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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2016

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 0-32565

RiceBran Technologies

(Exact Name of Registrant as Specified in its Charter)

Issuer’s telephone number, including area code:  (602) 522-3000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☒ No ☐

 

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RiceBran Technologies

Index

Form 10-Q

 

Cautionary Note about Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue, liquidity or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services, products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.  Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words.  The forward-looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Actual results may differ materially from those projected in such forward-looking statements due to a number of factors, risks and uncertainties, including the factors that may affect future results set forth in this Current Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015.  We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.

Unless the context requires otherwise, references to “we,” “us,” “our” and “the Company” refer to RiceBran Technologies, and its consolidated subsidiaries.

 

RiceBran Technologies

Condensed Consolidated Statements of Operations

Three Months Ended March 31, 2016 and 2015

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

 

See Notes to Unaudited Financial Statements

 

RiceBran Technologies

Condensed Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2016 and 2015

(Unaudited) (in thousands)

 

See Notes to Unaudited Financial Statements

 

RiceBran Technologies

Condensed Consolidated Balance Sheets

March 31, 2016 (Unaudited) and December 31, 2015

(in thousands, except share amounts)

See Notes to Unaudited Financial Statements

 

RiceBran Technologies

Condensed Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited) (in thousands)

 

See Notes to Unaudited Financial Statements

 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of RiceBran Technologies and subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q; therefore, as permitted under these rules, certain footnotes and other financial information included in audited financial statements were condensed or omitted.  The interim financial statements contain all adjustments necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.

These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2015, filed on March 30, 2016. The report of our independent registered public accounting firm that accompanies the audited consolidated financial statements for the year ended December 31, 2015, included in that Annual Report on Form 10-K, contains a going concern explanatory paragraph in which our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern.  The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

The interim results reported in these unaudited 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.

                                                    

In August 2014, the FASB issued guidance which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements.  Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern  The guidance applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.  We are currently evaluating the impact of adoption of this standard.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on revenue from contracts with customers, to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and IFRS.  Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.  The guidance is effective for our annual and interim periods beginning in 2018. Early adoption is permitted.  We continue to assess the potential impact of the guidance.

In February 2016, the FASB issued amendments which change the accounting for leases.  As under prior GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease for us as a lessee depend primarily on its classification as a finance or operating lease. For both types of leases, lessees will recognize a right-of-use asset and a lease liability. For capital or finance leases, lessees will recognize amortization of the right-of-use asset separately from interest on the lease liability. The guidance is effective for our annual and interim periods beginning in 2019 and must be adopted on a modified retrospective approach.  Early adoption is allowed.  We have not yet determined the impact that the new guidance will have on our results of operations and financial position and have not yet determined if we will early adopt the standard.

In March 2016, the FASB issued new guidance that changes the accounting for certain aspects of share-based payments to employees.  The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled.  In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows.  The guidance also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur.  The guidance is effective for our annual and interim periods beginning in 2018 with early adoption permitted.  We have not yet determined the impact that the new guidance will have on our results of operations and financial position and have not yet determined if we will early adopt the standard.

 

 

In February 2015, the FASB issued guidance which makes targeted amendments to current consolidation guidance.  Among other things, the standard changes the manner in which we would assess one of the characteristics of variable interest entities (VIEs) and introduces a separate analysis specific to limited partnerships and similar entities (such as Nutra SA, LLC) for assessing if the equity holders at risk lack decision making.  Limited partnerships and similar entities will be a VIE unless the limited partners hold substantive kick-out rights or participating rights.  A right to liquidate an entity is akin to a kick-out right.  Guidance for limited partnerships under the voting model has been eliminated.  A limited partner and similar partners with a controlling financial interest obtained through substantive kick-out rights would consolidate a limited partnership or similar entity.  The guidance was effective for our annual and interim periods beginning in 2016.  There was no impact on financial position or results of operations upon adoption in 2016.  Specifically, under the new guidance, we continue to be the primary beneficiary of Nutra SA, LLC.

