RiceBran Technologies (RIBT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the RiceBran Technologies 2016 second-quarter results conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host, Mr. Fred Sommer of Ascendant Partners. Please go ahead.

Thank you, Operator. Good afternoon, listeners. Welcome to the RiceBran Technologies 2016 Q2 financial results conference call.

With us today are John Short, Chief Executive Officer and President of RiceBran Technologies; Dale Belt, Chief Financial Officer; Dr. Robert Smith, Chief Operating Officer; and Michael Goose, President of USA ingredients. Mark McKnight is not with us today. He is at a rehearsal dinner in Utah preparing for his son's wedding tomorrow. Mark, if you're listening in on the call, congratulations to you and your spouse on getting another one out of the house.

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 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, August 11, 2016, and the Company assumes no obligation to update (technical difficulty) 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 John Short, CEO and President of RiceBran Technologies. John, please go ahead.

Thanks, Fred, and thanks to our listeners for joining today.

During the second quarter of 2016, we achieved record revenue of $8.8 million in our US-based segment, with sales increasing by 27.5% quarter over quarter and 13% sequentially. These results reflect the continued strength of our functional food, human ingredient, and animal nutrition businesses and mark our third straight quarter of USA segment sales growth.

A number of the same factors that contributed to our strong revenue performance in Q1 continued to gain momentum in Q2. First, revenues from functional food and human ingredient products increased 30% quarter over quarter, based on positive growth trends with both existing and new customers.

Second, the exclusive agreement signed at the end of last year with Kentucky Equine Research helped drive a 16% increase in animal nutrition revenue in Q2 2016 compared to Q2 2015.

And third, sales from functional food customers continued to grow rapidly, with further growth anticipated in the second half of 2016.

While revenues in our USA segment continued at a record pace, we saw strength in many other important areas as well. Gross profit at our USA segment increased by 17.5% and margins remained strong at just over 30%. We achieved these results in spite of the growth in lower-margin animal nutrition sales and a temporary supply issue at our Mermentau facility that resulted in higher costs and reduced gross margins.

We are confident that the positive revenue trend in our USA segment over the last three quarters will continue as we move through the remainder of 2016.

In addition, beginning in the third quarter, we expect to begin generating incremental revenue related to the organic RiceBran agreement signed with the Narula Group and we expect to see the organic business build to significant levels as we move into 2017.

Overall, we are pleased with the revenue growth of our USA segment and we expect to build on that performance in coming quarters with a platform that is capable of sustaining significant high-margin revenue growth for the foreseeable future.

Turning to our Brazil segment, we continue to work to minimize losses as we explore tactical and strategic alternatives. While our cost-cutting efforts have been vast and extensive, the operating environment in Brazil continues to deteriorate. We continue to experience negative gross margins and losses resulting from insufficient working capital and weather-related crop losses that reduced bran availability and dramatically increased bran costs.

With the plant operating at reduced levels in Q2 of 2016, revenue declined significantly on both the local currency and a US dollar basis.

We continue to work closely with our private equity partners in Brazil to evaluate a full range of tactical and strategic alternatives for Irgovel. Those alternatives include additional investments from our partners, possible investment from new strategic partners, idling the Irgovel facility either temporarily or permanently, and/or a possible divestiture of part or all of our interest in Irgovel. While the full spectrum of options are being evaluated, we continue to search for solutions that can maximize the value of our investments in Irgovel for the benefit of our shareholders.

As you know, several changes have taken place at our Company recently as a result of the proxy contest that culminated with a shareholder vote at the end of June. As a result of that vote, three new directors have joined four incumbent directors on our Board. I want to take a moment to highlight the backgrounds of our new directors, which can be found in more detail on our website.

Brent Rosenthal, our newly appointed Chairman of the Board, has an outstanding track record of creating shareholder value as a board member of several publicly listed companies in the food and technology industries. Brent's training in public accounting and mergers and acquisitions, combined with his prior success as chairman of the board of Rentrak Corporation and knowledge of the food industry, bring a welcome set of skills to our Board.

Beth Bronner is a managing director at Mistral Equity Partners, a private equity firm that specializes in the consumer and food sector, and has enjoyed a distinguished career developing revenue and market-share growth plans for marquee brands, including Jim Beam, Revlon, Nabisco, and Haagen Dazs, among others. Beth is a former member of the Board of Directors of Jamba, Assurant, and the Hain Celestial Group. Her deep experience and successful track record in brand development marketing are another welcome addition to our Board.

