10-Q 1 form10q.htm NUTRACEA 10-Q 6-30-2012 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 June 30, 2012

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 July 31, 2012, shares of the registrant’s common stock outstanding totaled 204,833,937.
 


 
 

 

NutraCea
Form 10-Q
 
PART I. FINANCIAL INFORMATION
Page
 
Item 1.
2
     
     
     
     
     
 
Item 2.
28
 
Item 3.
37
 
Item 4.
37
PART II. OTHER INFORMATION
 
 
Item 1.
38
 
Item 1A.
38
 
Item 2.
38
 
Item 3.
39
 
Item 4.
39
 
Item 5.
39
 
Item 6.
39
 
40
 
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, 2011.  We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.

PART I. FINANCIAL INFORMATION


 
2

 
NutraCea
Three and Six Months Ended June 30, 2012 and 2011
(Unaudited) (in thousands, except per share amounts)

   
Three Months
   
Six Months
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 9,711     $ 10,502     $ 19,457     $ 19,150  
Cost of goods sold
    7,948       7,915       15,953       14,357  
Gross profit
    1,763       2,587       3,504       4,793  
                                 
Operating expenses:
                               
Selling, general and administrative
    3,058       3,764       6,703       7,241  
Professional fees
    516       798       987       1,600  
Impairment of property, plant and equipment
    1,069       -       1,069       -  
Recovery from former customer
    -       -       -       (800 )
Total operating expenses
    4,643       4,562       8,759       8,041  
                                 
Loss from operations
    (2,880 )     (1,975 )     (5,255 )     (3,248 )
                                 
Other income (expense):
                               
Interest income
    16       67       63       80  
Interest expense
    (387 )     (424 )     (805 )     (812 )
Foreign currency exchange, net
    (576 )     9       (782 )     53  
Change in fair value of derivative warrant and conversion liabilities
    2,868       2,435       506       (141 )
Loss on extinguishment
    -       -       (2,986 )     -  
Financing expense
    (20 )     -       (1,544 )     -  
Other income
    3       309       7       367  
Other expense
    (23 )     (401 )     (117 )     (426 )
Total other income (expense)
    1,881       1,995       (5,658 )     (879 )
                                 
Income (loss) before income taxes
    (999 )     20       (10,913 )     (4,127 )
Income taxes
    369       (52 )     911       8  
Net loss
    (630 )     (32 )     (10,002 )     (4,119 )
Net loss attributable to noncontrolling interest in Nutra SA
    429       11       972       39  
Net loss attributable to NutraCea shareholders
  $ (201 )   $ (21 )   $ (9,030 )   $ (4,080 )
                                 
Loss per share attributable to NutraCea shareholders
                               
Basic
  $ (0.00 )   $ (0.00 )   $ (0.04 )   $ (0.02 )
Diluted
  $ (0.00 )   $ (0.00 )   $ (0.04 )   $ (0.02 )
                                 
Weighted average number of shares outstanding
                               
Basic
    204,589       198,310       203,634       196,767  
Diluted
    204,589       198,310       203,634       196,767  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
3

 
NutraCea
Three and Six Months Ended June 30, 2012 and 2011
(Unaudited) (in thousands)

   
Three Months
   
Six Months
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net loss
  $ (630 )   $ (32 )   $ (10,002 )   $ (4,119 )
                                 
Other comprehensive income (loss) - foreign currency translation, net of tax
    (1,584 )     802       (1,237 )     1,054  
                                 
Comprehensive income (loss), net of tax
    (2,214 )     770       (11,239 )     (3,065 )
                                 
Comprehensive (income) loss attributable to noncontrolling interest, net of tax
    1,205       (324 )     1,578       (368 )
                                 
Total comprehensive income (loss) attributable to NutraCea shareholders
  $ (1,009 )   $ 446     $ (9,661 )   $ (3,433 )
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
4

 
NutraCea
June 30, 2012 and December 31, 2011
(Unaudited) (in thousands, except share amounts)
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 533     $ 3,329  
Restricted cash
    1,918       2,118  
Accounts receivable, net of allowance for doubtful accounts of $472 and $323
    3,875       3,702  
Inventories
    1,686       2,297  
Note receivable
    100       700  
Deferred tax asset
    293       159  
Income and operating taxes recoverable
    1,364       1,659  
Deposits and other current assets
    1,116       1,049  
Total current assets
    10,885       15,013  
                 
Property, plant and equipment, net
    28,868       27,995  
Intangible assets, net
    3,117       3,928  
Goodwill
    4,701       5,240  
Other long-term assets
    404       56  
Total assets
  $ 47,975     $ 52,232  
                 
LIABILITIES, TEMPORARY EQUITY AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 4,243     $ 2,995  
Accrued expenses
    4,729       4,202  
Long-term debt, current portion
    7,437       6,792  
Pre-petition liabilities
    -       1,615  
Total current liabilities
    16,409       15,604  
                 
Long-term liabilities:
               
Long-term debt, net of current portion
    9,917       7,933  
Deferred tax liability
    2,721       3,767  
Derivative warrant liabilities
    6,221       1,296  
Total liabilities
    35,268       28,600  
                 
Commitments and contingencies
               
                 
Redeemable noncontrolling interest in Nutra SA
    8,340       9,918  
                 
Equity:
               