We continued to experience losses and negative cash flows from operations which raises substantial doubt about our ability to continue as a going concern.  We believe that we will be able to obtain additional funds to operate our business, should it be necessary, however, there can be no assurances that our efforts will prove successful.  The accompanying unaudited consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

In January 2014, we completed the acquisition of Healthy Natural, Inc. (HN), the operations of which are accretive to cash flows.  The Brazil segment consists of the consolidated operations of Nutra S.A. LLC (Nutra SA), whose only operating subsidiary is Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), located in Pelotas, Brazil.  Irgovel completed the final stages of a major capital expansion during the first quarter of 2015.  Throughout 2014, significant cash was used during the shutdown period and subsequent restart of the plant.  In 2015 and 2014, we invested $3.6 million and $10.3 million in Nutra SA, to fund Irgovel working capital needs. Operations at Irgovel began to improve during the end of 2015, such that Irgovel should continue to improve its gross profit margins in 2016 subject to raw bran availability.  However, there are no assurances that this will occur.

In May 2015, we entered into an $8 million senior secured credit facility agreement with a lender (the Lender) consisting of a $3.5 million revolving loan, not to exceed a borrowing base, as defined in the agreement, and an initial $2.5 million term loan, which term loan may be increased at the Lender’s discretion by up to $2.0 million within 2 years.  In February 2016, we issued and sold preferred stock and warrants that netted proceeds of $2.6 million.  Funds received under the facility with the Lender and from the February offering are being used for working capital and capital expenditure needs in both of our operating segments.  From January 1, 2016 through March 31, 2016, we have invested an additional $1.0 million in Nutra SA to fund Irgovel working capital needs.  As of March 31, 2016, we may make additional investments in Nutra SA up to $0.5 million without prior approval of the Lender.

The Brazil segment continues to require capital and will need additional cash investments in the latter half of the second quarter.  We are currently working with our minority partner to reach agreement on additional funding for Irgovel.  There are no assurances we will reach an agreement.

In March 2016, the restricted cash previously held in a $1.9 million escrow account associated with the purchase of Irgovel (the status of which is discussed further in Note 8) was released to us pursuant to a court order.  We repaid $1.0 million of the term note with the Lender upon receipt of funds from the escrow account.  In addition, we paid a $0.3 million short term note from a related party (see Note 11 – Related Party Transactions, in the Notes to Unaudited Financial Statements for information).

 

We are a human food ingredient, nutritional supplement and animal nutrition company focused on value-added processing and marketing of healthy, natural and nutrient dense products derived from raw rice bran, an underutilized by-product of the rice milling industry.  Using our bio-refining business model, we apply our proprietary and patented technologies and intellectual properties to convert raw rice bran into numerous high value products including stabilized rice bran (SRB), rice bran oil (RBO), defatted rice bran (DRB), RiBalance, a complete rice bran nutritional package derived from further processing of SRB; RiSolubles, a highly nutritious, carbohydrate and lipid rich fraction of RiBalance; RiFiber, a fiber rich insoluble derivative of RiBalance, and ProRyza, rice bran protein-based products, and a variety of other valuable derivatives extracted from these core products.  Our target markets are natural food, functional food, nutraceutical supplement and animal nutrition manufacturers, wholesalers and retailers, both domestically and internationally.

We have two reportable operating segments: (i) USA segment, which manufactures and distributes SRB (for human food ingredient and animal nutrition customers) in various granulations along with Stage II products and derivatives and (ii) Brazil segment, which extracts crude RBO and DRB from rice bran, which are then further processed into fully refined rice bran oil for sale internationally and in Brazil, compounded animal nutrition products for horses, cows, swine, sheep and poultry and a number of valuable human food and animal nutrition products derivatives and co-products. Stage II refers to the proprietary processes run at our Dillon, Montana facility and includes products produced at that facility using our patented processes. In addition we incur corporate and other expenses not directly attributable to reportable operating segments, which include costs related to our corporate staff, general and administrative expenses including public company expenses, intellectual property, professional fees, and other expenses.  No corporate allocations, including interest, are made to the reportable operating segments.

The USA segment produces SRB inside two supplier rice mills in California and our facility in Mermentau, Louisiana.  A facility located in Lake Charles, Louisiana has been idle since May 2009.  The USA segment also includes our Dillon, Montana Stage II facility which produces our Stage II products: RiBalance, a complete rice bran nutritional package derived from further processing of SRB; RiSolubles, a highly nutritious, carbohydrate and lipid rich fraction of RiBalance; RiFiber, a fiber rich insoluble derivative of RiBalance, and ProRyza, rice bran protein-based products, and a variety of other valuable derivatives extracted from these core products.  The manufacturing facilities included in our USA segment have proprietary processing equipment and process patented technology for the stabilization and further processing of rice bran into finished products.

