NOTE 2. DISCONTINUED OPERATIONS

Healthy Natural (HN) Discontinued Operations

The Company continuously assesses the composition of our business portfolio to ensure it is aligned with our strategic objectives and positioned to maximize growth and return to our shareholders. In the second quarter of 2017, we began exploring strategic options for our wholly-owned subsidiary, Healthy Natural, Inc. (HN). In July 2017, we completed the sale of the assets of HN for $18.3 million in cash. HN was reported as part of our Corporate and USA segment. The selling price is subject to adjustment if the estimated closing working capital with respect to the assets sold and the liabilities assumed is different than the actual closing working capital for those assets and liabilities. The sale agreement contains customary indemnification provisions and provisions that restrict us from engaging in a business conducted by HN for five years from the date of closing. A $0.2 million working capital adjustment escrow and a $0.6 million indemnity claim escrow were funded from the proceeds. We are providing certain support services under transition services agreement for a limited period of time. These support services are not expected to have a material impact on our consolidated statements of operations in 2017.

On a preliminary basis, we estimate the proceeds, net of expenses, at $16.7 million, the net carrying value of HN as of the date of sale at $3.5 million and the third quarter 2017 gain on sale as $8.8 million, net of a $4.3 million income tax provision. We currently expect to obtain the amounts held in escrow without adjustment. The following table summarizes the estimated carrying amount of HN as of the July 2017 sale (in thousands).

Accounts receivable, net	$	871
Inventories		1,987
Other current assets		47
Property and equipment		871
Intangible		791
Other		24
Assets		4,591
Accounts payable		759
Accrued expenses		290
Liabilities		1,049
Net assets sold	$	3,542

We determined that the disposal met the criteria for presentation as discontinued operations in the second quarter of 2017. Accordingly, HN results are presented as discontinued operations in our consolidated statements of operations and are excluded from continuing operations for all periods presented. In addition, the HN assets and liabilities are classified as held for sale in our consolidated balance sheets for all periods presented.

The operations of HN are included in our results though the July 14, 2017 date of sale. All following tables represent activity up to the date of the sale.

The following table summarizes the major line items included in the income (loss) from discontinued operations for the divestiture of HN (in thousands).

	Three Months Ended						Nine Months Ended
	2017			2016			2017			2016
Revenues	$	421		$	5,010		$	9,902		$	15,044
Cost of goods sold		(293	)		(3,330	)		(6,651	)		(9,991	)
Selling, general and administrative expenses		(19	)		(396	)		(462	)		(1,100	)
Income from operations, before income taxes		109			1,284			2,789			3,953
Income tax expense		(36	)		(437	)		(948	)		(1,344	)
Income from operations, net of tax		73			847			1,841			2,609
Gain on sale, net of $4.3 million income tax expense		8,845			-			8,845			-
Income from discontinued operations, net of tax	$	8,918		$	847		$	10,686		$	2,609

We expect to have sufficient net operating losses to offset the taxable gain related to the sale of HN and HN’s taxable operating income in 2017. Alternative minimum tax may be due on the sale of HN based on the calculation of alternative minimum taxable income, which allows taxable income to only be offset by 90% by net operating loss carryforwards; thereby leaving residual taxable income of 10%, subject to a rate of 20%. We currently estimate $0.3 million to be payable under the alternative minimum tax but we will continue to evaluate the use of additional current year operating losses to offset the taxable income.

The following table summarizes the carrying amounts of major classes of HN assets and liabilities classified as held for sale as of December 31, 2016 (in thousands).

	December 31, 2016
Accounts receivable, net	$	592
Inventories		1,915
Other current assets held for sale		23
Property and equipment		1,019
Intangible		791
Other noncurrent assets		24
Total assets held for sale	$	4,364
Accounts payable	$	443
Accrued expenses		382
Long term liabilities		44
Total liabilities held for sale	$	869

The following table summarizes the major line items included in cash flows from discontinued operations of HN for the nine months ended September 30, 2017 and 2016 (in thousands).

	Nine Months Ended
	2017			2016

Net cash provided by operating activities	$	2,803		$	3,701
Net cash provided by (used in) investing activities		16,719			(73	)
Net cash used in financing activities		(48	)		-
Net cash provided to continuing operations	$	(19,474	)	$	(3,628	)

In 2017, net cash provided by investing activities in the table above is presented in our consolidated statements of cash flows in net cash provided by (used in) investing activities of discontinued operations and includes the $16.7 million net proceeds from the sale of HN.

The following table summarizes other data for HN (in thousands).

