RiceBran Technologies - Quarter Report: 2016 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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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, 2016

☐	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)

 

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.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 ☒

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☒  No ☐

 

 

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RiceBran Technologies

Index

Form 10-Q

 

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, 2015.  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.

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

 

RiceBran Technologies

Condensed Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2016 and 2015

(Unaudited) (in thousands, except share and per share amounts)

 

		Three Months Ended								Nine Months Ended
		2016				2015				2016				2015
Revenues		$	8,824			$	8,917			$	29,420			$	29,982
Cost of goods sold			6,918				6,860				23,293				24,634
Gross profit			1,906				2,057				6,127				5,348
Operating expenses:
Selling, general and administrative			3,737				2,977				11,454				9,817
Depreciation and amortization			309				426				965				1,360
Goodwill impairment			-				-				3,024				-
Total operating expenses			4,046				3,403				15,443				11,177
Loss from operations			(2,140	)			(1,346	)			(9,316	)			(5,829	)
Other income (expense):
Interest income			84				23				94				91
Interest expense - accreted on debt			(94	)			(57	)			(497	)			(395	)
Interest expense - other			(652	)			(704	)			(2,081	)			(2,039	)
Change in fair value of derivative warrant liabilities			1,166				654				314				1,211
Gain on resolution of Irgovel purchase litigation			-				-				1,598				-
Foreign currency exchange, net			(27	)			(93	)			111				(281	)
Loss on extinguishment of debt			-				-				-				(1,904	)
Other income			132				2				133				167
Other expense			(19	)			(55	)			(160	)			(214	)
Total other income (expense)			590				(230	)			(488	)			(3,364	)
Loss before income taxes			(1,550	)			(1,576	)			(9,804	)			(9,193	)
Income tax benefit			-				6				-				19
Net loss			(1,550	)			(1,570	)			(9,804	)			(9,174	)
Net loss attributable to noncontrolling interest in Nutra SA			470				1,046				2,416				2,122
Net loss attributable to RiceBran Technologies shareholders			(1,080	)			(524	)			(7,388	)			(7,052	)
Dividends on preferred stock--beneficial conversion feature			-				-				(551	)			-
Net loss attributable to RiceBran Technologies common shareholders		$	(1,080	)		$	(524	)		$	(7,939	)		$	(7,052	)
Loss per share attributable to RiceBran Technologies common shareholders
Basic		$	(0.11	)		$	(0.06	)		$	(0.86	)		$	(0.77	)
Diluted		$	(0.11	)		$	(0.06	)		$	(0.86	)		$	(0.77	)
Weighted average number of shares outstanding
Basic			9,397,255				9,222,150				9,281,942				9,181,607
Diluted			9,397,255				9,222,150				9,281,942				9,181,607

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2016 and 2015

(Unaudited) (in thousands)

		Three Months Ended								Nine Months Ended
		2016				2015				2016				2015
Net loss		$	(1,550	)		$	(1,570	)		$	(9,804	)		$	(9,174	)
Other comprehensive income (loss) - foreign currency translation, net of tax			(165	)			(1,501	)			694				(2,731	)
Comprehensive loss, net of tax			(1,715	)			(3,071	)			(9,110	)			(11,905	)
Comprehensive loss attributable to noncontrolling interest, net of tax			330				1,528				1,998				3,022
Total comprehensive loss attributable to RiceBran Technologies shareholders		$	(1,385	)		$	(1,543	)		$	(7,112	)		$	(8,883	)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Condensed Consolidated Balance Sheets

September 30, 2016 (Unaudited) and December 31, 2015

(in thousands, except share amounts)

See Notes to Unaudited Condensed Consolidated Financial Statements

RiceBran Technologies

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015

(Unaudited) (in thousands)

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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 audited 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, 2015. The report of our independent registered public accounting firm that accompanies the audited consolidated financial statements for the year ended December 31, 2015, 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.

Certain reclassifications have been made to amounts reported for the prior year to achieve consistent presentation with the current year.  These reclassifications had no effect on the Company’s results of operations for any of the periods presented.

In August 2014, the Financial Accounting Standards Board (FASB) issued guidance which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements.  Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern  The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  We will adopt this standard in the fourth quarter of 2016, and we do not expect the adoption to have a material effect on our results of operations.