Ari Gendason is Senior Vice President, Corporate Investments, at Continental Grain Company, a privately held global food and agricultural company. Prior to joining Continental Grain in 2004, Ari worked in several investment banking positions where he developed a depth of knowledge and experience in evaluating business strategies and structuring and financing alternatives in the food industry. With his experience at Continental, which includes managing investments in food companies in Brazil, Ari brings yet another set of welcome skills, knowledge, and experience to our Board.

We have begun to work with our newly configured Board to update our tactical and strategic plans with a focus on maximizing shareholder value. While we are still early in that process, I believe we have the strongest Board in my tenure at RBT. We are better positioned than ever to take advantage of existing market opportunities to drive future revenue growth.

In addition to adding new directors, Michael Goose has also joined as President of USA segment ingredient sales and marketing. Mike is with us today and I have asked him to share his vision for growing our human and functional food ingredient business. I will turn the call over to Mike now.

Thanks, John.

First, I would like to say that I am very excited by the opportunity to join RiceBran Technologies to help drive ingredient sales growth.

For those on the call that do not know me, here is a brief bio of who I am. In my previous business life, I held numerous positions at the Hain Celestial Group, from marketing coordinator to general manager. I have worked on a variety of businesses, ranging from dry grocery, meat alternatives, and poultry. During my tenure at Hain, we identified the trend of consumer demand moving to cleaner, more nutritious, and better for you products, which is what has attracted me to RiceBran Technologies.

During my first month at RiceBran Technologies, I have visited the majority of our facilities and have met with numerous customers at the recent IFT trade show in Chicago. In that time, I learned a great deal about the significant opportunity that we have and believe that stabilized rice bran has a very bright future as an ingredient in the food and beverage industry.

Seeing the production of our stabilized rice bran and our value-added derivatives has confirmed my previous bullish view that stabilized rice bran is indeed a superfood. Our product offerings provides food manufacturers with an ingredient that contains a generous amount of micronutrients, including protein, fiber, carbohydrates, and healthy oil, all from one natural non-GMO superfood source. As CPG companies look to decrease the number of ingredients in their nutrition fact panels, stabilized rice bran provides a solution for them to achieve key nutritional goals with a single ingredient listing.

In my past experience as a brand manager, an ingredient such as stabilized rice bran would have been welcomed because it satisfies key macro trends occurring in the natural food space, like protein, fiber, non-GMO, and allergen free. Meeting these trends creates value and value creates margin.

Going forward, I expect to help drive sales growth not only with new customers, but also from our current customer base. Over the coming months, I will work with our sales team and conduct an outreach program to meet face to face with our top 15 ingredient customers to understand how we can strengthen and grow our current relationship.

We currently do business with numerous highly sought after companies. I was pleasantly surprised to see a large number of big CPG names on our current customer list. In the coming months, the question we will answer is, how do we do significantly more business with these big names? We have the ability to drive a tremendous amount of growth from these large CPG companies that already are familiar with our product, our product benefits, and we are comfortable with how to service.

While we are seeking to build additional business with current customers, we are also aggressively targeting new customers. We are focusing on the following categories -- beverage, dry grocery, bakery, snacks, and protein, which includes meat and meat alternatives. Our team is updating our marketing materials and sales stories to reemphasize our competitive advantage as a superfood ingredient for each one of these categories, while tying and focusing our sales strategy around the timing of major retailers' reset calendars.

In conclusion, I believe the opportunity exists to position stabilized rice bran as the next superfood, and my goal is to do just that. Our product offering is on trend both nutritionally and environmentally. Our products meet the current macro trends that consumers are demanding and we are working on building a roadmap towards a sustainable high margin and accelerated revenue streams for years to come. I look forward to working with our team and reporting back to the shareholders on our progress in the coming quarters.

I will stop right now and turn the call over to Dale Belt.

Thanks, Mike, and welcome to the team.

For the second quarter of 2016, consolidated revenues totaled $10.5 million, compared to $11.4 million recorded in Q2 2015. Our consolidated operating loss increased to $5.7 million, compared to an operating loss of $1.5 million in Q2 of last year. We recorded a net loss of $0.72 per share during the quarter, compared to a net loss of $0.38 per share in the quarter of last year.

USA segment revenues increased 27% to a record $8.8 million for the quarter. As John already mentioned, this is the second straight quarter of record revenue for our USA segment. Second-quarter revenue levels also represent a 13% increase over record first-quarter 2016 revenues. Growth was seen in both the human and animal nutrition categories, as John stated.

