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Edited Transcript of RIBT earnings conference call or presentation 7-Nov-19 9:30pm GMT

Q3 2019 RiceBran Technologies Earnings Call

SCOTTSDALE Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of RiceBran Technologies earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard Galterio

Ascendant Partners, LLC - IR

* Brent Rystrom

RiceBran Technologies - CEO & President

* Todd Mitchell

RiceBran Technologies - EVP & CFO

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Conference Call Participants

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* Mark Smith

Lake Street Capital - Analyst

* John Sun

Aperte Capital - Analyst

* Paul Sonz

Sonz Partners - Analyst

* Peter Wilke

- Analyst

* Garrett Newberg

- Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the RiceBran Technologies third-quarter 2019 financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce our host, Mr. Richard Galterio of Ascendant Partners. Please go ahead Mr. Galterio.

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Richard Galterio, Ascendant Partners, LLC - IR [2]

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Thank you, operator. Good afternoon, listeners. Welcome again to RiceBran Technologies' third-quarter 2019 financial results conference call. With us today are Brent Rystrom, Chief Executive Officer and President of RiceBran Technologies, and Todd Mitchell, Chief Financial Officer.

Before I turn the call over to Brent, I want to remind listeners that during the call management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore the Company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from results discussed today and, therefore, we refer you to a more detailed discussion of these risks and uncertainties in the Company's filings with the SEC. In addition, any projections as to the Company's future performance represented by management include estimates as of today, November 7, 2019, and the Company assumes no obligation to update these projections in the future as market conditions change.

This webcast and certain financial information provided in this call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures, are available at www.ricebrantech.com on the Investor Relations page. At this time I would like to turn the call over to Brent Rystrom, CEO and President of RiceBran Technologies. Mr. Rystrom, please go ahead.

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Brent Rystrom, RiceBran Technologies - CEO & President [3]

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Thanks, Rich, and good afternoon, everyone. In today's conference call Todd is going to provide an update on our third-quarter performance and other financials and I will follow that with a broader overview on our business and strategy and then we will open the call for a question-and-answer session. Go ahead, Todd.

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Todd Mitchell, RiceBran Technologies - EVP & CFO [4]

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Thank you, Brent. You should've all had a chance to review our press release by now. Before I go into the specifics on third-quarter results, I'd like to frame the bigger picture. We've built a solid foundation to position the Company for meaningful growth and profitability in the coming quarters. This foundation has three layers.

The first layer of the foundation was the acquisitions of Golden Ridge and MGI. Golden Ridge puts us at the heart of the largest rice producing region in the US, secures our access to rice bran and reduces our core cost structure. MGI builds upon this by expanding our offering into ancient grains and other related products demanded by our customers.

The second layer of this foundation is the completion of a capital investment cycle. Including the debottlenecking project at Golden Ridge, we will have invested over $4 million in upgrading all of our facilities this year. These investments have: increased the overall production capacity; enhanced our ability to deliver a wider variety of products; and importantly, will bring all of our facilities into FSMA compliance via SQF certification.

The third and final layer of this foundation is securing a non-dilutive source of financing to fund working capital as we transition to profitability. Last week we announced we closed on a $7 million lending facility with Republic Business Credit. We did a lot of due diligence before deciding to go with this structure and ultimately chose this option because of its flexibility.

There is no minimum borrowing base and there is no required reserves. So, we can use this facility only when we need it, which should result in a lower cost of capital than other alternatives. Moreover, the facility is completely segregated from the rest of our balance sheet. The lender has no claims on any other assets, so we can use the rest of our balance sheet strategically providing us with greater options to develop our business. With this lending facility we are now fully funded and positioned to transition to positive adjusted EBITDA.

Now let's talk about 3Q numbers. Revenue for the quarter was $5.3 million. This was up 53% year-over-year, but down from $6.4 million and $6.2 million in 1Q and 2Q. The shortfall is primarily from Golden Ridge as the debottlenecking took the mill off-line for much of September and, to lesser extent, we saw some weakness in new RiceBran customers coming online.

