10-Q 1 form10q.htm 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

(Mark one)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 0-32565
RiceBran Technologies
(Exact Name of Registrant as Specified in its Charter)

California
 
87-0673375
 (State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification No.)
2928 Ramco Street, Suite 120
West Sacramento, CA
 
95691
(Address of Principal Executive Offices)
 
(Zip Code)

Issuer’s telephone number, including area code:  (602) 522-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company, or an emerging company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☒
     
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act).  Yes ☐ No ☒
 
As of November 3, 2017, shares of the registrant’s common stock outstanding totaled 16,884,017.
 


RiceBran Technologies
Index
Form 10-Q

PART I. FINANCIAL INFORMATION
Page
 
Item 1.
3
    3
    4
    5
    6
    7
 
Item 2.
24
 
Item 3.
27
 
Item 4.
27
PART II. OTHER INFORMATION
 
 
Item 1.
27
 
Item 1A.
27
 
Item 2.
28
 
Item 3.
28
 
Item 4.
28
 
Item 5.
28
 
Item 6.
28
30

Cautionary Note about Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue, liquidity or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services, products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.  Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words.  The forward-looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Actual results may differ materially from those projected in such forward-looking statements due to a number of factors, risks and uncertainties, including the factors that may affect future results set forth in this Current Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016.  We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.

Unless the context requires otherwise, references to “we,” “us,” “our” and “the Company” refer to RiceBran Technologies and its consolidated subsidiaries.
 
2

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements.

RiceBran Technologies
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited) (in thousands, except share and per share amounts)
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
                         
Revenues
 
$
3,445
   
$
3,249
   
$
10,206
   
$
9,748
 
Cost of goods sold
   
2,305
     
2,434
     
7,081
     
7,199
 
Gross profit
   
1,140
     
815
     
3,125
     
2,549
 
Selling, general and administrative expenses
   
2,495
     
3,140
     
7,428
     
9,428
 
Loss from operations
   
(1,355
)
   
(2,325
)
   
(4,303
)
   
(6,879
)
Other (expense) income:
                               
Interest expense
   
(86
)
   
(352
)
   
(1,616
)
   
(1,484
)
Change in fair value of derivative warrant liabilities
   
(313
)
   
1,166
     
808
     
314
 
Loss on extinguishment of debt
   
(6,610
)
   
-
     
(8,290
)
   
-
 
Loss on conversion of preferred stock
   
(85
)
   
-
     
(85
)
   
-
 
Gain on resolution of Irgovel purchase litigation
   
-
     
-
     
-
     
1,598
 
Other income
   
157
     
132
     
194
     
132
 
Other expense
   
(28
)
   
-
     
(128
)
   
-
 
Total other (expense) income
   
(6,965
)
   
946
     
(9,117
)
   
560
 
Loss before income taxes
   
(8,320
)
   
(1,379
)
   
(13,420
)
   
(6,319
)
Income tax benefit
   
4,121
     
437
     
5,033
     
1,344
 
Loss from continuing operations
   
(4,199
)
   
(942
)
   
(8,387
)
   
(4,975
)
Income (loss) from discontinued operations, net of tax
   
6,706
     
(608
)
   
6,823
     
(4,829
)
Net income (loss)
   
2,507
     
(1,550
)
   
(1,564
)
   
(9,804
)
Less - Net loss attributable to noncontrolling interest in discontinued operations
   
(792
)
   
(470
)
   
(1,359
)
   
(2,416
)
Net income (loss) attributable to RiceBran Technologies shareholders
   
3,299
     
(1,080
)
   
(205
)
   
(7,388
)
Less - Dividends on preferred stock, beneficial conversion feature
   
-
     
-
     
778
     
551
 
Net income (loss) attributable to RiceBran Technologies common shareholders
 
$
3,299
   
$
(1,080
)
 
$
(983
)
 
$
(7,939
)
                                 
Basic earnings (loss) per common share:
                               
Continuing operations
 
$
(0.38
)
 
$
(0.10
)
 
$
(0.86
)
 
$
(0.60
)
Discontinued operations
   
0.68
     
(0.01
)
   
0.77
     
(0.26
)
Basic earnings (loss) per common share - RiceBran Technologies
 
$
0.30
   
$
(0.11
)
 
$
(0.09
)
 
$
(0.86
)
                                 
Diluted earnings (loss) per common share:
                               
Continuing operations
 
$
(0.38
)
 
$
(0.10
)
 
$
(0.86
)
 
$
(0.60
)
Discontinued operations
   
0.68
     
(0.01
)
   
0.77
     
(0.26
)
Diluted earnings (loss) per common share - RiceBran Technologies
 
$
0.30
   
$
(0.11
)
 
$
(0.09
)
 
$
(0.86
)
                                 
Weighted average number of shares outstanding:
                               
Basic
   
11,129,781
     
9,397,255
     
10,644,372
     
9,281,942
 
Diluted
   
11,129,781
     
9,397,255
     
10,644,372
     
9,281,942
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
3

RiceBran Technologies
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited) (in thousands)
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net income (loss)
 
$
2,507
   
$
(1,550
)
 
$
(1,564
)
 
$
(9,804
)
                                 
Other comprehensive income - foreign currency translation, net of tax
   
(31
)
   
(165
)
   
131
     
694
 
                                 
Comprehensive income (loss), net of tax
   
2,476
     
(1,715
)
   
(1,433
)
   
(9,110
)
                                 
Less - Comprehensive loss attributable to noncontrolling interest, net of tax
   
(803
)
   
(330
)
   
(1,321
)
   
(1,998
)
                                 
Total comprehensive income (loss) attributable to RiceBran Technologies shareholders
 
$
3,279
   
$
(1,385
)
 
$
(112
)
 
$
(7,112
)
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
4

RiceBran Technologies
Condensed Consolidated Balance Sheets
September 30, 2017 (Unaudited) and December 31, 2016
(in thousands, except share amounts)
 
   
September 30,
2017
   
December 31,
2016
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
8,187
   
$
342
 
Restricted cash
   
775
     
-
 
Accounts receivable, net of allowance for doubtful accounts of $8 and $12
   
1,384
     
1,094
 
Inventories
   
758
     
933
 
Deposits and other current assets
   
359
     
824
 
Current assets held for sale
   
2,398
     
4,335
 
Total current assets
   
13,861
     
7,528
 
Property and equipment, net
   
7,123
     
7,025
 
Intangible assets, net
   
135
     
242
 
Noncurrent assets held for sale
   
11,785
     
14,050
 
Total assets
 
$
32,904
   
$
28,845
 
                 
LIABILITIES, TEMPORARY EQUITY AND EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable
 
$
261
   
$
714
 
Accrued salary, wages and benefits
   
605
     
496
 
Accrued expenses
   
309
     
1,288
 
Income taxes payable
   
268
     
-
 
Current maturities of long-term debt
   
19
     
3,063
 
Current liabilities held for sale
   
18,239
     
15,801
 
Total current liabilities
   
19,701
     
21,362
 
Long-term debt, less current portion
   
13
     
5,964
 
Derivative warrant liabilities
   
769
     
1,527
 
Deferred tax liability
   
29
     
29
 
Noncurrent liabilities held for sale
   
-
     
44
 
Total liabilities
   
20,512
     
28,926
 
Commitments and contingencies
               
Temporary equity
               
Preferred stock, Series F, convertible, 20,000,000 shares authorized, 3,000 convertible shares issued and outstanding
   
-
     
551
 
Total temporary equity
   
-
     
551
 
Equity (deficit):
               
Equity (deficit) attributable to RiceBran Technologies shareholders:
               
Preferred stock, 20,000,000 shares authorized:
               
Series F, convertible, 3,000 shares authorized, 499 shares issued and outstanding
   
92
     
-
 
Series G, convertible, 3,000 shares authorized, 1,300 shares issued and outstanding
   
646
     
-
 
Common stock, no par value, 50,000,000 shares authorized, 16,551,350 and 10,790,351 shares issued and outstanding
   
278,079
     
264,232
 
Accumulated deficit
   
(260,802
)
   
(259,819
)
Accumulated deficit attributable to noncontrolling interest in discontinued operation
   
(1,370
)
   
(699
)
Accumulated other comprehensive loss
   
(4,253
)
   
(4,346
)
Total equity (deficit) attributable to RiceBran Technologies shareholders
   
12,392
     
(632
)
Total liabilities, temporary equity and equity (deficit)
 
$
32,904
   
$
28,845
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
5

RiceBran Technologies
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016
(Unaudited) (in thousands)
 
   
2017
   
2016
 
Cash flow from operating activities:
           
Net loss
 
$
(1,564
)
 
$
(9,804
)
Income (loss) from discontinued operations
   
6,823
     
(4,829
)
Loss from continuing operations
   
(8,387
)
   
(4,975
)
Adjustments to reconcile net loss from continuing operation to activities of continuing operations:
         
net cash used in operating activities of continuing operations:
               
Depreciation and amortization
   
571
     
694
 
Stock and share-based compensation
   
904
     
841
 
Change in fair value of derivative warrant and conversion liabilities
   
(808
)
   
(314
)
Loss on extinguishment of debt
   
8,290
     
-
 
Gain on resolution of Irgovel purchase litigation
   
-
     
(1,598
)
Interest accreted
   
1,000
     
497
 
Deferred taxes
   
(5,033
)
   
(1,344
)
Other
   
55
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(290
)
   
(182
)
Inventories
   
213
     
576
 
Accounts payable and accrued expenses
   
(1,310
)
   
3
 
Other
   
465
     
53
 
Net cash used in operating activities of continuing operations
   
(4,330
)
   
(5,749
)
Net cash provided by operating activities of discontinued operations
   
1,513
     
3,714
 
Net cash used in operating activities
   
(2,817
)
   