Gross profit from our USA segment remains strong at 30.1%, with gross profit dollars increasing 17.5% to $2.6 million this quarter, compared to $2.3 million last year. Our USA segment gross profit percentage declined by 2.6 percentage points, due to two primary factors. We experienced a temporary issue with supply from the rice milling facility that supplies our Mermentau plant in Louisiana. The interruption in supply resulted in our having to ship product from California at higher bran and freight cost for an eight-week period during the quarter.

And second, the increase in animal nutrition revenues had a modest negative overall sales mix impact on gross profit percentage.

The decline in consolidated revenues was entirely related to the 61% decline in quarterly Brazil segment revenue, which totaled $1.8 million. The revenue decline in Brazil resulted from significantly reduced raw bran processing levels, combined with a 12% decline in the Brazilian real versus US dollar exchange rate for Q2 of 2016.

Sourcing raw bran in Brazil continues to be a challenge for three reasons. First, adverse weather caused flooding during the rice harvest, which in turn has significantly reduced the amount of rice being milled in the region. Second, there is increased competition for purchasing of raw bran from other, more creditworthy raw bran buyers. And third, Irgovel continues to lack having sufficient funds necessary to meet raw bran supplier payment demands.

As is the case with revenues, the 11% decrease in consolidated gross profit in Q2 2016 is directly related to the significantly increased negative gross profit in the Brazil segment. Consolidated gross profit declined from last year's $2.2 million to $2 million for the current quarter.

The Irgovel plant is operating at significantly reduced levels, which is very inefficient and costly. On a comparative quarterly basis, bran processing volumes at Irgovel have declined quarter over quarter by 60%. A nearly $400,000 increase in USA segment gross profit partially offset some of the negative impact of the Brazil segment.

Moving on to expenses, consolidated operating expense was $7.7 million for the second quarter of 2016, compared to $3.8 million for the second quarter of 2015. That is an increase of $3.9 million. However, it is important to note that the increase in operating expense was due to two items that occurred during the current quarter.

We recorded an estimated goodwill impairment charge of $3 million, which, of course, is a non-cash charge. This goodwill was originally recorded as part of the 2008 acquisition of Irgovel. The second expense item is the $1.1 million of incremental expense related to the proxy contest that ensued in conjunction with our annual shareholder meeting in June. These expenses include additional legal fees, dissident group settlement cost, proxy solicitation services, filing and mailing fees, et cetera.

If you exclude these two items and do the simple math, operating expenses actually declined by approximately $200,000.

When looking at our Q2 performance on an adjusted EBITDA basis, we recorded consolidated negative adjusted EBITDA of $616,000 for the second quarter of 2016, compared to last year's positive adjusted EBITDA of $13,000. Our USA segment actually recorded positive adjusted EBITDA of $425,000, compared to $543,000 in Q2 of 2015. In our Brazil segment, the decline in performance previously discussed resulted in quarterly negative adjusted EBITDA of $1 million, compared to a negative $530,000 last year.

From a balance-sheet and liquidity perspective, the combined USA and corporate segments ended the quarter with $2.4 million in total liquidity, which represents the combined cash on hand and borrowing availability under our senior secured debt facility. This represents an increase of approximately $0.6 million since the end of 2015.

As already mentioned by others, the Brazil segment, on the other hand, is a challenge. There is little or no liquidity at the moment and only essential payments are being made while a solution is being sought. As an example of solutions being considered or implemented, Irgovel began working with some of its raw bran suppliers in July to provide toll processing, where the bran is provided by the supplier, Irgovel extracts the oil, keeps the oil for sale, and gives the defatted bran back to the supplier.

While toll processing in this manner results in less revenues being recorded, it does alleviate having to pay for the raw bran. And while this is not a 100% solution, it does offer some relief while a long-term solution is being sought.

And with that, I will stop here and turn the call over to Dr. Robert Smith.

Thanks, Dale.

As Dale previously mentioned, we had supply issues in the mid-south that negatively impacted our gross margins in our USA segment. These supply issues are not new to the region. In 2014, supply shortages resulted in significant revenue losses for our Company.

It is for this reason that last year we invested in additional warehouse space and inventories, so we could seamlessly supply our customers from strategic inventory reserves. Because of those investments, we have been able to create significant supply-chain flexibility and meet our target of 99% service level. Meanwhile, we continue to examine additional measures to de-risk our raw rice bran supply chain in both Louisiana and California as we grow the business.