Gross profit was once again negative, $359,000 negative in 3Q. This compares to negative $244,000 in 2Q and a gain of $343,000 in 1Q. Golden Ridge was the source of our negative gross margin in 2Q and 3Q due to lower productivity and a narrower spread in the business, both largely due to the [medium] grain contract we had to work through.

SG&A was $3.8 million in 3Q, which was higher than we would like but, again, included several extraordinary items including a bump in labor cost, higher legal and professional fees and an increase in bad debt as we cleaned up receivables ahead of our deal with Republic Business Credit.

Net losses for the quarter were $3.3 million or $0.10 per share. Net income included approximately $860,000 in one-time benefits from the Golden Ridge settlement in July. Adjusted EBITDA losses were just under $3.4 million in 3Q, which included $309,000 in stock comp and acquisition-related activities, but excluded the $860,000 benefit from the Golden Ridge settlement.

Total cash was $3.7 million at the end of 3Q, which was down from $7.4 million at the end of 2Q and included $1.2 million in short-term borrowings. Outflows included about $1.2 million for capital expenditures bringing total capital expenditures for the year to date to $3.5 million.

Let's talk about our 4Q outlook. We are confident trends will improve in 4Q. First and foremost, the turnaround in Golden Ridge numbers post debottlenecking is already apparent. Golden Ridge was the source of virtually all of the shortfall in revenue and gross profits in 3Q and a fair amount of the upside in SG&A. Even with the debottlenecking of the mill not yet fully optimized, October revenue for the mill was higher than any month in 3Q.

Second, momentum for our core rice bran business picked up in the second half of the third quarter and is trending towards stronger results in the fourth quarter. We saw some softness in July frankly, which held back overall 3Q results, but the business picked up in August and again in September. A lot of this was due to delays in bringing new customers online, but most of this was passive and trends in October point to a stronger 4Q.

And third, the pipeline for all three businesses, our core RiceBran business, Golden Ridge and MGI, has grown meaningfully. We are seeing an uptick in net new business for our RiceBran and derivatives products and we expect to add multiple large new customers in 4Q. We have our first customers crossing over from one to multiple products and one of these will represent a significant increase in MGI's revenue base.

And we've put together a customer book for Golden Ridge with the potential to absorb more than all of the entire capacity post debottlenecking. As such we expect a material reacceleration in revenue and a meaningful reduction in EBITDA losses in 4Q. This will be led most dramatically by the turnaround at Golden Ridge, but it will also be underpinned by meaningful new business at RiceBran and MGI as well.

And I remain optimistic that we should be able to ramp into positive EBITDA in the first half of 2020. I will turn it over to Brent now for some more qualitative updates.

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Brent Rystrom, RiceBran Technologies - CEO & President [5]

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Thanks, Todd. I am going to start by talking about what is largely behind us. First, we have completed almost all of the debottlenecking projects at Golden Ridge that we have discussed over the past several quarters. In September we installed new milling equipment that helps us mill a better quality product with greater capacity and with higher on-stream rates.

In October we installed another piece of equipment that sources our products to the highest product value, helping us maximize revenue yield and margins. We have one more install planned for late November or December that will further expand our capacity.

Second, we have largely completed the vast majority of an unfavorable contract entered into by previous management of the mill which caused us to learn sharply negative gross profit margins through the third quarter of this year. We expect minimal future impact from this contract.

Third, we've completed almost all of our certification process and the related large capital expenditure cycle that required over the past 24 months, and that strongly positions us to pursue business opportunities with large CPG companies. All the production facilities that we operated as of January one of this year are certified, and we are now in the process of seeking certification for the MGI grain facility in East Grand Forks, Minnesota that we acquired in April.