(2,035
)
Cash flows from investing activities:
               
Purchases of property
   
(596
)
   
(208
)
Net cash used in investing activities of continuing operations
   
(596
)
   
(208
)
Net cash provided by (used in) investing activities of discontinued operations
   
16,604
     
(252
)
Net cash provided by (used in) investing activities
   
16,008
     
(460
)
Cash flows from financing activities:
               
Payments of debt
   
(19,728
)
   
(24,124
)
Proceeds from issuance of debt, net of issuance costs
   
3,779
     
23,752
 
Proceeds from issuance of debt and warrants, net of issuance costs
   
5,518
     
300
 
Proceeds from issuance of preferred stock and warrants, net of issuance costs
   
1,747
     
2,554
 
Proceeds from issuance of common stock, net of issuance costs
   
2,778
     
-
 
Other
   
(23
)
   
(9
)
Net cash provided by (used in) financing activities of continuing operations
   
(5,929
)
   
2,473
 
Net cash provided by (used in) financing activities of discontinued operations
   
1,232
     
(551
)
Net cash provided by (used in)  financing activities
   
(4,697
)
   
1,922
 
Effect of exchange rate changes on cash and cash equivalents of discontinued operations
   
126
     
(182
)
Net change in cash and cash equivalents and restricted cash
 
$
8,620
   
$
(755
)
                 
Cash and cash equivalents and restricted cash, beginning of period
               
Cash and cash equivalents
 
$
342
   
$
966
 
Restricted cash
   
-
     
1,921
 
Cash and cash equivalents and restricted cash, beginning of period
   
342
     
2,887
 
Cash and cash equivalents and restricted cash, end of period
               
Cash and cash equivalents
   
8,187
     
2,132
 
Restricted cash
   
775
     
-
 
Cash and cash equivalents and restricted cash, end of period
   
8,962
     
2,132
 
Net change in cash and cash equivalents and restricted cash
 
$
8,620
   
$
(755
)
                 
Supplemental disclosures, continuing operations:
               
Cash paid for interest of continuing operations
 
$
729
   
$
780
 
Cash paid for income taxes of continuing operations
   
-
     
20
 
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
6

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements (interim financial statements) of RiceBran Technologies and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in complete financial statements were condensed or omitted.  The interim financial statements contain all adjustments necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.
 
These interim financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2016. The report of our independent registered public accounting firm that accompanies the audited consolidated financial statements for the year ended December 31, 2016, included in that Annual Report on Form 10-K, contains a going concern explanatory paragraph in which our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern.  The accompanying interim financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The results reported in these interim financial statements are not necessarily indicative of the results to be expected for the full fiscal year, or any other future period, and have been prepared assuming we will continue as a going concern based on the realization of assets and the satisfaction of liabilities in the normal course of business.

NOTE 2. DISCONTINUED OPERATIONS

Healthy Natural (HN) Discontinued Operations

The Company continuously assesses the composition of our business portfolio to ensure it is aligned with our strategic objectives and positioned to maximize growth and return to our shareholders.  In the second quarter of 2017, we began exploring strategic options for our wholly-owned subsidiary, Healthy Natural, Inc. (HN).  In July 2017, we completed the sale of the assets of HN for $18.3 million in cash.  HN was reported as part of our Corporate and USA segment.  The selling price is subject to adjustment if the estimated closing working capital with respect to the assets sold and the liabilities assumed is different than the actual closing working capital for those assets and liabilities.  The sale agreement contains customary indemnification provisions and provisions that restrict us from engaging in a business conducted by HN for five years from the date of closing.  A $0.2 million working capital adjustment escrow and a $0.6 million indemnity claim escrow were funded from the proceeds.  We are providing certain support services under transition services agreement for a limited period of time.  These support services are not expected to have a material impact on our consolidated statements of operations in 2017.

On a preliminary basis, we estimate the proceeds, net of expenses, at $16.7 million, the net carrying value of HN as of the date of sale at $3.5 million and the third quarter 2017 gain on sale as $8.8 million, net of a $4.3 million income tax provision.  We currently expect to obtain the amounts held in escrow without adjustment.  The following table summarizes the estimated carrying amount of HN as of the July 2017 sale (in thousands).
 
Accounts receivable, net
 
$
871
 
Inventories
   
1,987
 
Other current assets
   
47
 
Property and equipment
   
871
 
Intangible
   
791
 
Other
   
24
 
Assets
   
4,591
 
Accounts payable
   
759
 
Accrued expenses
   
290
 
Liabilities
   
1,049
 
Net assets sold
 
$
3,542
 
 
We determined that the disposal met the criteria for presentation as discontinued operations in the second quarter of 2017.  Accordingly, HN results are presented as discontinued operations in our consolidated statements of operations and are excluded from continuing operations for all periods presented.  In addition, the HN assets and liabilities are classified as held for sale in our consolidated balance sheets for all periods presented.
 
7

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

The operations of HN are included in our results though the July 14, 2017 date of sale.  All following tables represent activity up to the date of the sale.
 
The following table summarizes the major line items included in the income (loss) from discontinued operations for the divestiture of HN (in thousands).
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
Revenues
 
$
421
   
$
5,010
   
$
9,902
   
$
15,044
 
Cost of goods sold
   
(293
)
   
(3,330
)
   
(6,651
)
   
(9,991
)
Selling, general and administrative expenses
   
(19
)
   
(396
)
   
(462
)
   
(1,100
)
Income from operations, before income taxes
   
109
     
1,284
     
2,789
     
3,953
 
Income tax expense
   
(36
)
   
(437
)
   
(948
)
   
(1,344
)
Income from operations, net of tax
   
73
     
847
     
1,841
     
2,609
 
Gain on sale, net of $4.3 million income tax expense
   
8,845
     
-
     
8,845
     
-
 
Income from discontinued operations, net of tax
 
$
8,918
   
$
847
   
$
10,686
   
$
2,609
 
 
We expect to have sufficient net operating losses to offset the taxable gain related to the sale of HN and HN’s taxable operating income in 2017.  Alternative minimum tax may be due on the sale of HN based on the calculation of alternative minimum taxable income, which allows taxable income to only be offset by 90% by net operating loss carryforwards; thereby leaving residual taxable income of 10%, subject to a rate of 20%. We currently estimate $0.3 million to be payable under the alternative minimum tax but we will continue to evaluate the use of additional current year operating losses to offset the taxable income.
 
The following table summarizes the carrying amounts of major classes of HN assets and liabilities classified as held for sale as of December 31, 2016 (in thousands).
 
   
December 31,
2016
 
Accounts receivable, net
 
$
592
 
Inventories
   
1,915
 
Other current assets held for sale
   
23
 
Property and equipment
   
1,019
 
Intangible
   
791
 
Other noncurrent assets
   
24
 
Total assets held for sale
 
$
4,364
 
Accounts payable
 
$
443
 
Accrued expenses
   
382
 
Long term liabilities
   
44
 
Total liabilities held for sale
 
$
869
 
 
The following table summarizes the major line items included in cash flows from discontinued operations of HN for the nine months ended September 30, 2017 and 2016 (in thousands).
 
   
Nine Months Ended
 
   
2017
   
2016
 
             
Net cash provided by operating activities
 
$
2,803
   
$
3,701
 
Net cash provided by (used in) investing activities
   
16,719
     
(73
)
Net cash used in financing activities
   
(48
)
   
-
 
Net cash provided to continuing operations
 
$
(19,474
)
 
$
(3,628
)
 
In 2017, net cash provided by investing activities in the table above is presented in our consolidated statements of cash flows in net cash provided by (used in) investing activities of discontinued operations and includes the $16.7 million net proceeds from the sale of HN.
 
8

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
The following table summarizes other data for HN (in thousands).
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
Depreciation included in cost of goods sold
 
$
7
   
$
42
   
$
96
   
$
130
 
Depreciation included in selling, general and administrative expenses
   
4
     
20
     
49
     
58
 
Amortization included in selling, gneral and administrative expenses
   
-
     
204
     
-
     
659
 
Capital expenditures
   
3
     
22
     
18
     
95
 
 
Nutra SA Discontinued Operations

We hold a variable interest in our equity interest in Nutra SA.  Nutra SA’s only operating subsidiary is Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), located in Pelotas, Brazil.  We are the primary beneficiary of Nutra SA, and as such, Nutra SA’s assets, liabilities and results of operations are included in the condensed consolidated financial statements.  In the second quarter of 2017, we determined that our plans to divest our investment in Nutra SA met the criteria for presentation as discontinued operations.  Accordingly, the Nutra SA operating results are presented as discontinued operations in our condensed consolidated statements of operations and are excluded from continuing operations for all periods presented.  In addition, Nutra SA consolidated assets and liabilities are classified as held for sale in our consolidated balance sheets for all periods presented.  Other equity holders’ (Investors) interests in Nutra SA are reflected in net loss attributable to noncontrolling interest in discontinued operations in the condensed consolidated statements of operations and accumulated deficit attributable to noncontrolling interest in discontinued operations in the condensed consolidated balance sheets.

The following table summarizes the major line items included in income (loss) from discontinued operations for Nutra SA in the three and nine months ended September 30, 2017 and 2016 (in thousands).
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
Revenues
 
$
3,226
   
$
563
   
$
9,589
   
$
4,627
 
Cost of goods sold
   
(3,539
)
   
(1,154
)
   
(9,814
)
   
(6,103
)
Selling, general and administrative expenses
   
(1,541
)
   
(509
)
   
(2,572
)
   
(1,891
)
Goodwill impairment
   
-
     
-
     
-
     
(3,024
)
Other expense
   
(358
)
   
(355
)
   
(1,066
)
   
(1,047
)
Loss from discontinued operations, before income taxes
   
(2,212
)
   
(1,455
)
   
(3,863
)
   
(7,438
)
Income taxes
   
-
     
-
     
-
     
-
 
Loss from discontinued operations, net of tax
 
$
(2,212
)
 
$
(1,455
)
 
$
(3,863
)
 
$
(7,438
)
 
The following table summarizes the carrying amounts of major classes of Nutra SA assets and liabilities classified as held for sale (in thousands).
 