I will now discuss the newest opportunity at RBT, the introduction of organic rice bran and organic rice bran derivatives into our product portfolio. In February of this year, we announced a strategic supply partnership with the Narula Group of companies for organic rice bran. In June, we also announced an exclusive multi-year agreement with an existing customer to supply certain organic-certified derivatives produced from organic-stabilized rice bran.

I am pleased to report that we have completed the organic certification of our Dillon, Montana, Stage 2 derivatives plant, received the first container of organic rice bran, and successfully converted that rice bran into organic derivatives. We expect to ship our first order of organic derivative in the coming weeks.

We have also sampled organic rice bran and organic rice bran derivatives to several parties interested in developing organic health and wellness products fortified with protein and fiber, and we expect to generate initial orders in the third quarter.

I will stop here and hand the call back to John.

Thanks, Robert.

In conclusion, we expect the challenges in our Brazil segment to continue. We have taken a non-cash charge of $3 million to write down all of the goodwill associated with our Brazil segment investments. And unless a comprehensive solution is found, we do not plan to provide additional funding to Irgovel.

Nevertheless, we continue to aggressively pursue a full range of options that include identifying additional strategic partners, idling the facility, or a partial or full sale of our interest in an effort to maximize value for our shareholders.

Our USA segment, on the other hand, has reached record revenue levels for two consecutive quarters and delivered over 83% of consolidated revenues in Q2, while continuing to reduce normal SG&A expenses. With projected double-digit growth in the natural, organic, and functional food segments and installed capacity that can support more than a 200% increase in revenues, we are well positioned for continued growth.

We are seeing strong growth from a number of USA segment customers and have some exciting new product launches taking place in the second half of 2016. In addition to the organic rice bran from the Narula Group, we are launching a new functional beverage product with a customer that will be sold through an infomercial beginning this fall. Should this launch be successful, these products could generate substantial incremental revenue for us in 2017 and beyond.

While we still face challenges, demand for healthy natural foods with clean labels is growing at a robust pace. Our USA segment continues to gain momentum and we have significant installed production capacity to support rapid sales growth as we move through the second half of this year and into 2017.

As mentioned earlier on this call, we have assembled the strongest Board of Directors our Company has seen during my tenure at RiceBran Technologies. And with the addition of Mike Goose to our senior management team and sales organization, we are very well positioned to take advantage of existing opportunities for accelerated revenue growth in the natural, organic, and functional food markets.

Our management team and Board are committed to moving our Company forward to maximize value for all of our shareholders. We look forward to discussing our progress and providing more detail on our go-forward strategy during our third-quarter call in November.

That concludes our prepared comments. Operator, at this time please open the call for questions. Note that we will limit callers to one initial question and one follow-up.

(Operator Instructions). Anthony Vendetti, Maxim Group.

Thank you. I was wondering if you could, as you have done in some of the past quarters, give us the number of new clients you were able to sign up this quarter for some of your products, particularly in the human and functional ingredient category.

Anthony, I apologize. Normally, we would have Mark here with all of those numbers in front of him and he is out getting his son married tonight and tomorrow.

We do have very nice build in our functional food business from a number of points of view. I mentioned one of the new customers that we have coming on right now, the folks who are doing the functional beverage for infomercial.

That is a relatively fast product development. It took us about a year from initial meetings to first samples out the door. Those guys went out, developed their infomercial, did their initial testing, and we have now received the first couple of purchase orders for August and September, and we expect that to be a significant piece of new business going forward, based on those initial POs and particularly based on the test results and the readings they have from their infomercial testing. So they are very excited. We are very excited. We think that can be a big one and a big add.

We have added a couple of additional animal nutrition customers. And while that's at a lower margin than our human food ingredient or functional food business, they tend to be relatively large volumes that help with plant absorption. So we like those guys as well. But Anthony, I apologize for not having a specific number for you.

That's okay. So Robert mentioned that you have been able to convert the Dillon, Montana -- you have been able to convert that facility to organic derivative. Is there a plan underway to try to do that in Louisiana as well? And is that possible in California? Or how does that situation look right now?

In California, the way that the product is brought in, it is brought in from international locations in Asia into California ports. And so, our facilities in California are also certified organic to handle this material, and that is important because we also warehouse finished products in California. So those facilities are also organic certified.