The Brazil segment consists of the consolidated operations of Nutra SA, whose only operating subsidiary is Irgovel, located in Pelotas, Brazil.  Irgovel manufactures RBO and DRB products for both the human ingredient and animal nutrition markets in Brazil and internationally.  In refining RBO to an edible grade, several co-products are obtained.  One such product is distilled fatty acids, a valuable raw material for the detergent industry.  Irgovel also produces rice lecithin, which has application in human nutrition, animal nutrition and industrial applications.  DRB is either compounded with a number of other ingredients to produce complex animal nutrition products which are packaged and sold under Irgovel brands in the Brazilian market, sold as a raw material for further processing into human food ingredients or sold in bulk into the animal nutrition markets in Brazil and neighboring countries.

Basic EPS is computed by dividing net income (loss) attributable to RiceBran Technologies shareholders by the weighted average number of common shares outstanding during all periods presented.  Shares underlying options and warrants and convertible instruments are excluded from the basic EPS calculation but are considered in calculating diluted EPS.  Nonvested shares that vest solely on the basis of a service condition are not included in the denominator of the computation of basic EPS.

Diluted EPS is computed by dividing the net income attributable to RiceBran Technologies shareholders by the weighted average number of shares outstanding during the period increased by the number of additional shares that would have been outstanding if the impact of assumed exercises and conversions is dilutive.  The dilutive effect of outstanding options and warrants is calculated using the treasury stock method.  The dilutive effect of outstanding convertible instruments is calculated using the if-converted method.  Nonvested shares that vest solely on the basis of a service condition are included in the denominator of the computation of diluted EPS during their requisite service period under the treasury stock method.

 

Below are reconciliations of the numerators and denominators in the EPS computations for the three months ended March 31, 2016 and 2015.

The impact of potentially dilutive securities outstanding at March 31, 2016 and 2015, was not included in the calculation of diluted EPS for the three months ended March 31, 2016 and 2015 because to do so would be antidilutive.  Those securities listed in the table above which were antidilutive for the periods presented, which remain outstanding, could potentially dilute EPS in the future.

We hold a variable interest which relates to our equity interest in Nutra SA, LLC (Nutra SA).  We are the primary beneficiary of Nutra SA, and as such, Nutra SA’s assets, liabilities and results of operations are included in our consolidated financial statements.  The other equity holders’ interests are reflected in net loss attributable to noncontrolling interest in Nutra SA, in the consolidated statements of operations, and redeemable noncontrolling interest in Nutra SA, in the consolidated balance sheets.  Our variable interest in Nutra SA is our Brazil segment.  A summary of the carrying amounts of Nutra SA balances included in our consolidated balance sheets follows (in thousands).

Nutra SA’s debt is secured by its accounts receivable and property.  The non-Brazilian entities in our consolidated group do not guarantee any of Nutra SA’s debt.

 

                                         

A summary of changes in redeemable noncontrolling interest in Nutra SA follows for the three months ended March 31, 2016 and 2015 (in thousands).

Redeemable noncontrolling interest in Nutra SA is recorded in temporary deficit, above the equity section and after liabilities on our unaudited consolidated balance sheets, because the Investors have drag along rights which provide the Investors the ability to force a sale of Nutra SA assets in the future.  We have assessed the likelihood of the Investors exercising these rights as less than probable at March 31, 2016.  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.

Under the original limited liability company agreement for Nutra SA (LLC agreement), as amended, any units held by the Investors beginning January 1, 2014, accrued a yield at 4% (Yield).  The LLC agreement was further amended in August 2015 to eliminate the Yield, which resulted in the reversal of the Yield accrued since January 1, 2014, in the amount of $0.5 million.

Nutra SA must distribute all distributable cash, as defined in the LLC Agreement, to the members on March 31 of each year as follows: (i) first, to us and the Investors in proportion to our additional capital preference percentages (with respect to us, this means total  contributions we make on or after June 3, 2015 as a percentage of the total contributions we make after June 3, 2015, plus the amount contributed by the investors as of April 30, 2015; with respect to the Investors, this means the amount contributed by the investors as of April 30, 2015, as a percentage of the amount contributed by the investors as of April 30, 2015, plus total contributions we make on or after June 3, 2015), (ii) second, to the Investors in an amount equal to 2.0 times the Investors’ capital contributions, less the aggregate amount of distributions paid to the Investors, (iii) third, to us in an amount equal to twice the capital contributions made by us, less the aggregate amount of distributions paid to us; and (iv) fourth, to us and the Investors in proportion to our respective membership interests.

