NOTE 11. EQUITY AND SHARE-BASED COMPEN SATION

We have never declared or paid dividends on our common stock and have no plans to pay dividends in the foreseeable future. Pursuant to the terms of the senior convertible debentures, we may not pay any dividends while a debenture is outstanding. Cash provided by operations in our Brazil segment is generally unavailable for distribution to our Corporate and USA segments pursuant to the terms of the limited liability company agreement for Nutra SA.

In lieu of paying cash to non-employee board members for board retainer fees for the last three quarters of 2011, we issued 1,207,049 shares of common stock.

A summary of stock option and warrant activity for 2012 and 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		6.8		40,429,578		$	1.27		2.3
Granted		5,204,224			0.22				5,158,916			0.23
Impact of anti-dilution clauses		-		NA					6,303,255		NA
Exercised		-		NA					-		NA
Forfeited, expired or cancelled		(12,100,614	)		0.36				(5,102,385	)		0.74
Outstanding, December 31, 2011		38,588,721			0.27		6.3		46,789,364			1.04		1.7
Granted		5,812,148			0.15				84,756,427			0.10
Impact of anti-dilution clauses		-		NA					103,744,062		NA
Impact of amendment		-		NA					15,642,859		NA
Exercised		-		NA					(5,003,038	)		0.10
Forfeited, expired or cancelled		(10,549,974	)		0.34				(84,575,897	)		0.43
Outstanding, December 31, 2012		33,850,895		$	0.16		6.3		161,353,777		$	0.12		3.5
Exercisable, December 31, 2012		28,704,256		$	0.17		5.9		142,793,777		$	0.13		3.3

Options

Our board of directors adopted our 2010 Equity Incentive Plan (2010 Plan) in February 2010. A total of 25,000,000 shares of common stock were initially reserved for issuance under the 2010 Plan. The amount reserved increases annually each January 1st by 5% of the outstanding shares as of the prior December 31st. Additionally, in 2011 the board approved an 8,000,000 increase in the number of shares of common stock reserved under the plan. Under the terms of the 2010 Plan, we may grant options to purchase common stock and shares of common stock to officers, directors, employees or consultants providing services on such terms as are determined by the board of directors. Our board of directors administers the 2010 Plan, determines vesting schedules on plan awards and may accelerate the vesting schedules for award recipients. The options granted under the 2010 Plan have terms of up to 10 years.

	December 31, 2012

Initially reserved		25,000,000
Additionally reserved - annual increases		19,831,186
Additionally reserved - board action		8,000,000
Options granted since inception, net of forfeited, expired or cancelled		(22,977,927	)
Stock granted since inception		(12,056,309	)
Available for issuance under the 2010 Plan		17,796,950

Our board of directors adopted the 2005 Equity Incentive Plan (2005 Plan) in May 2005 and our shareholders approved the 2005 Plan in September 2005. Under the terms of the 2005 Plan, we could grant options to purchase common stock and shares of common stock to officers, directors, employees or consultants providing services on such terms as are determined by the board of directors. Options granted under the 2005 Plan have terms of up to 10 years. There are no longer any shares reserved for future issuance under the 2005 Plan.

We have outstanding a total of 3,415,282 options awarded to current and former directors, employees and consultants at various times beginning in 2004 through 2009 that do not fall under the plans described above. Expiration periods, typically ten years, and other terms of these non-plan specific options are not materially different from those issued under the 2010 Plan and 2005 Plan.

Share-based compensation expenses related to options are included in selling, general and administrative expenses in the statements of operations, and consisted of the following (in thousands):

	2012		2011
Consultants	$	42	$	14
Directors		285		280
Employees		152		112
Executive officers		444		501
Total share-based compensation expense - options	$	923	$	907

The following table summarizes option activity during 2012 and 2011:

	Employees and Directors					Consultants
	Weighted					Weighted
	Average		Shares			Average		Shares			Total
	Exercise		Under			Exercise		Under			Number of
	Price		Options			Price		Options			Options
Outstanding, January 1, 2011	$	0.41		43,761,576		$	1.46		1,723,535			45,485,111
Granted		0.21		4,404,224			0.31		800,000			5,204,224
Forfeited, expired or cancelled		0.34		(12,067,079	)		10.00		(33,535	)		(12,100,614	)
Exercised	NA			-		NA			-			-
Outstanding, December 31, 2011		0.24		36,098,721			0.76		2,490,000			38,588,721
Granted		0.13		5,612,148			0.08		200,000			5,812,148
Forfeited, expired or cancelled		0.29		(10,049,974	)		1.33		(500,000	)		(10,549,974	)
Exercised	NA			-		NA			-			-
Outstanding, December 31, 2012	$	0.13		31,660,895		$	0.53		2,190,000			33,850,895