And the certification agency is a French group called eco-CERT and the eco-CERT also certifies the rice bran and the rice that is produced in Asia that we source.

Dillon is now certified by eco-CERT as organic. We are going through a process at our Healthy Natural facility to get that organic certified. And with respect to Mermentau, today that services primarily the animal sector. We are looking to bring that up to speed to become a facility that would also service ingredients that go into the human food market. And with that, we would potentially look at organic certification. But that is not in our plans today.

Okay.

(multiple speakers) Anthony, just one more thought on that. We do not have domestic sources of organic bran.

One of the things that I don't know if we ever talked about on these calls, but we have a plant and everybody saw, I suppose, the press release on Organic By Nature. Organic By Nature challenged us two years ago to find a source of organic bran, a significant source of organic bran.

So we hunted in the US, in Central and South America, and a variety of other places to try to get long-term access to organic bran. And at the end of the day, we did the deal that was announced with the Narula Group in February.

So the organic bran is actually coming in, as Robert said, internationally, moving through organic-certified facilities and handling through Dillon. Right now, virtually -- I am going to say this, Robert, and you can correct me. I'm going to say virtually everything that is coming in is going up to Dillon to be converted to derivatives and we will start shipping right now under the contract that we signed with OBM. Does that --

That is correct. Most of the products right now is coming in, it's being converted to derivatives. However, we are holding back a small quantity of the organic stabilized rice bran and we are shipping those out as samples to a number of interested parties because there is significant interest in the organic derivatives, but I would also say that there is significant interest in just the stabilized rice bran as is.

And so we are looking at growth in all of those different markets, and we hope that two to three months down the road, we will be keeping some of that stabilized bran as a finished product to supply to customers.

Okay. That's helpful. And Mike, you mentioned there is five categories you see using stabilized rice bran, beverages, dry goods. I missed the other couple.

Hang on one second. (multiple speakers) the main reason behind highlighting the categories is we sat down with the team over the past month and we wanted to really get laser focused on where the best opportunity to overall was and where the best usage for rice bran would be.

And we really challenged the sales team to focus on one thing. Where could rice bran be a top three ingredient? And by top three ingredient, we were hoping to put rice bran in the deck that would always show up in the third level of the ingredient amount so the use would be the highest allowed there.

And we basically identified our major opportunities in beverage, dry grocery, bakery, snacks, and protein. Protein includes meat and meat alternatives, and there has been a lot of development that the team has already done way before me in the meat and meat alternative world. And there is a lot of opportunity in all those categories.

Okay. Great. And then, just a quick question for Dale. When should we expect to have the Q filed?

You are talking about Q2 or Q3?

This Q, Q2.

You're talking about this Q. It is filed today.

Oh, it is. Okay.

It should be filed now, Anthony. It was supposed to file one minute before the start of this call.

Yes. It should be there now.

All right. Awesome.

(Operator Instructions). Harry Golsha, Private Investor.

I am, unfortunately, disappointed by the results and I am sure you are, too.

I am a little confused about what is going on in Brazil. Numerous times in the past, you had stated that you could sell all the oil you produce there, yet we are still reducing the amount of product being sold and produced and blaming it on a decline in processing and supply issues. So even after we put in more processing equipment at other locations, why is there still a supply and processing issue? Outside of the money that you don't have to spend, are there no orders? Is there no demand?

Harry, we talked about this a little bit on our May call. And let me go back and recap.

There are lots of challenges in Brazil. The challenges for the rice industry are the worst they have been in probably 60 years this year because of El Nino. And while El Nino has been a huge benefit to us in terms of our Sacramento Valley -- our California supply chain, and we expect it to be a big benefit over the next couple of years, because with the additional water that has come from El Nino, the California growers are back up to planting in the 535,000-acre, 540,000-acre range of rice, near historic highs after three years of decline that, depending on who you talk to, went down to 380,000 to 400,000. So El Nino is a big benefit for us in California.

The same El Nino that benefited us, they have the southern hemisphere version, and it happens that this year it came with a vengeance, and we mentioned on the May call that Brazil and particularly the state of Rio Grande, where we are and where most of the rice is grown, suffered the worst flooding since 1940. And that flooding wiped out 30% of the rice crop in Brazil. So the harvest is down 30%, one major issue. So, in principle, your starting point is there is 30% less bran.

This morning as we wake up and we look at the impact of the weather-related problems, bran -- raw rice bran in Brazil is between BRL650 and BRL690 a ton, more than double the same time last year.

