10-Q 1 form10q.htm NUTRACEA 10-Q 9-30-2011 form10q.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

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

 
For the quarterly period ended September 30, 2011

o
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
 
 

 
NutraCea
(Exact Name of Registrant as Specified in its Charter)

California
 
87-0673375
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
6720 North Scottsdale Road, Suite 390   85253
Scottsdale, AZ   (Zip Code)
(Address of Principal Executive Offices)    
 
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 x No o
 
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 x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule l2b-2 of the Exchange Act).  Yes o No x

As of November 1, 2011, 201,129,624 shares of the registrant’s common stock were outstanding.
 


 
 

 

NutraCea
Form 10-Q
 
PART I. FINANCIAL INFORMATION Page
Item 1.
  Financial Statements 3
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2011 and 2010  
    Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2011 and 2010  
    Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010  
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010  
    Notes to Unaudited Condensed Consolidated Financial Statements  
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk 35
Item 4.
  Controls and Procedures 36
PART II. OTHER INFORMATION  
Item 1.
  Legal Proceedings 36
Item 1A.
  Risk Factors 36
Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3.
  Defaults Upon Senior Securities 38
Item 4.
  (Removed and Reserved) 38
Item 5.
  Other Information 38
Item 6.
  Exhibits 38
39
 
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 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, 2010.  We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.
 
 
2

 
PART I. FINANCIAL INFORMATION

NutraCea
Three and Nine Months Ended September 30, 2011 and 2010
(Unaudited) (in thousands, except per share amounts)
 
   
Three Months
   
Nine Months
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues
  $ 8,586     $ 8,403     $ 26,229     $ 23,126  
Cost of goods sold
    6,663       6,269       19,508       17,788  
Gross profit
    1,923       2,134       6,721       5,338  
                                 
Operating expenses:
                               
Selling, general and administrative
    3,666       3,929       11,004       11,800  
Professional fees
    610       668       2,118       1,632  
Settlement with former customer
    -       -       (800 )     -  
Impairment of property, plant and equipment
    -       -       -       1,000  
Loss on disposal of property, plant and equipment
    -       540       -       943  
Total operating expenses
    4,276       5,137       12,322       15,375  
                                 
Loss from operations
    (2,353 )     (3,003 )     (5,601 )     (10,037 )
                                 
Other income (expense):
                               
Interest income
    25       26       105       43  
Interest expense
    (302 )     (416 )     (1,114 )     (997 )
Warrant liability income
    916       250       775       63  
Loss on acquisition of additional interests in Rice Rx
    -       -       (140 )     -  
Gain on extinguishment of debt
    -       -       265       -  
Foreign currency exchange, net
    (321 )     (23 )     (268 )     (30 )
Other income
    46       54       119       261  
Other expense
    (24 )     (10 )     (281 )     (31 )
Total other income (expense)
    340       (119 )     (539 )     (691 )
                                 
Reorganization expenses - professional fees
    -       111       -       847  
                                 
Loss before income taxes
    (2,013 )     (3,233 )     (6,140 )     (11,575 )
Income tax benefit
    244       143       252       687  
Net loss
    (1,769 )     (3,090 )     (5,888 )     (10,888 )
Net loss attributable to noncontrolling interest in Nutra SA
    276       -       315       -  
Net loss attributable to NutraCea shareholders
  $ (1,493 )   $ (3,090 )   $ (5,573 )   $ (10,888 )
                                 
Loss per share attributable to NutraCea shareholders
                               
Basic
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.06 )
Diluted
  $ (0.01 )   $ (0.02 )   $ (0.03 )   $ (0.06 )
                                 
Weighted average number of shares outstanding
                               
Basic
    199,381       193,028       197,651       193,016  
Diluted
    199,381       193,028       197,651       193,016  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
3

 
NutraCea
Three and Nine Months Ended September 30, 2011 and 2010
(Unaudited) (in thousands)
 
   
Three Months
   
Nine Months
 
   
2011
   
2010
   
2011
   
2010
 
Net loss attributable to NutraCea shareholders
  $ (1,493 )   $ (3,090 )   $ (5,573 )   $ (10,888 )
Other comprehensive income (loss) - foreign currency translation, net of tax
    (2,630 )     751       (1,576 )     204  
Comprehensive loss, net of tax
    (4,123 )     (2,339 )     (7,149 )     (10,684 )
Comprehensive loss attributable to the noncontrolling interest, net of tax
    276       -       315       -  
Total comprehensive loss attributable to NutraCea shareholders
  $ (3,847 )   $ (2,339 )   $ (6,834 )   $ (10,684 )

See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
4

 
NutraCea
September 30, 2011 and December 31, 2010
(Unaudited) (in thousands, except share amounts)
 
   
September 30,
2011
   
December 31,
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 167     $ 537  
Restricted cash
    2,397       1,917  
Accounts receivable, net
    3,864       3,502  
Inventories
    2,904       2,994  
Note receivable, current portion
    900       1,200  
Deferred tax asset
    283       292  
Deposits and other current assets
    2,506       2,255  
Assets held for sale - property, plant and equipment
    -       3,598  
Total current assets
    13,021       16,295  
Long-term assets:
               
Note receivable, net of current portion
    -       600  
Property, plant and equipment, net
    28,562       24,054  
Intangible assets, net
    5,068       6,296  
Goodwill
    5,345       5,835  
Other long-term assets
    49       144  
Total assets
  $ 52,045     $ 53,224  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,120     $ 2,573  
Accrued expenses
    4,082       4,266  
Pre-petition liabilities
    2,198       6,406  
Long-term debt, current portion
    5,569       3,235  
Total current liabilities
    13,969       16,480  
Long-term liabilities:
               
Long-term debt, net of current portion
    4,140       7,365  
Deferred tax liability
    3,614       4,361  
Warrant liability
    853       1,628  
Other long-term liabilities
    1,000       1,000  
Total liabilities
    23,576       30,834  
                 
Commitments and contingencies
               
                 
Redeemable noncontrolling interest in Nutra SA
    11,310       -  
                 
Equity:
               
Equity attributable to NutraCea shareholders:
               
Preferred Stock, 20,000,000 authorized and none issued
    -       -  
Common stock, no par value, 500,000,000 shares authorized, 201,129,624 and 195,359,109 shares issued and outstanding
    209,194       207,432  
Accumulated deficit
    (190,385 )     (184,812 )
Accumulated other comprehensive loss
    (1,650 )     (74 )
Total equity attributable to NutraCea shareholders
    17,159       22,546  
Noncontrolling interest in Rice Science
    -       (156 )
Total equity
    17,159       22,390  
Total liabilities and equity
  $ 52,045     $ 53,224  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
5

 
NutraCea
Nine Months Ended September 30, 2011 and 2010
(Unaudited) (in thousands)
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (5,888 )   $ (10,888 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    3,827       3,471  
Provision for doubtful accounts
    96       209  
Impairment of property, plant and equipment
    -       1,000  
Loss on disposal of property, plant and equipment
    -       943  
Stock and share-based compensation
    1,118       872  
Warrant liability income
    (775 )     (63 )
Deferred tax benefit
    (441 )     (691 )
Reorganization expenses
    -       847  
Settlement with former officer
    (267 )     -  
Gain on extinguishment of debt
    (265 )     -  
Other
    445       31  
Changes in operating assets and liabilities:
               