In May 2014, the 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: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  The guidance is effective for our annual and interim periods beginning in 2018. Early adoption is permitted.  We have not yet determined the impact that the new guidance will have on our results of operations and financial position and have not yet determined if we will early adopt the standard.

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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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.  The guidance is effective for our annual and interim periods beginning in 2017 with early adoption permitted.  We plan to adopt the standard in the first quarter of 2017 and change our accounting policy to recognize forfeitures as they occur.  This change will not have a material effect on our results of operations as we currently do 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 is no risk of expensing awards that would be subsequently forfeited prior to vesting.

In June 2016, the FASB issued a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP.  The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments.  It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods.  Early adoption for fiscal years beginning after December 15, 2018 is permitted.  Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period.  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.

In February 2015, the FASB issued guidance which makes targeted amendments to current consolidation guidance.  Among other things, the standard changes the manner in which we would assess one of the characteristics of variable interest entities (VIEs) and introduces a separate analysis specific to limited partnerships and similar entities (such as Nutra SA, LLC) for assessing if the equity holders at risk lack decision making authority.  Limited partnerships and similar entities will be a VIE unless the limited partners hold substantive kick-out rights or participating rights.  A right to liquidate an entity is akin to a kick-out right.  Guidance for limited partnerships under the voting model has been eliminated.  A limited partner and similar partners with a controlling financial interest obtained through substantive kick-out rights would consolidate a limited partnership or similar entity.  Upon adoption in the first quarter of 2016, there was no impact on our financial position or results of operations.  Specifically, under the new guidance, we continue to be the primary beneficiary of Nutra SA, LLC.

We continued to experience losses and negative cash flows from operations which raises substantial doubt about our ability to continue as a going concern.  We 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 interim financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The Brazil segment consists of the consolidated operations of Nutra SA, LLC (Nutra SA), whose only operating subsidiary is Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), located in Pelotas, Brazil.  Irgovel completed the final stages of a major capital expansion during the first quarter of 2015.  Throughout 2014, significant cash was used during the shutdown period and subsequent restart of the plant.  In 2016, 2015 and 2014, we invested $1.1 million, $3.6 million and $10.3 million, respectively, in Nutra SA to fund completion of the capital project and Irgovel working capital needs. As of September 30, 2016, we may make additional investments in Nutra SA up to $0.4 million without prior approval of the Lender.

In May 2015, the USA segment entered into an $8 million senior secured credit facility agreement with a lender (the Lender) consisting of a $3.5 million revolving loan, not to exceed a borrowing base, as defined in the agreement, and an initial $2.5 million term loan, which term loan may be increased at the Lender’s discretion by up to $2.0 million within 2 years.  As a result of the credit facility transaction, the notes for a majority of the subordinated note holders representing approximately 97% of the principal due were amended, resulting in a $1.9 million loss on extinguishment.  In February 2016, we issued and sold preferred stock and warrants that netted proceeds of $2.6 million.  Funds received under the facility with the Lender and from the February offering are being used for working capital and capital expenditure needs in both of our operating segments.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

In March 2016, the restricted cash previously held in a $1.9 million escrow account associated with the purchase of Irgovel (see Note 9) was released to us pursuant to a court order.  We repaid $1.0 million of the term loan with the Lender upon receipt of funds from the escrow account.  In addition, we repaid a $0.3 million short-term note from a related party (see Note 12).

Beginning in the second quarter of 2016 and through the third quarter of 2016, the Brazil segment has experienced severe cash shortages resulting in an increase in accounts payable (principally to raw bran suppliers) and accrued payroll related tax obligations as we delayed non-essential payments.  The nonpayment of working capital liabilities has resulted in suppliers refusing to ship raw bran and other materials necessary to maintain steady operation of the plant.  In addition to the working capital issues, the funds necessary to meet scheduled debt payments no longer exist without additional equity funding. As a result, the Brazil segment ceased making all bank debt payments in the second and third quarters of 2016. Discussions have ensued with the related banks with regard to renegotiation of existing debt agreements. However, there is no assurance these discussions will be successful. In October 2016, our minority partner contributed $1.2 million to Irgovel.  Additionally, Irgovel’s management has negotiated various raw bran supply agreements that will allow Irgovel to obtain rice bran on a consistent basis with set pricing. We continue to closely monitor Irgovel’s operations and related funding requirements.