   
September 30,
2017
   
December 31,
2016
 
Cash and cash equivalents
 
$
54
   
$
109
 
Accounts receivable, net (restricted)
   
781
     
398
 
Inventories
   
1,237
     
925
 
Other current asssets
   
326
     
373
 
Property and equipment, net (restricted $2,662 and $2,599)
   
10,464
     
10,889
 
Other noncurrent assets
   
1,321
     
1,327
 
Total assets held for sale
 
$
14,183
   
$
14,021
 
Accounts payable
 
$
2,338
   
$
2,553
 
Accrued expenses
   
8,274
     
5,607
 
Current maturities of long-term debt (nonrecourse)
   
7,627
     
6,816
 
Total liabilities held for sale
 
$
18,239
   
$
14,976
 
 
Cash provided by Nutra SA operations are generally unavailable for distribution to our Corporate and USA segment pursuant to the terms of the LLC Agreement.  Therefore Nutra SA’s consolidated cash is classified as held for sale in our consolidated balance sheets.  Nutra SA’s debt is secured by Irgovel’s accounts receivable and property.  The non-Brazilian entities within the consolidated ownership group do not guarantee any of Nutra SA’s debt.
 
9

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
The following table summarizes the major line items included in cash flows from Nutra SA discontinued operations for the nine months ended September 30, 2017 and 2016 (in thousands).
 
   
Nine Months Ended
 
   
2017
   
2016
 
             
Net cash used in operating activities
 
$
(1,345
)
 
$
(9
)
Net cash used in investing activities
   
(115
)
   
(157
)
Net cash provided (used) by financing activities
   
1,280
     
(551
)
Net cash provided by continuing operations
   
-
     
863
 
Effect of exchange rate changes
   
125
     
(183
)
Net change in cash and cash equivalents
   
(55
)
   
(37
)
Cash and cash equivalents, beginning of period
   
109
     
104
 
Cash and cash equivalents, end of period
 
$
54
   
$
67
 
 
The following table summarizes other data for Nutra SA (in thousands).
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
Depreciation included in cost of goods sold
 
$
274
   
$
246
   
$
792
   
$
672
 
Depreciation included in selling, general and administrative expenses
   
15
     
16
     
46
     
42
 
Capital expenditures
   
22
     
1
     
115
     
157
 
 
Nutra SA’s debt consists of the following (in thousands):
 
   
September 30
2017
   
December 31,
2016
 
Capital expansion loans
 
$
2,635
   
$
2,454
 
Working capital lines of credit
   
1,081
     
401
 
Advances on customer export orders
   
785
     
1,113
 
Special tax programs
   
3,014
     
2,767
 
Other
   
112
     
81
 
   
$
7,627
   
$
6,816
 
 
As of September 30, 2017, Irgovel had approximately $0.4 million (USD) of debt installment payments in arrears.  The banks have not called these loans in default, and management continues to work with the lenders to renegotiate payment terms, however, all Nutra SA debt has been classified as current liabilities held for sale in the accompanying condensed consolidated balance sheet as of September 30, 2017.  As of September 30, 2017, Irgovel had approximately $9.3 million of tax and tax related payments in arrears.  Approximately  $0.2 million of the tax payments in arrears is related to certain unpaid employer tax from April 2017 through September 2017.  All tax and tax related payments in arrears, other than the certain unpaid employer tax, can be included in a new Brazil tax amnesty program, but to qualify to do so, an entrance fee of approximately $0.4 million must be paid prior to November 15, 2017.  At this time it is not certain Irgovel will qualify for the new Brazil tax amnesty.  If Irgovel is unable to qualify for the new Brazil tax amnesty, Irgovel will likely petition the tax authorities seeking a favorable payment plan but it is likely the installment payments will not exceed 60 monthly payments.  All Nutra SA debt is denominated in the Brazilian Real (R$), except advances on customer export orders which are denominated in U.S. Dollars.  The fair value of Nutra SA debt (Level 3 measurement) approximates the carrying value of that debt based on the current market rates for similar debt with similar maturities.

Cash provided by operations in our Brazil segment is generally unavailable for distribution to our Corporate and USA segment pursuant to the terms of the limited liability company agreement of Nutra SA (LLC Agreement).

A summary of changes in redeemable noncontrolling interest in Nutra SA, reflected as accumulated deficit attributable to noncontrolling interest in discontinued operations, in the accompanying condensed consolidated balance sheets, for the three and nine months ended September 30, 2017 and 2016 (in thousands) follows.
 
10

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
Redeemable noncontrolling interest in Nutra SA, beginning of period
 
$
(567
)
 
$
(1,599
)
 
$
(699
)
 
$
69
 
Investors' interest in net loss of Nutra SA
   
(792
)
   
(470
)
   
(1,359
)
   
(2,416
)
Investors' interest in other comprehensive loss of Nutra SA
   
(11
)
   
(60
)
   
38
     
218
 
Investors purchase of additional membership interest
   
-
     
200
     
650
     
200
 
Redeemable noncontrolling interest in Nutra SA, end of period
 
$
(1,370
)
 
$
(1,929
)
 
$
(1,370
)
 
$
(1,929
)
                                 
Investors' average interest in Nutra SA during the period
   
35.8
%
   
32.5
%
   
35.5
%
   
32.2
%
Investors' interest in Nutra SA at the end of the period
   
35.8
%
   
32.7
%
   
35.8
%
   
32.7
%
 
The Investors have drag along rights which provide the Investors the ability to force a sale of Nutra SA assets after January 1, 2018.  The right terminates upon the occurrence of certain events (a $50 million Nutra SA initial public offering or a change of control, as defined in the LLC Agreement).  We may elect to exercise a right of first refusal to purchase the Investors’ interest instead of proceeding to a sale.  We have assessed the likelihood of the Investors exercising these rights as less than probable at September 30, 2017.  We will continue to evaluate the probability of the Investors exercising their drag along rights each reporting period.  We will begin to accrete the redeemable noncontrolling interest to fair value if and when it is probable the Investors will exercise these rights.

As the result of an amendment effective March 31, 2017, the Investors right to elect to exchange units in Nutra SA for our common stock terminated.  In exchange for the termination of this right, we paid the Investors $0.1 million.
 
Under the LLC Agreement, the business of Nutra SA is to be conducted by the manager, currently our EVP of Special Projects, subject to the oversight of the management committee.  The management committee is comprised of three of our representatives and two of Investors’ representatives.  Upon an event of default or a qualifying event, we will no longer control the management committee and the management committee will include three Investors’ representatives and two of our representatives.  In addition, following an event of default or a qualifying event, a majority of the members of the management committee may replace the manager of Nutra SA.
 
As of September 30, 2017, there have been no unwaived events of default.  Events of default, as defined in the Membership Interest Purchase Agreement (MIPA) and the October 2013 amendment of investment agreements, are the failure of Irgovel to meet minimum annual processing targets or to achieve EBITDA on a local currency basis of at least R$4.0 million annually.

As of September 30, 2017, there have been no qualifying events.  The LLC Agreement defines a qualifying event as the bankruptcy of RiceBran Technologies or Nutra SA.

In evaluating whether we are the primary beneficiary of Nutra SA, we considered the matters which could be put to a vote of the members.  Until there is an event of default or a qualifying event, the Investors’ rights and abilities, individually or in the aggregate, do not allow them to substantively participate in the operations of Nutra SA.  The Investors do not currently have the ability to dissolve Nutra SA or otherwise force the sale of all its assets.  However, the Investors do have drag along rights in the future.  We will continue to evaluate whether we are the primary beneficiary of Nutra SA each reporting period.

NOTE 3. LIQUIDITY, GOING CONCERN AND MANAGEMENT’S PLAN

Our cash position has improved since December 31, 2016, as a result of a debt and equity raise in February 2017, the sale of HN in July 2017 and an equity raise in September 2017.  However, our continued operations continued to experience losses and negative cash flows from operations which raises substantial doubt about our ability to continue as a going concern for a period of one year from the issue date of these financial statements.

In February 2017, as discussed further in Note 8, we received net proceeds of $7.2 million from the sale and issuance of preferred stock, senior debentures and related warrants.  The net proceeds were used in part to pay in full amounts owing our previous senior lender ($3.8 million) and to pay principal and accrued interest on our subordinated notes ($0.5 million).  In July 2017, as discussed further in Note 2, we received cash proceeds, net of expenses, of $16.7 million from the sale of HN a portion of which was used to pay off our senior debentures ($6.6 million) and subordinated notes ($6.0 million).  In September 2017, as discussed further in Note 8, we received net proceeds of $2.7 million from the sale and issuance of common stock.  We continue to believe that we will be able to obtain additional funds to operate our business, should it be necessary; however, there can be no assurances that our efforts will prove successful.  The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
 
11

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

Beginning in the second quarter of 2016 and through the third quarter of 2017, Irgovel experienced severe cash shortages resulting in an increase in accrued expenses and payroll related tax obligations.  In 2016, our minority partners (the Investors) contributed $1.7 million to Nutra SA and an additional $0.7 million through September 30, 2017.  In 2016, we invested $1.1 million in Nutra SA.  Our board has determined we will not contribute any additional funds to Nutra SA.
 