Preferred stock, 20,000,000 authorized and none issued
    -       -  
Common stock, no par value, 500,000,000 shares authorized, 204,833,937 and 201,264,622 shares issued and outstanding
    209,927       209,613  
Accumulated deficit
    (203,941 )     (194,911 )
Accumulated other comprehensive loss
    (1,619 )     (988 )
Total equity
    4,367       13,714  
Total liabilities, temporary equity and equity
  $ 47,975     $ 52,232  
 
See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
5

 
NutraCea
Six Months Ended June 30, 2012 and 2011
(Unaudited) (in thousands)

   
Six Months Ended June 30,
 
   
2012
   
2011
 
Cash flow from operating activities:
           
Net loss
  $ (10,002 )   $ (4,119 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    2,524       2,512  
Provision for doubtful accounts receivable
    292       132  
Stock and share-based compensation
    692       423  
Change in fair value of derivative warrant and conversion liabilities
    (506 )     141  
Financing expense
    1,544       -  
Loss on extinguishment
    2,986       -  
Impairment of property, plant and equipment
    1,069       -  
Deferred tax benefit
    (911 )     (255 )
Settlement with former officer
    -       (267 )
Other
    166       21  
Changes in operating assets and liabilities:
               
Accounts receivable
    (766 )     (655 )
Inventories
    405       257  
Accounts payable and accrued expenses
    (370 )     894  
Pre-petition liabilities
    (1,615 )     (3,352 )
Other
    329       (476 )
Net cash used in operating activities
    (4,163 )     (4,744 )
                 
Cash flows from investing activities:
               
Receipts on notes receivable
    600       550  
Purchases of property, plant and equipment
    (3,793 )     (4,501 )
Proceeds from sale of property, plant and equipment
    276       -  
Restricted cash
    200       (401 )
Other
    (16 )     (178 )
Net cash used in investing activities
    (2,733 )     (4,530 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of convertible debt and related warrants
    2,411       730  
Proceeds from sale of membership interests in Nutra SA, net of costs
    -       10,725  
Payments of debt
    (5,345 )     (5,878 )
Proceeds from issuance of debt
    7,052       3,871  
Net cash provided by financing activities
    4,118       9,448  
                 
Effect of exchange rate changes on cash and cash equivalents
    (18 )     (33 )
Net change in cash and cash equivalents
    (2,796 )     141  
Cash and cash equivalents, beginning of period
    3,329       537  
Cash and cash equivalents, end of period
  $ 533     $ 678  
                 
Supplemental disclosures:
               
Cash paid for interest
  $ 704     $ 452  
Cash paid for income taxes
    -       -  

See Notes to Unaudited Condensed Consolidated Financial Statements
 
 
6


NutraCea

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of NutraCea 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 financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011.

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.

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

Recent Accounting Pronouncements

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

In May 2011, the Financial Accounting Standards Board (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 adopted the guidance prospectively, effective January 1, 2012.  Adoption did not 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 adopted the amendments effective for annual and interim goodwill impairment tests (if required) performed after January 1, 2012.  Adoption had no impact on our financial position or results of operations.

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

Chapter 11 Reorganization

On November 10, 2009, NutraCea (the 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 (the Bankruptcy Court), in the proceeding entitled In re:  NutraCea, Case No. 2:09-bk-28817-CGC (the Chapter 11 Reorganization).  None of the Parent Company’s subsidiaries, including its Brazilian rice bran 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 through the November 2010 plan effective date (see below).   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.  Additional claims arose subsequent to the filing date from the Parent Company’s business operations, its secured borrowing from Wells Fargo Bank, N.A. its employment of professionals, its disposition of certain non-core assets and its treatment of certain executory contracts.

 
7

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

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 liabilities subject to compromise existing at December 31, 2009, became the Parent Company’s payment obligations under the Amended Plan of approximately $7.0 million when the Amended Plan became effective.  As of December 31, 2011, remaining unpaid creditor obligations are reflected as pre-petition liabilities in our consolidated balance sheets.  Interest accrued on the unpaid pre-petition liabilities at an annual rate of 8.25% beginning in December 2010.

Through December 31, 2011, we had distributed $5.4 million to the unsecured creditors.  In January 2012, we made our final $1.6 million distribution to the general unsecured creditors.  Cumulatively, we made distributions totaling $7.0 million, representing 100% of the amount owed under the Amended Plan, plus accrued interest.  The distributions were made with the proceeds from (i) the sale of interests in Nutra SA LLC (Nutra SA), (ii) proceeds from the issuance of convertible notes, debentures and related warrants (iii) receipts on notes receivable and (iv) proceeds from the sale of the idle Phoenix facility.

Liquidity and Management’s Plans

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 to operate our business, 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 took steps in 2011 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 for stabilized rice bran (SRB), rice bran oil (RBO) and defatted rice bran (DRB);
·
expanding our product offerings and improving existing products;
·
aligning with strategic partners who can provide channels for additional sales of our products; and
·
implementing price increases.