So you start with that initial crop-related shortage. That has been exacerbated by the currency issues. With the currency significantly depreciated, a lot of growers are happier to export their rice for US dollars, which they convert for a larger number of reals. So if you look at the amount of rice that is being milled, it is more than half the amount that was being milled last year at this time, but it is less than the 70% that you would expect based on the reduction of the crop losses from the weather-related patterns from the flooding.

So, we really have a supply problem. And many rice mills are suffering badly because you know what happens in -- what is happening to us as a large industrial plant that can only operate at a fraction of its capacity, you're trying to absorb the cost of those plant -- of the entire plant into a much smaller amount of product running through, rice mills are having the same problem. So the entire rice industry in Brazil is suffering significantly.

Our problems are exacerbated by banking issues and working capital issues as well because as we completed our expansion and the investments we made to get the plant to 300-plus tons a day, we had a situation where the banks are generally experiencing big losses and reducing their portfolios across the board. So funding is a challenge in Brazil, and the combination of the weather-related issues that have specifically impacted the rice industry, combined with working capital, put the business in a very difficult situation (multiple speakers)

So when you add on that, additional hardware 500 miles away didn't really help that situation at all, did it?

Oh, the investment to put the stabilization [in co]? It's certainly not going to help this year. That is right.

But Harry, from -- the other part of your question, from a demand point of view and a sales point of view, we sell every single thing we can push through the plant at the end of every month. The only thing that remains to be sold at any given point in time, we have no oil to be sold at the end of the month, we have no product to be sold at the end of the month because it is all sold, other than what is actually in process in the last one or two days of the month. So we don't have a demand-related problem. We have a supply-related problem and a working capital problem.

Is it not cost feasible to bring in bran from other countries, like the Far East?

Yes, it is not.

Okay. And do you have oil processing capabilities in this country now? Or did it all go to Brazil?

No, we have never -- we acquired -- prior to any of us joining, the Irgovel business was acquired in Brazil and that is the only oil processing facility the Company owns.

I see. And one last question, John.

Harry, ask what you want. We are happy to take your questions.

Okay. You said you are extremely happy with the structure of the current Board. And given that, how do you justify spending $1.1 million to fight that current structure?

Well, we didn't launch the proxy challenge, Harry.

I don't know that you have a choice.

Yes. And, you know, we have an obligation to our shareholders so that if a group of shareholders decides that they want to launch a proxy contest, we have no option but to see that that process is fairly run. So I would much have preferred that there was no proxy contest and we didn't spend the $1.1 million. But it isn't an option of mine to say we are going to ignore a group of shareholders who wants to launch that process.

And Harry, this is Dale. I would say no one here, when you enter into one of those types of contests, you have no idea how it is going to go. It could be a short process and you reach some terms and you settle under some arrangement, and that happens frequently.

But this process -- this contest began in earnest early May and literally went all the way through the first week or two of July. And I don't think any of us anticipated that it was going to be that long and protracted. All of the best expert advice we could get legally and otherwise was that most of the time these things settle prior to even reaching the shareholder meeting and a vote.

So you have no idea how to weigh cost versus benefit because you frankly don't know how it is going to go or what is going to happen or whatever -- however it plays out.

Okay. Well, thank you for your answers.

Andrea Hayley, Epoch Times.

As stated, I am a reporter and I am interested in RiceBran from the perspective of its use of what was otherwise a waste product. But I am hearing a lot on the call today about supply problems, particularly in Brazil, and in the US you are importing at least organic rice bran from Asia.

However, I have heard that there is a tremendous amount of rice bran that goes to waste. So if someone could speak to the issue of the supply and availability of this -- of rice bran and the potential of your Company to utilize what was otherwise a waste product, and sort of speak to the issue that I am hearing regarding supply. Is there a lot out there or not? Thank you.

Happy to take your question. On a global basis, about -- I would say around 60 million metric tons of rice bran are produced every year. That is from milling brown rice to make white rice. Of that 60 million-odd metric tons, about 10% of that goes to produce rice bran oil and 1% or less ends up in the food ingredient market.

And so you can see, just from the start, that the majority of the rice bran that is produced on a global basis really doesn't make it to markets where it captures the value, the true value, that could be captured from rice bran.

In the US, of course, the amount of rice bran that is produced is probably 1/10 of what we are talking about on a global basis. And for the most part, in the US it is the same case where a lot of it is -- if it isn't fed to animals within one or two days, it ends up going to waste because it is inherently unstable. And that instability causes rancidity to the point where even animals won't eat the product.

