RiceBran Technologies - Quarter Report: 2017 March (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 March 31, 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.

 

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
			Emerging growth company ☐

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act).  Yes ☐ No ☒

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, 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.

 

RiceBran Technologies

Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2017 and 2016

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

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2017 and 2016

(Unaudited) (in thousands)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Condensed Consolidated Balance Sheets

March 31, 2017 (Unaudited) and December 31, 2016

(in thousands, except share amounts)

 

See Notes to Unaudited Condensed Consolidated Financial Statements

 

RiceBran Technologies

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2017 and 2016

(Unaudited) (in thousands)

 

See 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, 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.

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: (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.  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 have not yet selected a transition method but have determined that we will utilize the deferred effective date of January 1, 2018, to 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.

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 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.  It is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  We adopted the standard as of January 1, 2017, with no effect on our financial position or results of operations.

 

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 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.

We have improved our USA segment cash position since December 31, 2016 as a result of completing a debt and equity raise in February.  The Brazil segment continues to be a challenging operating unit although it has improved.  On a consolidated basis, we 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 7, 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 addition, we lowered the interest rate and extended the maturity date of our subordinated notes.  Consequently, we believe the Corporate and USA segments are adequately funded at this time to allow us to operate and execute on our business strategy for achieving consistent and positive operational cash flows in the USA segment.  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.

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, we invested $1.1 million in Nutra SA to fund completion of the capital project and Irgovel working capital needs.  Under the terms of the February 2017 Transactions, we are prohibited from contributing additional funding to Irgovel.

Beginning in the second quarter of 2016 and through the fourth quarter of 2016, the Brazil segment 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 resulted in suppliers refusing to ship raw bran and other materials necessary to maintain steady operation of the plant.  In addition to the Brazil segment working capital issues, the funds necessary to meet scheduled debt payments no longer existed 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 2016, our minority partners (the Investors) contributed $1.7 million to Irgovel and an additional $0.7 million through April of 2017.  With this equity support, Irgovel management has negotiated various raw bran supply agreements that management believes will allow Irgovel to obtain rice bran on a consistent basis with set pricing.  As a result, the Irgovel plant operations began to improve in November 2016 allowing Irgovel to begin repairing vendor relationships overall.  First quarter Brazil segment revenues for 2017 increased 48% versus prior year and the plant operated at 58% of targeted capacity.  While this represents a significant improvement, achieving positive cash flows remains a challenge.  We continue to closely monitor Irgovel’s operations and related funding requirements.

We are an ingredient company serving food, animal nutrition and specialty markets 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.  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, and 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 food 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 food and animal nutrition products derivatives and co-products. Stage II refers to the proprietary, patented processes run at our Dillon, Montana facility and includes products produced at that facility. 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.  Our facility located in Lake Charles, Louisiana has been idle since May 2009 but has recently been utilized as a warehouse.  The USA segment also includes our Dillon, Montana Stage II facility which produces our Stage II products: 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, and ProRyza, rice bran protein-based products, 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 food 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.  Irgovel also produces rice lecithin, which has application in food ingredient products, animal nutrition and industrial applications.  DRB is 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 food ingredient products or sold in bulk into the animal nutrition markets in Brazil and neighboring countries.

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”) and Series G Convertible Preferred Stock (the “Series G Preferred Stock”) 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 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 effects of the Preferred Stocks are calculated using the if-converted method.

 

 

Below are reconciliations of the numerators and denominators in the EPS computations for the three months ended March 31, 2017 and 2016.

The impact of potentially dilutive securities outstanding at March 31, 2017 and 2016, was not included in the calculation of diluted EPS for the three months ended March 31, 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.

We hold a variable interest which relates to our equity interest in Nutra SA (see Note 3).  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 accumulated deficit attributable to noncontrolling interest in Nutra SA in the condensed consolidated balance sheets.  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).

 

 

A summary of changes in redeemable noncontrolling interest in Nutra SA for the three months ended March 31, 2017 and 2016 (in thousands) follows.