Accounts receivable
    (656 )     11  
Inventories
    (102 )     332  
Other current assets
    (361 )     178  
Accounts payable and accrued expenses
    812       (911 )
Pre-petition liabilities
    (4,807 )     -  
Net cash used in operating activities, before reorganization items
    (7,264 )     (4,659 )
Reorganization items:
               
Reorganization expenses
    -       (847 )
Change in accounts payable for reorganization items
    -       109  
Net cash used for reorganization items
    -       (738 )
Net cash used in operating activities
    (7,264 )     (5,397 )
                 
Cash flows from investing activities:
               
Receipts on note receivable
    900       900  
Purchases of property, plant and equipment
    (5,216 )     (415 )
Restricted cash
    (480 )     -  
Proceeds from sale of property, plant and equipment
    -       8,872  
Acquisition of additional interests in Rice Science and Rice Rx
    (150 )     -  
Other
    (49 )     (16 )
Net cash provided by (used in) investing activities
    (4,995 )     9,341  
                 
Cash flows from financing activities:
               
Proceeds from sale of membership interests in Nutra SA, net of costs
    11,625       -  
Proceeds from (payments of) debt, net
    (175 )     (3,595 )
Proceeds from issuance of warrants and note conversion feature
    444       -  
Net cash provided by (used in) financing activities
    11,894       (3,595 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (5 )     (28 )
Net change in cash and cash equivalents
    (370 )     321  
Cash and cash equivalents, beginning of period
    537       952  
Cash and cash equivalents, end of period
  $ 167     $ 1,273  
                 
Supplemental disclosures:
               
Cash paid for interest
  $ 723     $ 812  
Cash paid for taxes
    14       -  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
6

 
 
NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of NutraCea and subsidiaries (“we”, “us”, “our” or the “Company”) 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 financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2010.

The interim results reported in these condensed consolidated 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.  We have experienced recurring losses and negative cash flows from operations.  In 2011, we issued shares of common stock and warrants to satisfy certain obligations, in an effort to conserve cash.  In 2011, we also obtained funds from issuances of convertible notes.  The equity markets, however, have not been a significant source of funds during 2011 and 2010 due to our financial position, the state of the equity markets and the bankruptcy filing discussed below.  Improving financial performance and equity market conditions, may allow us to raise equity funds in the near  future.  We intend to provide the necessary cash to continue operations through the monetization of certain assets, improved profitability and possible equity and/or debt financing transactions.

Certain reclassifications have been made to amounts reported for the prior year to achieve consistent presentation with the current year.

Recent Accounting Pronouncement

Accounting pronouncements that are applicable to us and could potentially have a material impact on our consolidated financial statements, are discussed below.

The FASB has issued guidance clarifying the criteria for separating revenue between multiple deliverables.  This guidance applies to new revenue arrangements or arrangements materially modified in periods subsequent to adoption.  We were required to adopt this standard effective January 1, 2011.  Adoption of the standard had no impact on our consolidated financial statements.

In May 2011, the FASB amended guidance on fair value measurement and expanded the required disclosures related to fair value.  The amendments, among other things, clarify that the highest and best use concept applies only to nonfinancial assets and addresses the appropriate premiums and discounts to consider in fair value measurement.  We are required to adopt the guidance prospectively, effective January 1, 2012.  We do not expect adoption to have a significant impact on our financial position or results of operations.

In September 2011, the FASB amended guidance on goodwill impairment testing.  The amendments permit us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.   Previous guidance required us to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one).  If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any.  Under the amendments, we are not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than its carrying amount.  We are required to adopt the amendments effective for annual and interim goodwill impairment tests (if required) performed after January 1, 2012.  Early adoption is permitted.  We do not expect adoption to have a significant impact on our financial position or results of operations.
 
 
7

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 2. CHAPTER 11 REORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLAN

Chapter 11 Reorganization

On November 10, 2009, NutraCea (Parent Company) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United States Bankruptcy Court for the District of Arizona (Bankruptcy Court), in the proceeding entitled In re:  NutraCea, Case No. 2:09-bk-28817-CGC (Chapter 11 Reorganization).  None of the Parent Company’s subsidiaries, including its Brazilian rice oil operation, were included in the bankruptcy filing.  The Parent Company continued to manage its assets and operate its business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  Under the Bankruptcy Code, certain claims against the Parent Company in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization.

On August 10, 2010, the Parent Company and the official unsecured creditors committee filed with the Bankruptcy Court an amended plan of reorganization (Amended Plan) in accordance with the Bankruptcy Code.  The Amended Plan called for the payment in full of all allowed claims.  Creditors voted overwhelmingly in favor of the Amended Plan and, on October 27, 2010, the Bankruptcy Court entered its order confirming the Amended Plan.  The confirmation order became final on November 10, 2010, and the Amended Plan became effective on November 30, 2010.

The Parent Company intends to discharge its obligation to pay the pre-petition liabilities by selling non-core assets, equity financing transactions, collecting outstanding receivables, and borrowing on a secured basis.  To secure a portion of these payment obligations, unsecured creditors were granted a lien in all of the Parent Company’s assets.  The lien is administered and may be enforced by a plan agent, who was jointly selected by the Parent Company and the official unsecured creditors committee.  The plan agent may, among other things, sell specified assets if the payment benchmarks set forth in the Amended Plan are not met.

Under the Amended Plan, if we fail to meet certain benchmarks for payment to our Class 6 general unsecured creditors as described in the Amended Plan, the plan agent may direct and control the sale of pledged assets as follows:

Benchmark Date
 
Required Cumulative
Payment
 
Pledged Assets Subject to
Sale by Plan Agent, if
Benchmark Not Met
 
Net Proceeds Plan Agent Retains for the
General Unsecured Creditors
July 15, 2011
  50%  
Dillon, Montana facility and all loose equipment
 
75% of proceeds from the sale of the facility and up to 100% of the proceeds from the sale of loose equipment
             
October 15, 2011
  75%  
Dillon, Montana facility and all loose equipment
 
75% of proceeds from the sale of the facility and up to 100% of the proceeds from the sale of loose equipment
             
January 15, 2012
  100%  
Lake Charles, Louisiana facility and any remaining pledged assets
 
Up to 100% of net proceeds from the sale
 
Since we will not be able to control the sale of the above assets if we do not meet a payment benchmark, we cannot guarantee that the assets will be sold at a value satisfactory to us.  Interest accrues on the unpaid pre-petition liabilities at an annual rate of 8.25%.  In 2011, cumulatively through the third quarter, we distributed to the Class 6 general unsecured creditors $4.2 million plus accrued interest.  In October 2011, we distributed an additional $0.5 million plus accrued interest and, as a result, we have met our October 15, 2011 payment benchmark.  Cumulatively through October 2011, we have distributed to the Class 6 general unsecured creditors $4.7 million plus $0.3 million in accrued interest, or approximately 75.0% of the amounts owed.