We are a human food ingredient, nutritional supplement and animal nutrition company focused on value-added processing and marketing of healthy, natural and nutrient dense products derived from raw rice bran, an underutilized by-product of the rice milling industry.  Using our bio-refining business model, we apply our proprietary and patented technologies and intellectual properties to convert raw rice bran into numerous high value products including: stabilized rice bran (SRB); rice bran oil (RBO); defatted rice bran (DRB); RiBalance, a complete rice bran nutritional package derived from further processing of SRB; RiSolubles, a highly nutritious, carbohydrate and lipid rich fraction of RiBalance; RiFiber, a fiber rich insoluble derivative of RiBalance; ProRyza, rice bran protein-based products, and a variety of other valuable derivatives extracted from these core products.  Our target markets are natural food, functional food, nutraceutical supplement and animal nutrition manufacturers, wholesalers and retailers, both domestically and internationally.

We have two reportable operating segments: (i) USA segment, which manufactures and distributes SRB (for human food ingredient and animal nutrition customers) in various granulations along with Stage II products and derivatives and (ii) Brazil segment, which extracts crude RBO and DRB from rice bran, which are then further processed into fully refined rice bran oil for sale internationally and in Brazil, compounded animal nutrition products for horses, cows, swine, sheep and poultry and a number of valuable human food and animal nutrition products derivatives and co-products. Stage II refers to the proprietary processes run at our Dillon, Montana facility and includes products produced at that facility using our patented processes. In addition we incur corporate and other expenses not directly attributable to reportable operating segments, which include costs related to our corporate staff, general and administrative expenses including public company expenses, intellectual property, professional fees and other expenses.  No corporate allocations, including interest, are made to the reportable operating segments.

The USA segment produces SRB inside two supplier rice mills in California and our facility in Mermentau, Louisiana.  The USA segment also includes our Dillon, Montana Stage II facility which produces our Stage II products: RiBalance, RiSolubles, RiFiber, ProRyza and a variety of other valuable derivatives extracted from these core products.  The manufacturing facilities included in our USA segment have proprietary processing equipment and process patented technology for the stabilization and further processing of rice bran into finished products.

The Brazil segment consists of the consolidated operations of Nutra SA, whose only operating subsidiary is Irgovel, located in Pelotas, Brazil.  Irgovel manufactures RBO and DRB products for both the human ingredient and animal nutrition markets in Brazil and internationally.  In refining RBO to an edible grade, several co-products are obtained.  One such product is distilled fatty acids, a valuable raw material for the detergent industry.  DRB is either compounded with a number of other ingredients to produce complex animal nutrition products which are packaged and sold under Irgovel brands in the Brazilian market, sold as a raw material for further processing into human food ingredients or sold in bulk into the animal nutrition markets in Brazil and neighboring countries.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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 Series F Convertible Preferred Stock (the Series F Preferred Stock) is considered a participating security as the security holders may participate in undistributed earnings with holders of common shares.  The holders of the Series F Preferred Stock are not obligated to share in net losses of the Company.

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 effect of outstanding options, warrants and nonvested shares that vest solely on the basis of a service condition is calculated using the treasury stock method.  The dilutive effect of the Series F Preferred Stock is calculated using the if-converted method.

Below are reconciliations of the numerators and denominators in the EPS computations for the three and nine months ended September 30, 2016 and 2015.

The impact of potentially dilutive securities outstanding at September 30, 2016 and 2015, was not included in the calculation of diluted EPS for the three and nine months ended September 30, 2016 and 2015 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.

The following table reflects goodwill allocated to each reporting segment at September 30, 2016 and December 31, 2015 (in thousands):

Several economic factors occurred during the second quarter of 2016, specifically related to our Brazil segment, including a decline in raw bran availability and continuing operating losses resulting in a lack of working capital.  Due to the lack of working capital, the Brazil segment ceased making all bank debt payments in the second quarter of 2016.  These events resulted in the need to perform an interim impairment test of our goodwill as of June 30, 2016, which resulted in an estimated goodwill write-down of $3.0 million in the second quarter of 2016, which was recorded in our Brazil segment. In the third quarter of 2016, we completed Step 2 of the goodwill impairment test to determine if any adjustment to the goodwill impairment charge was required.  The Step 2 analysis required the Company to perform a theoretical purchase price allocation for the reporting unit to determine the implied fair value of goodwill and to compare the implied fair value of goodwill to the recorded amount of goodwill.  Based on the analysis, no modification of the initial impairment estimated was required in the third quarter of 2016.  The goodwill impairment charge does not affect the debt covenants under our existing credit facility.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