In 2011 and the first six months of 2012, we issued shares of common stock and warrants to satisfy certain obligations in an effort to conserve cash.  In 2011 and the first six months of 2012, we also obtained funds from issuances of convertible debt and warrants.  The equity markets, however, were not a significant source of funds during 2011 and the first six months of 2012 due to our financial position and the state of the equity markets.  In the third quarter of 2012, we raised an additional $1.1 million from the issuances of convertible debt and warrants (see Note 16).  Improving financial performance and equity market conditions may allow us to raise equity funds in the 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 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 human food ingredient and animal nutrition company focused on the procurement, bio-refining and marketing of numerous products derived from rice bran.  We have proprietary and patented intellectual property that allows us to convert rice bran, one of the world’s most underutilized food sources, into a number of highly nutritious human food and animal nutrition products.  Our target markets are human food and animal nutrition manufacturers and retailers, as well as natural food, functional food and nutraceutical supplement manufacturers and retailers, both domestically and internationally.  We have developed a bio-refining approach to processing raw rice bran into various value added constituents such as stabilized rice bran (SRB), rice bran oil (RBO), defatted rice bran (DRB) and a variety of other valuable derivative products from each of these core products.

 
8

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

We have three reportable business segments: (1) Corporate; (2) USA, which manufactures and distributes SRB in various granulations along with other products derived from rice bran via proprietary and patented enzyme treatment processes; and (3) Brazil, which extracts crude RBO and DRB from rice bran, which are then further processed into a number of valuable human food and animal nutrition products.  The Corporate segment includes general and administrative expenses including public company expenses, professional fees, financing related costs and other expenses not directly attributable to other segments.  No Corporate allocations are made to the other segments.  General corporate interest is not allocated.  For further information on segment results see Note 13 to the consolidated financial statements included herein.

The USA segment consists of two locations in California and two locations in Louisiana, all of which can produce SRB. One of the Louisiana SRB facilities, located in Lake Charles, has been idle since May 2009.  The USA segment also includes our Dillon, Montana Stage II facility which produces RiSolubles (a highly nutritious, carbohydrate and lipid rich fraction of SRB), RiFiber (a fiber rich derivative of SRB) and RiBalance (a complete rice bran nutritional package derived from further processing SRB).  The manufacturing facilities included in our USA segment have proprietary and patented processing equipment and technology for the  stabilization and further processing of rice bran into finished products.  In the first half of 2012, 45.8% of USA segment revenue was from sales of human food products and 54.2% was from sales of animal nutrition products.

The Brazil segment consists of the operation of our subsidiary Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), located in Pelotas, Brazil.  Irgovel manufactures RBO and DRB products for both the human and animal food markets in Brazil and internationally.  Irgovel owns the largest rice bran processing facility in South America.  In refining RBO to an edible grade, several co-products are obtained.  One such product is distilled fatty acids, a valuable raw material for the detergent industry.  DRB is sold in bulk as animal feed and 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.  In the first half of 2012, 45.5% of Brazil segment product revenue was from sales of RBO products and 54.5% was from sales of DRB products.

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.  Shares underlying options, warrants and convertible notes payable are excluded from the basic EPS calculation but are considered in calculating 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.
 
 
9

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
NUMERATOR (in thousands):
                       
Basic and diluted - net loss attributable to NutraCea shareholders
  $ (201 )   $ (21 )   $ (9,030 )   $ (4,080 )
                                 
DENOMINATOR:
                               
Basic EPS - weighted average number of shares outstanding
    204,588,939       198,309,844       203,633,571       196,767,291  
Effect of dilutive securities outstanding
    -       -       -       -  
Diluted EPS - weighted average number of shares outstanding
    204,588,939       198,309,844       203,633,571       196,767,291  
                                 
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 six months ended June 30, 2012 of $0.24 and $0.25 per share)
    39,821,934       38,734,230       39,335,617       40,734,884  
Warrants (average exercise price for the three and six months ended June 30, 2012 of $0.45 and $0.48 per share)
    120,710,994       41,219,735       113,711,533       41,107,083  
Convertible debt
    49,300,000       2,000,000       44,529,813       1,500,000  

The impact of potentially dilutive securities outstanding at June 30, 2012 and 2011, was not included in the calculation of diluted EPS in 2012 and 2011 because to do so would be antidilutive.  Those securities listed in the table above which were antidilutive in 2012 and 2011, which remain outstanding, could potentially dilute EPS in the future.

NOTE 5. REDEEMABLE NONCONTROLLING INTEREST IN NUTRA SA

A summary of changes in redeemable noncontrolling interest follows (in thousands).

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Redeemable noncontrolling interest in Nutra SA, beginning of period
  $ 9,545     $ 7,769     $ 9,918     $ -  
Investors' purchase of units
    -       3,000       -       10,725  
Investors' interest in net loss of Nutra SA
    (429 )     (11 )     (972 )     (39 )
Investors' interest in other comprehensive income of Nutra SA
    (776 )     335       (606 )     407  
Redeemable noncontrolling interest in Nutra SA, end of period
  $ 8,340     $ 11,093     $ 8,340     $ 11,093  

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.  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 its 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 outstanding 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 was 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 outstanding 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 December 31, 2011 and the Investors’ interest remained 49.0% throughout the first six months of 2012.

We determined that we continue to control Nutra SA after each of the Investors’ purchases and therefore we continue to consolidate Nutra SA.  We treated each Investor’s purchase 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 (loss) and other comprehensive income (expense) after the January 2011 closing increases (decreases) redeemable noncontrolling interest in Nutra SA.

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 June 30, 2012, 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.

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 until the later of (i) the date the first phase of the Irgovel capital expansion 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 financial institution(s) to complete the first phase of the Irgovel capital expansion 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.