Under the Amended Plan, the items listed below must be paid to the Class 6 general unsecured creditors, if and when received.  Until distributed to the Class 6 general unsecured creditors, amounts received for these items, if any, are classified as restricted cash:
 
·
75% of the net proceeds from the sale of the Dillon, Montana facility;
 
·
the greater of (i) $2.2 million or (ii) 40% of the first $5.0 million in net proceeds we receive from the monetization of our interest in Nutra SA, LLC (Nutra SA) plus 50% of any net proceeds over $5.0 million;
 
·
50% of the net proceeds from the sale of our interest in Rice Science, LLC or Rice Rx LLC;
 
·
100% of the net proceeds from the sale of any loose (uninstalled) equipment;
 
 
8

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
 
·
75% of any prepayments received on the note receivable from Ceautamed Worldwide, LLC (Ceautamed), if any, and all receipts on the note beginning April 1, 2011;
 
·
75% of the net proceeds from the sale or monetization of the Lake Charles, Louisiana improvements or Mermentau, Louisiana facility, after payment of professional fees;
 
·
75% of the net proceeds from the sale or monetization of any other pledged assets;
 
·
100% of any recoveries from avoidance actions or actions against former officers and directors.
 
Liquidity and Management’s Plans

Although we have made significant improvements in the past year, we continue to experience losses and negative cash flows from operations which raises substantial doubt about our ability to continue as a going concern.  Although we believe that we will be able to obtain the funds necessary to continue as a going concern there can be no assurances that our efforts will prove successful.  The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We have taken steps in 2011 and 2010 to improve profitability and liquidity by reducing our U.S. based employee headcount at both the corporate and plant operations level.  In the ongoing effort to improve profitability, significant emphasis will be placed on growing revenues.  The growth of revenues is expected to include the following:

·
growth in existing markets, including bulk processed rice bran (SRB) and rice oil;
·
aligning with strategic partners who can provide channels for additional sales of our products including rice oil extraction; and
·
implementing price increases.

In 2011, we issued shares of common stock and warrants to satisfy certain obligations in an effort to conserve cash.  In 2011, we also obtained funds from issuances of convertible notes.  The equity markets, however, have not been a significant source of funds during 2011 and 2010 due to our financial position, the state of the equity markets and our November 2010 emergence from bankruptcy.  Improving financial performance and equity market conditions may allow us to raise equity funds in the near future.  We intend to provide the necessary cash to continue operations through the monetization of certain assets, improved profitability and possible equity and/or debt financing transactions.  Some of these monetizations could result in additional impairment of asset values.  Asset monetization may include some or all of the following:

·
sale or a sale-lease back of certain facilities;
·
sale of a noncontrolling interest in one or more subsidiaries; or
·
sale of surplus equipment.

NOTE 3. GENERAL BUSINESS

We are a food ingredient and health science company focused on bio-refining rice bran into numerous derivative products.  We have proprietary intellectual property that allows us to process and convert rice bran, one of the world’s most underutilized food resources, into highly nutritious ingredients including rice oil, processed rice bran (SRB), defatted rice bran (DRB) and their derivative products, that have applications in various food products and nutraceutical applications.  Our target markets are food, nutraceutical and animal nutrition manufacturers and distributors.  Rice oil and SRB are also used as stand-alone products that can be sold through non-related entities with distribution into the marketplace, both domestically and internationally.  We believe that products containing rice oil, SRB, DRB, and their derivative products, can deliver beneficial physiological effects.  We continue to pursue both internal and independent research and development along with third party analyses in order to further support the uses for and effectiveness of our products.
 
We have three reportable business segments: (i) Corporate; (ii) SRB, which manufactures and distributes SRB in various granulations along with products derived from bran via patented enzyme treatment processes including a fat and protein rich water soluble fraction and a fiber rich insoluble fraction; and (iii) Bio-Refining, which separates rice bran into rice oil and defatted rice bran which are then further processed into a number of valuable food and feed products.  Bio-Refining operations currently consist of our operations in Brazil.  The Corporate segment includes general and administrative expenses, legal settlements and other expenses not directly attributable to other segments.  No corporate allocations are made to the other segments.  Interest incurred at the Corporate level is not allocated.
 
 
9

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4. LOSS PER SHARE (EPS)

Basic EPS is computed by dividing net income (loss) attributable to NutraCea shareholders by the weighted average number of common shares outstanding during all periods presented.  Options, warrants and shares issuable upon conversion of convertible notes payable are excluded from the basic EPS calculation and are considered in calculating the diluted EPS.

Diluted EPS is computed by dividing net income (loss) attributable to NutraCea 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 and warrants is calculated using the treasury stock method.  The dilutive effect of outstanding convertible notes payable is calculated using the “if converted” method.

Below are reconciliations of the numerators and denominators in the EPS computations for the three months and nine months ended September 30, 2011.
 
   
Three Months Ended
   
Nine Months Ended
 
   
2011
   
2010
   
2011
   
2010
 
NUMERATOR (in thousands):
                       
Basic and diluted - net loss attributable to NutraCea shareholders
  $ (1,493 )   $ (3,090 )   $ (5,573 )   $ (10,888 )
                                 
DENOMINATOR:
                               
Basic EPS - weighted average number of shares outstanding
    199,380,838       193,027,680       197,650,794       193,015,812  
Effect of dilutive securities outstanding
    -       -       -       -  
Diluted EPS - weighted average number of shares outstanding
    199,380,838       193,027,680       197,650,794       193,015,812  
                                 
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 (average exercise price for the three and nine months ended September 30, 2011 of $0.29 and $0.29)
    39,557,171       30,996,197       40,342,313       28,089,581  
Warrants (average exercise price for the three and nine months ended September 30, 2011 of $1.10 and $1.17)
    42,950,415       39,578,506       41,721,527       39,666,418  
Convertible notes payable
    6,286,935       -       3,230,007       -  

The impact of potentially dilutive securities outstanding at September 30, 2011 and 2010, were not included in the calculation of diluted EPS in 2011 and 2010 because to do so would be antidilutive.  Those securities which were antidilutive in 2011 and 2010, which remain outstanding, could potentially dilute EPS in the future.

NOTE 5. REDEEMABLE NONCONTROLLING INTEREST IN NUTRA SA

In December 2010, we entered into a membership interest purchase agreement (MIPA) with AF Bran Holdings-NL LLC and AF Bran Holdings LLC (Investors).  The transaction closed in January 2011.  The Investors agreed to purchase units in Nutra SA for an aggregate purchase price of $7.7 million.  Prior to the transaction, Nutra SA was a wholly owned subsidiary.  Nutra SA owns 100% of Irgovel Industria Riograndense De Oleos (Irgovel).  Initially after the closing, effective in January 2011, we owned a 64.4% interest in Nutra SA, and the Investors owned a 35.6% interest in Nutra SA.  The Parent Company received $4.0 million of the January 2011 proceeds.  The remaining $3.7 million, less $0.5 million retained by Nutra SA for administrative expenses, was invested in Irgovel for capital improvements and working capital needs.

The Parent Company agreed to use $2.2 million of the funds received from the January 2011 transaction closing to repay amounts owed to the Class 6 general unsecured creditors in accordance with the Amended Plan.  The remaining $1.8 million was used for general corporate purposes, other unsecured creditor claims and administrative expenses associated with the Chapter 11 Reorganization.
 
 
10

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

We received in the second quarter of 2011 an additional $3.0 million from the Investors - $1.0 million for the purchase of existing units in Nutra SA from the Parent Company, which was used by the Parent Company for working capital, and $2.0 million for the purchase of new units in Nutra SA, which will be used by Irgovel to fund a capital expansion.  We received in the third quarter of 2011 an additional $0.9 million from the Investors for the purchase of existing units in Nutra SA from the Parent Company, which was used by the Parent Company for working capital.  These purchases increased the Investors’ interest in Nutra SA to a 49.0% interest as of September 30, 2011.