We hold a variable interest which relates to our equity interest in Nutra SA (see Note 2).  Our variable interest in Nutra SA is our Brazil segment.  We are the primary beneficiary of Nutra SA, and as such, Nutra SA’s assets, liabilities and results of operations are included in our condensed consolidated financial statements.  The other equity holders’ (Investors) interests are reflected in net loss attributable to noncontrolling interest in Nutra SA in the condensed consolidated statements of operations and redeemable noncontrolling interest in Nutra SA in the condensed consolidated balance sheets.  Due to the goodwill impairment charge recorded in the second quarter of 2016 combined with continuing operating losses, the carrying amount of the redeemable noncontrolling interest reflects a deficit balance beginning in the second quarter of 2016.  This deficit balance is reflected in the total (deficit) equity attributable to RiceBran Technologies shareholders section of our condensed consolidated balance sheet at September 30, 2016.  Prior to June 30, 2016, the redeemable noncontrolling interest was reflected in the total temporary equity section of our condensed consolidated balance sheet.  A summary of the carrying amounts of Nutra SA balances included in our condensed consolidated balance sheets follows (in thousands).

Nutra SA’s debt is secured by its accounts receivable and property.  The non-Brazilian entities within the consolidated ownership group do not guarantee any of Nutra SA’s debt.

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

During the first nine months of 2016, we invested an additional $1.1 million in Nutra SA.  Upon receipt of the escrow funds by us on March 24, 2016 (see Note 9), Nutra SA redeemed a certain number of units held by us equal to $1.7 million, which resulted in a slight decrease in our membership interest in Nutra SA.  Our membership interest subsequently changed due to additional investments by us and by our minority partner.  In October 2016, our minority partner contributed $1.2 million to Nutra SA.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

A summary of changes in redeemable noncontrolling interest in Nutra SA for the three and nine months ended September 30, 2016 and 2015 (in thousands) follows.

The Investors have drag along rights which allow the Investors 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, 2016.  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 up to fair value if and when it is probable the Investors will exercise these rights.

The Investors may elect, until January 1, 2018, to exchange units in Nutra SA for our common stock (the Exchange Right).  The appraised fair value of the Investors’ interest in Nutra SA and the market price of our stock would be used to determine the amount of ownership interest the Investors would receive.  The shares issued to the Investors may not exceed 49% of our outstanding common stock after such issuance; however, if this limitation applies, we would be required to issue to the Investors a warrant to purchase a number of shares of our common stock that, when combined with the shares of common stock issued to the Investors, would equal 49% of our fully diluted shares outstanding after such issuance.

Under the LLC Agreement, the business of Nutra SA is to be conducted by the manager, currently our CEO, subject to the oversight of the management committee.  The management committee is comprised of three of our representatives and two Investor 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 Investor 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, 2016, 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 failure of Irgovel to meet minimum annual processing targets or failure to achieve EBITDA on a local currency basis of at least R$4.0 million annually.

As of September 30, 2016, 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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes current and long-term portions of debt (in thousands):

In January 2016, we entered into a note payable with a director in the principal amount of $0.3 million and issued the director a warrant to acquire 25,000 shares of common stock (exercise price of $5.25, exercisable immediately and expiring in January 2021).  On the date of issuance, we recorded the warrant at fair value as a derivative warrant liability (see Note 8) and recorded a corresponding debt discount which amortized to interest expense when we repaid the note and accumulated interest in full in March 2016.

In February 2016, we entered into an agreement with the Lender which modified the financial covenants to require that (a) from February 1, 2016 to July 15, 2016, we maintain cash on hand, including availability under our revolving loan with the Lender, of not less than $1.5 million, provided that at least $0.8 million of such amount must be in the form of cash on hand, and (b) we maintain an average monthly adjusted EBITDA, as defined by the agreement, calculated over each consecutive three-month period beginning on January 1,  February 1, March 1, April 1 and May 1, 2016, of not less than $0.1 million.  The Lender also waived, for the first three quarters of 2016, any non-compliance with the financial covenants in the May 2015 agreement.  We may not be able to comply with the original May 2015 covenants without further modifications from the Lender.  Therefore, as of September 30, 2016, we have recorded the term loan, net of related debt issuance costs, as a current portion of long-term debt.  As of September 30, 2016, we are in compliance with the financial covenants associated with our debt agreements, as modified and discussed above.