As of June 30, 2012, 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, 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 June 30, 2012, 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 in, (i) 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 Investors’ purchase of additional units in Nutra SA under the waiver to the MIPA, such that the Investors’ ownership interest in Nutra SA exceeds 49.0%.

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.

 
11

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

 
·
Global Holding Company (GHC) Roll-Up – If we form an entity, GHC, to hold our Brazil 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.

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 above).  We will continue to evaluate our ability to control Nutra SA each reporting period.

Cash on hand at our Brazil segment is generally unavailable for distribution to our Corporate and USA segments pursuant to the terms of the limited liability company agreement for Nutra SA.  We are restricted from competing with Nutra SA and Irgovel in Brazil as further described in the MIPA.

 
12

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 6. INVENTORIES

Inventories are composed of the following (in thousands):

   
June 30,
   
December 31,
 
   
2012
   
2011
 
Finished goods
  $ 984     $ 906  
Work in process
    112       804  
Raw materials
    435       353  
Packaging supplies
    155       234  
Total inventories
  $ 1,686     $ 2,297  

NOTE 7.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

   
June 30,
   
December 31,
 
   
2012
   
2011
 
Land
  $ 416     $ 422  
Furniture and fixtures
    1,460       1,464  
Plant
    16,871       16,821  
Computer and software
    1,421       1,357  
Leasehold improvements
    189       189  
Machinery and equipment
    17,514       17,905  
Construction in progress
    9,683       5,775  
Property, plant and equipment
    47,554       43,933  
Less accumulated depreciation
    18,686       15,938  
Property, plant and equipment, net
  $ 28,868     $ 27,995  

Included in property plant and equipment, net, is machinery and equipment not currently in use and carried at net realizable value of $1.2  million as of June 30, 2012.  Property, plant and equipment increased in the first six months of 2012 by $3.7 million due to the capital expansion project at Irgovel.  Included in accounts payable at June 30, 2012, is $2.3 million related to amounts payable for capital expansion project additions.
 
 
13

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
NOTE 8.  DEBT

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

   
June 30,
   
December 31,
 
   
2012
   
2011
 
USA segment:
           
Senior convertible debenture, net
  $ 278     $ -  
Subordinated convertible notes, net
    4,176       2,126  
Customer list purchase
    62       448  
Supplier note
    9       59  
Factoring agreement
    320       262  
      4,845       2,895  
Brazil segment:
               
Capital expansion loans
    3,584       3,789  
Equipment financing
    273       214  
Working capital lines of credit
    2,247       1,778  
Advances on export letters of credit
    3,713       2,838  
Special tax programs
    2,692       3,211  
      12,509       11,830  
Total debt
    17,354       14,725  
Current portion
    7,437       6,792  
Long-term portion
  $ 9,917     $ 7,933  

Convertible Notes and Debenture

During the first six months of 2012, we issued subordinated convertible notes, a senior convertible debenture and related warrants, which are described in the chart below.

 
14


NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

Issuance
 
Date of Debt
 and/or
  Warrant
 
Principal
 Amount of
 Notes and
 Debenture (in
 thousands)
 
Creditor's
 Debt
 Conversion
 Right
 
Stated
 Annual
 Interest
 Rate on
 Debt
 
Maturity
 Date of Debt
 
Number of
 Shares Under
 Warrant
 
Exercise Price
 of Warrant
 
Expiration
 Date of
Warrant
                                 
Senior Convertible Debenture and Warrant
 
January 2012
  $ 870  
Convertible immediately  at $0.15 per share
    10 %
July 2013
    6,250,000  
Exercisable beginning July 2012 at $0.12 per share
 
July 2017
Subordinated Convertible Notes and Warrants
 
January 2012
    4,325  
Convertible immediately at $0.10 per share
    10 %
January 2015
    43,250,000  
Exercisable immediately at $0.12 per share
 
January 2017
Subordinated Convertible Note and Warrant
 
May 2012
    50  
Convertible immediately at $0.10 per share
    10 %
May 2015
    500,000  
Exercisable immediately at $0.12 per share
 
May 2017
$0.10 Transactional Warrants
 
January 2012
                        1,112,500  
Exercisable immediately at $0.10 per share
 
January 2017
$0.15 Transactional Warrants
 
January 2012
                        250,000  
Exercisable beginning July 2012 at $0.15 per share
 
January 2017
$0.10 Transactional Warrants
 
May 2012
                        12,500  
Exercisable immediately at $0.10 per share
 
May 2017

All of the convertible debt and warrants listed in the table above contain full ratchet antidilution provisions and require the holders to provide us with 61 day notice prior to conversion or exercise to the extent the holder would have a beneficial ownership interest in our common stock in excess of 4.99% of our outstanding common stock immediately after conversion or exercise.  The transactional warrants were issued under the terms of our financial advisor agreement with Halpern Capital, Inc. (see Note 15).

In connection with the transactions described in Note 16, in the third quarter of 2012 (i) the terms of all of the subordinated convertible notes outstanding as of June 30, 2012 were modified such that the maturity date was extended from January and May 2015 to July 2015 and (ii) the conversion price of these subordinated convertible notes was lowered from $0.10 per share to $0.07 per share under their antidilution provisions.