We determined that we continued to control Nutra SA after each of the transactions and therefore we continued to consolidate Nutra SA.  We treated each transaction similar to an equity transaction, with no gain or loss recognized in consolidated net income or comprehensive income.  The Investors’ share of Nutra SA’s net income or loss after the January 2011 closing is recorded in redeemable noncontrolling interest.

A summary of changes in redeemable noncontrolling interest follows (in thousands):
 
   
Investors'
Ownership
Interest
After
Transaction
   
Three Months
Ended
September 30,
2011
   
Nine Months
Ended
September 30,
2011
 
Redeemable noncontrolling interest in Nutra SA, beginning of period
        $ 10,686     $ -  
Investors' purchase of initial units - first quarter 2011
    35.6 %     -       7,725  
Investors' purchase of additional units - second quarter 2011
    45.2 %     -       3,000  
Investors' purchase of additional units - third quarter 2011
    49.0 %     900       900  
Investors' interest in net loss of Nutra SA
            (276 )     (315 )
Redeemable noncontrolling interest in Nutra SA, end of period
          $ 11,310     $ 11,310  

Redeemable noncontrolling interest in Nutra SA is recorded in temporary equity, above the equity section and after liabilities on our consolidated balance sheets, because the Investors have the right to force a sale of Nutra SA assets in the future (see Drag Along Rights described below).  We have assessed the likelihood of the Investors exercising these rights as less than probable at September 30, 2011, in part because it is more likely the Investors will exercise other rights prior to January 2015.  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.

We are restricted from competing with Nutra SA and Irgovel in Brazil as further described in the MIPA.

In the third quarter of 2011, in connection with the Investors’ purchase of additional units for $0.9 million, we entered into a waiver agreement to the MIPA and an amendment to the limited liability company agreement for Nutra SA, LLC (LLC agreement).  Under the waiver and amendment the Investors have the right to purchase additional units in Nutra SA at $2.00 per unit if we are unable, by December 15, 2011, to obtain binding loan documentation from Brazilian financial institution(s) for a loan(s) totaling at least R$9.0 million, at 10.5% annual interest or less, which matures in no less than 5 years.  This purchase right only applies to the extent that such purchases are required to fund the first phase of the Irgovel capital expansion project and Irgovel’s operations.  In addition, until the later of (i) the date the first phase of the project is completed or (ii) August 31, 2013, the Investors have the right to purchase additional units in Nutra SA at $2.00 per unit if (i) there are inadequate funds available from a Brazilian institution(s) to complete the first phase of the project or to operate Irgovel, creating a cash shortfall, and (ii) we are unable to fund the first $0.9 million of this shortfall, or our prorata share of any additional cash shortfall above the first $0.9 million, by purchasing additional units in Nutra SA at $2.00 per unit.

Under the LLC agreement, the business of Nutra SA is to be conducted by the manager, NutraCea’s CEO, subject to the oversight of the management committee.  The management committee is comprised of three NutraCea representatives and two Investors’ representatives.  Upon an event of default or a qualifying event, the management committee will no longer be controlled by NutraCea, and will include three Investors representatives and two NutraCea 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.

 
11

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
As of September 30, 2011, there have been no events of default.  Events of default, as defined in the MIPA, are:
 
·
A Nutra SA business plan deviation, defined as the occurrence, in either 2012, 2013 or 2014, of a 20% unfavorable variation in two out of three of the following: (i) revenue, (ii) earnings before interest, taxes, depreciation and amortization (EBITDA) or (iii) debt,
 
·
A Nutra SA EBITDA default, which is defined as the failure to achieve 85% of planned EBITDA for three consecutive quarters, beginning with the quarter ended March 31, 2011, or
 
·
A material problem, which is defined as a material problem in a facility (unrelated to changes in law, weather, etc.) likely to cause a Nutra SA business plan deviation or Nutra SA EBITDA default, which results in damages not at least 80% covered by insurance proceeds.

As of September 30, 2011, there have been no qualifying events.  The LLC agreement, as amended in the third quarter of 2011, defines a qualifying event as any event prior to September 16, 2014, which results, or will result, (i) in a person or group of persons exercising the right to appoint members to our board of directors holding one third or more of the votes of all board members, (ii) the sale, exchange, pledge or use as guarantee of one half of our ownership interest in Nutra SA to a third party (iii) the bankruptcy of NutraCea or Nutra SA or (iv) the Investor’s purchase of additional units in Nutra SA under the waiver to the MIPA, such that the Investor’s ownership interest in Nutra SA exceeds 49%.

In evaluating whether we maintain control over 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.  They do have such rights in the future (Drag Along Rights as described below).  We will continue to evaluate our ability to control Nutra SA each reporting period.

The Investors have certain rights, summarized below, under an investor rights agreement and the LLC agreement, as further defined in the agreements.
 
·
Conversion Rights – The Investors may exchange units in Nutra SA for equity interests in Irgovel beginning in July 2011.  After any exchange, the Investors would possess the same rights and obligations with respect to the securities of Irgovel, as they have in Nutra SA.
 
·
Global Holding Company (GHC) Roll-Up – If we form an entity, GHC, to hold our bio-refining segment assets, the Investors may exchange units in Nutra SA for equity interests in GHC.  The investors may exercise this right after the second anniversary of the formation of GHC or, if an event of default has occurred, after the later of January 2013 and the GHC formation date.  The appraised fair value of the Investors’ interest in Nutra SA would be used to determine the amount of ownership interest the Investors would receive in GHC.
 
·
NutraCea Roll-Up – The Investors may exchange units in Nutra SA for NutraCea common stock..  This right is available upon the earlier of January 2014 or, if an event of default has occurred, January 2013.  We may elect to postpone our obligation to complete the NutraCea roll-up to January 2015 if the roll-up would result in over 25% of our common stock being owned by the Investors.  The appraised fair value of the Investors’ interest in Nutra SA and the market price of our stock would be used to determine the amount of ownership interest the Investors would receive in NutraCea.
 
·
Drag Along Rights – The Investors have the right to force the sale of all Nutra SA assets after the earlier of (i) January 2015, (ii) January 2013 if an event of default occurs, (iii) February 2014 if we make a NutraCea roll-up postponement election or (iv) the date of a qualifying event.  The right terminates upon the occurrence of certain events (a $50 million Nutra SA initial public offering or a change of control, as defined).  We may elect to exercise a right of first refusal to purchase the Investors’ interest instead of proceeding to a sale.

NOTE 6. SETTLEMENT WITH HERBAL SCIENCE

In March 2010, Herbal Science Singapore Pte. Ltd. (HS) filed a proof of claim against the Parent Company in the amount of $1.5 million in the Chapter 11 Reorganization.  In November 2010, we entered into a stipulated settlement agreement with HS and certain affiliates, which was subsequently approved by the Bankruptcy Court.  The stipulation, as amended, provided that we would pay HS $0.9 million.

During the first quarter of 2011, we paid $0.4 million of our obligation to HS.  In the second quarter of 2011, HS sold their receivable due from us to a third party (Buyer).  In settlement of our remaining $0.5 million obligation to Buyer we issued to Buyer 2,576,775 shares of common stock and a warrant to purchase 605,730 shares, at $0.23 per share, expiring in November 2016, in a noncash transaction.  The fair value of the common stock and warrant issued to Buyer exceeded our obligation to the Buyer by $0.2 million.  This excess is recorded as a transaction cost in other expense in the second quarter of 2011.  The stock had a fair value, based on the closing price of our stock, of $0.6 million.  The warrant had a fair value of $0.1 million, determined using Black-Scholes valuation methodology.