In March 2016, we repaid $1.0 million of the senior term loan principal outstanding, which as of December 31, 2015, had been scheduled to be repaid in 2018, as required under the February agreement with the Lender described above.  In the first quarter of 2016, we expensed $0.2 million of debt issuance costs to interest expense as a result of that repayment.  We also paid a $0.1 million amendment fee in the first quarter of 2016, which is included in interest expense in our condensed consolidated statement of operations.  In June 2016, we entered into an amendment agreement with our lender to extend the prior modification of the loan agreement to September 30, 2016.  In September 2016, we entered into an additional amendment agreement with our lender to extend the prior modification of the loan agreement to December 31, 2016 and that from February 1, 2016 to December 30, 2016, we maintain cash on hand, including availability under our revolving loan with the Lender, of not less than approximately $1.3 million, provided that at least $0.5 million of such amount must be in the form of cash on hand (see Note 8 for additional information related to the repricing of the warrant associated with these modifications).  We also paid an approximately $0.2 million amendment fee in the third quarter of 2016, which was added to the outstanding loan balance. 

Beginning in the second quarter of 2016, the Brazil segment did not have sufficient working capital to make their scheduled debt payments, and, as a result, the Brazil segment ceased making all bank debt payments in the second and third quarters.  Therefore, we have recorded all Brazil segment debt as current, regardless of maturity date.  Discussions have ensued with the related banks with regard to renegotiation of existing debt agreements. However, there is no assurance these discussions will be successful.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

In February 2016, our board of directors authorized the issuance of 3,000 shares of Series F Preferred Stock.  The Series F Preferred Stock is non-voting and may be converted into a total of 2,000,000 shares of our common stock at the holder’s election at any time, subject to certain beneficial ownership limitations, at a ratio of 1 preferred share for 666.66666 shares of common stock.  The Series F Preferred Stock is only entitled to receive dividends if we declare dividends, in which case the dividend will be paid (i) first an amount equal to $0.01 per share of preferred stock and (ii) then to and in the same form as dividends paid on shares of our common stock.  Otherwise, the Series F Preferred Stock has no liquidation or other preferences over our common stock.

The number of common shares and warrants issuable if the Investors elect the Exchange Right is variable and indeterminate.  For accounting purposes, we are not able to conclude that we have sufficient authorized and unissued shares to settle all contracts subject to the FASB’s derivative guidance.  Our adopted sequencing approach is based on earliest issuance date (the Share Sequencing), therefore we are required to record certain warrants issued after the right was granted to the Investors in June 2015 at fair value, as derivative warrant liabilities.  For the same reason, the 3,000 shares of Series F Preferred Stock, which are convertible to 2,000,000 shares of our common stock, have been recorded in temporary equity on our condensed consolidated balance sheet.

A summary of equity activity for the nine months ended September 30, 2016, (in thousands, except share data) follows.

In September 2016, we issued shares of common stock to directors at a grant date fair value of $1.46 per share.  We issued 174,825 shares which vest on the earlier of June 30, 2017 or one day before the date of the next annual shareholder meeting.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

A summary of warrant activity for the nine months ended September 30, 2016, follows.

In January 2016, we entered into a note payable with a director in the principal amount of $0.3 million and issued the director a warrant to acquire 25,000 share of common stock (exercise price of $5.25, exercisable immediately and expiring in January 2021).  On the date of issuance, we recorded the warrant at fair value as a derivative warrant liability, pursuant to the Share Sequencing, and recorded a corresponding debt discount which amortized to interest expense when we repaid the note and accumulated interest in full in March 2016.