The January 2012 senior convertible debenture and related warrant were issued for $0.8 million, a $0.1 million discount from the debenture’s stated principal amount.  We received cash proceeds of $0.6 million, net of cash financing costs.  In connection with the transaction described in Note 16, in the third quarter of 2012, this January 2012 debenture was replaced by a new debenture with a stated principal amount of $1.0 million, representing the original principal amount plus interest which will accrue through the January 2014 maturity.  Each of the new debentures is convertible immediately at $0.07 per share.  Commencing February 2013, we are required to redeem 1/12th of the $1.0 million principal each month until the January 2014 maturity date.  In lieu of a cash redemption we may elect to issue shares of common stock equal to the monthly redemption amount divided by the lesser of (i) the current debenture conversion price or (ii) 80% of the 20-day volume weighted average trading price of our common stock or (iii) the volume weighted average trading price of our common stock on the day immediately prior to the redemption date less $0.01.  The number of shares delivered may not exceed 20% of the number of shares traded in the 20-day trading period prior to payment.  The debenture is secured by a senior interest in substantially all of our assets, excluding our interest in Nutra SA.  Pursuant to the terms of the debenture, we may not pay any dividends while the debenture is outstanding.  Under the terms of the original January 2012 debenture, we had been required to redeem 1/12th of the $0.9 million principal each month commencing August 2012 until the July 2013 maturity date.

 
15

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

The January 2012 subordinated convertible notes with a face amount of $4.3 million, and the related warrants to purchase 43,250,000 shares of common stock, were issued in exchange for $1.7 million cash, net of issuance costs, and surrender of then outstanding convertible notes with original principal totaling $2.3 million and a related warrant (old notes and old warrant).  Interest is payable monthly at an annual rate of 10%.  The notes are secured by a junior interest in substantially all of our assets, excluding our interest in Nutra SA.  The old notes and old warrant were held by Baruch Halpern, who became a director concurrent with the January 2012 transaction.  In exchange for surrendering the old notes and old warrant and an additional $0.1 million cash investment, we issued a $2.5 million subordinated convertible note and related warrant to purchase 25,000,000 shares of common stock to a trust beneficially owned by Mr. Halpern (Halpern Trust).  Three different directors (or entities beneficially owned by the directors) were among the other investors in the transaction and purchased for a total of $0.1 million subordinated convertible notes, in the principal amount of $0.1 million, and related warrants for the purchase a total of 1,000,000 shares of common stock.

The May 2012 subordinated convertible note with a face amount of $0.1 million, and the related warrant to purchase 500,000 shares of common stock, were issued in exchange for $0.1 million cash, net of issuance costs.  Interest is payable monthly at an annual rate of 10%.  The notes are secured by a junior interest in substantially all of our assets, excluding our interest in Nutra SA.

A summary of the allocation of the proceeds from the January 2012 and May 2012 issuances of the senior convertible debenture, subordinated convertible notes and related warrants follows (in thousands).

         
January 2012
             
   
Senior
Convertible
   
Subordinated Convertible Notes
 and Warrants
   
May 2012
 Subordinated
       
   
 Debenture
   
Halpern
   
Other
   
Convertible
       
   
 and Warrant
   
 Trust
   
 Investors
    Note and Warrant    
Total
 
(Increases) decreases in:
                             
Debt - principal
  $ (870 )   $ (2,500 )   $ (1,825 )   $ (50 )     (5,245 )
Debt - discount
    870       630       1,825       50       3,375  
Debt - derivative conversion liabilities
    (296 )     (1,942 )     (1,417 )     (31 )     (3,686 )
Derivative warrant liabilities
    (648 )     (2,473 )     (1,808 )     (40 )     (4,969 )
Debt (carrying amount of old note)
    -       2,152       -       -       2,152  
Equity
    -       1,089       -       -       1,089  
Loss on extinguishment
    -       2,986       -       -       2,986  
Financing expense
    168       -       1,356       20       1,544  
Other long -term assets - deferred finance costs
    144       65       132       2       343  
Proceeds, net of finance costs
  $ 632     $ (7 )   $ 1,737     $ 49     $ 2,411  
 
We accounted for the issuance of the $2.5 million subordinated convertible note and related warrant to the Halpern Trust as a significant modification to the old notes and warrant held by Mr. Halpern.  We recognized a loss on extinguishment for the difference between the fair value of the subordinated convertible note and warrant issued, determined using a lattice model and the total of (i) the Black-Scholes fair values of the conversion features embedded in the old notes, (ii) the Black-Scholes fair value of the old warrant, (iii) the carrying amount of the old notes and (iv) the proceeds received, net of issue costs.  The old notes’ embedded conversion features and the old warrant did not qualify as separate derivative liabilities and, therefore, we reduced equity by the January 2012 fair value of the embedded conversion features and warrant  determined using the Black-Scholes method.  We concluded that the new warrant issued was not indexed to our common stock because of the full ratchet antidilution provisions and should be recorded as a derivative liability and carried at fair value.  We also concluded that the embedded conversion feature in the new note should be accounted for separately from the host debt as a derivative liability and carried at fair value.

The $2.4 million in cash proceeds, net of issue costs, received from the issuance of the senior convertible debenture in January 2012, and the subordinated convertible notes issued to the other investors in January and May 2012 were allocated to convertible debt and warrants.  We concluded that the warrants were not indexed to our common stock because of the full ratchet antidilution provisions each contain and should be recorded as derivative liabilities and carried at fair value.  We also concluded that the embedded conversion features in the convertible debt should be accounted for separately from the host debt as derivative liabilities and carried at fair value.  We determined the fair value of each warrant and embedded conversion feature using a lattice model.  In each case, the fair value of the warrants and embedded conversion features exceeded the proceeds received, which resulted in the recognition of financing expense on the date of issuance.