NOTE 4. RECENT ACCOUNTING GUIDANCE

Recent accounting standards not yet adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on revenue from contracts with customers to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards.  Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  An entity may choose to adopt the new standard either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the new standard.  The guidance is effective for our annual and interim periods beginning in 2018, however, early adoption is permitted.  We have begun to evaluate the impact that adoption of this guidance will have on our consolidated financial statements but have not completed the evaluation and implementation process. We expect to transition through a cumulative effect adjustment as of January 1, 2018.  Under the modified retrospective method adoption will have no impact on reported results of operations, financial position and cash flows of discontinued operations, with respect to HN, because we no longer reflect HN operations in our consolidated results after the sale of HN in July 2017.  Similarly, if we dispose of Nutra SA, before December 31, 2017, we expect adoption will have no impact on reported results of operations, financial position and cash flows of discontinued operations, with respect to Nutra SA as well.

In February 2016, the FASB issued guidance which changes the accounting for leases.  Under prior GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease for us as a lessee depend primarily on the lease’s classification as a finance or operating lease.  For both types of leases, lessees will recognize a right-of-use asset and a lease liability.  For capital or finance leases, lessees will recognize amortization of the right-of-use asset separately from interest expense on the lease liability.  The guidance is effective for our annual and interim periods beginning in 2019 and must be adopted on a modified retrospective approach.  Early adoption is allowed.  We have not yet determined the impact that the new guidance will have on our results of operations, financial position and cash flows and have not yet determined if we will early adopt the standard.

Recently adopted accounting standards

In May 2017, the FASB issued guidance that clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets.  We adopted the standard early, as of January 1, 2017, with no effect on our financial position or results of operations.

In February 2017, the FASB issued guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.  We adopted the standard early, as of January 1, 2017, with no effect on our financial position or results of operations.

In January 2017, the FASB issued a new goodwill impairment standard that simplifies the goodwill impairment testing methodology.  The new standard eliminates Step 2 of the goodwill impairment test, in which an entity determines the fair value at the test date of its assets and liabilities using the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.  We adopted the standard early, as of January 1, 2017, with no effect on our financial position or results of operations.

In November 2016, the FASB issued guidance that requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  We were required to adopt the guidance for our annual and interim periods beginning in 2018.  We early adopted the standard in the third quarter of 2017 on a retrospective basis.   As a result, changes in restricted cash reported in 2016 as cash flows from investing activities are no longer reported as such.
 
12

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

In August 2016, the FASB issued guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flow, including the classification of (i) payments to extinguish debt and (ii) payments for the settlement of debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing.  We were required to adopt the guidance for our annual and interim periods beginning in 2018.  We early adopted the standard in the third quarter of 2017 on a retrospective basis.  This change did not have an effect on the presentation of our cash flows, as our presentation in previously reported periods had complied with the new guidance.

In March 2016, the FASB issued new guidance that changes the accounting for certain aspects of share-based payments to employees.  The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled.  In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows.  The guidance also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur.  We adopted the standard in the first quarter of 2017 and changed our accounting policy to recognize forfeitures as they occur.  This change did not have a material effect on our results of operations as we previously did not apply an estimated forfeiture rate to restricted stock awards to our officers and directors.  Additionally, most of our outstanding stock option awards vest on a monthly basis over the vesting period (generally three or four years).  As these awards do not have performance conditions, the expense is recognized each month on a straight-line basis and excludes the effect of the estimated forfeiture rate as there was no risk of expensing awards that would be subsequently forfeited prior to vesting.

NOTE 5. LOSS PER SHARE (EPS)

Basic EPS is calculated under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends.  Our outstanding convertible preferred stocks are considered participating securities as the holders may participate in undistributed earnings with holders of common shares and are not obligated to share in our net losses.

Diluted EPS is computed by dividing the net income attributable to RiceBran Technologies shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding if the impact of assumed exercises and conversions is dilutive.  The dilutive effects of outstanding options, warrants, nonvested shares and restricted stock units that vest solely on the basis of a service condition are calculated using the treasury stock method.  The dilutive effects of the outstanding preferred stock are calculated using the if-converted method.

Below are reconciliations of the numerators and denominators in the continuing operations EPS computations for the three and nine months ended September 30, 2017 and 2016.
 
   
Three Months Ended
   
Nine Months Ended
 
   
2017
   
2016
   
2017
   
2016
 
NUMERATOR (in thousands):
                       
Basic and diluted - loss from continuing operations
 
$
(4,199
)
 
$
(942
)
 
$
(8,387
)
 
$
(4,975
)
Dividend on preferred stock--beneficial conversion feature
   
-
     
-
     
(778
)
   
(551
)
Basic and diluted - adjusted loss from continuing operations
 
$
(4,199
)
 
$
(942
)
 
$
(9,165
)
 
$
(5,526
)
                                 
DENOMINATOR:
                               
Basic EPS - weighted average number of common shares outstanding
   
11,129,781
     
9,397,255
     
10,644,372
     
9,281,942
 
Effect of dilutive securities outstanding
   
-
     
-
     
-
     
-
 
Diluted EPS - weighted average number of shares outstanding
   
11,129,781
     
9,397,255
     
10,644,372
     
9,281,942
 
                                 
Number of shares of common stock which could be purchased with weighted average outstanding securities not included in diluted EPS because effect would be antidilutive:
                               
Stock options
   
629,969
     
340,037
     
473,498
     
350,203
 
Warrants
   
22,824,888
     
10,842,006
     
21,306,727
     
10,132,045
 
Nonvested stock
   
1,301,725
     
1,114,747
     
1,236,241
     
1,038,019
 
Convertible preferred stock
   
2,128,180
     
2,000,000
     
3,020,739
     
1,611,722
 
Restricted stock unit awards
   
1,175,000
     
-
     
406,066
     
-
 
 
13

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

The impact of potentially dilutive securities outstanding at September 30, 2017 and 2016, was not included in the calculation of the continuing operations diluted EPS for the three and nine months ended September 30, 2017 and 2016 because to do so would be antidilutive.  Those securities listed in the table above which were antidilutive for the periods presented, which remain outstanding, could potentially dilute EPS in the future.

NOTE 6. CONCENTRATIONS OF RISK

Our trade accounts receivable subject us to significant concentrations of credit risk.  We perform ongoing credit evaluations on our customers’ financial condition and generally do not require collateral.

Revenues and accounts receivable from certain significant customers are stated below as a percent of continuing operations total revenue for the nine months ended September 30, 2017 and 2016.
 
   
% of Total Revenue
Nine Months Ended
   
% of Total Accounts Receivable
Nine Months Ended
 
Customer
 
2017
   
2016
   
2017
   
2016
 
Customer 1
   
17
%
   
12
%
   
31
%
   
28
%
Customer 2
   
15
%
   
15
%
   
*
     
*
 
Customer 3
   
*
     
12
%
   
*
     
*
 
Customer 4
   
*
     
*
     
*
     
*
 
Customer 5
   
*
     
*
     
*
     
11
%
Others
   
68
%
   
61
%
   
69
%
   
61
%
Total
   
100
%
   
100
%
   
100
%
   
100
%
                                 
* Less than 10%
                               
 
Purchases by continuing operations from certain significant suppliers are stated below as a percent of total purchases for the nine months ended September 30, 2017 and 2016.
 
   
% of Total Purchases
Nine Months Ended
 
Supplier
 
2017
   
2016
 
Supplier 1
   
*
     
13
%
Supplier 2
   
*
     
*
 
Supplier 3
   
*
     
*
 
Supplier 4
   
*
     
*
 
Supplier 5
   
*
     
*
 
Others
   
100
%
   
87
%
Total
   
100
%
   
100
%
                 
* Less than 10%
               
 
14

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 7. DEBT
 
The following table summarizes current and long-term portions of debt (in thousands):
 
   
September 30,
2017
   
December 31,
2016
 
Senior debentures, net, maturing in February 2019, principal $6.6 million
 
$
-
   
$
-
 
Subordinated notes, net, maturing in May 2019, principal $5.9 million
   
-
     
6,310
 
Other
   
32
     
75
 
Senior revolving loan
   
-
     
1,725
 
Senior term loan, net
   
-
     
917
 
     
32
     
9,027
 
Current portion
   
19
     
3,063
 
Long-term portion
 
$
13
   
$
5,964
 
 
We issued senior debentures in the principal amount of $6.6 million and related warrants in a private placement, in February 2017In connection with the senior debenture private placement, in February 2017, we also entered into agreements that resulted in (i) a reduction in the annual interest rate on the subordinated notes from 11.75% to 7%, (ii) an extension of the maturity date of the subordinated notes to May 2019 from May 2018 and (iii) our first quarter 2017 payment of $0.2 million of note principal and $0.3 million of accrued note interest.  The transactions, and the accounting therefore, are described further in Note 8.

Until July 2017, when we repaid the senior debentures and the subordinated notes in full with the proceeds from the sale of HN in July 2017, we accreted interest on the debentures at an effective rate of 160.6% per year and on the subordinated notes at 15.0% per year.  Upon extinguishment in July 2017, we recognized a loss on extinguishment of $6.6 million for the differences between (i) the $0.6 million carrying amount of the senior debentures and the $6.6 million face value paid and (ii) the $5.3 million carrying amount of the subordinated notes and the $6.0 million face value paid.

In February 2017, we used the net proceeds from the senior debenture private placement discussed further in Note 8 to pay the senior revolving loan and the senior term loan in full.
 