	Three Months Ended				Nine Months Ended
	2017		2016		2017		2016
Depreciation included in cost of goods sold	$	7	$	42	$	96	$	130
Depreciation included in selling, general and administrative expenses		4		20		49		58
Amortization included in selling, gneral and administrative expenses		-		204		-		659
Capital expenditures		3		22		18		95

Nutra SA Discontinued Operations

We hold a variable interest in our equity interest in Nutra SA. Nutra SA’s only operating subsidiary is Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), located in Pelotas, Brazil. We are the primary beneficiary of Nutra SA, and as such, Nutra SA’s assets, liabilities and results of operations are included in the condensed consolidated financial statements. In the second quarter of 2017, we determined that our plans to divest our investment in Nutra SA met the criteria for presentation as discontinued operations. Accordingly, the Nutra SA operating results are presented as discontinued operations in our condensed consolidated statements of operations and are excluded from continuing operations for all periods presented. In addition, Nutra SA consolidated assets and liabilities are classified as held for sale in our consolidated balance sheets for all periods presented. Other equity holders’ (Investors) interests in Nutra SA are reflected in net loss attributable to noncontrolling interest in discontinued operations in the condensed consolidated statements of operations and accumulated deficit attributable to noncontrolling interest in discontinued operations in the condensed consolidated balance sheets.

The following table summarizes the major line items included in income (loss) from discontinued operations for Nutra SA in the three and nine months ended September 30, 2017 and 2016 (in thousands).

	Three Months Ended						Nine Months Ended
	2017			2016			2017			2016
Revenues	$	3,226		$	563		$	9,589		$	4,627
Cost of goods sold		(3,539	)		(1,154	)		(9,814	)		(6,103	)
Selling, general and administrative expenses		(1,541	)		(509	)		(2,572	)		(1,891	)
Goodwill impairment		-			-			-			(3,024	)
Other expense		(358	)		(355	)		(1,066	)		(1,047	)
Loss from discontinued operations, before income taxes		(2,212	)		(1,455	)		(3,863	)		(7,438	)
Income taxes		-			-			-			-
Loss from discontinued operations, net of tax	$	(2,212	)	$	(1,455	)	$	(3,863	)	$	(7,438	)

The following table summarizes the carrying amounts of major classes of Nutra SA assets and liabilities classified as held for sale (in thousands).

	September 30, 2017		December 31, 2016
Cash and cash equivalents	$	54	$	109
Accounts receivable, net (restricted)		781		398
Inventories		1,237		925
Other current asssets		326		373
Property and equipment, net (restricted $2,662 and $2,599)		10,464		10,889
Other noncurrent assets		1,321		1,327
Total assets held for sale	$	14,183	$	14,021
Accounts payable	$	2,338	$	2,553
Accrued expenses		8,274		5,607
Current maturities of long-term debt (nonrecourse)		7,627		6,816
Total liabilities held for sale	$	18,239	$	14,976

Cash provided by Nutra SA operations are generally unavailable for distribution to our Corporate and USA segment pursuant to the terms of the LLC Agreement. Therefore Nutra SA’s consolidated cash is classified as held for sale in our consolidated balance sheets. Nutra SA’s debt is secured by Irgovel’s accounts receivable and property. The non-Brazilian entities within the consolidated ownership group do not guarantee any of Nutra SA’s debt.

The following table summarizes the major line items included in cash flows from Nutra SA discontinued operations for the nine months ended September 30, 2017 and 2016 (in thousands).

	Nine Months Ended
	2017			2016

Net cash used in operating activities	$	(1,345	)	$	(9	)
Net cash used in investing activities		(115	)		(157	)
Net cash provided (used) by financing activities		1,280			(551	)
Net cash provided by continuing operations		-			863
Effect of exchange rate changes		125			(183	)
Net change in cash and cash equivalents		(55	)		(37	)
Cash and cash equivalents, beginning of period		109			104
Cash and cash equivalents, end of period	$	54		$	67

The following table summarizes other data for Nutra SA (in thousands).

	Three Months Ended				Nine Months Ended
	2017		2016		2017		2016
Depreciation included in cost of goods sold	$	274	$	246	$	792	$	672
Depreciation included in selling, general and administrative expenses		15		16		46		42
Capital expenditures		22		1		115		157

Nutra SA’s debt consists of the following (in thousands):

	September 30 2017		December 31, 2016
Capital expansion loans	$	2,635	$	2,454
Working capital lines of credit		1,081		401
Advances on customer export orders		785		1,113
Special tax programs		3,014		2,767
Other		112		81
	$	7,627	$	6,816