 
16

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
As of June 30, 2012, our convertible debt consists of the following components (in thousands):
 
     
Senior
     
Subordinated Convertible
 Notes
         
      Convertible      
Halpern
     
Other
         
      Debenture       Trust       Investors      
Total
 
Principal outstanding
  $ (870 )   $ (2,500 )   $ (1,875 )   $ (5,245 )
Discount
    870       559       1,875       3,304  
Derivative conversion liabilities
    (278 )     (1,271 )     (964 )     (2,513 )
Debt
  $ (278 )   $ (3,212 )   $ (964 )     (4,454 )
                                 
Debt - current portion
  $ (278 )   $ -     $ -     $ (278 )
Debt - long-term portion
    -       (3,212 )     (964 )     (4,176 )

The discount recorded on the subordinated convertible note held by the Halpern Trust and the related deferred finance costs are amortized to interest expense under the effective interest method.  As a result we are recognizing interest expense on this note at an effective interest rate of 23.9%.

The debt discounts on the senior convertible debentures and subordinated convertible notes held by the other investors, listed in the table above, are also being amortized to interest expense under the effective interest method.  However, because the fair value at issuance of the conversion features and warrants exceeded the proceeds from these issuances, in each case, under the effective interest method, this will result in the debt discount being expensed when the principal of the convertible debt matures or is redeemed, in proportion to the principal reduction.  Deferred finance costs are also being amortized to interest expense under the effective interest method, in a similar fashion.

Changes in the fair value of the derivative liabilities subsequent to issuance are recognized in other income (expense).

The $2.4 million in proceeds from the January 2012 issuances of the senior convertible debenture, subordinated convertible notes and related warrants were used to make the final distributions to the unsecured creditors in January 2012 and for general corporate purposes.

NOTE 9.  EQUITY, SHARE-BASED COMPENSATION AND LIABILITY WARRANTS

A summary of equity activity for the six months ended June 30, 2012 (in thousands, except share data) follows.

   
Common Stock
   
Accumulated
   
Accumulated
 Other
 Comprehensive
   
Total
 
   
Shares
   
Amount
   
Deficit
   
Loss
   
Equity
 
Balance, December 31, 2011
    201,264,622     $ 209,613     $ (194,911 )   $ (988 )   $ 13,714  
Share-based compensation
    -       500       -       -       500  
Warrant exercised
    1,552,667       711       -       -       711  
Common stock issued for vendor services
    1,207,000       192       -       -       192  
Common stock issued in exchange for vested options
    809,648       -       -       -       -  
Cancellation of convertible notes and warrant
    -       (1,089 )     -       -       (1,089 )
Foreign currency translation
    -       -       -       (631 )     (631 )
Net loss
    -       -       (9,030 )     -       (9,030 )
Balance, June 30, 2012
    204,833,937     $ 209,927     $ (203,941 )   $ (1,619 )   $ 4,367  

 
17

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

A summary of stock option and warrant activity for the six months ended June 30, 2012 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, December 31, 2011
    38,588,721     $ 0.27       6.3       46,789,364     $ 1.04       1.7  
Granted
    5,487,148       0.16               51,375,000       0.12          
Impact of anti-dilution clauses
    -       -               29,414,109       -          
Exercised
    -       -               (5,003,038 )     0.10          
Forfeited, expired or cancelled
    (4,288,346 )     0.41               (2,323,186 )     0.22          
Outstanding, June 30, 2012
    39,787,523     $ 0.24       6.4       120,252,249     $ 0.45       2.5  
Exercisable, June 30, 2012
    29,520,330     $ 0.26       5.6       114,002,249     $ 0.47       2.4  
 
Options

In January 2012, we issued 809,648 shares of common stock to a retiring director in exchange for the surrender of vested stock options exercisable for 1,454,596 shares of common stock.  The fair value of the vested options surrendered on the date of the stock issuance equaled the $0.1 million fair value of the stock issued.

For 2012, our non-employee directors agreed to accept stock options in lieu of cash representing one half of the board retainer fees to which they otherwise would have been entitled.  As a result, we issued options for the purchase of 1,096,505 shares of common stock in March 2012 and for 121,384 shares in April 2012, at an exercise price of $0.14 per share.  The stock options vested 25% in April 2012, and the remainder vests in installments through December 31, 2012.  The $0.2 million grant date fair value of the options equaled the cash fees to which the directors were otherwise entitled.

In 2012, our three executive officers are receiving in cash 83.3% or 90.0% of their stated contract salary, as detailed in their employment agreements.  In April 2012, our board of directors granted these officers stock options for the purchase of up to 852,592 shares of common stock at an exercise price equal to $0.12 per share.  The options vested 25% in April 2012, and the remainder vests in installments through 2012.  The $0.1 million grant date fair value of the options equaled the officers’ salary forbearance.