15

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 8. EQUITY, SHARE-BASED COMPENSATION AND WARRANTS (in thousands)
 
   
Shares
                     
Accumulated
Deficit
Attributable to
Non-controlling
   
Accumulated
Other Comp-
       
   
Preferred
         
Preferred
   
Common
   
Accumulated
   
 Interest in
   
rehensive
   
Equity
 
   
Series F
   
Series G
   
Common
   
Stock
   
Stock
   
Deficit
   
Nutra SA
   
Loss
   
(Deficit)
 
Balance, December 31, 2016
   
-
     
-
     
10,790,351
   
$
-
   
$
264,232
   
$
(259,819
)
 
$
(699
)
 
$
(4,346
)
 
$
(632
)
Issuance of common stock awards under equity incentive plans
   
-
     
-
     
642,839
     
-
     
817
     
-
     
-
     
-
     
817
 
Dividend on preferred stock - beneficial conversion feature
   
-
     
-
     
-
     
-
     
778
     
(778
)
   
-
     
-
     
-
 
Modification of senior debenture holder warrants
   
-
     
-
     
-
     
-
     
582
     
-
     
-
     
-
     
582
 
Modification of subordinated note holder warrants
   
-
     
-
     
-
     
-
     
117
     
-
     
-
     
-
     
117
 
Change in classification of preferred stock to equity from liability
   
3,000
     
2,000
     
-
     
1,545
     
-
     
-
     
-
     
-
     
1,545
 
Change in classification of warrants to equity from liability
   
-
     
-
     
-
     
-
     
7,851
     
-
     
-
     
-
     
7,851
 
Conversion of preferred stock into common stock
   
(2,501
)
   
(700
)
   
2,331,627
     
(807
)
   
807
     
-
     
-
     
-
     
-
 
Proceeds from sale of common stock, net of costs
   
-
     
-
     
2,654,732
     
-
     
2,730
     
-
     
-
     
-
     
2,730
 
Exercise of warrant
   
-
     
-
     
103,008
     
-
     
101
     
-
     
-
     
-
     
101
 
Other
   
-
     
-
     
28,793
     
-
     
64
     
-
     
-
     
-
     
64
 
Proceeds from sale of membership interests
   
-
     
-
     
-
     
-
     
-
     
-
     
650
     
-
     
650
 
Foreign currency translation
   
-
     
-
     
-
     
-
     
-
     
-
     
38
     
93
     
131
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(205
)
   
(1,359
)
   
-
     
(1,564
)
Balance, September 30, 2017
   
499
     
1,300
     
16,551,350
   
$
738
   
$
278,079
   
$
(260,802
)
 
$
(1,370
)
 
$
(4,253
)
 
$
12,392
 
 
16

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

A summary of warrant activity for the nine months ended September 30, 2017, follows.
 
   
Equity Warrants
   
Liability Warrants
 
   
Shares
Underlying
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Shares
Underlying
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
 
Outstanding, December 31, 2016
   
6,364,110
   
$
5.77
     
2.4
     
4,474,868
   
$
1.82
     
3.3
 
Issued
   
-
   
NA
   
NA
     
11,783,163
     
0.96
     
5.0
 
Impact of repricing debenture purchaser warrants:
                                               
Prior to repricing
   
(875,000
)
   
5.49
     
2.1
     
-
   
NA
   
NA
 
After repricing
   
875,000
     
0.96
     
5.5
     
-
   
NA
   
NA
 
Impact of repricing subordinated note holder warants:
                                               
Prior to repricing
   
(289,669
)
   
5.25
     
3.3
     
-
   
NA
   
NA
 
After repricing
   
289,669
     
0.96
     
3.3
     
-
   
NA
   
NA
 
Impact of anti-dilution clauses:
                                               
Prior to impact
   
-
   
NA
   
NA
     
(1,489,868
)
   
1.50
     
0.8
 
After impact
   
-
   
NA
   
NA
     
2,327,919
     
0.96
     
0.8
 
Transfer from liability to equity
   
14,468,163
     
1.16
     
4.8
     
(14,468,163
)
   
1.16
     
4.8
 
Exercised
   
-
   
NA
   
NA
     
(781,252
)
   
0.96
     
-
 
Forfeited, expired or cancelled
   
-
   
NA
   
NA
     
-
   
NA
   
NA
 
Outstanding, September 30, 2017
   
20,832,273
   
$
2.32
     
3.6
     
1,846,667
   
$
1.06
     
0.7
 
Exercisable, September 30, 2017
   
20,832,273
   
$
2.32
     
3.6
     
1,846,667
   
$
1.06
     
0.7
 
 
Common Stock

In February 2017, shareholders approved and we filed an amendment to our articles of incorporation increasing our authorized shares of common stock from 25,000,000 to 50,000,000.

On February 14, 2017, we issued a former employee 108,696 shares of our common stock, in lieu of paying $100,000 cash for a 2016 bonus.

In June 2017, we issued 96,372 shares of common stock as transitional director compensation to the chairman of our board, who was awarded transitional director compensation in the amount of (i) $10,000 or 7,035 shares per month for July 2016 through December 2016 and (ii) $8,333 or 9,027 shares per month for January 2017 through March 2017.  The amount was payable in either cash or stock at the chairman’s election.  The chairman elected to receive shares of common stock.

In June 2017, we issued 345,205 shares of common stock to our directors at a grant date fair value of $0.90 per share.  In August 2017, we issued 35,336 shares of common stock to a director at a grant date fair value of $1.09 per share.  The restricted stock awards vest on the earlier of June 2018 or one day before the date of the next annual shareholder meeting.

In the second quarter of 2017, we issued 220,439 shares of common stock upon conversion of 315 shares of Series F preferred stock and 11 shares of Series G preferred stock.  We reclassified the $0.1 million carrying value of the related preferred stock to common stock.

In September 2017, we issued and sold 2,654,732 shares of common stock for $1.08 per share.  The net proceeds from the offering of $2.8 million, after deducting commissions and other cash offering expenses of $0.1 million, are included in common stock.   We used the proceeds for general corporate purposes.

In the third quarter of 2017, we issued 2,111,188 shares of common stock upon conversion of 2,186 shares of Series F preferred stock and 689 shares of Series G preferred stock.  We reclassified the $0.7 million carrying value of the related preferred stock to common stock.
 
In the fourth quarter of 2017, through the date of this filing, we issued 332,667 shares of common stock upon conversion of 499 shares of Series F preferred stock, with a $0.1 million carrying value.
 
17

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

Share Sequencing

From June 2015 until March 2017, the minority interest holders in Nutra SA could elect to exchange units in Nutra SA for shares of our common stock, the number of common stock and warrants issuable upon this election, was variable and indeterminate.  For accounting purposes, we were not able to conclude that we had sufficient authorized and unissued shares to settle all contracts subject to the GAAP derivative guidance during the period the minority interest holders had this right, which terminated March 31, 2017.  Our adopted sequencing approach (Share Sequencing) was based on earliest issuance date, therefore, we were required to carry warrants issued between June 2015 and March 2017, at fair value, as derivative warrant liabilities, and preferred stock issued between June 2015 and March 2017, in temporary equity.  We reclassified the affected warrants from derivative liability to equity (deficit) at an amount equal to the warrants’ fair value on March 31, 2017, and we reclassified the amounts related to the 3,000 shares of Series F preferred stock and 2,000 shares of Series G preferred stock from temporary equity to equity (deficit) at the preferred stocks’ carrying amount on March 31, 2017.

Transactions with Preferred Stock Holders.

In February 2017, we issued and sold 2,000 shares of Series G preferred stock.  The Series G preferred stock is non-voting and may be converted into a total of 1,897,983 shares of our common stock at the holders’ election at any time, subject to certain beneficial ownership limitations, at a ratio of 1 preferred share for 948.9915 shares of common stock.  The Series G preferred stock is entitled to receive dividends if we pay dividends on our common stock, in which case the holders of Series G preferred stock are entitled to receive the amount and form of dividends that they would have received if they held the common stock that is issuable upon conversion of the Series G preferred stock.  If we are liquidated or dissolved, the holders of Series G preferred stock are entitled to receive, before any amounts are paid in respect of our common stock, an amount per share of Series G preferred stock equal to $1,000, plus any accrued but unpaid dividends thereon.

In February 2017, in conjunction with the sale of the Series G preferred stock, we also sold warrants to purchase 1,423,488 shares of common stock (exercise price of $0.96 per share, exercisable beginning in February 2017 and expiring in February 2022).  A subordinated note holder exchanged subordinated notes with a principal and carrying value of $0.1 million and cash for 180 shares of the Series G preferred stock and related warrants, which was treated as an extinguishment of debt.  The net cash proceeds from the sale was $1.7 million, after deducting allocated cash offering expenses of $0.1 million.  On the date of issuance, we allocated $1.0 million of the proceeds to derivative warrant liability, to record the warrants at fair value, recorded a $0.1 million loss on extinguishment and reduced debt $0.1 million related to the subordinated noteholders exchange, and recorded $1.2 million as preferred stock.  We recorded a $0.8 million dividend on preferred stock for the preferred stock beneficial conversion feature equal to the proceeds allocated to the preferred stock issued to purchases who did not exchange debt, as the fair value of the common stock underlying the convertible preferred stock at issuance exceeded the amount recorded in preferred stock.

Transactions with Senior Debenture Holders

In February 2017, we sold and issued in a private placement, for an aggregate subscription amount of $6.0 million: (i) senior debentures in the principal amount of $6.6 million and (ii) warrants to purchase an aggregate of 6,875,000 shares of common stock (exercise price of $0.96 per share, exercisable beginning February 2017 and expiration February 2022).  We received aggregate net proceeds of $5.5 million, after deducting placement agent fees and allocated expenses of $0.5 million.  Concurrently, we amended existing warrants, held by the debenture purchasers, for the purchase of up to 875,000 shares to (i) reduce the exercise prices from an average $5.49 per share to $0.96 per share, providing the warrants are not exercisable until August 2017, and (ii) change the expiration dates to August 2022, which increased the average remaining term of the warrants from 2.1 years to 5.5 years.  We recorded $4.6 million as an increase to derivative warrant liabilities, to record the warrants at their fair value on the date of issuance, the $0.5 million as an increase in common stock to record the change in fair value of existing warrants and the remaining $0.4 million to debt, debt issuance costs and debt discount.  We used the net proceeds from the offering to (i) pay off the senior revolving loan and term loan debt totaling $3.8 million and (ii) pay $0.2 million of principal and $0.3 million of interest due on subordinated notes and (iii) for working capital and general corporate purposes.  We filed a registration statement on Form S-3, which became effective in May 2017, to register the shares under the warrants issued to the senior debenture purchasers.
 