		Three Months Ended
		2017				2016
Redeemable noncontrolling interest in Nutra SA, beginning of period		$	(699	)		$	69
Investors' interest in net loss of Nutra SA			(318	)			(438	)
Investors' interest in accumulated other comprehensive loss of Nutra SA			51				145
Investors' purchase of additional units			550				-
Redeemable noncontrolling interest in Nutra SA, end of period		$	(416	)		$	(224	)
Investors' average interest in Nutra SA during the period			35.0	%			31.7	%
Investors' interest in Nutra SA at the end of the period			35.7	%			32.5	%

 

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 March 31, 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 up 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 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 March 31, 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 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 March 31, 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.

 

 

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

We issued senior debentures in the principal amount of $6.6 million and related warrants in a private placement,in February 2017.  The transaction, and the accounting therefore, is described further in Note 7.  The debentures mature in February 2019.  We accrete interest on the debentures at an effective rate of 160.6% per year.  The debentures are secured by a senior interest in substantially all of our assets.  Under the debenture agreements, the USA segment is required to have adjusted EBITDA, as defined in the agreement of not less than $325 thousand, $756 thousand, $483 thousand and $461 thousand in the quarters ended March 31, 2017, June 30, 2017, September 30, 2017 and December 31, 2017.

In connection with the senior debenture private placement, in February 2017, we 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 entire transaction, and its accounting consequences, are described further in Note 7. Beginning in February 2017, we accrete interest on the subordinated notes at an effective rate of 15.0% per year.

As of March 31, 2017, Brazil had approximately $0.7 million (USD) of installment payments in arrears.  The banks have not called these loans in default, and management continues to work with the lenders to renegotiate payment terms, however, all Brazil segment debt has been classified as current in the accompanying consolidated balance sheet as of March 31, 2017.  All Brazil segment debt is denominated in the Brazilian Real (R$), except advances on customer export orders which are denominated in U.S. Dollars.

 

 

* Series F preferred stock, 3,000 shares outstanding; Series G pereferred stock, 2,000 shares outstanding

 

A summary of warrant activity for the three months ended March 31, 2017, follows.

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.

The chairman of our board 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 is to be paid in either cash or stock at the chairman’s election.  As of the date of this filing no election has been made.

 

 

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 shares 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 Series F Preferred Stock and 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.

On 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

 

 

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.  On the transaction date 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 $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 March 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 vests as to 25,000 shares in August 2017 and the remaining shares vest in monthly instalments through August 2020.

In April 2017, we granted options to purchase an aggregate 345,500 shares of our common stock to executive officers and employees.  The options vest in four equal annual instalments beginning in April 2018 at an exercise price of $0.85 per share.

In March 2017, our compensation committee approved a resolution proposing the award of restricted stock units (RSUs) under the 2014 Equity Incentive Plan to our executive officers covering a total of 1,175,000 shares of our common stock subject to and effective upon shareholder approval of a 1,700,000 increase in the authorized shares issuable under the 2014 Equity Incentive Plan.  The committee believes the RSUs are an incentive designed to align the interests of executive management with shareholder value.  If the increase in authorized shares is approved, the RSUs would be granted and would be effective on the fifth business day after the date of our annual shareholders meeting.  The annual shareholders meeting is currently scheduled to occur on June 21, 2017.  The shares subject to RSU would 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 would 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 following table summarizes information related to outstanding warrants as March 31, 2017 and December 31, 2016:

 

 

(1)

Includes two warrants which contain full ratchet anti-dilution provisions and are classified as derivative warrant liabilities in our balance sheets.  Under the anti-dilution clauses contained in these warrants, 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 prices of these warrants, we are required to lower the exercise price on these warrants and increase the number of shares underlying these warrants.

(2)

Includes a warrant for the purchase of 300,000 shares of our common stock which contains a most favored nations anti-dilution provision.  Under that provision, in the event of issuances of stock options and/or convertible instruments with anti-dilution provisions (providing for the adjustment of the exercise price, conversion price or other price or rate at which shares of common stock thereunder may be purchased, acquired or converted, and/or any upward adjustment in the number of shares of common stock issuable) we 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.

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 March 31, 2017, the fair value of our Corporate segment debt (Level 3 measurement) is approximately $4.5 million higher than the $5.6 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) approximates the $7.3 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:

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Level 1 – inputs include quoted prices for identical instruments and are the most observable.

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Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves.

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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.

 

RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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RiceBran Technologies

Notes to Unaudited Condensed Consolidated Financial Statements

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

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