Exercisable, December 31, 2012	$	0.14		26,830,930		$	0.56		1,873,326			28,704,256
Exercisable, December 31, 2011	$	0.26		25,914,194		$	0.95		1,773,330			27,687,524

The following are the weighted-average assumptions used in valuing stock options:

	2012			2011

Fair value of options granted	$	0.10		$	0.19
Volatility		109.2	%		101.5	%
Risk free interest rate		0.9	%		0.8	%
Expected life of options (in years)		6.1			5.2
Expected dividends		-			-
Forfeiture rate		5	%		5	%

The following table summarizes information related to outstanding and exercisable options:

	As of December 31, 2012
	Outstanding						Exercisable
Range of Exercise Prices	Shares Under Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Shares Under Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)

$0.08		22,042,441	$	0.08		7.0		17,212,476	$	0.08		6.7
$0.14		708,075		0.14		9.2		708,075		0.14		9.2
$0.20		6,812,879		0.20		5.6		6,812,879		0.20		5.6
$0.30		3,000,000		0.30		2.0		3,000,000		0.30		2.0
$0.37		687,500		0.37		8.2		370,826		0.37		8.2
$1.21		100,000		1.21		3.0		100,000		1.21		3.0
$1.50		500,000		1.50		0.4		500,000		1.50		0.4
$0.08 to $1.5		33,850,895		0.16		6.3		28,704,256		0.17		5.9

In 2012, we issued 3,004,308 shares of common stock to retiring directors in exchange for the surrender of vested stock options exercisable for 4,741,905 shares of common stock. The fair values of the options surrendered on the date of the stock issuances was $0.3 million and fair value of the stock at issuances was $0.3 million.

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 1,217,889 shares of common stock in 2012, at an exercise price of $0.14 per share. The stock options vested in installments during 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 agreed to accept stock options in lieu of receiving their full salary in cash. Our three executive officers received cash equal to either 83.3% or 90.0% of their stated contract salary, as detailed in their employment agreements, and these officers were collectively issued 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 in installments during 2012. The $0.1 million grant date fair value of the options equaled the officers' salary forbearance.

In 2012, we lowered the exercise price on outstanding options held by certain employees for the purchase of up to 21,717,441 shares of common stock to $0.08 per share from an average exercise price of $0.19 per share. The stock price on the date of the re-pricing was $0.07 per share. No other terms of the options were modified. We recorded expense of less than $0.1 million in 2012, representing the difference between the fair value of the options before and after the modification. Total unrecognized compensation increased less than $0.1 million as a result of the modification.

In 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 was paid in stock options instead of in cash. The options vested and became exercisable in installments during 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.

In 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 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 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 December 31, 2012.

In 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 2011. We cancelled the stock and options in 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.

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)
Balance, January 1, 2011		545,454		$	0.69		2.8		39,884,124		$	1.28		2.3
Granted		5,158,916			0.23				-
Impact of antidilution clauses		-							6,303,255
Exercised		-							-
Forfeited, expired or cancelled		(2,230,000	)		0.23				(2,872,385	)		1.13
Balance, December 31, 2011		3,474,370			0.30		3.5		43,314,994			1.10		1.5
Granted		-			-				84,756,427			0.10
Impact of antidilution clauses		-			-				103,744,062		NA
Impact of amendment		-			-				15,642,859		NA
Exercised		-			-				(5,003,038	)		0.10
Forfeited, expired or cancelled		(2,323,186	)		0.22				(82,252,711	)		0.44
Outstanding, December 31, 2012		1,151,184		$	0.45		2.4		160,202,593		$	0.12	$	3.5
Exercisable, December 31, 2012		1,151,184		$	0.45		2.4		141,642,593		$	0.12	$	3.3

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.

The following table summarizes information related to outstanding and exercisable warrants:

		As of December 31, 2012
		Outstanding						Exercisable
Range of Exercise Prices	Type of Warrant	Shares Under Warrants		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Shares Under Warrants		Exercise Price		Remaining Contractual Life (Years)
$0.07-$0.08	Liability		131,397,900	$	0.08		4.2		112,837,900	$	0.08		4.1
$0.23	Equity		605,730		0.23		3.9		605,730		0.23		3.9
$0.33	Liability		28,804,693		0.33		0.3		28,804,693		0.33		0.3
$0.69	Equity		545,454		0.69		0.8		545,454		0.69		0.8
			161,353,777	$	0.12		3.5		142,793,777	$	0.13		3.3

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, and issuances of warrants and/or other convertible instruments below a certain exercise price.

Common stock and warrant issuance to Buyer (Note 12), convertible note and warrant issuances (Note 10), in 2012 and 2011 triggered the antidilution clauses in certain liability warrants and, as a result, we were required to lower the exercise price and increase the number of shares underlying certain liability warrants. In addition, certain amendments required us to lower the exercise price and increase the numbers of shares underlying certain warrants.