18

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

Transaction with Subordinated Note Holders

In connection with the February 2017 senior debenture private placement, we entered into agreements which resulted in (i) a reduction in the annual interest rate on the subordinated notes from 11.75%  to 7% (ii) an extension of the maturity date of the subordinated notes  to May 2019 from May 2018 (iii) the payment of an aggregate amount equal to $0.5 million on the subordinated notes; (iv) the issuance of warrants to purchase up to 3,484,675 shares of our common stock (exercise price of  $0.96 per share, expiration February 2022); and (v) the amendment of existing warrants held by the subordinated note holders for the purchase 289,669 shares of common stock to reduce the exercise price from $5.25 per share to $0.96 per share.  We accounted for the transaction as an extinguishment of debt and issuance of new debt.  In February 2017, we (i) recorded a loss on extinguishment of debt of $1.5 million, (ii) adjusted subordinated notes payable debt down by $0.9 million, to its fair value as of the transaction date, (iii) increased derivative liability $2.3 million, representing the fair value of the newly issued warrants, and (iv) increased common stock equity by $0.1 million for the change in the fair value of the existing warrants.

Full Ratchet Anti-Dilution

As a result of the February 2017 transactions described above, the exercise price of certain warrants that contain full ratchet anti-dilution provisions was reduced from $1.50 per share to $0.96 per share and the number of shares of common stock underlying these warrants increased from 1,489,868 shares to 2,327,919 shares.  In the third quarter of 2017, the holder exercised one of the warrants, for the purchase 781,252 shares, into common stock.

Equity Incentive Plan

In June 2017, shareholders approved a 1,700,000 increase in the authorized shares issuable under the 2014 Equity Incentive Plan (the 2014 Plan).  The total shares authorized under the 2014 Plan is now 3,300,000 shares.

Option Issuances

In the first quarter of 2017, we granted our chief executive officer an option to purchase 100,000 shares of our common stock at an exercise price of $0.76 per share.  The option vested as to 25,000 shares in August 2017, the remaining shares in monthly installments through August 2020 and the option had a grant date fair value of $0.56 per share.

In the second quarter of 2017, we granted options to purchase an aggregate 355,500 shares of our common stock to executive officers and employees at an average exercise price of $0.85 per share.  The options vest in four equal annual installments beginning in the second quarter of 2018 and had a grant date fair value of $0.62 per share.

In the third quarter of 2017, we granted an option to purchase an aggregate 20,000 shares of our common stock to an employee at an exercise price of $1.09 per share.  The option vests in four equal annual installments beginning in the third quarter of 2018 and had a grant date fair value of $0.77 per share.

Restricted Stock Unit Awards

In late June 2017, we issued restricted stock units (RSUs), under the 2014 Plan, to our executive officers covering a total of 1,175,000 shares of our common stock.  The shares subject to the RSUs vest based upon a vesting price equal to the volume weighted average trading price of our common stock over sixty-five consecutive trading days.  Each RSU’s shares vest (i) 10% if the vesting price equals or exceeds $5.00 per share, (ii) 30% if the vesting price equals or exceeds $10.00 per share and (iv) 60% if the vesting price equals or exceeds $15.00 per share.  The shares had a grant date fair value of $0.2 million which is being expensed ratably over a 3.5-year period beginning in July 2017.

Warrants

In July 2017, the holder of a liability warrant to purchase 781,252 shares, at an exercise price of $0.96 per share, exercised the warrant into common stock with a fair value on the date of the conversion of $0.98 per share.  We issued 103,008 shares of common stock to the holder in a cashless transaction and recorded a $0.1 million loss on the conversion equal to the difference between the fair value of the liability and the fair value of the common stock on the date of the conversion.
 
19

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes information related to outstanding warrants as September 30, 2017 and December 31, 2016:
 
        
September 30, 2017
   
December 31, 2016
 
Range of
Exercise Prices
 
Type of
Warrant
 
Shares
Under
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
   
Shares Under
Warrants,
Exercisable
Cashless
   
Shares
Under
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life (Years)
 
                           
(4
)
                 
$
0.96
 
 Liability (1)
   
1,546,667
   
$
0.96
     
0.4
     
1,546,667
     
-
   
$
-
     
-
 
$
0.96
 
 Equity
   
12,947,832
     
0.96
     
4.6
     
3,774,344
     
-
     
-
     
-
 
$
1.50
 
 Liability (2)
   
300,000
     
1.60
     
2.9
     
300,000
     
-
     
-
     
-
 
$
1.50 to $1.60
 
 Liability
   
-
     
-
     
-
     
-
     
1,789,868
     
1.52
     
1.3
 
$
2.00
 
 Liability (3)
   
-
     
-
     
-
     
-
     
2,660,000
     
2.00
     
4.6
 
$
2.00
 
 Equity
   
2,660,000
     
2.00
     
4.2
     
-
     
-
     
-
     
-
 
$
5.25
 
 Liability (3)
   
-
     
-
     
-
     
-
     
25,000
     
5.25
     
3.6
 
$
5.25 to $5.87
 
 Equity
   
3,156,670
     
5.33
     
2.2
     
359,536
     
4,296,339
     
5.36
     
2.7
 
$
6.55 to $16.80
 
 Equity
   
2,067,771
     
6.61
     
1.5
     
190,899
     
2,067,771
     
6.61
     
2.0
 
           
22,678,940
   
$
2.21
     
3.6
     
6,171,446
     
10,838,978
   
$
4.14
     
2.8
 
 
(1)
Includes one warrant which contains full ratchet anti-dilution provisions and is classified as derivative warrant liabilities in our balance sheet.  Under the anti-dilution clause contained in this warrant, in the event of equity issuances (i.e. issuances of our common stock, certain awards of stock options to employees, and issuances of warrants and/or other convertible instruments) at prices below the exercise price of this warrant, we are required to lower the exercise price on this warrant and increase the number of shares underlying this warrant.
(2)
Includes a warrant to purchase of 300,000 shares of our common stock which contains a most favored nations anti-dilution provision.  Under that provision, in the event we issue warrants and/or other convertible instruments with anti-dilution provisions with respect to the exercise price of the warrant or the conversion price of the convertible instrument, we will be required to provide the same anti-dilution provision in this warrant and may be required to lower the exercise price on this warrant and/or increase the number of shares underlying this warrant.
(3)
The warrants were classified as derivative warrant liabilities in our balance sheets due to the Share Sequencing as of December 31, 2016, and were reclassified to equity (deficit) effective March 31, 2017.
(4)
Under the terms of certain outstanding warrants, the holders may elect to exercise the warrants under a cashless exercise feature.  The shares listed, represent the shares holders could exercise cashless as of September 30, 2017.  If we register for resale the shares subject to warrants, the holders of some of the warrants may no longer have the right to elect a cashless exercise.  Should we fail to maintain a registration statement for the resale of shares under certain other warrant, the shares under those warrants may be exercisable using a cashless exercise feature.

NOTE 9. FAIR VALUE MEASUREMENTS

The fair value of cash and cash equivalents, accounts and other receivables and accounts payable approximates their carrying value due to their shorter maturities.  As of September 30, 2017, the fair value of our debt (Level 3 measurement) approximated its carrying value, based on current market rates for similar debt with similar maturities.

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Certain assets and liabilities are presented in the financial statements at fair value.  Assets and liabilities measured at fair value on a recurring basis include derivative warrant and conversion liabilities.  Assets and liabilities measured at fair value on a non-recurring basis may include property.

We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:

Level 1 – inputs include quoted prices for identical instruments and are the most observable.
Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves.
Level 3 – inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.
 
20

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

For instruments measured using Level 3 inputs, a reconciliation of the beginning and ending balances is disclosed.

The following tables summarize the fair values by input hierarchy of items measured at fair value on a recurring basis on our condensed consolidated balance sheets (in thousands).
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Total liabilities at fair value, as of September 30, 2017 - derivative warrant liabilities
 
$
-
   
$
-
   
$
769
   
$
769
 
Total liabilities at fair value, as of December 31, 2016 - derivative warrant liabilities
 
$
-
   
$
-
   
$
1,527
   
$
1,527
 

Warrants accounted for as derivative liabilities are valued using the lattice model each reporting period and the resultant change in fair value is recorded in the consolidated statements of operations.  The lattice model requires us to assess the probability of future issuance of equity instruments at a price lower than the current exercise price of the warrants.  The risk-free interest rate is determined by reference to the treasury yield curve rate of instruments with the same term as the warrant.  Additional assumptions that were used to calculate fair value follow.
 
   
September 30, 2017
   
December 31, 2016
 
Risk-free interest rate
   
1.2%
   
0.6% -1.9%
   
(1.2% weighted average)
   
(1.6% weighted average)
 
Expected volatility
   
67%-72%
   
64%
 
   
(71% weighted average)
   
(64% weighted average)
 
 
The following tables summarize the changes in Level 3 items measured at fair value on a recurring basis (in thousands):
 
Total Level 3 Fair Value
 
Fair Value
as of
Beginning of
Period
   
Total
Realized and
Unrealized
Gains
(Losses)
   
Issuance of
New
Instruments
   
Reclassify to
(Deficit)
Equity
   
Conversion
to Common
Stock
   
Fair Value,
at End of
Period
 
         
(1)
                       
Nine Months Ended September 30, 2017, derivative warrant liabilities
 
$
(1,527
)
 
$
808
   
$
(7,917
)
 
$
7,851
   
$
16
   
$
(769
)
Nine Months Ended September 30, 2016, derivative warrant liabilities
 
$
(678
)
 
$
314
   
$
(2,474
)
 
$
-
   
$
-
   
$
(2,838
)
 
(1)
Included in change in fair value of derivative warrant liabilities in our consolidated statements of operations.