While working through some of these projects curtailed our financial performance thus far in 2019, it has placed us in a position to capitalize on what we have built here for the future. So now, let me take you through some thoughts on where we plan to drive the business.

We remain highly focused on building the core of our product line, our stabilized RiceBran and derivatives products. We are excited to see an acceleration in customer wins for our RiceBran products for the variety of attributes and label benefits they provide -- natural, gluten-free, non-GMO, allergen free, a long and stable shelf life and so on.

As you know, Golden Ridge represents a major strategic change in how we conduct our operations and plan our growth, especially in the markets for rice bran ingredients. Its location in Arkansas is important for several reasons. Arkansas is the largest producer of rice in the US and establishing a footprint there gives us access to about half of US rice production, a resource that was previously unavailable to us.

Golden Ridge also puts us in better geographic proximity to most of the major customers and prospective customers for our products, enhancing our competitiveness. Most US food production is located near where the crops are grown. The aforementioned traits of rice bran -- gluten-free, non-GMO, allergen free and the others- - position us to displace wheat, corn and soybeans in many applications.

Corn and soybeans are generally growing in the Midwest states known as the Corn Belt, while wheat tends to be also grown there and in the Great Plains states as well. As a result, most of the major food companies are located near these areas where the grain supplies are strongest. Arkansas production gives us a seat at that geographic table by making our rice bran products more competitive on price and freight costs against these alternative ingredients.

This opens us up to many customer opportunities that were historically off-limits and, when combined with our label attributes, we are excited by what this means for RBT's growth. Golden Ridge will help us to sharply lower our production costs. Integrating our stabilized rice bran model into a rice milling operation that we own and operate allows us to control production and cost, positioning us for a scalable expansion of the business over many years.

In the fourth quarter we are increasingly shifting our focus at Golden Ridge to growing our production and sales as we ramp up the debottlenecking projects with the bulk of these up shortly from levels we experienced in the first three quarters of the year. We are planning to grow sequentially by month at Golden Ridge as we gain experience and confidence with our new higher capacity. And we believe we will reach and sustain peak levels of production in the first quarter of 2020.

Speaking of sales, new customer adds for our rice bran products have been exciting and accelerating the last few months. Since our last conference call, we have added major new rice bran customers in equine, pet nutrition and nutritional drink mix and several bakery-related wins. In addition, we recently won major increases in business with two of our most important customers, one in equine and the other and pet nutrition.

We are also starting to win sales outside of our traditional rice bran business, demonstrating the success of our sales team to sell a broadened product portfolio. We now have orders for hundreds of truckloads of rice and rice co-products over the next several months and we are about to ship an innovative new product we developed for a rice industry customer in the fourth quarter.

At MGI Grain we recently shipped to our first major new customer add since we acquired that business. Our sales team is making major progress in adding several more large customers to this business as well and we hope to win some of this business in the next few months. A few of these are exceptionally large and could significantly expand MGI Grain.

As a reminder, we are only using about 35% of the capacity at MGI Grain, so we have plenty of room to expand that business. Almost all of the new customer wins and expansions just discussed had minimal or no impact on our third quarter but will deliver revenue in our fourth quarter.

To close our comments, we are excited by our prospects going forward. Golden Ridge is growing substantially and should help drive a meaningful improvement in EBITDA, as should our growth in sales of stabilized rice bran and derivatives.

We are focused on driving down costs and expenses across the Company. And our new financing package gives flexibility to fund our growth, especially as we are experiencing a large build in our accounts receivable at Golden Ridge in the fourth quarter because of the large sales expansion.

We are focused on using all these efforts to drive our business to positive EBITDA in 2020 and a great and profitable long-term future. Operator, we are ready to begin our question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mark Smith, Lake Street.

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Mark Smith, Lake Street Capital - Analyst [2]

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First off, just a housekeeping item. The other income, the $860,000, just to confirm that all came from the settlement during the quarter?

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Todd Mitchell, RiceBran Technologies - EVP & CFO [3]

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Yes, it did.