 
12

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
As a result of the settlement of our obligation to HS in the second quarter of 2011, we became the sole member of Rice Rx, LLC (RRX) and Rice Science, LLC (RS).  Our ownership interest in RRX, increased from 50% to 100% and our ownership interest in RS increased from 80% to 100%.  In addition, we were assigned all interests in the patentable pharmaceuticals, SRB isolates and related intellectual property derived from the preliminary research and development activities of RRX and RS.

The $0.9 million settlement was comprised of $0.6 million for the satisfaction of liabilities RRX and RS had payable to HS, $0.1 million for interest expense on those liabilities, $0.1 million for reimbursement of HS attorney fees, and $0.1 million for the additional ownership interests in RRX and RS.  We used cash to satisfy our obligation to pay the $0.1 million for the ownership interests and $0.3 million of the liabilities to RRX and RS and settled the remainder with issuance of the shares of common stock and the warrant to the Buyer.

We had a controlling interest in RS prior to the transaction, therefore no gain or loss was recorded with the purchase of the additional RS ownership interests.  We recorded the indicated loss, representing the cash paid for the RS ownership interests and the noncontrolling interest derecognized with the transaction, of $0.3 million in equity in the second quarter of 2011.

We increased our interest in RRX from a noncontrolling interest to a controlling interest.  Consequently, in the second quarter of 2011, we recorded a loss on the transaction, equal to the cash paid for the RRX ownership interests and the net RRX liabilities assumed, of $0.1 million.  The $0.1 million loss on acquisition of the additional interest in RRX is included in other income (expense).

NOTE 7. INVENTORIES

Inventories are composed of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Finished goods
  $ 969     $ 553  
Work in process
    1,134       1,076  
Raw materials
    625       1,119  
Packaging supplies
    176       246  
Total inventories
  $ 2,904     $ 2,994  

NOTE 8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Land
  $ 424     $ 208  
Furniture and fixtures
    1,459       1,461  
Plant
    16,889       13,369  
Computer and software
    1,608       1,628  
Leasehold improvements
    189       189  
Machinery and equipment
    16,569       15,239  
Construction in progress
    6,759       2,081  
Property, plant and equipment
    43,897       34,175  
Less accumulated depreciation
    15,335       10,121  
Property, plant and equipment, net
  $ 28,562     $ 24,054  

In October 2009, as part of evaluating non-core assets and businesses, management determined that the Dillon facility (which included land, building and equipment) would be offered for sale.  Throughout 2010, we aggressively marketed the facility.  The facility continued to be classified as held for sale through December 31, 2010.  While classified as held for sale, no depreciation was recorded on the Dillon assets.  In the fourth quarter of 2010, we recognized an impairment loss of $0.9 million based on an evaluation of market conditions and a discounted cash flow analysis.

 
13

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
In February 2011, we ceased actively marketing the facility.  We continue to operate the facility and are evaluating ways to utilize excess capacity.  As a result, in the first quarter of 2011, we reclassified $3.6 million for the Dillon facility from assets held for sale to property, plant and equipment in use, and restarted depreciation.

Property, plant and equipment also increased in the nine months ended September 30, 2011, by $5.1 million for the capital expansion project at Irgovel.

NOTE 9. SETTLEMENT WITH FORMER CUSTOMER

In March 2011, pursuant to a settlement agreement with a former customer, we received $0.8 million in connection with a 2007 transaction with that customer.  We shipped products in 2007 to the customer and no revenue was recognized for the transaction under revenue recognition rules.  The customer had not remitted payment prior to the settlement.  The $0.8 million received is recorded as settlement with former customer in the statements of operations for the nine months ended September 30, 2011.

NOTE 10. DEBT

The following table summarizes current and long-term portions of debt (in thousands):
 
   
September 30,
2011
   
December 31,
2010
 
Domestic:
           
Customer list purchase
  $ 590     $ 993  
Supplier note
    84       177  
Convertible notes payable
    1,493       -  
      2,167       1,170  
Foreign:
               
Equipment financing
    247       290  
Working capital lines of credit
    3,780       4,404  
Special tax programs
    3,379       4,470  
Other obligations
    136       266  
      7,542       9,430  
Total debt
    9,709       10,600  
Current portion
    5,569       3,235  
Long-term portion
  $ 4,140     $ 7,365  

Convertible Notes Payable

The terms of the convertible notes payable outstanding as of September 30, 2011, and related warrants (vested and exercisable at issuance), are summarized below.
 
 
Date of Note
and Warrant
 
Principal Amount of
Note (in thousands)
 
Creditor's Note
Conversion Right
 
Stated Annual
Interest
Rate on Note
   
Maturity Date of Note
 
Shares
Under
Warrant
   
Exercise
Price of
Warrant
 
Expiration Date of
Warrant
June 2011
  $ 739  
Convertible immediately at $0.21 per share
    10  
June 2014
    730,000     $ 0.23  
December 2014
                                         
July 2011
    270  
Convertible immediately at $0.21 per share
    10  
June 2014
    270,000       0.23  
December 2014
                                         
August 2011
    730  
Convertible immediately at $0.21 per share
    10  
June 2014, unless accelerated by creditor to March 2013, or later
    730,000       0.23  
June 2015
 
 
14

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
In October 2011, we entered into an agreement under which the convertible notes described above were terminated and the related warrants were cancelled in connection with the holder of the convertible note lending us an addition $0.6 million.  The carrying amount of the old notes on the date of cancellation was $1.8 million.  New convertible notes and a warrant were issued to the creditor.  The terms of the October 2011 convertible notes payable and related warrant (vested and exercisable at issuance), are summarized below.
 
Date of Note
and Warrant
 
Principal Amount of
Note (in thousands)
 
Creditor's Note
Conversion Right
 
Stated Annual
Interest
Rate on Note
   
Maturity Date of Note
 
Number of
Shares Under
Warrant
   
Exercise
Price of
Warrant
 
Expiration Date of
Warrant
                                 
October 2011
  $ 1,773  
Convertible immediately at $0.20 per share
    10 %  
October 2014, unless accelerated by creditor to March 2013, or later
    1,773,186     $ 0.22  
June 2015
                                         
October 2011
    550  
Same as above
    10 %  
October 2014, unless accelerated by creditor to January 2012, or later
    550,000       0.22  
June 2015

Interest accrues monthly on the notes.  Accrued interest from October 2011 through January 2012 is payable in January 2012.  Interest accruing after January 2012 is payable monthly.  All unpaid principal and interest is due at maturity.  The convertible notes are secured by substantially all of our personal property, except for equity interests in subsidiaries and joint ventures.  Beginning in January 2012, or the date the general unsecured creditors are paid in full, if earlier, the notes will be secured by our Dillon, Montana and Mermentau, Louisiana real estate as well.

With each funding we determined the fair value of each convertible note as the total of (i) the discounted cash flows of the payments due under the note related to that advance, discounted at 25%, plus (ii) the fair value of the related conversion feature, determined using the Black-Scholes methodology.  We determined the fair value of the warrants using the Black-Scholes valuation methodology.  Based on the relative fair values, we allocated a portion of the proceeds to the convertible note and a portion to equity for the warrant.  We then determined if any of the amount allocated to the convertible note should be recorded to equity for the conversion feature.  If there was a beneficial conversion feature based on the effective conversion price, that amount was recorded in equity for the conversions feature, and the remainder was recorded in debt.

