when it comes up will be operating toward capacity? And then on the other side of that, do you have enough quality customers for the stage-two output of those plants to fully sell that?

I'll address the supply side of that question. As I stated earlier, we are anticipating 60,000 tons of stabilized rice bran to come to us this year. And that's after having conversations with our rice mill suppliers. So we feel reasonably confident we will be in that range. Brad, perhaps you'd want to take the question about the Dillon plant?

The stage one product that we sell, many of our customers for that product are under medium and even some long-term, many short term contracts for supply, and those customers are typically bulk ingredient supply customers on our side. The stage-two, you don't need a lot of that supply to satisfy the stage-two, although it accounts for a huge portion of your revenue, although it's only a small portion of your volume. So it's key for us to be able to get to that high utilization rate of those facilities to be able to carry that over. The stage-two customers act slightly differently. We don't typically enter into long-term contracts with those types of customers as they are different in that sense. Also we are taking proprietary, we are taking some proprietary volume of that and putting it through our own channel. But the bottom line is we are building the facility in Phoenix and we have the facility in Dillon that's been expanded. And we have that facility and the expansion underway because we fully expect to utilize the maximum capacity that we can make out of it.

Do you have other supply that you haven't talked about in the U.S. or other international outside of Indonesia that were working on planning that would be coming on board 2009, 2010? Would you anticipate some of that?

Here's what we think. Right now we have a domestic supply. And we have both domestic and international customers. And although we have stated publicly that our intension is to try to utilize as much as domestic supply as possible current and future, the reality is that it is insufficient to be able to meet the demands in the various for purposes of our products that we have in our and are creating for our customer base current and future. So the U.S. is not going to be able to satisfy what we believe is the demand. Therefore as I've stated previously, the way to address the issue is we will need to address it by having supply internationally. And we have been and we continue to work toward an international supply solution to international demands situation. And we are working on it aggressively.

All right. Thank you. Thank you.

Our next question comes from the line of Mark Hoffman with MLK Investment Management. Please go ahead. Hi, guys. Now are you going to run into the same problems with the plant in Phoenix and the plant in Dillon, or the expansion of the plant in Dillon, that you have down in Louisiana? Are you still going to be dependent on what's getting milled? And then obviously shipping it off to those areas?

The answer to your question is we have a certain amount of customers that we've got contracted commitments to supply. And those customers when the volume of milling was slightly lower than we anticipated consumed all of our available or the majority of our available bran out of our existing facility that we had, leaving very little of that supply to be shipped and utilized by our higher end facilities. The new facilities that we have that we're building, the next one in Louisiana and Lake Charles we have not committed contractually to use the entire amount to assure ourselves that we'll have excess supply to be able to service the plant in Phoenix and the plant in Dillon. The plant in Dillon only utilizes approximated 2700 tons of annual supply of bran. The plant in Phoenix only utilizes about 5,000 tons of supplies. You are only talking about 7500 to 8,000 tons of supply out of 60,000. That additional 30,000 tons of supply comes on board, it gives us a great deal of latitude and flexibility to make sure that we can continually not only inventory that excess supply, because it has a shelf life of well over a year, but it also assures us of being able to service those high end plants, a situation we didn't have earlier this year.

Thank you. Thank you.

Our next question comes from the line of [Henry Glasheen] with with Wedbush Morgan Securities.

My question was actually answered but I just want to do get some clarity. On Q4 '07, your guidance was somewhere between five and 7 million. Did you provide any guidance for '08?

We have not at this time. We may be in a position to do so on or before our next conference call. But we have not given guidance for '08 at this time.

So '07 is somewhere between five and seven then?

For the fourth quarter.

For the fourth quarter. That's it. That's all I need. Thank you.

Thank you. Our next question comes from the line of [Jason Edgars] with Southern Investment Management.

Hey, Brad, I apologize if you covered this, I jumped on the call late. But a couple quick questions just in regards to the lumpiness of the quarters as it relates to the availability of rice that you have. And I know that you talked about this before and we talked about it in addressing the supply issue and Indonesia is obviously the solution. But if that's really not going to ramp until '09 are we in the same situation for the next year to 18 months of going through this? And we've talked about other facilities or you've mentioned in the past of a European announcement. I'm just trying to get color on what's '08 going to look like and how is '08 going to be different from what we are seeing now if the same issues are going on and not going to be addressed until '09 in terms of capacity. And then a follow up, when you're done with that.