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

                                        

As of March 31, 2016, there have been no qualifying events.  The LLC agreement defines a qualifying event as the bankruptcy of RiceBran Technologies or Nutra SA.

The Investors have drag along rights, the right to force the sale of all 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).  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 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.  They 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.

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 LLC agreement.

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

In February 2016, we entered into an agreement with the Lender which modified the financial convents to require that (a) from February 1, 2016 to July 15, 2016, we maintain cash on hand, including availability under our revolving loan with the Lender, of not less than $1.5 million provided that at least $0.8 million of such amount must be in the form of cash on hand, and (b) we maintain an average monthly adjusted EBITDA, as defined by the agreement, calculated over each consecutive three-month period beginning on January 1,  February 1, March 1, April 1 and May 1, 2016, of not less than $0.1 million.  The Lender also waived, for the first two quarters of 2016, any non-compliance with the financial covenants in the May 2015 agreement.  We may not be able to comply with the original May 2015 covenants without further modifications from the Lender.  Therefore, as of March 31, 2016, we have recorded the term note, net of related debt issuance costs, as a current portion of long-term debt.  As of March 31, 2016, we are in compliance with the provisions and covenants associated with our debt agreements, as modified and discussed above.

In March 2016, we paid $1.0 million of the senior term note principal outstanding, which as of December 31, 2015, had been scheduled to be repaid in 2018, as required under the February agreement with the Lender described above.  In the first quarter of 2016, we wrote off $0.2 million of debt issuance costs to interest expense as a result of that repayment.  We also paid a $0.1 million amendment fee in the first quarter of 2016, which is included in interest expense in our statement of operations.

 

In February 2016, our board of directors authorized the issuance of 3,000 shares of Series F convertible preferred stock.  The preferred stock is non-voting and may be converted into a total of 2,000,000 shares of our common stock at the holder’s election at any time, subject to certain beneficial ownership limitations, at a ratio of 1 preferred share for 666.66666 shares of common stock.  The preferred stock is only entitled to receive dividends if we declare dividends, in which case the dividend will be paid (i) first an amount equal to $0.01 per share of preferred stock and (ii) then to and in the same form as dividends paid on shares of our common stock.  Otherwise, the preferred stock has no liquidation or other preferences over our common stock.

                                                      

A summary of equity activity for the three months ended March 31, 2016, (in thousands, except share and per share data) follows.

 

		Common Stock								Accumulated				Accumulated Other Comprehensive				Total
		Shares				Amount				Deficit				Loss				Equity
Balance, December 31, 2015			9,537,415			$	262,895			$	(250,738	)		$	(4,889	)		$	7,268
Share-based compensation, employees and directors			-				232				-				-				232
Issuance of preferred stock and warrants			-				(447	)			-				-				(447	)
Dividend on preferred stock			-				551				(551	)			-				-
Issuance of common stock to supplier			950,000				-												-
Other			8,924				13				-				-				13
Foreign currency translation			-				-				-				301				301
Net loss			-				-				300				-				300
Balance, March 31, 2016			10,496,339			$	263,244			$	(250,989	)		$	(4,588	)		$	7,667

 

A summary of warrant activity for the three months ended March 31, 2016, follows.

                                                    

In January 2016, we entered into a note payable with a director in the principal amount of $0.3 million and issued the director warrants to acquire 25,000 share of common stock (exercise price of $5.25, January 2021 expiration).  On the date of issuance recorded the warrant at fair value as a derivative warrant liability, pursuant to the Share Sequencing, and recorded a corresponding debt discount which amortized to interest expense when we paid the note and accumulated interest in full in March 2016.

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.  Defense costs are expensed as incurred and are included in professional fees.  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.

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 $3.0 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 assert is approximately $1.0 million.  We have withheld payment of the second installment pending resolution of the Resyng lawsuit noted above.  Our parent company has not been served with any formal notices in regard to this matter.  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.  In 2015, a final unappealable arbitration award was granted in our favor.  We are considering collection actions against the Sellers for amounts awarded in excess of the escrow funds described below and have a contingent gain in an amount that is not currently determinable. 