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Mark Smith, Lake Street Capital - Analyst [4]

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Perfect. And then you gave a good update on the mill. Maybe, Brent, if you want to talk about the last piece of equipment that's coming in, it sounds like hopefully later this month if not early December, and maybe what that adds to the mill?

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Brent Rystrom, RiceBran Technologies - CEO & President [5]

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Sure. So, Mark, when you visited us in the mill we showed you the Buhler husker/sheller that we installed. We have a second Buhler husker/sheller that is expected. We've got a -- part of it actually was delivered last week. We are expecting the rest in the next couple of days.

Until we get that we are using still one of the old pieces of equipment, one of the old husker/shellers that we had in there that has much, much lower capacity. So, when we get this additional piece of equipment we think it's going to be another significant leg up in our ability to ramp production there.

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Mark Smith, Lake Street Capital - Analyst [6]

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Okay. And then last one from me, now that you've had a little bit of time -- and I know it's still early -- to run the mill with new equipment and working through the debottlenecking process here, can you talk to any additional investments you feel you need, whether it's in equipment or people or how it's running and what the next steps are now to finalize it?

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Brent Rystrom, RiceBran Technologies - CEO & President [7]

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Sure. Thanks, Mark. So, a couple things I would mention. The most obvious is our inbound -- what's called the inbound grain storage where we keep what we call the paddy rice. So, the tanks that we have for inbound raw material, it used to take us about 4, 4.5 days to go through those. And right now when we are running the mill we are often going through it in about 30, 32 hours.

So, what has been relative comfort keeping grain supply has now become a big area of supply, particularly on logistics, to make sure we have grain coming in with great frequency because of the much, much higher rate of production.

So, that's probably the area of focus that's most intense right now. I think the idea is that we are evaluating an expanded inbound grain system that will probably be the first of several projects that we'll do over the next year that will alleviate that bottleneck. So far we're doing well with it. We are rarely running out of grain, but it's definitely a different challenge than we've had before.

The second area that we're looking at is the ability to expand the mill within the existing footprint by adding more production equipment. And that's something that we're also evaluating right now as we are starting to see the success in the results of what we're doing.

The third area we're looking at is we would like to get much greater stabilized rice bran capacity at that facility and we'd like to elevate it to food grade. Right now we are primarily focused on a customer for animal and we'd like to also add capabilities with food grade. So, there's really three projects: inbound bins, an expansion within the existing footprint, and then a larger capability for SRB particularly in the food market.

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Mark Smith, Lake Street Capital - Analyst [8]

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Great, thank you.

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Operator [9]

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John Sun, [Airtay] (sic - Aperte) Capital.

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John Sun, Aperte Capital - Analyst [10]

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So, kind of a quick question around whether there's been any thought about restarting some form of guidance and, if not, why not? And I ask that particularly just because, obviously, kick the can down the road a few times in terms of when we're going to hit profitability.

And also looking at Q4 revenue estimates, it's pretty aggressive right now and the Street estimate's around $11 million. But obviously that will be something that would help renew investor confidence given you missed some numbers in the past few quarters. Just some thoughts around whether you have considered issuing guidance and, if not, why not?

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Todd Mitchell, RiceBran Technologies - EVP & CFO [11]

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So, this is Todd. I think when we get into next year, and we're going into our fourth-quarter budget cycle right now, I think I'll have a much better handle on the outlook and how to handicap it. And yes, I think it would be very constructive for us to give guidance in that situation. I have refrained at this point from doing so just because I would rather get it right as not to have so much variability in your expectations.

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John Sun, Aperte Capital - Analyst [12]

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That's all I had. Thanks, guys.

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Operator [13]

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(Operator Instructions). Paul Sonz, Sonz Partners.

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Paul Sonz, Sonz Partners - Analyst [14]

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I had a question -- at the beginning of the call, you talked about weakness in new customers coming online. And then afterwards you talked about it seems like you're having tremendous success as the quarter has gone on. Could you talk a little bit about what the weakness might have been like and what's changed or different that you're now seeing a reacceleration?