During the first nine months of 2011, we received $1.7 million in cash from the issuance of the convertible notes and related warrants.  We recorded in equity $0.4 million for the warrants and the note conversion features, $0.1 million to other assets and the remainder to debt.  During the first nine months of 2011, we recognized $0.1 million in accreted interest expense.  As of September 30, 2011, the carrying amount of the notes is $1.5 million.

We recognized no gain or loss as a result of the October 2011 refinancing of the convertible notes.  Beginning in October 2011, interest expense is being recognized on the $1.8 million note, related to the refinanced balance outstanding on the old notes, at a 22.9% effective rate to accrete the $1.5 million October 2011 carrying amount up to the principal and interest due as of the accelerated maturity date in March 2013.  Prior to the refinancing, interest expense was being recognized on the old notes at an average effective interest rate of 18.7%.  Interest expense is being recognized on the $0.6 million note at a 48.8% effective rate to accrete the initial $0.5 million carry amount up to the principal and interest due as of the accelerated maturity date in January 2012.

Factoring Agreement

In January 2011, we entered into a domestic factoring agreement which provides for a $1.0 million credit facility with a bank.  We may only borrow to the extent we have qualifying accounts receivable as defined in the agreement.  The facility expires on December 31, 2011, and renews automatically for another year unless proper termination notice is given.  The bank will charge the greater of $2,000 per month or a 2.0% fee on any borrowing.  The 2.0% fee increases incrementally for any qualified account with a balance that remains outstanding in excess of 45 days.  In the three and nine months ended September 30, 2011, average borrowings under this agreement were less than $0.2 million and $0.1 million.
 
 
15

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
Special Tax Programs

Irgovel qualified for a modification of one of its special tax program debts and as a result we recorded a $0.3 million gain on extinguishment of debt in other income (expense) in the second quarter of 2011.  Certain maturities of the debt, carried at $3.2 million as of September 30, 2011, were extended.  Prior to the modification the debt maturities ranged from 2011 though 2017.  As modified, debt maturities range from 2011 through 2021 and interest is payable monthly at an annual rate of 11.3%.

NOTE 11. EQUITY, SHARE-BASED COMPENSATION AND WARRANT LIABILITY

A summary of equity activity for the nine months ended September 30, 2011 (in thousands, except share data) follows.

 
   
NutraCea Shareholders
             
                            Non-         
                     
Accumulated 
    controlling        
    Common Stock    
Accumulated
    Other Comp-     Interest in     Total  
    Shares    
Amount
    Deficit     rehensive Loss     Rice Science     Equity  
Balance, January 1, 2011
    195,359,109     $ 207,432     $ (184,812 )   $ (74 )   $ (156 )   $ 22,390  
Cancelled shares and options -settlements with former officers
    (44,666 )     (267 )     -       -       -       (267 )
Share-based employee and director compensation - options
    -       585       -       -       -       585  
Share-based consultant compensation -options
    -       9       -       -       -       9  
Beneficial conversion feature of convertible note
    -       165       -       -       -       165  
Warrants issued for convertible note
    -       279       -       -       -       279  
Acquisition of additional interests in Rice Science
    -       (254 )     -       -       156       (98 )
Warrants issued to Buyer (Note 6)
    -       103       -       -       -       103  
Common stock issued to Buyer (Note 6)
    2,576,775       618       -       -       -       618  
Common stock issued for vendor services
    2,031,357       359       -       -       -       359  
Common stock issued to directors
    1,207,049       165       -       -       -       165  
Foreign currency translation
    -       -       -       (1,576 )     -       (1,576 )
Net loss
    -       -       (5,573 )     -       -       (5,573 )
Balance, September 30, 2011
    201,129,624     $ 209,194     $ (190,385 )   $ (1,650 )   $ -     $ 17,159  
 
In lieu of paying cash to non-employee board members for board retainer fees for the last three quarters of 2011, we issued shares of common stock.  The number of shares issued equaled the $0.2 million cash compensation to which the directors are entitled, divided by $0.20.  We issued in the third quarter of 2011 a total of 1,207,049 shares for 2011 retainer fees.  As of September 30, 2011, 336,250 of these shares were unvested.   Directors will continue to be paid cash for meeting attendance fees.

 
16

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
A summary of stock option and warrant activity for the nine months ended September 30, 2011 follows.
 
   
Options
   
Equity and Liability Warrants
 
   
Shares Under
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life
(Years)
   
Shares Under
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life
(Years)
 
Outstanding, January 1, 2011
    45,485,111     $ 0.30       6.9       40,429,577     $ 1.28       2.1  
Granted
    4,904,224       0.22               2,835,730       0.23          
Impact of anti-dilution clauses
    -                       4,328,701                  
Exercised
    -                       -                  
Forfeited, expired or cancelled
    (11,816,539 )     (0.34 )             (3,372,387 )     1.00          
Outstanding, September 30, 2011
    38,572,796     $ 0.28       6.6       44,221,621     $ 1.10       1.7  
                                                 
Exercisable, September 30, 2011
    24,926,077     $ 0.32       5.9       44,221,621     $ 1.10       1.7  

Options

In December 2010, we reached an agreement to settle all potential claims associated with the employment of Mr. Brad Edson, our former chief executive officer.  The agreement was subject to the approval of the Bankruptcy Court and became effective upon court approval in January 2011.  Mr. Edson agreed to return to NutraCea $0.4 million, representing a bonus earned in 2008.  We recorded a receivable for the return of the bonus.  The corresponding income reduced selling, general and administrative expenses in the first quarter of 2011.  As partial payment of the receivable, Mr. Edson forfeited 6,000,000 options granted in 2004 and returned 35,000 shares of common stock in payment of $0.3 million of his obligation.  The options had an exercise price of $0.30 per share and were outstanding and exercisable as of December 31, 2010.  We reduced the receivable from Mr. Edson, reduced equity by $0.3 million, and cancelled the options in the first quarter of 2011, when the Bankruptcy Court approved the agreement.  The remaining $0.1 million receivable remains unpaid and reserved for due to uncertainty with regard to the collectability of the receivable as of September 30, 2011.

In March 2011, we reached an agreement to settle all potential claims associated with the employment of Mr. Todd Crow, our former chief financial officer.  As part of the settlement, Mr. Crow was required to forfeit 1,662,942 options and return 9,666 shares of common stock held.  The agreement was subject to the approval of the Bankruptcy Court and became effective upon court approval in April 2011.  We canceled the stock and options in the second quarter of 2011.  The options had an average exercise price of $0.37 per share and were outstanding and exercisable as of December 31, 2010.  No value was assigned to the cancelled stock or options because we transferred no cash or other assets in exchange.  In connection with the settlement, Mr. Crow agreed to withdraw his $0.2 million bankruptcy claim.

On July 15, 2011, we entered into amendments to employment agreements with each of our four executive officers.  Twenty percent of each officer’s salary for the last six months of 2011 will be paid in stock options instead of in cash.  The options will vest and become exercisable in twelve equal installments commencing on July 15, 2011 and ending on December 31, 2011.  Under the amendments we issued options to purchase 2,116,726 shares of common stock, at an average exercise price of $0.20, and an average initial term of 1.6 years.
 
 
17

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
Warrants

We have outstanding warrants classified as equity (equity warrants) and as warrant liability (liability warrants).
 