NOTE 10. COMMITMENTS AND CONTINGENCIES

In addition to the matters discussed below, from time to time we are involved in litigation incidental to the conduct of our business in the USA and Brazil.  These matters may relate to employment and labor claims, patent and intellectual property claims, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations.  When applicable, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.  While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position or results of operations.  Defense costs are expensed as incurred and are included in professional fees.

Irgovel Litigation

Irgovel is a defendant in several labor claims, mainly related to overtime, illnesses allegedly contracted at work and work-related injuries and salary related matters for periods prior to the acquisition of Irgovel by RiceBran.  The labor suits are mainly in the lower courts, and for the majority of the cases a decision for the dismissal of the claims has been granted.  None of these labor claims is individually significant.  Management believes it’s unlikely there will be a judgment against Irgovel, however, in the event the court does issue a judgment against Irgovel, it could be approximately $1.1 million.
 
21

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

Irgovel accrues for losses on tax and other legal contingencies when it has a present obligation, formalized or not, as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated. Irgovel is a party to several other pending litigations and administrative proceedings at the Federal, State and Municipal level.  The assessment of the likelihood of an unfavorable outcome in these litigations and proceedings includes the analysis of the evidence available, the hierarchy of the applicable laws, available former court decisions, as well as the most recent court decisions and their importance to the Brazilian legal system, as well as the opinions of our external and in-house legal counsels.  We record amounts considered sufficient by our management to cover probable losses based on these elements.

In addition to the above items, Irgovel has a contingent liability of approximately $0.3 million for amounts claimed to be owed in connection with a loan agreement entered into in April 2007 between Irgovel and a former shareholder of Irgovel.  In April 2014, the former shareholder filed an enforcement action against Irgovel to collect such amounts.  In June 2014, Irgovel filed a motion to annul the enforcement proceedings.  The enforcement proceedings were dismissed in September 2015.  In May 2016, the court found in favor of the former shareholder to appeal the stay of execution that was previously granted.

Irgovel - Events of Default

As further described in Note 2, Irgovel is required to meet minimum annual processing targets or to achieve EBITDA on a local currency basis of at least R$4.0 million annually. If not achieved, this would result in an event of default under our existing agreements with the Investors.  It is possible that an event of default may be triggered as of December 31, 2017, and a waiver of non-compliance may not be obtained from the Investors.

Employment Contracts and Severance Payments

We have employment contracts with certain officers and key management that include provisions for potential severance payments in the event of without-cause terminations or terminations under certain circumstances after a change in control.  In addition, vesting of outstanding unvested equity grants held by these individuals would accelerate following a change in control.

NOTE 11. INCOME TAXES

We expect to have sufficient net operating losses to offset the taxable gain related to the sale of HN and HN’s taxable operating income in 2017.  Alternative minimum tax may be due on the sale of HN based on the calculation of alternative minimum taxable income, which allows taxable income to only be offset 90% by net operating loss carryforwards; thereby potentially leaving residual taxable income of 10%, subject to a rate of 20%.  We currently estimate $0.3 million to be payable under the alternative minimum tax but we will continue to evaluate the use of additional current year operating losses to offset the taxable income.  We have determined that a Section 382 ownership change occurred in September 2017 and our ability to carryforward remaining net operating losses subsequent to the most recent change in ownership will be severely limited.  The Internal Revenue Service rules in this area are complex and our estimates are subject to change.
 
NOTE 12. RELATED PARTY TRANSACTIONS

Prior to 2017, entities beneficially owned by Baruch Halpern, a director, invested in our subordinated notes and related warrants prior to 2014.  As of September 30, 2017, and throughout the first six months of 2017, Mr. Halpern beneficially held approximately 43% of our outstanding subordinated notes and related warrants.  See Note 8 for information related to the modification of the subordinated notes, repricing of related warrants and the issuance of warrants to subordinated note holders in February 2017.  The notes were paid in full in July 2017 from the proceeds of the sale of HN.  In the three months ended September 30, 2017 and 2016, we expensed $0.1 million of interest on the subordinated notes beneficially owned by Mr. Halpern. In the nine months ended September 30, 2017 and 2016, we expensed $0.2 million of interest on the subordinated notes.
 
As discussed in Note 8, in September 2017, we issued and sold 2,654,732 shares of common stock to Continental Grain Company (CGG).  Our director, Ari Gendason is an employee and senior vice president -corporate investments of CGG.  As of the date of this filing, CGG owns approximate 16% of our outstanding common stock.  We have agreed that in connection with each annual or special meeting of our shareholders at which members of our board of directors are to be elected, or any written consent of our shareholders pursuant to which members of the board of directors are to be elected, CGC shall have the right to designate one nominee to our board of directors.
 
22

RiceBran Technologies
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 13. FAILURE TO COMPLY WITH NASDAQ LISTING REQUIREMENTS

On August 18, 2016, we received a notification letter from The Nasdaq Stock Market LLC (Nasdaq) indicating that we have failed to comply with the minimum stockholders’ equity requirement of Nasdaq Listing Rule 5550(b)(1). Nasdaq Listing Rule 5550(b)(1) requires that companies listed on the Nasdaq Capital Market maintain a minimum of $2.5 million in stockholders’ equity for continued listing pursuant to Nasdaq Listing Rule 5550(b)(1).  As of September 30, 2016, we reported stockholders’ deficit of $36,000.

We submitted our plan to regain compliance in October 2016.  On November 15, 2016, Nasdaq granted us a 180-day extension to February 14, 2017 to evidence compliance with the minimum stockholders’ equity requirement.  On February 16, 2017, we received a determination letter from Nasdaq stating that we had not regained compliance with the minimum stockholders’ equity requirement.  The letter also stated our common stock would be delisted from The Nasdaq Capital Market at the opening of business on February 27, 2017 unless we request a hearing before the Nasdaq Hearing Panel.

We requested and were granted a hearing before the panel to appeal the determination letter on March 30, 2017.  After that hearing, on April 24, 2017, we received a decision letter from Nasdaq stating that the panel granted the request we made at the hearing for continued listing provided that, on or before May 15, 2017, we have announced that our equity is over $2.5 million (it was $7.9 million as of March 31, 2017).  As reported herein our equity is $12.4 million and exceeds the minimum as of September 30, 2017.

On March 10, 2017, we received a notification letter from Nasdaq indicating that we have failed to comply with the minimum bid price requirement of Nasdaq List Rule 5550(a)(2) because our common stock failed to meet the closing bid price of $1.00 or more for 30 consecutive trading days.  Nasdaq rules allowed for a compliance period of 180 calendar days, or until September 6, 2017, in which to regain compliance.  On August 1, 2017, we received a notification letter from Nasdaq that we regained compliance with Nasdaq List Rule 5550(a)(2) minimum bid price requirement by meeting the closing bid price of $1.00 or more for 10 consecutive trading days on July 31, 2017.
 
23

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

See Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of divestitures and discontinued operations.

See Note 3 of our Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of going concern considerations and management’s plans.

Results of Operations

During the second quarter of 2017, we began to separately report the results of our wholly-owned subsidiary, Healthy Natural, Inc. (HN) and our investment in Nutra SA as discontinued operations in our consolidated statements of operations and present the related assets and liabilities as held for sale in the consolidated balance sheets. These changes have been applied for all periods presented. Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from our continuing operations.  Refer to Note 2 to our consolidated financial statements for additional information on discontinued operations.
 
   
Three Months Ended
   
Change
   
Nine Months Ended
   
Change
 
   
2017
   
2016
   
%
   
2017
   
2016
   
%
 
                                     
Revenues
 
$
3,445
   
$
3,249
     
6.0
   
$
10,206
   
$
9,748
     
4.7
 
Cost of goods sold
   
2,305
     
2,434
     
5.3
     
7,081
     
7,199
     
1.6
 
Gross profit
   
1,140
     
815
     
39.9
     
3,125
     
2,549
     
22.6
 
Gross profit %
   
33.1
%
   
25.1
%
           
30.6
%
   
26.1
%
       
                                                 
Operating selling, general and administrative expenses
   
2,495
     
3,140
     
20.5
     
7,428
     
9,428
     
21.2
 
Loss from operations
   
(1,355
)
   
(2,325
)
   
41.7
     
(4,303
)
   
(6,879
)
   
37.4
 
Other (expense) income:
                                               
Interest expense
   
(86
)
   
(352
)
           
(1,616
)
   
(1,484
)
       
Change in fair value of derivative warrant liabilities
   
(313
)
   
1,166
             
808
     
314
         
Loss on extinguishment of debt
   
(6,610
)
   
-
             
(8,290
)
   
-
         
Loss on conversion of preferred stock
   
(85
)
   
-
             
(85
)
   
-
         
Gain on resolution of Irgovel purchase litigation
   
-
     
-
             
-
     
1,598
         
Other income net
   
129
     
132
             
66
     
132
         
Total other (expense) income
   
(6,965
)
   
946
             
(9,117
)
   
560
         
Loss before income taxes
 
$
(8,320
)
 
$
(1,379
)
         
$
(13,420
)
 
$
(6,319
)
       
 
THREE MONTHS ENDED SEPTEMBER 30, 2017 and 2016

Revenues increased $0.2 million, or 6.0%, quarter over quarter.  Animal nutrition product revenues increased 13% over prior year levels driven by the supply and cooperation agreement entered into with Kentucky Equine Research (KER) at the end of December 2015.  Food product revenues remained relatively constant with an increase of approximately 1.0%, quarter over quarter. The increase in food product revenue was offset primarily due to decreased buying from specialty ingredients accounts.