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Todd Mitchell, RiceBran Technologies - EVP & CFO [15]

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Yes, in going back over my script I don't think that was as articulate as I should've been about that. I think what we saw in the third quarter in the SRB business was that July was a little bit soft. And then it picked up in August and again in September. But overall July held us back versus expectation.

And I think the dynamic that we were saying and which I was trying to articulate was most of the softness versus our expectations was in net new. And I would attribute it to a seasonality maybe, because then they started coming online in August and September.

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Paul Sonz, Sonz Partners - Analyst [16]

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And the new -- is there any particular area that the new interest and the new orders are coming in? Or is it spread across animal and equine and whatnot?

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Brent Rystrom, RiceBran Technologies - CEO & President [17]

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I would say, Paul, we are seeing it -- probably the greatest tonnage is probably related to equine. And then I would say we are seeing a roughly even split after that with new customers between companion animal or pet and human.

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Paul Sonz, Sonz Partners - Analyst [18]

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Okay, all right, good. Thank you.

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Operator [19]

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(Operator Instructions). Peter [Wilke].

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Peter Wilke, - Analyst [20]

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Brent, congratulations on what you've accomplished. As you look at all the things that you have on your plate, are there any plans to further enhance the management structure such as getting a COO to help you on all the different projects you're working on?

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Brent Rystrom, RiceBran Technologies - CEO & President [21]

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Yes, I believe that a COO is something that the Board would like to see put in place. We've had -- we've actually had a fair number of additions to the team this year. As we acquired MGI Grain we brought in a very seasoned and senior grain industry veteran. We've added a couple of other people to the team since. But I do think, Peter, that at some point in the near future that that is a role that we need fill.

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Peter Wilke, - Analyst [22]

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Very good. The sooner the better. Just my two cents.

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Brent Rystrom, RiceBran Technologies - CEO & President [23]

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Appreciate it, Peter.

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Peter Wilke, - Analyst [24]

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No further.

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Operator [25]

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[Garrett Newberg].

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Garrett Newberg, - Analyst [26]

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I was wondering -- I know we're not giving guidance and I may fumble this question a little bit. But if you were to take a look at your -- if you think most of the shortfall was in July and then you talked about how quickly we are ramping up at Golden Ridge since the debottlenecking, I was wondering if you can just give us a sense of where we might be run rating on a monthly basis and, if we were to accelerate or have any new business wins, where that would kind of get us for Q4.

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Todd Mitchell, RiceBran Technologies - EVP & CFO [27]

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So, what I tried to articulate was that in the core SRB business the softness was in July. Overall on a monthly basis the bigger lever was Golden Ridge, which -- where most of the weakness was actually in September when the mill was off-line. So, I think that if you think about Golden Ridge coming back online and, as I think I said in my comments, we've already seen that October was stronger than any month than in the third quarter.

I think if you go back and look at the first quarter before we had MGI as a sort of base rate for where Golden Ridge is starting to come out, and then add MGI onto that, you can get to kind of a higher run rate. Let's say well in excess of $2 million per month starting and getting stronger.

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Garrett Newberg, - Analyst [28]

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Okay. We'll take it off-line. Sorry for the confusion on the one part versus the other. I missed it earlier in the call. Thanks, guys.

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Operator [29]

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And this does conclude the Q&A session. I'd like to turn the program back over to Mr. Brent Rystrom for any closing remarks.

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Brent Rystrom, RiceBran Technologies - CEO & President [30]

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Thank you and thank you, everyone, for joining us on this call. We'd like to also thank all of our investors for their continued interest in RiceBran Technologies and we look forward to updating you on our fourth-quarter results in March of 2020. Have a good day.

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Operator [31]

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Thank you for your participation. This does conclude today's program. You may disconnect at any time.