   
Equity Warrants
   
Liability Warrants
 
   
Shares
Under
Equity
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life 
(Years)
   
Shares Under
Liability
Warrants
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual Life 
(Years)
 
Outstanding, January 1, 2011
    545,454     $ 0.69       2.8       39,884,124     $ 1.28       2.1  
Granted
    2,835,730       0.23               -                  
Impact of antidilution clauses
    -                       4,328,701                  
Exercised
    -                       -                  
Forfeited, expired or cancelled
    (500,000 )     0.25               (2,872,387 )     1.13          
Outstanding and Exercisable, September 30, 2011
    2,881,184     $ 0.32       3.6       41,340,438     $ 1.16     $ 1.6  
 
As of September 30, 2011, we have outstanding liability warrants to purchase 21,591,715 shares of common stock that expire in August 2012.

We have certain warrant agreements in effect for outstanding liability warrants that contain antidilution clauses.  Under the antidilution clauses, in the event of equity issuances, we may be required to lower the exercise price on liability warrants and increase the number of shares underlying liability warrants.  Equity issuances may include issuances of our common stock, certain awards of options to employees, issuances of warrants and/or other convertible instruments below a certain exercise price.

The table below summarizes the equity issuances in 2011, through the date of this filing, which triggered the antidilution clauses in certain liability warrants.
 
Triggering Event
   
Shares Under
Equity
Warrants
   
Exercise
Price of
Warrants
 
Common stock issuance to Buyer and related warrant (Note 6):
             
Second quarter 2011
      605,730     $ 0.23  
Convertible note issuances and related warrants (Note 10):
                 
First quarter 2011
(1 )   500,000       0.25  
Second quarter 2011
(2 )   730,000       0.23  
Third quarter 2011, event A
(2 )   270,000       0.23  
Third quarter 2011, event B
(2 )   730,000       0.23  
        2,835,730     $ 0.23  
Convertible note issuances and related warrants (Note 10):
                 
Fourth quarter 2011
      2,323,186     $ 0.22  
 
(1)
The warrant to purchase 500,000 shares of common stock, issued to the holder of the convertible note in the first quarter of 2011, was cancelled in the second quarter of 2011.
(2)
Warrants to purchase 1,730,000 shares of common stock, issued to the holder of the convertible note in the second and third quarters of 2011, were cancelled in the fourth quarter of 2011.

 
18

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
The table below summarizes the impact of the equity issuances, listed above which triggered the antidilution clauses in certain liability warrants.
 
       
Before Event
   
After Event
   
Increase in
 
Triggering Event
     
Shares
Under
Liability
Warrants
   
Weighted
Average
Exercise
Price
   
Shares
Under
Liability
Warrants
   
Weighted
Average
Exercise
Price
   
Shares
Under
Liability
Warrants
 
Common stock issuance to Buyer and related warrant (Note 6):
                                 
Second quarter 2011
(1 )     40,735,768     $ 1.25       41,707,143     $ 1.22       971,375  
Convertible note issuances and related warrants (Note 10):
                                           
First quarter 2011
(1 )     39,884,124       1.28       40,735,768       1.25       851,644  
Second quarter 2011
(1 )     38,834,756       1.23       39,721,515       1.20       886,759  
Third quarter 2011, event A
        39,721,515       1.20       40,362,227       1.19       640,712  
Third quarter 2011, event B
        40,362,227       1.19       41,340,438       1.16       978,211  
                                          4,328,701  
Convertible note issuances and related warrants (Note 10):
                                           
Fourth quarter 2011
        41,340,438       1.16       43,314,994       1.10       1,974,554  

(1)
During the third quarter of 2011, the calculations of the impact of the triggering events were revised.  The revised figures are reflected above.  The impact was immaterial to the financial statements and less than $0.1 million.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Lease Commitments

In November 2011, we amended our corporate office space lease which was to expire in January 2012.  Under the terms of the amendment, rent is abated for the period from November 2011 through March 2012.  Future minimum payments under the lease, as amended, are as follows: $0.2 million for 2012; $0.2 million for 2013 , $0.3 million for 2014; $0.3 million for 2015; $0.3 million for 2016, and $0.1 million for 2017.

Purchase and Supply Commitments

In January 2011, Irgovel entered into a commitment to supply $0.4 million of rice oil each month from April 2011 to December 2011 to an existing customer.  The commitment represents approximately 50% of Irgovel’s current rice oil production capacity.

As of September 30, 2011, Irgovel has outstanding equipment purchase commitments totaling approximately $1.5 million.  The equipment is part of a capital project to expand production capacity and improve operational efficiency.  We expect to pay for this equipment through the second quarter of 2012.

Litigation

In addition to the matters discussed below, from time to time we are involved in litigation incidental to the conduct of our business.  When applicable, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.  While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position or results of operations.  Defense costs are expensed as incurred and are included in professional fees.
 
 
19

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
Irgovel Stockholders Lawsuit

On August 28, 2008, former Irgovel stockholder David Resyng filed an indemnification suit against Irgovel, Osmar Brito and the remaining Irgovel stockholders (Sellers), requesting: (i) the freezing of the escrow account maintained in connection with the transfer of Irgovel’s corporate control to us and the presentation of all documentation related to the transaction, and (ii) damages in the amount of the difference between (a) the sum received by David Resyng in connection with the judicial settlement agreement executed in the action for the partial dissolution of the limited liability company filed by David Resyng against Irgovel and the Sellers and (b) the amount received by the Sellers in connection with the sale of Irgovel’s corporate control to us, in addition to moral damages as determined in the court’s discretion.  The amount of damage claimed by Mr. Resyng is approximately $3 million.

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

On February 6, 2009, the Sellers filed a collection lawsuit against us seeking payment of the second installment of the purchase price under the Purchase Agreement, which the Sellers allege is approximately $1 million.  We have withheld payment of the second installment pending resolution of the Resyng lawsuit noted above.  The Parent Company has not been served with any formal notices in regard to this matter so far.  To date, only Irgovel has received formal legal notice.  In addition, the Purchase Agreement requires that all disputes between us and the Sellers be adjudicated through arbitration.  As part of the Purchase Agreement, $2.0 million was deposited into an escrow account to cover contingencies with the net remaining funds payable to the Sellers upon resolution of all contingencies.  We believe any payout due to the lawsuit will be made out of the escrow account.  As of September 30, 2011, and December 31, 2010, the balance in the escrow account was $1.9 million and is included in restricted cash in the consolidated balance sheets.  There is an offsetting liability in accrued expenses in our consolidated balance sheets as of September 30, 2011 and December 31, 2010.  We believe that there is no additional material exposure as any amounts determined to be owed as a result of the above noted litigation and contingencies will be covered by the escrow account.

SEC Enforcement Investigation

We received a letter from the SEC in January 2009 indicating that it had opened an informal inquiry, and we subsequently received an informal request for the production of documents in February 2009 relating to a number of 2007 transactions.  In March 2009, we received a formal order of private investigation from the SEC.  In June 2009, we received a subpoena for the production of documents that largely tracked the SEC’s earlier requests.  We responded to these requests for documents and based on findings related to the internal review and the SEC’s requests, we restated our financial statements for 2006, 2007 and the first three quarters of 2008.

