RiceBran Technologies - Quarter Report: 2017 September (Form 10-Q)

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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, 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)

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.

 

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 ☒

 

 

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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, 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.

 

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

 

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

 

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

 

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

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

 

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.

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.

 

 

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.

 

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

 

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.

 

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

 

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.

 

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.

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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

 

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.

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				-

 

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.

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%

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

We issued senior debentures in the principal amount of $6.6 million and related warrants in a private placement, in February 2017.  In 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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

 

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 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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

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.

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.

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.

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.

 

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.

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.

 

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)