We believe that there are no significant remaining contingencies.  We recognized a gain of $1.6 million in the first quarter of 2016, equal to the difference between the $1.9 million escrow liability and the $0.3 million of resolved pre-acquisition contingencies that had either been paid or specifically identified and accrued.

As further described in Note 5, Irgovel is required to meet minimum annual processing targets or to achieve EBITDA on a local currency base of at least R$4.0 million annually. If not achieved, this would result in an event of default.  It is possible that an event of default may be triggered in the future and a waiver of non-compliance may not be obtained from the Investors. 

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

 

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

 

Corporate segment total assets include cash, restricted cash, property and other assets. All changes to goodwill in the first quarter of 2016 relate to changes in foreign currency translation.

We review our long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Subsequent to March 31, 2016, a number of economic and market conditions have arisen related to operations of our Brazil segment that impact raw bran availability and working capital necessary to acquire it.  Management cannot currently determine the outcome of these uncertainties. However, we will continue to assess and consider these additional uncertainties in the second quarter and future periods.  Additional information on impairment testing of long-lived assets, intangible assets and goodwill can be found in Note 9 – Intangible Assets and Goodwill, of our Annual Report on Form 10-K for the year ended December 31, 2015.

The following table presents revenue by geographic area for the three months ended March 31, 2016 and 2015 (in thousands).

The fair value of cash and cash equivalents, accounts and other receivables and accounts payable approximates their carrying value due to their shorter maturities.  As of March 31, 2016, the fair value of our Corporate segment debt (Level 3 measurement) approximates the $9.0 million carrying value of that debt, based on current market rates for similar debt with similar maturities.  The fair value of our Brazil segment debt (Level 3 measurement) also approximates the $6.9 million carrying value of that debt based on the current market rates for similar debt with similar maturities.

Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Certain assets and liabilities are presented in the financial statements at fair value.  Assets and liabilities measured at fair value on a recurring basis include derivative warrant and conversion liabilities.  Assets and liabilities measured at fair value on a non-recurring basis may include property.

We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:

●

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

●

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

●

Level 3 – inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.

For instruments measured using Level 3 inputs, a reconciliation of the beginning and ending balances is disclosed.

 

 

Warrants accounted for as derivative liabilities are valued using the lattice model each reporting period and the resultant change in fair value is recorded in the statements of operations.  The lattice model requires us to assess the probability of future issuance of equity instruments at a price lower than the current exercise price of the warrants.  The risk-free interest rate is determined by reference to the treasury yield curve rate of instruments with the same term as the warrant.  Additional assumptions that were used to calculate fair value follow.

The following tables summarize the changes in level 3 items measured at fair value on a recurring basis (in thousands):

(1)

Included in change in fair value of derivative warrant liabilities in our consolidated statements of operations.

 

Entities beneficially owned by Baruch Halpern, a director, invested $2.6 million in our subordinated convertible notes and related warrants prior to 2015.  In the three months ended March 31, 2016 and 2015, we expensed and paid $0.1 million of interest on subordinated notes beneficially owned by Mr. Halpern.

In January 2016, we entered into a note payable with Mr. Halpern, in the principal amount of $0.3 million and issued Mr. Halpern warrants to acquire 25,000 share of common stock (exercise price of $5.25, January 2021 expiration).  Principal and all interest, accumulating at an 11.75% annual rate, was payable on October 31, 2016.  We paid the note and accumulated interest in full in March 2016.

W. John Short, our chief executive officer and director, invested in $50,000 of our subordinated convertible notes and related warrants prior to 2015.  The terms of the notes beneficially owned by Mr. Short were modified in the fourth quarter of 2013.  In the three months ended March 31, 2016 and 2015, we paid approximately $10,000 of interest on subordinated notes beneficially owned by Mr. Short.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

                                                            

See Note 2 – Liquidity, Going Concern and Management’s Plans in the Notes to Unaudited Financial Statements for a discussion of going concern considerations and management’s plans.

                                                     

See Note 3 – Business in the Notes to Unaudited Financial Statements for a description of our business and the operating segments of our business.