Our technology, as you may be aware, stabilizes that product and puts it back into various markets where we can capture the value.

Having said that, what it requires is a company that can efficiently take the bran that is being produced in the mills and stabilize it. And today, we sit in two mills in California with our equipment and we draw as much of the bran as we can, and we also have a facility in Louisiana that draws on a neighboring mill.

As we look forward to our growth and our plans, we are looking at developing systems that will allow us to draw bran from all of the mills and all of these regions in the US, and we are looking at possibilities of doing the same in other countries. But you have to put in the right kind of receiving equipment to be able to draw as much bran as possible.

So to answer your question in terms of supply of bran, there is plenty of bran out there. And we are looking at how we can capture more of that bran and not have any of these supply issues in the future.

That helps a lot. So when you are receiving organic bran from Asia, how is that stabilized? Because it would obviously be past one day. And just to clarify, you are receiving this bran particularly from a milling facility into your facility, where you stabilize it. So it is a question of proximity. Is that right?

Let me deal with that. Let me answer the question, too, or let me talk about why we don't source the bran here in the US.

There is some organic rice grown in the US. But the customers that, basically, that rice goes to our customers that prefer to have whole-grain or brown rice. So they want brown rice and they want organic brown rice. And so, that rice isn't milled. And that is why we don't have a supply of organic rice bran in the US -- or it is very little.

So we have had to go look for organic rice bran in other parts of the world. And we've found a very good source of very high-quality organic rice bran being produced in Thailand today. And the facility that is basically contract growing that rice and also milling that rice does have technology in house for stabilization, and we are working with them today to improve that technology with our own equipment. And so, we have equipment that will be going over to their facility to help with that process.

But the bran we are receiving from that location today is stabilized already. We bring it into the US and we further process it into value-added derivatives in our facility up in Dillon, Montana.

Understood. And this is John speaking?

This is Robert Smith.

Robert speaking. Thank you so much. Thank you for taking the question.

Michael Siegel, Private Investor.

So you say you are not going to provide any more financial -- any more money to Irgovel, right? So my question is, what are you waiting for?

(multiple speakers) yes, Michael. That is correct. Hi, how are you?

I am fine. Thank you. Nice growth in the US and it looks like your segment is pretty much breakeven. It might be profitable in the next quarter, right? So what are you waiting for in Brazil (multiple speakers)

We are headed in the right direction in the USA segment and we think the business will continue to trend, yes.

Yes, so my question is if you are not going to provide any more money to Irgovel and there was $1 million every quarter, plus or minus, they are going to run out of money any time now, right? So if you walk away, can you walk away clearly? Can you walk away and not have any financial obligation? Or do you have some financial obligation if you just walk away?

Michael, that is a complex issue that we have -- we are in the process of reviewing internally with our Board, including our new Board members, legal counsel in Brazil and in the US.

But let me say it is not our objective to see that happen. Our objective is to work with our partners in Brazil and with our milling partners and others to do our very best to see that that business does not go away.

We think that while things are very difficult in Brazil right now because of the combination of factors, that the economy collapsed and the president is impeached and all of those things that are going on, the additional challenge came from the flooding, as I said in response to Harry's question, worst in 40 years. We were down to look at it. It is crazy, machines can't get in the field and all of those things. So, we have an extremely unusual year and that creates great difficulty for Irgovel, but also for the industry as a whole.

So our partners at Alothon, who have offices in Sao Paolo, are spending a lot of time with the management at Irgovel and our milling partners, looking for solutions. And it is our objective to find a solution that keeps the business moving forward.

Can we go on in the current status permanently? No, right? But we haven't given up on that business and we do not want to see it go away. We will do everything in our power to make sure that it doesn't.

And if we can figure out how to bring it through what is a very, very difficult situation, we have a business that has produced consistently 300 tons a day of bran, has produced a peak of, I think, 425 tons in a day, based on the investments we made, and has a real reason to be from a market point of view.

I mentioned in response to Harry's question, everything is sold. We don't have a demand problem. We have a supply and a working capital problem. So we will work very, very hard to nurse the business through what we believe is the bottom of the economic cycle.

Those of you who look probably have noticed that thus far this year the best-performing currency in the world is the Brazilian real, and because the terrible currency depreciation that we experienced at the end of last year and the beginning of this year is starting to move back in a favorable direction. And people believe in the marketplace that with the changes in the government, with Michel Temer coming in as president and Dilma Rousseff now out and under impeachment, things are starting to settle a little bit.