In June 2016, we entered into an amendment agreement with our Lender to extend the prior modification of the loan agreement.  In connection with this amendment, we repriced a previously issued warrant held by the Lender from $5.25 per share to $1.85 per share. In September 2016, we entered into an additional amendment agreement with our Lender to extend the prior modification of the loan agreement.  In connection with this amendment, we repriced the warrant held by the Lender from $1.85 per share to $1.60 per share.  Both prior to and subsequent to these modifications, we recorded the warrant at fair value as a derivative warrant liability, pursuant to the Share Sequencing, with changes in fair value recorded in the condensed consolidated statements of operations.

In addition to the matters discussed below, from time to time we are involved in litigation incidental to the conduct of our business.  We record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.  Legal costs are expensed as incurred and are included in professional fees.  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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

On August 28, 2008, former Irgovel stockholder David Resyng filed an indemnification suit against Irgovel, Osmar Brito and the remaining former Irgovel stockholders (Sellers), requesting:  (i) the freezing of the escrow account maintained in connection with the transfer of Irgovel’s corporate control to us and the presentation of all documentation related to the transaction, and (ii) damages in the amount of the difference between (a) the sum received by David Resyng in connection with the judicial settlement agreement executed in the action for the partial dissolution of the limited liability company filed by David Resyng against Irgovel and the Sellers and (b) the amount received by the Sellers in connection with the sale of Irgovel’s corporate control to us, in addition to moral damages as determined in the court’s discretion.  The amount of damage claimed by Mr. Resyng is approximately $3.0 million.

We believe that the filing of the above lawsuit is a fundamental default of the obligations undertaken by the Sellers under the quotas purchase agreement for the transfer of Irgovel’s corporate control, executed by and among the Sellers and us on January 31, 2008 (Purchase Agreement).  Consequently, we believe that the responsibility for any indemnity, costs and expenses incurred or that may come to be incurred by Irgovel and/or us in connection with the above lawsuit is the sole responsibility of the Sellers.

On February 6, 2009, the Sellers filed a collection lawsuit against us seeking payment of the second installment of the purchase price under the Purchase Agreement, which the Sellers assert is approximately $1.0 million.  We have withheld payment of the second installment pending resolution of the Resyng lawsuit noted above.  RiceBran Technologies, the parent company, has not been served with any formal notices in regard to this matter.  To date, only Irgovel has received formal legal notice.  In addition, the Purchase Agreement requires that all disputes between us and the Sellers be adjudicated through arbitration.  In 2015, a final unappealable arbitration award was granted in our favor.  We are considering collection actions against the Sellers for amounts awarded in excess of the escrow funds described below and have a contingent gain in an amount that is not currently determinable. 

We believe that there are no significant remaining contingencies.  We recognized a gain of $1.6 million in the first quarter of 2016, equal to the difference between the $1.9 million escrow liability and the $0.3 million of resolved pre-acquisition contingencies that had either been paid or specifically identified and accrued.

As further described in Note 6, Irgovel is required to meet minimum annual processing targets or to achieve EBITDA in local currency of at least R$4.0 million annually. If not achieved, this would result in an event of default.  It is possible that an event of default may be triggered in the future and a waiver of non-compliance may not be obtained from the Investors. 

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 nonvested equity grants would accelerate following a change in control. See Note 14 for severance information related to our former chief executive officer.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

The tables below present segment information for the periods identified and provide reconciliations of segment information to total consolidated information (in thousands).

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

The tables below present segment information for selected balance sheet accounts (in thousands).

Corporate segment total assets include cash, restricted cash, property and other assets.

We review our long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  During the second quarter of 2016, a number of economic and market conditions arose related to operations of our Brazil segment that impacted raw bran availability and working capital necessary to acquire it, resulting in the Brazil segment taking an estimated goodwill impairment charge of $3.0 million.  No modification of the estimated impairment charge was required in the third quarter of 2016 (see Note 5).  Additional information on impairment testing of long-lived assets, intangible assets and goodwill can be found in Note 9 of our Annual Report on Form 10-K for the year ended December 31, 2015.

The following table presents revenue by geographic area for the three and nine months ended September 30, 2016 and 2015 (in thousands).

 

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2016, the fair value of our Corporate segment debt (Level 3 measurement) approximates the $10.2 million carrying value of that debt, based on current market rates for similar debt with similar maturities.  The fair value of our Brazil segment debt (Level 3 measurement) also approximates the $6.8 million carrying value of that debt based on the 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.

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).

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 condensed 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.