Gross profit percentage increased eight percentage points for the third quarter of 2017 versus the prior year quarter.  In the third quarter of 2017, our production of raw bran processing volume increased 6% quarter over quarter.  Additionally, raw bran prices decreased approximately 11% when comparing quarter over quarter, leading to improved margin performance during the quarter.

Operating selling, general and administrative expenses (SG&A) were $1.0 million for the third quarter of 2017, compared to $1.3 million for the third quarter of 2016, a decrease of $0.4 million.  The decrease is related to our continued strategic effort to manage costs and expenses.  Due to the reduction of staff and outside sales consultants, the SG&A salary, bonus, wages and benefit related expenses decreased $0.2 million. Marketing and tradeshow related expenses decreased $0.1 million and travel and entertainment expenses decreased $0.1 million.

Corporate SG&A expenses in the third quarter of 2017 were $1.5 million, a decrease of $0.3 million over the prior year quarter that was primarily due to expenses during the third quarter of 2016 as a result of the $0.7 million settlement with former chief executive officer, W. John Short. On August 27, 2016, Mr. Short’s employment as our chief executive officer was terminated. At September 30, 2016, we included the estimated severance payments in the amount of $0.7 million in accrued salary, wages and benefits in our condensed consolidated balance sheets.
 
24

Other income (expense) was $7.0 million of other expense for the third quarter of 2017 compared to $0.9 million of other income for the third quarter of 2016.  The $7.9 million increase in expense is primarily related to the $6.6 million loss on extinguishment of debt related to accreting the senior debentures and subordinated notes (see Note 7) to face value when the notes were fully paid off in July 2017 from the HN divestiture proceeds.  The payoff of the notes also reduced interest expense of $0.3 million during the third quarter compared to the prior year quarter.  Additionally, a $1.5 million increase in other expense is related to the fair value of derivative warrant liabilities in the third quarter compared to the prior year quarter.

NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016

Revenues increased $0.5 million, or 4.7%, in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Animal feed product revenues increased 10%. Animal nutrition revenue growth was driven by the supply and cooperation agreement entered into with Kentucky Equine Research (KER) at the end of December 2015.  Food product revenues remained relatively constant period over period.

Gross profit percentage increased 4.5 percentage points to 30.6% in the first nine months of 2017, from 26.1% in the first nine months of 2016.  The increase in gross profit was primarily attributable to the approximately 2.3% decrease in raw bran prices during the first nine months of 2017 compared to the same period of the previous year.  Additionally, the improvement in gross profit was attributable to a decrease in obsolete inventory during the first nine months of 2017 compared to the prior year same period.

Operating expenses were $2.9 million for the first nine months of 2017, compared to $3.9 million for the first nine months of 2016, a decrease of $1.0 million, or 26%.  The decrease is related to our continued strategic effort to manage costs and expenses.  Due to the reduction of staff and outside sales consultants, the SG&A salary, bonus, wages and benefit related expenses decreased $0.7 million.  Additionally, travel expenses and marketing expenses decreased $0.4 million.

Corporate SG&A expenses decreased $1.0 million, or 18%, in the first nine months of 2017 compared to the prior year same period.  This was primarily related to the additional expenses during the second quarter of 2016 incurred as a result of the proxy contest in connection with the 2016 Annual Shareholder Meeting.  Additionally, the additional expenses during the third quarter of 2016 incurred as a result of the settlement related to the termination of the former chief executive officer, as described above.

Other expense increased $9.7 million in the first nine months of 2017 compared to the prior year period.  The $9.7 million increase in expense is primarily related to $6.6 million loss on extinguishment of debt related to accreting the senior debentures and subordinated notes (see Note 7) to face value when the notes were fully paid off in July 2017 from the HN divestiture proceeds and to $1.7 million loss on extinguishment of debt related to the extinguishment and replacement of subordinated notes in February 2017 (see Note 8).  Additionally, a $1.6 million increase in expense is associated with the gain on resolution of Irgovel purchase litigation recognized in the prior year period.

Liquidity, Going Concern and Capital Resources

See Note 3 of our Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of going concern considerations and management’s plans.

Cash used in operating activities of continuing operations for the nine months ended September 30, 2017 and 2016, is presented below (in thousands).
 
25

   
2017
   
2016
 
Cash flow from operating activities:
           
Loss from continuing operations
 
$
(8,387
)
 
$
(4,975
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
   
571
     
694
 
Stock and share-based compensation
   
904
     
841
 
Change in fair value of derivative warrant and conversion liabilities
   
(808
)
   
(314
)
Loss on extinguishment of debt
   
8,290
     
-
 
Gain on resolution of Irgovel purchase litigation
   
-
     
(1,598
)
Interest accreted
   
1,000
     
497
 
Deferred taxes
   
(5,033
)
   
(1,344
)
Other
   
55
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(290
)
   
(182
)
Inventories
   
213
     
576
 
Accounts payable and accrued expenses
   
(1,310
)
   
3
 
Other
   
465
     
53
 
Net cash used in operating activities of continuing operations
 
$
(4,330
)
 
$
(5,749
)
 
We used $4.3 million of operating cash during the first nine months of 2017, compared to using $5.7 million of operating cash in the first nine months of 2016.  We funded the use of cash with available cash on hand derived from the sale of the assets of HN for $16.7 million in cash, net of assumed liabilities (see Note 2 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional information).  The net proceeds from the HN divestiture were used in part to pay in full amounts of senior debentures ($6.6 million) and to pay principal and accrued interest on our subordinated notes ($6.0 million) (see Note 7).

Additionally, we funded the use of cash from the debt and equity raise in February 2017 (February 2017 Transactions).  We received net proceeds of $7.2 million from the sale and issuance of preferred stock, senior debentures and related warrants from the February 2017 Transactions.  The net proceeds were used in part to pay in full amounts owing our previous senior lender ($3.8 million) and to pay principal and accrued interest on our subordinated notes ($0.5 million).  See Note 8 of our Notes to Unaudited Condensed Consolidated Financial Statements for additional information.

As of September 30, 2017, our cash and cash equivalents balance is $8.2 million and our restricted cash balance is $0.8 million (see Note 2), compared to $0.3 million as of December 31, 2016.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risk, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing and liquidity support or market risk or credit support risk to us.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements.  On an ongoing basis, we evaluate the estimates, including, but not limited to, those related to revenue recognition.  We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.

For further information about other critical accounting policies, see the discussion of critical accounting policies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recent Accounting Pronouncements

See Note 4 in the Notes to Unaudited Condensed Consolidated Financial Statements for further discussion.
 
26

Item 3.
Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4.
Controls and Procedures 

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial disclosures.

We evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the guidelines established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013).  Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

During the most recently completed fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.
Legal Proceedings

See Note 10 in the Notes to Unaudited Condensed Consolidated Financial Statements for information regarding certain legal proceedings to which we are a party.

We are involved in or subject to, or may become involved in or subject to, routine litigation, claims, disputes, proceedings and investigations in the ordinary course of business.  While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position, results of operations or cash flows.  We record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.

In addition to the above items, Irgovel has a contingent liability of approximately $0.3 million for amounts claimed to be owed in connection with a loan agreement entered into in April 2007 between Irgovel and a former shareholder of Irgovel.  In April 2014, the former shareholder filed an enforcement action against Irgovel to collect such amounts.  In June 2014, Irgovel filed a motion to annul the enforcement proceedings.  The enforcement proceedings were dismissed in September 2015.  In May 2016, the court found in favor of the former shareholder to appeal the stay of execution that was previously granted.

Item 1A.
Risk Factors

In addition to the other information set forth in this Quarterly Report and the risk factor set forth below, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition, liquidity or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, liquidity or future results.
 
27

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2017, we issued the securities described below without registration under the Securities Act.  The description below does not include issuances that were disclosed previously on Current Reports on Form 8-K.  Unless otherwise indicated below, the securities were issued pursuant to the private placement exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.  All issuances below were made without any public solicitation, to a limited number of persons and were acquired for investment purposes only.

During the quarter ended September 30, 2017, we issued 2,111,188 shares of common stock upon the conversion of 2,186 shares of Series F convertible preferred stock and 689 shares of Series G convertible preferred stock.  These issuances were exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933.
 
Item 3.
Defaults upon Senior Securities

None

Item 4.
Mine Safety Disclosures

None

Item 5.
Other Information

None

Item 6.
Exhibits

The following exhibits are attached hereto and filed herewith:
 
28

       
Incorporated by Reference
   
Exhibit
Number
 
Exhibit Description
 
Form
 
File No.
 
Exhibit
Number
 
Filing/Effective
Date
 
Filed
Here-
with
 
Asset Purchase Agreement dated July 14, 2017, among the Registrant, Healthy Natural, Inc. and United Laboratories Manufacturing, LLC
 
8-K
 
001-36245
 
2.1
 
July 17, 2017
   
 
Form of Common Stock Purchase Agreement dated September 13, 2017
 
8-K
 
001-36245
 
10.1
 
September 13., 2017
   
 
Form of Registration Rights Agreement dated September 13, 2017
 
8-K
 
001-36245
 
10.2
 
September 13., 2017
   
 
Certification by CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                 
X
 
Certification by CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
                 
X
 
Certification by CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                 
X
101.INS (1)
 
XBRL Instance Document
                 
X
101.SCH (1)
 
XBRL Taxonomy Extension Schema Document
                 
X
101.CAL (1)
 
XBRL Taxonomy Extension Calculation Linkbase Document
                 
X
101.DEF (1)