                                                      

Revenues (in thousands):

Consolidated revenues for the first quarter of 2016 were $10.1 million compared to $9.7 million in the prior year quarter, an increase of $0.4 million, or 4.1%.

USA segment revenues increased $2.7 million, or 53.2% quarter over quarter.  Animal feed product and human nutrition product revenues both increased over 50%, quarter over quarter.  Animal nutrition revenue growth was driven by the supply and cooperation agreement entered into with Kentucky Equine Research (KER) at the end of December 2015.  Human nutrition revenue gains were primarily attributable to increased buying from the existing customer base and specifically the contract manufacturing accounts.

                                                    

Brazil segment revenues decreased $2.3 million, or 50.0% in 2016, compared to 2015.  The average exchange rate decreased 27% quarter over quarter causing a $0.8 million reduction in Brazil segment revenue quarter over quarter.  On a local currency basis, Brazil segment revenue declined 33% quarter over quarter, on a 34% decline in volume (kg).  The decline in revenue in the first quarter of 2016 was due to challenging sourcing of raw bran caused by a confluence of three issues: (1) adverse weather conditions reducing the volume of rice during harvest, (2) an increase in competition for purchasing raw bran and (3) having sufficient working capital to meet raw bran supplier payment demands.  The decrease in access to raw bran caused a decline in production volume, resulting in a decrease in revenues.  The Brazil segment continues to sell everything it makes and demand remains strong from customers.

                                                            

Gross profit (in thousands):

                                                                

The USA segment gross profit percentage decreased 0.9 percentage points to 31.7 in the first quarter of 2016, from 32.6 in the 2015 quarter.  The slight decline was primarily attributable to shifting sales mix from human ingredient to animal nutrition products.  As noted above, animal nutrition revenues were up significantly and represented a slightly higher percentage of total USA segment revenues.  Additionally, as part of the KER agreement, we are sharing one-fourth of our gross profit on equine nutrition customers with KER.  Over time, the additional volume generated by the agreement will drive down our per unit production costs and offset the sharing.  Raw bran prices also showed modest decreases but were offset by sales mix within the human nutrition category when comparing quarter over quarter.

 

The Brazil segment experienced negative gross profit in the first quarter of 2016, primarily due to the three reasons stated above: (1) adverse weather conditions reducing the volume of rice during harvest, (2) an increase in competition for purchasing raw bran and (3) having sufficient working capital to meet raw bran supplier payment demands.  During the first quarter of 2016, obtaining adequate amounts of raw bran in order to operate the Irgovel plant at an appropriate level was and continues to be a challenge.  This caused a 47% decline in raw bran processing volume quarter over quarter which was offset by better pricing and improved sales mix.  For cost reasons, bagged animal feed production was eliminated in the middle of the first quarter in 2016 and all efforts were shifted to producing bulk animal feed which is a simpler operation that requires less personnel.  In spite of the first quarter lackluster performance, gross profit increased 3.3 percentage points when compared to 2015.  The improvement is primarily related to the truck driver strike that took place in the first quarter of 2015.  The strike impacted our ability to receive raw bran deliveries last year.  Further, when bran was delivered, the quality was impaired due to higher fatty acid levels associated with the extra time between milling and delivery to the plant.

                                                         

We review our long-lived assets, including goodwill, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Subsequent to March 31, 2016, a number of economic and market conditions have arisen related to operations of our Brazil segment that impact raw bran availability and working capital necessary to acquire it.  These conditions have a negative impact on gross profit.  Management cannot currently determine the outcome of these uncertainties.  However, we will continue to assess and consider these additional uncertainties in the second quarter and future periods.  Additional information on impairment testing of long-lived assets, intangible assets and goodwill can be found in Note 9 – Intangible Assets and Goodwill, of our Annual Report on Form 10-K for the year ended December 31, 2015.

                                                          

Consolidated operating expenses were $3.7 million for the first quarter of 2016, compared to $4.0 million for the first quarter of 2015, a decrease of $0.3 million or 6.6%.

Consolidated selling, general and administrative expenses (SG&A) decreased $0.1 million quarter over quarter.

SG&A expenses in the Corporate and USA segments in the first quarter of 2016 were relatively unchanged from the prior quarter.

Brazil segment SG&A expenses decreased $0.1 million in 2016, mostly due to fluctuations in the exchange rates between the Brazilian Real and the US Dollar.  The average exchange rate decreased 27% quarter over quarter, offsetting a one-time severance expense of $0.2 million related to the reduction in staff associated with the bagged animal feed production eliminated in the middle of the first quarter 2016.