Warrants

We have outstanding warrants classified as equity (equity warrants) and as derivative warrant liabilities (liability warrants).  The following tables summarize information related to outstanding 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, December 31, 2011
    3,474,370     $ 0.30       3.5       43,314,994     $ 1.10       1.5  
Granted
    -       -               51,375,000       0.12          
Impact of antidilution clauses
    -       -               29,414,109       -          
Exercised
    -       -               (5,003,038 )     0.10          
Forfeited, expired or cancelled
    (2,323,186 )     0.22               -       -          
Outstanding, June 30, 2012
    1,151,184     $ 0.45       2.9       119,101,065     $ 0.45       2.5  
Exercisable, June 30, 2012
    1,151,184     $ 0.45       2.9       112,851,065     $ 0.47       2.4  

 
18


NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements


       
Outstanding as of June 30 2012
   
Outstanding as of December 31, 2011
 
Range of
Exercise Prices
 
Type of
 Warrant
 
Shares Under
 Warrants
   
Weighted
 Average
 Exercise
 Price
   
Average
 Remaining
 Contractual
 Life
 (in years)
   
Shares Under
 Warrants
   
Weighted
 Average
 Exercise
 Price
   
Average
 Remaining
 Contractual
 Life
 (in years)
 
                                         
$0.10  
Liability
    15,536,524     $ 0.10       3.1       -     $ -       -  
$0.12  
Liability
    50,000,000       0.12       4.6       -       -       -  
$0.15  
Liability
    250,000       0.15       4.6       -       -       -  
$0.20  
Liability
    -       -       -       9,707,282       0.20       3.2  
$0.22-$0.23  
Equity
    605,730       0.23       4.4       2,928,916       0.22       3.8  
$0.64  
Liability
    15,075,369       0.64       0.8       -       -       -  
$0.69  
Equity
    545,454       0.69       1.3       545,454       0.69       1.8  
$0.92  
Liability
    -       -       -       10,360,057       0.92       1.3  
$0.95  
Liability
    38,239,172       0.95       0.1       -       -       -  
$1.56  
Liability
    -       -       -       23,247,655       1.56       0.9  
          120,252,249     $ 0.45       2.5       46,789,364     $ 1.04       1.7  

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 certain exercise prices.  The January 2012 and May 2012 issuances of the convertible debt and related warrants triggered the antidilution clauses in these warrant agreements and as a result, we lowered the exercise price and increased the number of underlying shares on certain liability warrants outstanding on the dates of the transactions.  The  issuances of convertible debt and related warrants in the third quarter of 2012 (see Note 16), triggered the antidilution clauses in these liability warrant agreements and as a result, we lowered the exercise price and increased the number of underlying shares on all liability warrants outstanding on the dates of those transactions as well.

During the first quarter of 2012, the holder of a liability warrant to purchase 5,003,038 shares of common stock exercised the warrant on a cashless basis and, as a result, we issued the holder 1,552,667 shares of our common stock.  We transferred the $0.7 million fair value of the liability warrant as of the date of exercise into equity.

NOTE 10.  COMMITMENTS AND CONTINGENCIES

Supply Commitments

Irgovel has commitments to supply three customers a total of 1,200 metric tons of rice bran oil product during the period of July 2012 to January 2013, at fixed prices.

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 former Irgovel stockholders (Sellers), requesting: (i) the freezing of the escrow account maintained in connection with the transfer of Irgovel’s corporate control to us and the presentation of all documentation related to the transaction, and (ii) damages in the amount of the difference between (a) the sum received by David Resyng in connection with the judicial settlement agreement executed in the action for the partial dissolution of the limited liability company filed by David Resyng against Irgovel and the Sellers and (b) the amount received by the Sellers in connection with the sale of Irgovel’s corporate control to us, in addition to moral damages as determined in the court’s discretion.  The amount of damage claimed by Mr. Resyng is approximately $3 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 $1.0 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 June 30, 2012, and December 31, 2011, the balance in the escrow account was $1.9 million and is included in restricted cash in our balance sheets.  There is an offsetting liability in accrued expenses in our balance sheets as of June 30, 2012, and December 31, 2011.  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.

NOTE 11.  EMPLOYEE BONUS PLAN

In 2010, our board of directors approved a cash incentive bonus plan.  As of August 14, 2012, the plan provides for payment of $0.6 million to employees, employed at the time of payment, if all of the following conditions are met: (i) court approval of our Plan of Reorganization and successfully exiting the Chapter 11 bankruptcy process, (ii) being cash flow positive, defined by our board as earnings before interest, taxes, depreciation, amortization and certain non-cash charges, and (iii) cash availability as determined by our board at its sole discretion.  Because the consolidated operating cash flow condition and cash availability condition were not met as of June 30, 2012, and December 31, 2011, our board of directors has not approved payments and no accruals have been recorded.

NOTE 12.  RECOVERY FROM 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 six months ended June 30, 2011.

NOTE 13.  SEGMENT INFORMATION

We have three reportable business segments: (1) Corporate; (2) USA, which manufactures and distributes SRB in various granulations along with other products derived from rice bran via proprietary and patented enzyme treatment processes; and (3) Brazil, which extracts crude RBO and DRB from rice bran, which are then further processed into a number of valuable human food and animal nutrition products.  The Corporate segment includes general and administrative expenses including public company expenses, professional fees, financing related costs and other expenses not directly attributable to other segments.  No Corporate allocations are made to the other segments.  General corporate interest is not allocated.
 