Okay. So let's take that a step at a time. The part of your lumpiness statement that occurred in 2007 had to do with a bit with the stop and go of being able to supply the higher end facilities. So by taking that aspect of the equation out by being able to service the stage-two facilities on a consistent basis which comes from just even a small incremental amount of supply which would be generated both by the increase in harvest that's occurring right now and second by the additional facility in Louisiana, you are going to be able to assure yourself of the quantities necessary to run those facilities. So that removes some of the lumpiness and also assures some of the higher volume sales revenues from having consistent running of those stage two facilities. Second issue takes the questions of how do you handle the larger stage one demand in various forms and that's something that we are addressing as we stated earlier and as Leo has confirmed, we are way ahead on the construction of our stabilization units and our modular, let's say compartmentalizing the facility installation equipment portion what have we are doing. In anticipation of succeeding some of our international initiatives. And to the extent that we've cut the time line on that, we are working towards being able to mitigate that time to take advantage of whatever opportunities we are able to consummate.

Okay. To follow up, and I appreciate that and I understand where you are going on the stage-two aspect in the U.S. but in terms of '08 and to get to supply on stage-one, are your customers feeling any ramifications with your difficulty in supplying them and do you think that it could potentially impact your ability to work with them in terms of broader product? Because you don't have the ability to supply them on a stage one level.

The good thing is and as we mentioned previously we have hundreds of customers right now. We have a number of small, a small number of extremely large customers and a large number of potentially extremely large customers that are now looking to become, I should say potential customers, and the issue is this; product rolls out involving ingredients don't typically happen overnight. The lead time for a product independent ingredient introduction, especially with products and services that have been around 50, 100 years take a long time and are taken methodically and judiciously with a lot of involvement from all sides. So the timing of our potential customers are worked through that process with us so that the process coincides with when our production will hopefully come on board along with our expectations of usage. So we have a number of large customers that are working with us. They understand our times frame for implementations. They understand their time frame for introduction and we hope those will meld together. In the meantime we will try to meet as best we can our existing customers growth and the anticipated customers coming on board, that can handle our incremental production increase. So I think the bottom line is, I think we will be able to meet the expectation of our customers and the larger customers take longer time to introduce any way new mixes into what they are doing.

Okay. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Leonard Grove with G. T. Capital.

Yes, hi. I've been tracking your company for awhile and I'm not really going to ask you any specific questions like the other people. To me the whole integration of the vitamin company whatever it was just really a footnote and it's a side show. Just in the bigger picture, your earnings, your revenues, your targets, your business plans have missed and have missed and have missed and have missed. And I'm just curious, like what really in the big picture is keeping you from just making things happen? You seem to have this brilliant product. You seem to have the interest of the major food companies in the world and I just really don't understand why you guys aren't up to the race already in the big picture.

Let's take a look again. As I stated earlier in the call; three years ago you had you a company that wasn't appropriately capitalized, had very little in the way of any production. It was losing tens of millions of dollars. Literally within a period of less than 36 months you have multiple facilities geared up, you are under R&D development with probably over 500 companies of international stature and domestic stature looking at your product for introduction in various R& D projects. You have a large amount of cash on the books and you have increased revenues dramatically. That is a dramatic turnaround in and of itself. The product introduction as I mentioned previously for these companies often take five to seven years for ingredients to do something in a period of 12 to 18 months in the food business is considered almost overnight. And so because of the desirability of the ingredients, the functional benefits that are offered by that ingredient and the ability of time when grain prices are at astronomical heights, to have an alternative to incorporate the products, we are one of the best solutions.

The process of building functional plants throughout the United States and potentially the world is not a simple task. As probably anyone in the engineering business would tell you, that multiple facilities involving hundreds of thousands square feet in multiple locations and all kind of issues that come into play are not something that should be easily done. The other thing is we are dealing with a food product. We take the quality assurance and control of what we do incredibly seriously. We go through rigorous processes of Q&A, the process that we do for development and approval of what we give to our customers is quite extensive and the testing that goes through both formulation and texture is also quite extensive.

So we think that in the scheme of things going from where we were to where we are today in less than 30 months is quite impressive. And although we've had a few stumbling blocks along the way which we readily admit to we think we are well-positioned today to take advantage of an opportunity that is quite expansive. And we are pleased with where we stands, we acknowledge the issues that we've had. We think we've overcome them and I think you will be very pleased with where we are going.

Are there any further questions or comments from Leonard Grove?

No. Thank you. Do you think you, really think you will be able to make the targets going forward? Do you think they are aggressive targets or do you think they will be conservative and you will be able to easily get on track and accomplish your goals of building these plants? And finally if you build the plants, is the finance side a lay up (inaudible) or do you think there's going to be a hurdle in terms of getting the attention of these demands from the larger companies?