As of September 30, 2017, Irgovel had approximately $0.4 million (USD) of debt installment payments in arrears. The banks have not called these loans in default, and management continues to work with the lenders to renegotiate payment terms, however, all Nutra SA debt has been classified as current liabilities held for sale in the accompanying condensed consolidated balance sheet as of September 30, 2017. As of September 30, 2017, Irgovel had approximately $9.3 million of tax and tax related payments in arrears. Approximately $0.2 million of the tax payments in arrears is related to certain unpaid employer tax from April 2017 through September 2017. All tax and tax related payments in arrears, other than the certain unpaid employer tax, can be included in a new Brazil tax amnesty program, but to qualify to do so, an entrance fee of approximately $0.4 million must be paid prior to November 15, 2017. At this time it is not certain Irgovel will qualify for the new Brazil tax amnesty. If Irgovel is unable to qualify for the new Brazil tax amnesty, Irgovel will likely petition the tax authorities seeking a favorable payment plan but it is likely the installment payments will not exceed 60 monthly payments. All Nutra SA debt is denominated in the Brazilian Real (R$), except advances on customer export orders which are denominated in U.S. Dollars. The fair value of Nutra SA debt (Level 3 measurement) approximates the carrying value of that debt based on the current market rates for similar debt with similar maturities.

Cash provided by operations in our Brazil segment is generally unavailable for distribution to our Corporate and USA segment pursuant to the terms of the limited liability company agreement of Nutra SA (LLC Agreement).

A summary of changes in redeemable noncontrolling interest in Nutra SA, reflected as accumulated deficit attributable to noncontrolling interest in discontinued operations, in the accompanying condensed consolidated balance sheets, for the three and nine months ended September 30, 2017 and 2016 (in thousands) follows.

	Three Months Ended						Nine Months Ended
	2017			2016			2017			2016
Redeemable noncontrolling interest in Nutra SA, beginning of period	$	(567	)	$	(1,599	)	$	(699	)	$	69
Investors' interest in net loss of Nutra SA		(792	)		(470	)		(1,359	)		(2,416	)
Investors' interest in other comprehensive loss of Nutra SA		(11	)		(60	)		38			218
Investors purchase of additional membership interest		-			200			650			200
Redeemable noncontrolling interest in Nutra SA, end of period	$	(1,370	)	$	(1,929	)	$	(1,370	)	$	(1,929	)

Investors' average interest in Nutra SA during the period		35.8	%		32.5	%		35.5	%		32.2	%
Investors' interest in Nutra SA at the end of the period		35.8	%		32.7	%		35.8	%		32.7	%

The Investors have drag along rights which provide the Investors the ability to force a sale of Nutra SA assets after January 1, 2018. The right terminates upon the occurrence of certain events (a $50 million Nutra SA initial public offering or a change of control, as defined in the LLC Agreement). We may elect to exercise a right of first refusal to purchase the Investors’ interest instead of proceeding to a sale. We have assessed the likelihood of the Investors exercising these rights as less than probable at September 30, 2017. We will continue to evaluate the probability of the Investors exercising their drag along rights each reporting period. We will begin to accrete the redeemable noncontrolling interest to fair value if and when it is probable the Investors will exercise these rights.

As the result of an amendment effective March 31, 2017, the Investors right to elect to exchange units in Nutra SA for our common stock terminated. In exchange for the termination of this right, we paid the Investors $0.1 million.

Under the LLC Agreement, the business of Nutra SA is to be conducted by the manager, currently our EVP of Special Projects, subject to the oversight of the management committee. The management committee is comprised of three of our representatives and two of Investors’ representatives. Upon an event of default or a qualifying event, we will no longer control the management committee and the management committee will include three Investors’ representatives and two of our representatives. In addition, following an event of default or a qualifying event, a majority of the members of the management committee may replace the manager of Nutra SA.

As of September 30, 2017, there have been no unwaived events of default. Events of default, as defined in the Membership Interest Purchase Agreement (MIPA) and the October 2013 amendment of investment agreements, are the failure of Irgovel to meet minimum annual processing targets or to achieve EBITDA on a local currency basis of at least R$4.0 million annually.

As of September 30, 2017, there have been no qualifying events. The LLC Agreement defines a qualifying event as the bankruptcy of RiceBran Technologies or Nutra SA.

In evaluating whether we are the primary beneficiary of Nutra SA, we considered the matters which could be put to a vote of the members. Until there is an event of default or a qualifying event, the Investors’ rights and abilities, individually or in the aggregate, do not allow them to substantively participate in the operations of Nutra SA. The Investors do not currently have the ability to dissolve Nutra SA or otherwise force the sale of all its assets. However, the Investors do have drag along rights in the future. We will continue to evaluate whether we are the primary beneficiary of Nutra SA each reporting period.