 
20

 
NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements

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

   
Three Months Ended June 30, 2012
 
   
Corporate
   
USA
   
Brazil
   
Consolidated
 
Revenues
  $ -     $ 3,153     $ 6,558     $ 9,711  
Cost of goods sold
    -       2,154       5,794       7,948  
Gross profit
    -       999       764       1,763  
Depreciation and amortization (in selling, general and administrative)
    (43 )     (308 )     (35 )     (386 )
Intersegment fees
    56       -       (56 )     -  
Impairment of property, plant and  equipment
    -       (1,069 )     -       (1,069 )
Other operating expense
    (1,447 )     (628 )     (1,113 )     (3,188 )
Loss from operations
  $ (1,434 )   $ (1,006 )   $ (440 )   $ (2,880 )
                                 
Net income (loss) attributable to NutraCea shareholders
  $ 1,259     $ (1,015 )   $ (445 )   $ (201 )
Interest expense
    166       9       212       387  
Depreciation (in cost of goods sold)
    -       278       421       699  
Purchases of property, plant and equipment
    -       64       2,186       2,250  
 
   
Six Months Ended June 30, 2012
 
   
Corporate
   
USA
   
Brazil
   
Consolidated
 
Revenues
  $ -     $ 6,564     $ 12,893     $ 19,457  
Cost of goods sold
    -       4,553       11,400       15,953  
Gross profit
    -       2,011       1,493       3,504  
Depreciation and amortization (in selling, general and administrative)
    (71 )     (639 )     (460 )     (1,170 )
Intersegment fees
    112       -       (112 )     -  
Impairment of property, plant and equipment
    -       (1,069 )     -       (1,069 )
Other operating expense
    (2,723 )     (1,297 )     (2,500 )     (6,520 )
Loss from operations
  $ (2,682 )   $ (994 )   $ (1,579 )   $ (5,255 )
                                 
Net loss attributable to NutraCea shareholders
  $ (7,009 )   $ (1,010 )   $ (1,011 )   $ (9,030 )
Interest expense
    321       17       467       805  
Depreciation (in cost of goods sold)
    -       535       819       1,354  
Purchases of property, plant and equipment
    -       66       3,727       3,793  

 
21


NutraCea
Notes to Unaudited Condensed Consolidated Financial Statements
 
   
Three Months Ended June 30, 2011
 
   
Corporate
   
USA
   
Brazil
   
Consolidated
 
Revenues
  $ -     $ 2,890     $ 7,612     $ 10,502  
Cost of goods sold
    -       1,791       6,124       7,915  
Gross profit
    -       1,099       1,488       2,587  
Depreciation and amortization (in selling, general and administrative)
    (55 )     (306 )     (321 )     (682 )
Intersegment fees
    56       -       (56 )     -  
Other operating expense
    (1,650 )     (1,007 )     (1,223 )     (3,880 )
Loss from operations
  $ (1,649 )   $ (214 )   $ (112 )   $ (1,975 )
                                 
Net income (loss) attributable to NutraCea shareholders
  $ 322     $ (304 )   $ (39 )   $ (21 )
Interest expense
    131       72       221       424  
Depreciation (in cost of goods sold)
    -       276       368       644  
Purchases of property, plant and equipment
    -       39       2,609       2,648  

   
Six Months Ended June 30, 2011
 
   
Corporate
   
USA
   
Brazil
   
Consolidated
 
Revenues
  $ -     $ 5,493     $ 13,657     $ 19,150  
Cost of goods sold
    -       3,476       10,881       14,357  
Gross profit
    -       2,017       2,776       4,793  
Depreciation and amortization (in selling, general and administrative)
    (112 )     (621 )     (627 )     (1,360 )
Settlement with former customer
    -       800       -       800  
Intersegment fees
    112               (112 )     -  
Other operating expense
    (3,274 )     (1,963 )     (2,244 )     (7,481 )
Income (loss) from operations
  $ (3,274 )   $ 233     $ (207 )   $ (3,248 )
                                 
Net income (loss) attributable to NutraCea shareholders
  $ (4,029 )   $ 127     $ (178 )   $ (4,080 )
Interest expense
    316       102       394       812  
Depreciation (in cost of goods sold)
    -       433       719       1,152  
Purchases of property, plant and equipment
    -       82       4,419       4,501  

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

   
Corporate
   
USA
   
Brazil
   
Consolidated
 
As of June 30, 2012
                       
Inventories
  $ -     $ 657     $ 1,029     $ 1,686  
Property, plant and equipment, net
    220       9,605       19,043       28,868  
Goodwill
    -       -       4,701 (1 )   4,701  
Intangible assets, net
    -       1,368       1,749       3,117  
Total assets
    3,245 (2 )   13,068       31,662       47,975  
                                 
As of December 31, 2011
                               
Inventories
    -       617       1,680       2,297  
Property, plant and equipment, net
    263       11,899       15,833       27,995  
Goodwill
    -       -       5,240 (1 )   5,240  
Intangible assets, net
    -       1,612       2,316       3,928  
Total assets
    4,672 (2 )   14,219       33,341       52,232  

(1)
All changes in goodwill between December 31, 2011 and June 30, 2012, 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 (in thousands).

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
United States
  $ 2,787     $ 2,440     $ 5,816     $ 4,761  
Brazil
    4,855       5,358       9,771       9,466  
Other international
    2,069       2,704       3,870       4,923