As I've stated before previously on multiple calls I think that there is unquestionably a demand for the product. I think there's unquestionably an issue of being able to service the supply side which we are trying to address and I think that we are going to be successful in completing that in a realistic, in a fashion that doesn't jeopardize the capital structure of the company for the shareholders and maximize the shareholder value and the fact that we have interest from customers right now from all spectrums both large and small only validates the interest that we have and I fully expect that whatever guidance and indication we give to the market will be real you low risk and we will meet it for you. Thank you.

Thank you. Our next question comes from the line of Daniel O'Connor with Objective Equity. Please go ahead.

Hi, Brad.

Hey, Dan. How are you?

I have a question on your 10Qon page ten in regards to your agreement. Is that a payable note? Can you explain that? Can you give me some clarity for that, please?

There are several issues-- I am talking about Pacific Holdings Advisers Limited. PHAL. I think that note that we're talking about is a, are you talking about the liability obligation or receivable obligation, Dan?

Receivable obligation.

That's a note that was payable to us pursuant to receiving a licensing commitment from our partner for having the ability to participate with us under exclusivity clause for the distribution of that product in that area.

When it says with in five years, could it be paid sooner than that or later than that or within five years?

The maximum will be paid over a period of five years. Certainly it can be paid sooner and that's always an option for various reasons on the part of the party.

In regards to the return of product noted on the quarterly report, what was that?

Basically we entered into -- we made a sale of a product to a customer out of -- that was in the infomercial business. That customer, we then entered into later an agreement to develop a joint venture with them to, because they had expertise in that area, to sell products into that space, a specific product having to do with the inflammatory for pets. That customer was then acquired by another company and that new company did not do ingestible products. So unfortunately we ended up having a joint venture with a customer that was no longer able to participate in that avenue of sale. At that point, we had already realized that the product had been tested, had been successful and had a lot of interest into retail but we had a customer unfortunately that couldn't participate with us and he was a 50% joint venture partner.

We decided the best thing to do at that point, was to buy back ,basically get a return of the inventory and by out that partners interest in the joint venture, instead of being a 50/50 partner selling into retail we would be 100% of the sales of that product which has already been approved and tested. And again as I said earlier we already placed that product into PetCo., we placed that product into several hundred stores in Canada, we are in discussions with many other retails and now we receive 100% of the revenue. Unfortunately we did have to take the inventory back to be able to do that and that's why we had a classification as a product return which was an unusual situation. We already sold some of that in the fourth quarter. We expect the rest of that to be sold out plus more as we go into early next year.

Is it safe to assume that we are kind of finished with infomercials for the time being?

No, quite the contrary. We still sell into the infomercial market and we are selling infomercial product right now. The benefit of selling the infomercial is really a multiple number of benefits--one; your expenses are limited, the second; the information doesn't pull you no longer are advertising so you can mitigate your exposure on the SG&A side. Additionally we score a large number of sales into retail supported by the infomercial.

So without having to do additional incremental advertising for the retail sales, we get those as a function of running the show. So we get the sales from the infomercial, we get the sales from the retail and we control our cost directly to the sale. In addition to that, we still sell to a number of customers that are in the retail channeling as a wholesaler to them of our proprietary formulations. It's a good channel. It's a high-end channel. The reason we went into that directly just to manage that to make it a little bit less lumpy than where we are just simply responding to our customers.

One other clarity if you don't mind going back to your 10Q, can you provide some clarity in regards to your agreement that you entered into with Patricia McPeak, on page 19. The agreement I think is fairly self explanatory. She was, as you know, the former Officer and Director of the Company. She had an employment agreement with the Company that went out for quite an extended period of time and we were able to do an arrangement where we did an asset purchase of certain things and at the same time extinguish the obligations of the Company on the employment contract and revolved a number of issues that were associated with that financially that we think were beneficial to both parties and we look. She doesn't have exclusive rights in Central and South America, though, does she?

There are no exclusive rights, but we do give her the right as we would with any other person to sell product on their own behalf. We have hundreds of customers that buy products from us that resell it and she has the right to do so if she wishes.

Just wanted some clarity on that. Thank you.

Ladies and gentlemen, we have run out of time for our question and answer session. I would like to turn it back over to management for closing remarks.

I want to thank everyone for their participation on the call today. I'd like to invite everyone to our next call which we anticipate will be on or before March 15 of 2008. Thank you again.

Thank you ladies and gentlemen. That does conclude our NutraCea third quarter conference call. If would you like to listen to a replay of today's conference please dial (303)590-3000, or 1(800)405-2236, and enter the passcode number 11102158. Again those numbers are (303)590-3000, or 1(800)405-2236 and passcode number is 11102158. A.C. T. would like to thank you for your participation. You may now disconnect.