The following tables summarize the changes in Level 3 items measured at fair value on a recurring basis (in thousands).

(1)

Included in change in fair value of derivative warrant liabilities in our unaudited condensed consolidated statements of operations.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

Prior to 2015, entities beneficially owned by Baruch Halpern, a director, invested $2.6 million in our subordinated notes and related warrants, the terms of which were subsequently modified.  In the third quarter of 2016, Mr. Halpern purchased an additional $137,500 in subordinated notes from an unrelated note holder.  In the three and nine months ended September 30, 2016 and 2015, we expensed and paid $0.1 million and $0.2 million, respectively, of interest on the subordinated notes beneficially owned by Mr. Halpern.

In January 2016, we entered into a note payable with Mr. Halpern in the principal amount of $0.3 million and issued Mr. Halpern a warrant to acquire 25,000 shares of common stock (exercise price of $5.25, exercisable immediately and expiring in January 2021).  Principal and all interest, accumulating at an 11.75% annual rate, was payable on October 31, 2016.  We repaid the note and accumulated interest in full in March 2016.

Prior to 2015, W. John Short, our former chief executive officer and a current director, invested $50,000 in our subordinated notes and related warrants, the terms of which were subsequently modified.  In the three and nine months ended September 30, 2016 and 2015, we expensed and paid approximately $2,000 and $5,000, respectively, of interest on the subordinated notes beneficially owned by Mr. Short.

On July 5, 2016, we entered into a Settlement Agreement (Settlement Agreement) with (i) LF-RB Management, LLC, Stephen D. Baksa, Richard Bellofatto, Edward M. Giles, Michael Goose, Gary L. Herman, Larry Hopfenspirger and Richard Jacinto II (collectively, the LF-RB Group) and (ii) Beth Bronner, Ari Gendason and Brent Rosenthal (the LF-RB Designees and together with the LF-RB Group, the Shareholder Group).  The LF-RB Group beneficially owns approximately 9.0% of our outstanding stock.

Among other things, under the Settlement Agreement we paid the LF-RB Group $50,000 in cash and issued 100,000 shares of our common stock to designees of the LF-RB Group to partially reimburse the LF-RB Group for out-of-pocket legal fees and other expenses incurred by the LF-RB Group in connection with its solicitation of proxies to elect its designees to the Board at the 2016 Annual Meeting of Shareholders.

On August 27, 2016, W. John Short’s employment as our chief executive officer was terminated.  Mr. Short continues to serve on the Company’s Board of Directors.  The Company and Mr. Short have been unable to agree upon the severance payments owed to Mr. Short under his employment agreement with the Company.   In order to resolve this dispute, on September 22, 2016, we filed an Arbitration Demand for Declaratory Relief (the “Demand”) against Mr. Short.  In the Demand, we seek a determination and declaration resolving all disputes between the Company and Mr. Short, including those relating to the amounts owed to Mr. Short in connection with his employment termination.   The Demand was filed with the American Arbitration Association in Phoenix, Arizona.  We have accrued estimated severance payments in the amount of $700,000.  We expect to pay the final settlement within the next 12 months and, therefore, we have included the amount in accrued salary, wages and benefits in our condensed consolidated balance sheet as of September 30, 2016.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

On August 27, 2016, Robert Smith, PhD, 55, was appointed interim Chief Executive Officer of RiceBran Technologies.  Dr. Smith has served as our Chief Operating Officer since June 2016.  Dr. Smith served as the Company’s senior vice president of operations and R&D from November 2014 to June 2016, as senior vice president of sales and business development from November 2013 to November 2014 and as senior vice president of business development from March 2012 to November 2013.  Dr. Smith brings over 20 years’ experience managing research and development and business development in the Ag-biotech industry.  He served as director of business development at HerbalScience Group from 2007 to 2010 and worked at Affynis LLC from 2010 to 2012 as a consultant.  Dr. Smith has also served as director of research and developments at Global Protein Products Inc. and PhycoGen Inc., and was project leader at Dekalb Genetics, a Monsanto Company.  Dr. Smith was a research assistant professor at the Ag-Biotech Center at Rutgers University and did his post-doctoral work in plant molecular biology at the University of Missouri-Columbia.  He holds a doctor of philosophy degree in molecular genetics and cell biology from the University of Chicago and a bachelor of arts degree in biology from the University of Chicago.