So Michael, our belief is that we are at or very near the bottom and our challenge is to nurse the business through the bottom of the economic cycle. We believe that as it turns up, that business has real opportunities to perform and provide value for ourselves and our partners.

I don't want to give people the wrong impression. From an accounting point of view, we have had to -- we thought it was appropriate to impair that investment in the goodwill. So we have done that, but we haven't -- don't take that as a fact that we are giving up on this business and we are going to see it close down and go away.

Yes. But if worse comes and you have to walk away, do you have some financial obligations or you are a separate entity from your [various] side?

The USA segment has no cross default or debt guarantee arrangements with regard to Brazilian debt. There are no relationships cross border whatsoever with regard to debt. I don't know if that answers your question, but (multiple speakers). I'm sorry?

My question is if you walk away, do you have any financial obligation as a Company?

That is an issue -- we do not believe so, but that is an issue that has a lot of legal complexity to it.

Okay, thank you, and one more question. Usually you will say how you see the current quarter developing. So do you see the Q3, how it is going? Is it going to be on track as previous one or better?

Michael, if we tell you (multiple speakers) we have to kill you because we are not providing forward-looking guidance. No. I am only teasing.

Listen, we continue to perform very well. We expect this quarter to significantly beat same quarter last year. We are talking about our USA segment now. That was your question, right?

Yes.

So our USA segment continues to trend very well. Our existing base of business is growing nicely. We expect it to continue to do that in the quarter and, as I said earlier, we are super excited to have Mike on board because he brings a wealth of experience in big CPG that creates a whole other level of opportunity.

So when you look at what we have going on, the current base of business is trending and is going to grow. That is great news. Organic will add a layer to that and, in all fairness, Mike has been here for 30 days. He found the bathroom last week and he found the customer list, and we go through all those things, but we are genuinely very excited about the business and about the opportunities in the US segment.

So we have -- we talked about on the last call sort of a tale of two segments here. Our USA segment is strong, trending, right place at right time, installed capacity that can allow us to grow to north of $100 million. So our challenge is to sell into that installed capacity and we have great momentum and great opportunities to do that.

Brazil is very challenging, but, I repeat, we are not giving up on Brazil. We believe that Brazil -- Irgovel can still be successful. It plays a vital role in the vertically integrated supply chain in the rice world in Rio Grande do Sul where it operates, and we believe we will find a solution for -- our objective is to find a solution for the business, not to walk away from it and see it close down.

Okay. Yes. It sounds great. And how about your [site] capital needs, if you are very well on cash right now? Are you expecting Narula Group to convert some shares to provide you some cash or how are you going to deal with that growth?

Yes, what happens in that deal, Michael, is Narula Group will convert some shares by essentially foregoing margin. And mechanically -- Dale, do you want to describe what happens with that from an accounting point of view and how it impacts equity?

Yes. Once organic bran that we have purchased from the Narula Group is sold by us, the gross profit on the sale of those products, we will take half of the gross profit and we'll -- through just a mathematical formula which is described in our public [earnings] filings on this, that will determine how many shares we release to them.

Those shares are already sitting in escrow. They have already been issued. They are included in our outstanding share count. So they are there, but they are under escrow. And they will be released as we sell product and, as John said, we are essentially sharing a part of the gross profit from the sale of that product.

Okay. Thank you very much.

(multiple speakers)

(Operator Instructions). Mr. Short, there are no further questions at this time. Please continue with your closing remarks.

Operator, we will give people another 15 seconds to see if any other questions come up, and if not, we will wrap.

Okay. The queue is still open.

Stacy, let's shut it down. Nobody has jumped on.

I just want to thank everyone for joining the call. I would like to repeat again what you heard earlier on, disappointing numbers. Brazil, of course, remains a huge challenge, but if you remove the one-time goodwill impairment and the proxy cost, we continued to grow sales dramatically in our USA segment on a reduction in SG&A. I mentioned in response to Michael's question that we are trending in that same direction for Q3 and we are very excited about the addition of some very strong new Board members who are already a strong team, and Michael, as Dale said earlier, welcome. Super excited to have you as a part of the team.

So thanks to everyone for joining our call and we look forward to reporting back when we get together again in November to talk about Q3. Stacy, thank you for handling the call for us.

Thank you. Have a good night.