Consolidated depreciation and amortization decreased $0.2 million quarter over quarter, primarily due to the impact of certain USA segment and Brazil segment fixed assets becoming fully depreciated since the first quarter of 2015.

 

Consolidated other income (expense) was $1.4 million of other income for the first quarter of 2016, compared to other expense of $0.7 million for the first quarter of 2015.  The change is directly attributable to the gain on the resolution of Irgovel litigation contingency described below.

The Corporate segment experienced $1.7 million of additional other income, net.  A $0.4 million increase in interest expense was more than offset by a $1.6 million gain related to the reversal of the Irgovel purchase litigation contingency.  The increase in interest expense in the 2016 quarter included $0.2 million of additional interest expense related to amortized debt issuance costs associated with the repayment of $1.0 million of senior term debt, and included $0.1 million of bank fees for a first quarter 2016 modification of the senior lender agreements.  See Note 8 – Commitments and Contingencies, Irgovel Purchase, in the Notes to Unaudited Financial Statements for information related to the Irgovel purchase litigation contingency in the first quarter of 2016.  The gain related to the reversal of the Irgovel purchase litigation is nonrecurring in nature.

The Brazil segment other expense, net, decreased $0.4 million, primarily due to the $0.3 million change in foreign currency exchange, net, related to the impact of exchange rate changes on the Brazil segment’s US Dollar denominated debt.

                                                     

                                                

With respect to liquidity and capital resources, we manage the Brazil segment, consisting currently of our plant in Brazil, separately from our U.S. based Corporate and USA segments.  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.  Cash used in operating activities for the three months ended March 31, 2016 and 2015, is presented below by segment (in thousands).

 

 

On a combined basis, the Corporate and USA segments used $1.4 million of cash in operating activities in the 2016 first quarter compared to using $0.8 million of operating cash in the first three months of 2015.  Corporate and USA segments used $0.9 million of additional working capital in the 2016 quarter to fund the increases in accounts receivable and inventory in the first quarter of 2016, which were driven by growth in sales.

                                                     

The Brazil segment used $0.6 million in operating cash in the first quarter of 2016, compared to using $1.1 million of operating cash in the first quarter of  2015.  These losses were funded through additional equity contributions from the USA segment totaling $1.0 million and $1.1 million during the first quarters of 2016 and 2015, respectively.  The Brazil segment continues to require capital and will need additional cash investments in the latter half of the second quarter.  We are currently working with our minority partner to reach agreement on additional funding for Irgovel.  There are no assurances we will reach an agreement.  As of March 31, 2016, we may make additional investments in Nutra SA up to $0.5 million without prior approval of our senior lender.

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risk, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides us financing and liquidity support or market risk or credit risk support.

Our discussion and analysis of our financial condition and results of operations are based upon unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements.  On an ongoing basis, we evaluate the estimates, including, but not limited to, those related to revenue recognition.  We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments.  Actual results could differ from those estimates.

 

See Note 1 – Basis of Presentation in the Notes to Unaudited Financial Statements for further discussion.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4.

Controls and Procedures

 

We evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

                                                               

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

See Note 8 – Commitments and Contingencies, Irgovel Purchase in the Notes to Unaudited Financial Statements for information regarding certain legal proceedings to which we are a party.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition, liquidity or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, liquidity or future results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended March 31, 2016, we issued the securities described below without registration under the Securities Act.  Unless otherwise indicated below, the securities were issued pursuant to the private placement exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.  All issuances below were made without any public solicitation, to a limited number of persons and were acquired for investment purposes only.

 

On January 29, 2016, we entered into a note payable with a director in the principal amount of $0.3 million and in connection therewith we issued the director warrants to acquire 25,000 share of common stock (exercise price of $5.25, January 2021 expiration).  Principal and all interest on the note payable, accumulating at an 11.75% annual rate, was payable October 31, 2016.  We paid the note and accumulated interest in full in March 2016.

Item 3.

Defaults upon Senior Securities

None

Item 4.

Mine Safety Disclosures

None

Item 5.

Other Information

None

Item 6.

Exhibits

The following exhibits are attached hereto and filed herewith:

 

(1)

XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

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