On January 13, 2011, the SEC filed a complaint in the United States District Court for the District of Arizona alleging that we violated Section 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act of 1934 (the Exchange Act), 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13 (the SEC Action).  We have settled these allegations with the SEC, without admitting or denying them, and have consented to the entry of a final judgment of permanent injunction (Consent Judgment), which, among other things, permanently restrains and enjoins us from violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13.  The final Consent Judgment was entered in the SEC action on February 14, 2011.  No financial penalty was assessed by the SEC against us.

Farmers’ Rice Milling

Farmers’ Rice Milling (FRM) contended that we defaulted by failing to pay rentals due under two leases between the parties: (i) the March 15, 2007, ground lease, as amended on November 1, 2008, and (ii) the April 15, 2007, warehouse lease.  FRM filed suit against us to terminate the leases and recover damages thereunder.  This suit was filed in the 14th Judicial District Court on June 24, 2009, and was timely removed to the United States District Court, Western District of Louisiana, Lake Charles division.  We filed an answer and counterclaim and deposited into the registry of the court $0.1 million constituting the rentals due under the leases, a late fee due under the warehouse lease plus accrued interest.  As part of the Chapter 11 Reorganization, the leases were assumed under Section 365 of the Bankruptcy Code.  Arrearages due under the leases were paid in January 2011 and the lawsuit was dismissed.  FRM also asserted a claim for monetary damages for breach of a supply agreement, but that claim was dismissed from the lawsuit and allowed as a general unsecured claim in the Chapter 11 Reorganization.
 
 
20

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

 NOTE 13. SEGMENT INFORMATION

We have three reportable segments: (i) Corporate; (ii) SRB, which manufactures and distributes SRB in various granulations along with products derived from bran via patented enzyme treatment processes including a fat and protein rich water soluble fraction and a fiber rich insoluble fraction; and (iii) Bio-Refining, which separates rice bran into rice oil and defatted rice bran which are then further processed into a number of valuable food and feed products.  The Bio-Refining segment consists of our Irgovel operations in Brazil.  The Corporate segment includes general and administrative expenses, legal settlements and other expenses not directly attributable to segments.  No corporate allocations are made to the other segments.  Interest incurred at the Corporate level is not allocated.

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

   
Three Months Ended September 30, 2011
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Revenues
  $ -     $ 2,528     $ 6,058     $ 8,586  
Cost of goods sold
    -       1,784       4,879       6,663  
Gross profit
    -       744       1,179       1,923  
Depreciation and amortization (in selling, general and administrative)
    (42 )     (313 )     (315 )     (670 )
Intersegment fees
    102       -       (102 )     -  
Other operating expense
    (1,520 )     (933 )     (1,153 )     (3,606 )
Loss from operations
  $ (1,460 )   $ (502 )   $ (391 )   $ (2,353 )
                                 
Net loss attributable to NutraCea shareholders
  $ (634 )   $ (535 )   $ (324 )   $ (1,493 )
Interest expense
    (114 )     (34 )     (154 )     (302 )
Depreciation (in cost of goods sold)
    -       (279 )     (366 )     (645 )
Purchases of property, plant and equipment
    -       12       703       715  
 
   
Nine Months Ended September 30, 2011
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Revenues
  $ -     $ 7,919     $ 18,310     $ 26,229  
Cost of goods sold
    -       5,153       14,355       19,508  
Gross profit
    -       2,766       3,955       6,721  
Depreciation and amortization (in selling, general and administrative)
    (154 )     (933 )     (942 )     (2,029 )
Settlement with former customer
    -       800       -       800  
Intersegment fees
    307       -       (307 )     -  
Other operating expense
    (4,904 )     (2,881 )     (3,308 )     (11,093 )
Loss from operations
  $ (4,751 )   $ (248 )   $ (602 )   $ (5,601 )
Net loss attributable to NutraCea shareholders
  $ (4,680 )   $ (383 )   $ (510 )   $ (5,573 )
Interest expense
    (430 )     (136 )     (548 )     (1,114 )
Depreciation (in cost of goods sold)
    -       (712 )     (1,086 )     (1,798 )
Purchases of property, plant and equipment
    -       94       5,122       5,216  
 
 
21

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
   
Three Months Ended September 30, 2010
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Revenues
  $ -     $ 2,761     $ 5,642     $ 8,403  
Cost of goods sold
    -       1,501       4,768       6,269  
Gross profit
    -       1,260       874       2,134  
Depreciation and amortization (in selling, general and administrative)
    (90 )     (320 )     (310 )     (720 )
Impairment of property, plant and equipment
    -       -       -       -  
Loss on disposal of property, plant and equipment
    -       (540 )     -       (540 )
Other operating expense
    (2,003 )     (1,023 )     (851 )     (3,877 )
Loss from operations
  $ (2,093 )   $ (623 )   $ (287 )   $ (3,003 )
                                 
Net loss attributable to NutraCea shareholders
  $ (2,181 )   $ (657 )   $ (252 )   $ (3,090 )
Interest expense
    (228 )     (24 )     (164 )     (416 )
Depreciation (in cost of goods sold)
    -       (97 )     (414 )     (511 )
Purchases of property, plant and equipment
    8       41       222       271  
 
   
Nine Months Ended September 30, 2010
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Revenues
  $ -     $ 9,298     $ 13,828     $ 23,126  
Cost of goods sold
    -       5,582       12,206       17,788  
Gross profit
    -       3,716       1,622       5,338  
Depreciation and amortization (in selling, general and administrative)
    (280 )     (930 )     (860 )     (2,070 )
Impairment of property, plant and equipment
    -       (1,000 )     -       (1,000 )
Loss on disposal of property, plant and equipment
    -       (943 )     -       (943 )
Other operating expense
    (5,516 )     (3,403 )     (2,443 )     (11,362 )
Loss from operations
  $ (5,796 )   $ (2,560 )   $ (1,681 )   $ (10,037 )
Net loss attributable to NutraCea shareholders
  $ (6,891 )   $ (2,684 )   $ (1,313 )   $ (10,888 )
Interest expense
    (389 )     (116 )     (492 )     (997 )
Depreciation (in cost of goods sold)
    -       (348 )     (1,053 )     (1,401 )
Purchases of property, plant and equipment
    23       49       343       415  
 
The tables below presents segment information for selected balance sheet accounts (in thousands).
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
As of September 30, 2011
                       
Inventories
  $ -     $ 780     $ 2,124     $ 2,904  
Property, plant and equipment
    536       13,055       14,971       28,562  
Goodwill
    -       -       5,345 (1)     5,345  
Intangible assets, net
    -       2,519       2,549       5,068  
Total assets
    4,457 (2)     17,508       30,080       52,045  
                                 
As of December 31, 2010
                               
Inventories
    -       596       2,398       2,994  
Property, plant and equipment
    1,996       9,337       12,721       24,054  
Assets held for sale
    -       3,598       -       3,598  
Goodwill
    -       -       5,835 (1)     5,835  
Intangible assets, net
    -       2,901       3,395       6,296  
Total assets
    7,143 (2)     17,308       28,773       53,224  
 
(1)
All changes in goodwill between September 30, 2011 and December 31, 2010, relate to foreign currency translation.
(2)
Corporate segment total assets include cash, restricted cash, note receivable, property and other assets.
 
 
22

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
The following table presents revenue by geographic area for the three months and nine months ended September 30 (in thousands):
 
   
Three Months Ended
   
Nine Months Ended
 
   
2011
   
2010
   
2011
   
2010
 
United States
  $ 2,068     $ 2,459     $ 6,727     $ 7,253  
Brazil
    5,263       4,318       13,324       12,496