 

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 going concern considerations and management’s plans.

See Note 3 of our Notes to Unaudited Condensed Consolidated Financial Statements for a description of our business and the operating segments of our business.

See Notes 5 and 10 of our Notes to Unaudited Condensed Consolidated Financial Statements for a description of our long-lived asset impairment review.

Revenues (in thousands):

Consolidated revenues for the third quarter of 2016 were $8.8 million compared to $8.9 million in the prior year quarter, a decrease of $0.1 million, or 1%.

USA segment revenues increased $3.2 million, or 64%, quarter over quarter.  Human nutrition product revenues increased 75%, quarter over quarter. Gains in this category were primarily attributable to increased buying from the existing customer base and specifically the contract manufacturing accounts which grew by 110%. Animal feed product revenues increased 44% over prior year levels driven by the supply and cooperation agreement entered into with Kentucky Equine Research (KER) at the end of December 2015.

Brazil segment revenues decreased $3.3 million, or 86%, in the third quarter of 2016, compared to the prior year quarter.  The average Brazilian real to US Dollar exchange rate increased 8% quarter over quarter.  On a local currency basis, Brazil segment revenue declined 87% quarter over quarter, and raw bran volume processed declined 77% in the current period.  The decline in revenue in the third quarter of 2016 was due to the continuing challenge of sourcing raw bran caused by a confluence of three issues: (1) adverse weather conditions reducing the volume of rice during harvest earlier this year, (2) competition for purchasing raw bran and (3) having sufficient working capital to meet raw bran supplier payment demands.  The decrease in access to raw bran caused a decline in production volume, resulting in a decrease in revenues.

 

Gross profit (in thousands):

Consolidated gross profit in the third quarter of 2016 decreased by $0.2 million, with gross profit percentage decreasing to 21.6% from 23.1% in the prior year quarter, a decline of 1.5 percentage points.

 

The USA segment gross profit percentage increased 4.0 percentage points to 30.2% in the third quarter of 2016 as compared to the prior year quarter.  As noted above, both human and animal nutrition revenues increased significantly in the current quarter.  Additionally, raw bran prices have decreased approximately 6% when comparing quarter over quarter, leading to improved margin performance during the quarter.

The Brazil segment continues to experience negative gross profit in the third quarter of 2016, primarily due to the three reasons stated above: (1) adverse weather conditions reducing the volume of rice during harvest earlier this year, (2) competition for purchasing raw bran and (3) having sufficient working capital to meet raw bran supplier payment demands.  Beginning in the first quarter of 2016, obtaining adequate amounts of raw bran in order to operate the Irgovel plant at an appropriate level has been a challenge.  This has contributed to a 77% decline in raw bran processing volume quarter over quarter. The plant is only operating at approximately 16% of its targeted capacity of 300 metric tons per day resulting in very inefficient operations and significant negative gross profit. For cost reasons, bagged animal feed production was eliminated in the middle of the first quarter in 2016 and all efforts were shifted to selling bulk animal feed which is a simpler operation that requires less working capital and personnel. Additionally, because of the significantly reduced supply of raw bran available from rice millers, the cost of raw bran when it is available has increased by 17% during the third quarter to historically high prices.

 

 

Consolidated operating expenses were $4.0 million for the third quarter of 2016, compared to $3.4 million for the third quarter of 2015, an increase of $0.6 million.

Corporate segment selling, general and administrative expenses (SG&A) in the third quarter of 2016 increased $0.7 million over the prior year quarter due to the $0.7 million in accrued severance expense related to our former chief executive officer (see Note 14).

USA segment SG&A expenses increased $0.3 million in the current quarter as compared to prior year. The increase is primarily related to increases in employment contract-related incentive pay, travel expenses, and commissions owed to KER under the December 2015 agreement.

Brazil segment SG&A expenses decreased $0.3 million in the current quarter due to further cost reduction efforts that were implemented to reduce administrative personnel overhead during the quarter along with reduced commissions and other selling costs associated with the decline in revenues.  The average currency exchange rate increased 8% quarter over quarter.

Consolidated depreciation and amortization decreased $0.1 million quarter over quarter, primarily due to the impact of certain USA segment fixed assets becoming fully depreciated subsequent to the third quarter of 2015.